SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended
Commission File
December 27, 1997
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)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Class C Common Stock, par value $.0625
Class D Common Stock, par value $.0625
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The registrant's Class C stock is not publicly traded, and
therefore there is no ascertainable aggregate market value of
voting stock held by nonaffiliates. The registrant's Class D
stock has been trading on the Nasdaq OTC Bulletin Board. The
aggregate market value of the Class D stock held by nonaffiliates
as of March 14, 1998 was $7.3 billion.
As of March 15, 1998, the number of outstanding shares of
each class of the Company's common stock was:
Class C - 7,681,020
Class D - 146,943,752
Portions of the Company's definitive Proxy Statement for the 1998
Annual Meeting of Stockholders are incorporated by reference into
Part III of this Form 10-K.
TABLE OF CONTENTS
Page
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Index to Financial Statements and Financial Statement Schedules of Registrant
PART I
ITEM 1. BUSINESS
Peter Kiewit Sons', Inc. ("PKS" or the "Company") is one of
the largest construction contractors in North America and also
owns information services, telecommunications and coal mining
businesses. The Company pursues these activities through two
subsidiaries, Kiewit Construction Group Inc. ("KCG") and Level 3
Communications, Inc., formerly known as Kiewit Diversified Group
Inc. ("Level 3"). The organizational structure is shown by the
following chart.
Class C Stock
Peter Kiewit Sons', Inc.
Kiewit Construction Group Inc.
Materials Operations
Construction Operations
Class D Stock
Level 3 Communications, Inc.
PKS Information Services, Inc.
Level 3 Communications, LLC
Kiewit Energy Group Inc.
Kiewit Coal Properties Inc.
Cable Michigan, Inc. 48.5%
Commonwealth Telephone Enterprises, Inc. 48.4%
RCN Corporation 46.1%
The Company has two principal classes of common stock, Class
C Construction & Mining Group Restricted Redeemable Convertible
Exchangeable Common Stock, par value $.0625 per share (the "Class
C stock") and Class D Diversified Group Convertible Exchangeable
Common Stock par value $.0625 per share (the Class D stock").
The value of Class C stock is linked to the Company's
construction and materials operations (the "Construction Group").
The value of Class D stock is linked to the operations of Level 3
(the "Diversified Group"), under the terms of the Company's
charter (see Item 5 below). All Class C shares and historically
most Class D shares have been owned by current and former
employees of the Company and their family members. The Company
was incorporated in Delaware in 1941 to continue a construction
business founded in Omaha, Nebraska in 1884. The Company entered
the coal mining business in 1943 and the telecommunications
business in 1988. In 1995, the Company distributed to its Class
D stockholders all of its shares of MFS Communications Company,
Inc. ("MFS") (which was later acquired by WorldCom, Inc.).
Through subsidiaries, the Company owns 48.5% of the common stock
of Cable Michigan, Inc., 48.4% of Commonwealth Telephone
Enterprises, Inc., formerly known as C-TEC Corporation ("C-TEC")
and 46.1% of RCN Corporation (collectively, the "C-TEC
Companies"), the three companies that resulted from the
restructuring of C-TEC, which was completed in September 1997.
RCN Corporation, Cable Michigan, Inc. and Commonwealth Telephone
Enterprises, Inc. are publicly traded companies and more detailed
information about each of them is contained in their separate
Annual Reports on Form 10-K. Prior to January 2, 1998, the
Company was also engaged in the alternative energy business
through its ownership of 24% of the voting stock of CalEnergy
Company, Inc. ("CalEnergy") and certain international development
projects in conjunction with CalEnergy.
On December 8, 1997, the Company's stockholders ratified the
decision of the Company's Board of Directors (the "PKS Board") to
separate the business conducted by the Construction Group and the
business conducted by the Diversified Group (collectively, the
"Business Groups") into two independent companies. In connection
with the consummation of this transaction, the PKS Board declared
a dividend of eight-tenths of one share of the Company's newly
created Class R Convertible Common Stock, par value $.01 per
share ("Class R stock") with respect to each outstanding share of
Class C stock. The Class R stock is convertible in shares of
Class D stock pursuant to a defined formula. In addition, the
Company has announced that effective March 31, 1998, the Company,
through a resolution of the PKS Board, shall cause each
outstanding share of Class C stock to be mandatorily exchanged
(the "Share Exchange") pursuant to provisions of the PKS Restated
Certificate of Incorporation (the "PKS Certificate") for one
outstanding share of Common Stock, par value $.01 per share, of
PKS Holdings, Inc. ("PKS Holdings"), a recently formed, direct,
wholly owned subsidiary of PKS, to which the eight-tenths of one
share of Class R Stock would attach (collectively, the
"Transaction"). In connection with the consummation of the
Transaction, the Company will change its name to Level 3
Communications, Inc. and PKS Holdings, Inc. will change its name
to Peter Kiewit Sons', Inc. The Company has announced that the
PKS Board has approved in principle a plan to force conversion of
all 6,538,231 shares of Class R Stock outstanding. Due to
certain provisions of the Class R stock, conversion will not be
forced prior to May 1998, and the final decision to force
conversion would be made at that time. The decision may be made
not to force conversion if it were decided that conversion is not
in the best interest of the then stockholders of the Company.
The Transaction is intended to separate the Business Groups
into two independent companies. The PKS Board believes that
separation of the Business Groups will (i) permit Level 3 to
attract and retain the senior management and employees needed to
implement and develop Level 3's expansion plan (which is
discussed below), (ii) enable Level 3 to access the capital
markets in order to fund its expansion plan on more advantageous
terms than would be available to Level 3 as part of the Company,
(iii) enable Level 3 to pursue strategic investments and
acquisitions, as part of the expansion plan, which could be
foreclosed to Level 3 as part of the Company and (iv) allow the
directors and management of each Business Group to focus their
attention and financial resources on that Business Group's
business. Except for the anticipated effect of the Transaction
on the management of the construction business, the PKS Board
does not believe that the Transaction will have any other
significant effect on the construction business.
For purposes of this filing, the Company has filed as
exhibits to this Form 10-K, Financial Statements and Other
Information for each of the Construction Group (Exhibit 99.A) and
the Diversified Group or Level 3 (Exhibit 99.B). These exhibits
generally follow the format of Form 10-K and consist of separate
financial statements for each Group and excerpts of other
information from this Form 10-K pertaining to each Business
Group.
For 1997 results, the Company reports financial information
for four business segments: construction; information services;
telecommunications; and coal mining. Additional financial
information about these segments, including revenue, operating
earnings, equity earnings, identifiable assets, capital
expenditures, and depreciation, depletion and amortization, as
well as foreign operations information, is contained in Note 13
to the Company's consolidated financial statements.
KIEWIT CONSTRUCTION GROUP
CONSTRUCTION OPERATIONS
The construction business is conducted by operating
subsidiaries of Kiewit Construction Group Inc. (collectively,
"KCG"). KCG and its joint ventures perform construction services
for a broad range of public and private customers primarily in
the United States and Canada. New contract awards during 1997
were distributed among the following construction markets:
transportation (including highways, bridges, airports, railroads,
and mass transit) -- 62%, power, heat, cooling -- 18%, commercial
buildings -- 8%, water supply -- 2%, mining -- 2%, sewage and
waste disposal -- 1% and other markets -- 7%.
KCG primarily performs its services as a general contractor.
As a general contractor, KCG is responsible for the overall
direction and management of construction projects and for
completion of each contract in accordance with terms, plans, and
specifications. KCG plans and schedules the projects, procures
materials, hires workers as needed, and awards subcontracts. KCG
generally requires performance and payment bonds or other
assurances of operational capability and financial capacity from
its subcontractors.
Contract Types. KCG performs its construction work under
various types of contracts, including fixed unit or lump-sum
price, guaranteed maximum price, and cost-reimbursable contracts.
Contracts are either competitively bid and awarded or negotiated.
KCG's public contracts generally provide for the payment of a
fixed price for the work performed. Profit on a fixed-price
contract is realized on the difference between the contract price
and the actual cost of construction, and the contractor bears the
risk that it may not be able to perform all the work for the
specified amount. Construction contracts generally provide for
progress payments as work is completed, with a retainage to be
paid when performance is substantially complete. Construction
contracts frequently contain penalties or liquidated damages for
late completion and infrequently provide bonuses for early
completion.
Government Contracts. Public contracts accounted for 74% of
the combined prices of contracts awarded to KCG during 1997.
Most of these contracts were awarded by government and
quasi-government units under fixed price contracts after
competitive bidding. Most public contracts are subject to
termination at the election of the government. In the event of
termination, the contractor is entitled to receive the contract
price on completed work and payment of termination related costs.
Backlog. At the end of 1997, KCG had backlog (anticipated
revenue from uncompleted contracts) of $3.9 billion, an increase
from $2.3 billion at the end of 1996. Of current backlog,
approximately $1.0 billion is not expected to be completed during
1998. In 1997 KCG was low bidder on 226 jobs with total contract
prices of $3.5 billion, an average price of $15.3 million per
job. There were 19 new projects with contract prices over $25
million, accounting for 76% of the successful bid volume.
Competition. A contractor's competitive position is based
primarily on its prices for construction services and its
reputation for quality, timeliness, experience, and financial
strength. The construction industry is highly competitive and
lacks firms with dominant market power. In 1997 Engineering News
Record, a construction trade publication, ranked KCG as the 9th
largest U.S. contractor in terms of 1996 revenue and 12th largest
in terms of 1996 new contract awards. It ranked KCG 1st in the
transportation market in terms of 1996 revenue.
Joint Ventures. KCG frequently enters into joint ventures
to efficiently allocate expertise and resources among the
venturers and to spread risks associated with particular
projects. In most joint ventures, if one venturer is financially
unable to bear its share of expenses, the other venturers may be
required to pay those costs. KCG prefers to act as the sponsor
of its joint ventures. The sponsor generally provides the
project manager, the majority of venturer-provided personnel, and
accounting and other administrative support services. The joint
venture generally reimburses the sponsor for such personnel and
services on a negotiated basis. The sponsor is generally
allocated a majority of the venture's profits and losses and
usually has a controlling vote in joint venture decision making.
In 1997 KCG derived 70% of its joint venture revenue from
sponsored joint ventures and 30% from non-sponsored joint
ventures. KCG's share of joint venture revenue accounted for 28%
of its 1997 total revenue.
Demand. The volume and profitability of KCG's construction
work depends to a significant extent upon the general state of
the economies of the United States and Canada, and the volume of
work available to contractors. Fluctuating demand cycles are
typical of the industry, and such cycles determine to a large
extent the degree of competition for available projects. KCG's
construction operations could be adversely affected by labor
stoppages or shortages, adverse weather conditions, shortages of
supplies, or governmental action. The volume of available
government work is affected by budgetary and political
considerations. A significant decrease in the amount of new
government contracts, for whatever reasons, would have a material
adverse effect on KCG.
Locations. KCG structures its construction operations
around 20 principal operating offices located throughout the U.S.
and Canada, with headquarters in Omaha, Nebraska. Through its
decentralized system of management, KCG has been able to quickly
respond to changes in the local markets. At the end of 1997, KCG
had current projects in 33 states and 6 Canadian provinces. KCG
also participates in the construction of geothermal power plants
in the Philippines and Indonesia.
Properties. KCG has 20 district offices, of which 16 are in
owned facilities and 4 are leased. KCG owns or leases numerous
shops, equipment yards, storage facilities, warehouses, and
construction material quarries. Since construction projects are
inherently temporary and location-specific, KCG owns
approximately 950 portable offices, shops, and transport
trailers. KCG has a large equipment fleet, including
approximately 4,500 trucks, pickups, and automobiles, and 2,000
heavy construction vehicles, such as graders, scrapers, backhoes,
and cranes.
MATERIALS OPERATIONS
Several KCG subsidiaries, primarily in Arizona and Oregon,
produce construction materials, including ready-mix concrete,
asphalt, sand and gravel. KCG also has quarrying operations in
New Mexico and Wyoming, which produce landscaping materials and
railroad ballast. Kiewit Mining Group Inc. ("KMG"), a subsidiary
of KCG, provides mine management services to Kiewit Coal
Properties Inc., a subsidiary of PKS. KMG also owns a 48%
interest in an underground coal mine near Pelham, Alabama.
LEVEL 3 COMMUNICATIONS, INC.
Level 3 engages in the information services,
telecommunications, coal mining and energy businesses, through
ownership of operating subsidiaries, joint venture investments
and ownership of substantial positions in public companies.
Level 3 also holds smaller positions in a number of development
stage or startup ventures.
INFORMATION SERVICES
PKS Information Services, Inc. ("PKSIS") is a full service
information technology company that provides computer operations
outsourcing and systems integration services to customers located
throughout the United States as well as abroad. Utilizing all
computing environments from mainframes to client/server
platforms, PKSIS offers custom-tailored computer outsourcing
services. PKSIS also provides network and systems integration
and network management services for various computer platforms.
In addition, PKSIS develops, implements and supports applications
software. Through its subsidiary NET Twenty-One, Inc., PKSIS'
strategy is to focus on assisting its customers in "Web-enabling"
legacy software applications, that is, migrating computer
applications from closed computing and networking environments to
network platforms using Transmission Control Protocol/Internet
Protocol ("TCP/IP") technology that are then accessed using Web
browsers.
The computer outsourcing services offered by PKSIS through
its subsidiary PKS Computer Services, Inc. include networking and
computing services necessary both for older mainframe-based
systems and newer client/server-based systems. PKSIS provides
its outsourcing services to clients that desire to focus their
resources on core businesses, rather than expending capital and
incurring overhead costs to operate their own computing
environment. PKSIS believes that it is able to utilize its
expertise and experience, as well as operating efficiencies, to
provide its outsourcing customers with levels of service equal to
or better than those achievable by the customer itself, while at
the same time reducing the customer's cost for such services.
This service is particularly useful for those customers moving
from older computing platforms to more modern client/server
networks.
PKSIS' systems integration services help customers define,
develop and implement cost-effective information services. In
addition, through PKS Systems Integration, Inc., PKSIS offers
reengineering services that allow companies to convert older
legacy software systems to modern networked computing systems,
with a focus on reengineering software to enable older software
application and data repositories to be accessed by Hypertext
Markup Language (HTML)-based browsers ("Web browsers") over the
Internet or over private or limited access TCP/IP networks.
PKSIS, through its Suite 2000-SM line of services, provides
customers with a multi-phased service for converting programs and
application so that date-related information is accurately
processed and stored before and after the year 2000. Through the
process of converting a customer's legacy software for year 2000
compliance, PKSIS is able to provide additional insight and
advice to further stream-line and improve the customer's
information systems.
PKSIS has established a software engineering facility at the
National Technology Park in Limerick, Ireland, to undertake:
large scale development projects; system conversions; and code
restructuring and software re-engineering. PKSIS has also
established relationships with domestic and international
partners to provide such activities as well as establishing
recently a joint venture in India.
PKSIS' subsidiary, LexiBridge Corporation of Shelton,
Connecticut, provides customers with a combination of workbench
tools and methodology that provide a complete strategy for
converting mainframe-based application systems to client/server
architecture, while at the same time ensuring year 2000
compliance.
In 1997, 93% of PKSIS' revenue was from external customers
and the remainder was from affiliates.
Level 3 recently has determined to increase substantially
the emphasis it places on and the resources devoted to its
information services business, with a view to becoming a
facilities-based provider (that is, a provider of information
services that owns or leases a substantial portion of the plant,
property and equipment necessary to provide those services) of a
broad range of integrated information services to business (the
"Expansion Plan"). Pursuant to the Expansion Plan, Level 3
intends to expand substantially its current information services
business, through both the expansion of the business of PKSIS and
the creation, through a combination of construction, purchase and
leasing of facilities and other assets, of a substantial,
facilities-based communications network that utilizes Internet
Protocol or IP technology.
In order to grow and expand substantially the information
services it provides, Level 3 has developed a comprehensive plan
to construct, purchase and lease local and backbone facilities
necessary to provide a wide range of communications services over
a network that uses Internet Protocol based technology. These
services include:
A number of business-oriented communications services using
a combination of network facilities Level 3 would
construct, purchase and lease from third parties, which
services may include fax services that are transmitted in
part over an Internet Protocol network and are
offered at a lower price than public circuit-switched telephone
network- based fax service and voice message storing and
forwarding that are transmitted in part over the same
Internet Protocol technology based network; and
After construction, purchase and lease of local and
backbone facilities, a range of Internet access services at
varying capacity levels and, as technology development
allows, at specified levels of quality of service and
security.
Level 3 believes that, over time, a substantial number of
businesses will convert existing computer application systems
(which run on standalone or networked computing platforms
utilizing a wide variety of operating systems, applications and
data repositories) to computer systems that communicate using
Internet Protocol and are accessed by users employing Web
browsers. Level 3 believes that such a conversion will occur for
the following reasons:
Internet Protocol has become a de facto networking standard
supported by numerous hardware and software vendors and, as
such, provides a common protocol for connecting computers
utilizing a wide variety of operating systems;
Web browsers can provide a standardized interface to data
and applications and thus help to minimize costs
of training personnel to access and use these resources;
and
As a packet-switched technology, in many instances,
Internet Protocol utilizes network capacity more
efficiently than the circuit-switched public telephone
network. Consequently, certain services provided over an
Internet Protocol network may be less costly than the same
services provided over public switched telephone network.
Level 3 further believes that businesses will prefer to
contract for assistance in making this conversion with those
vendors able to provide a full range of services from initial
consulting to Internet access with requisite quality and security
levels.
Pursuant to the Expansion Plan, Level 3's strategy will be
to attempt to meet this customer need by: (i) growing and
expanding its existing capabilities in computer network systems,
consulting, outsourcing, and software reengineering, with
particular emphasis on conversion of legacy software systems to
systems that are compatible with Internet Protocol networks and
Web browsers access; and (ii) creating a national end-to-end
Internet Protocol based network through a combination of
construction, purchase and leasing of assets. Level 3 intends to
optimize its international network to provide Internet based
communications services to businesses at low cost and high
quality, and to design its network, to the extent possible, to
more readily include future technological upgrades than older,
less flexible networks owned by competitors.
To implement its strategy, Level 3 has formulated a long
term business plan that provides for the development of an end-to-
end network optimized for the Internet Protocol. Initially,
Level 3 will offer its services over facilities, both local and
national, that are in part leased from third parties to allow for
the offering of services during the construction of its own
facilities. Over time, it is anticipated that the portion of
Level 3's network that includes leased facilities will decrease
and the portion of facilities that have been constructed, and are
owned, by Level 3 will increase. Over the next 4 to 6 years, it
is anticipated that the Level 3 network will encompass local
facilities in approximately 40 North American markets, leased
backbone facilities in approximately 10 additional North American
markets, a national or inter-city network covering approximately
15,000 miles, the establishment of local facilities in
approximately 10 European and 4 Asian markets and an inter-city
network covering approximately 2,000 miles across Europe. Level
3 intends to design and construct its inter-city network using
multiple conduits. Level 3 believes that the spare conduits will
allow it to deploy future technological innovations and expand
capacity without incurring significant overbuild costs. The
foregoing description of the Level 3 network and the Expansion
Plan constitutes a forward-looking statement. The actual
configuration of the network, including the number of markets
served and the expanse of the inter-city networks will depend on
a variety of factors including Level 3's ability to: access
markets; design fiber optic network backbone routes; attract and
retain qualified personnel; design, develop and deploy enterprise
support systems that will allow Level 3 to build and operate a
packet switched network that interconnects with the public
switched network, install fiber optic cable and facilities;
obtain rights-of-way, building access rights, unbundled loops and
required government authorizations, franchises and permits; and
to negotiate interconnection and peering agreements.
The operations to be conducted as a result of the Expansion
Plan will be subject to extensive federal and state regulation.
Federal laws and Federal Communications Commission regulations
apply to interstate telecommunications while state regulatory
authorities exercise jurisdiction over telecommunications both
originating and terminating within a state. Generally,
implementation of the Expansion Plan will require obtaining and
maintaining certificates of authority from regulatory bodies in
most states where services are to be offered.
With respect to the Expansion Plan, Level 3 is devoting
substantially more management time and capital resources to its
information services business with a view to making the
information services business, over time, the principal business
of Level 3. In that respect, the management of Level 3 has been
conducting a comprehensive review of the existing Level 3
businesses to determine how those businesses will complement
Level 3's focus on information services businesses as a result of
the Expansion Plan. For example, the management of Level 3
negotiated the sale of its energy interests (see "- CalEnergy"
below) because it believed that the ongoing ownership by Level 3
of an interest in an energy businesses was not compatible with
its focus on the information services business, and because sale
of those assets provided a substantial portion of the money
necessary to fund the early stages of the Expansion Plan.
In addition, the Construction Group and Level 3 are
currently discussing a restructuring of the current mine
management arrangement between the two Business Groups. Level 3
also is reviewing its involvement in a number of start-up and
development stage businesses and recently completed the sale of
its interest in United Infrastructure Company ("UIC"). Level 3
is also currently discussing with the Construction Group the sale
of Kiewit Investment Management Corp. to the Construction Group.
Level 3 has no current intention, however, to sell, dispose or
otherwise alter its ownership interest in the C-TEC Companies.
C-TEC COMPANIES
On September 30, 1997, C-TEC completed a tax-free
restructuring, which divided C-TEC into three public companies: C-
TEC, which changed its name to Commonwealth Telephone
Enterprises, Inc. ("Commonwealth Telephone"), RCN Corporation
("RCN") and Cable Michigan, Inc. ("Cable Michigan").
Businesses of the C-TEC Companies. Commonwealth Telephone
owns the following businesses: Commonwealth Telephone Company
(the rural local exchange carrier business); Commonwealth
Communications (the communications engineering business); the
Pennsylvania competitive local exchange carrier business; and
long distance operations in certain areas of Pennsylvania. RCN
owns the following businesses: its competitive
telecommunications services operations in New York City and
Boston; its cable television operations in New York, New Jersey
and Pennsylvania; its 40% interest in Megacable S.A. de C.V.,
Mexico's second largest cable operator; and its long distance
operations (other than the operations in certain areas of
Pennsylvania). Cable Michigan owns and operates cable television
systems in the State of Michigan and owns a 62% interest in
Mercom, Inc., a publicly held Michigan cable television operator.
Ownership of the C-TEC Companies. In connection with the
restructuring and as a result of the conversion of certain shares
of C-TEC held by Level 3, Level 3 now holds 13,320,485 shares of
RCN common stock, 3,330,119 shares of Cable Michigan common
stock, and 8,880,322 shares of Commonwealth Telephone common
stock. Such ownership represents 48.5% of the outstanding common
stock of Cable Michigan, 48.4% of the outstanding common stock of
Commonwealth Telephone and 46.1% of the outstanding common stock
of RCN.
Each of the shares of RCN common stock, Cable Michigan
common stock and Commonwealth Telephone Common Stock is traded on
the National Association of Securities Dealers, Inc.'s National
Market (the "Nasdaq National Market").
In its filings with the Securities and Exchange Commission,
the board of directors of C-TEC concluded that the distributions
were in the best interests of the shareholders because the
distributions will, among other things, (i) permit C-TEC to raise
financing to fund the development of the RCN business on more
advantageous economic terms than the other alternatives
available, (ii) facilitate possible future acquisitions and joint
venture investments by RCN and Cable Michigan and possible future
offerings by RCN, (iii) allow the management of each company to
focus attention and financial resources on its respective
business and permit each company to offer employees incentives
that are more directly linked to the performance of its
respective business, (iv) facilitate the ability of each company
to grow in both size and profitability, and (v) permit investors
and the financial markets to better understand and evaluate C-
TEC's various businesses.
Accounting Method. Since the ownership by Level 3 of the
equity and voting rights of each of RCN, Cable Michigan and
Commonwealth Telephone at the end of 1997 was less than 50%,
under generally accepted accounting principles, Level 3 uses the
equity method to account for its investments in each of these
companies. Under the equity method, Level 3 reports its
proportionate share of each of Commonwealth Telephone's, RCN's
and Cable Michigan's earnings, even though it has received no
dividends from those companies. Level 3 keeps track of the
carrying value of its investment in each of the C-TEC Companies.
"Carrying value" is the purchase price of the investment, plus
the investor's proportionate share of the investee's earnings,
less the amortized portion of goodwill, less any dividends paid.
Level 3 purchased its C-TEC Companies shares at a premium over
the book value of the underlying net assets. This premium is
being amortized over a period of between 30 to 40 years. At
December 27, 1997 the carrying value of Level 3's Commonwealth
Telephone shares was $75 million, RCN shares was $214 million and
Cable Michigan shares was $46 million.
Description of the C-TEC Companies. RCN is developing
advanced fiber optic networks to provide a wide range of
telecommunications services including local and long distance
telephone, video programming and data services (including high
speed Internet access), primarily to residential customers in
selected markets in the Boston to Washington, D.C. corridor.
Cable Michigan is a cable television operator in the State of
Michigan which, as of December 31, 1997, served approximately
204,000 subscribers. These figures include the approximately
42,000 subscribers served by Mercom, a 62% owned subsidiary of
Cable Michigan. Clustered primarily around the Michigan
communities of Grand Rapids, Traverse City, Lapeer and Monroe
(Mercom), Cable Michigan's systems serve a total of approximately
400 municipalities in suburban markets and small towns.
Commonwealth Telephone Company is a Pennsylvania public utility
providing local telephone service to a 19 county, 5,067 square
mile service territory in Pennsylvania. The telephone company
services approximately 259,000 main access lines. The company
also provides network access, long distance, and billing and
collection services to interexchange carriers. The telephone
company's business customer base is diverse in size as well as
industry, with very little concentration. Commonwealth Long
Distance operates principally in Pennsylvania, providing switched
services and resale of several types of services, using the
networks of several long distance providers on a wholesale basis.
Commonwealth Communications Inc. provides telecommunications
engineering and facilities management services to large corporate
clients, hospitals and universities throughout the Northeastern
United States and sells, installs and maintains PBX systems in
Pennsylvania and New Jersey. In January 1995, C-TEC purchased a
40% equity position in Megacable, Mexico's second largest cable
television operator, serving approximately 174,000 subscribers in
12 cities.
For more information on the business of each of RCN, Cable
Michigan and Commonwealth Telephone, please see the individual
filings of Annual Reports on Form 10-K for each of such companies
as filed with the Securities and Exchange Commission.
COAL MINING
Level 3 is engaged in coal mining through its subsidiary,
Kiewit Coal Properties Inc. ("KCP"). KCP has a 50% interest in
three mines, which are operated by KCP. Decker Coal Company
("Decker") is a joint venture with Western Minerals, Inc., a
subsidiary of The RTZ Corporation PLC. Black Butte Coal Company
("Black Butte") is a joint venture with Bitter Creek Coal
Company, a subsidiary of Union Pacific Resources Group Inc.
Walnut Creek Mining Company ("Walnut Creek") is a general
partnership with Phillips Coal Company, a subsidiary of Phillips
Petroleum Company. The Decker mine is located in southeastern
Montana, the Black Butte mine is in southwestern Wyoming, and the
Walnut Creek mine is in east-central Texas.
Production and Distribution. The coal mines use the surface
mining method. During surface mining operations, topsoil is
removed and stored for later use in land reclamation. After
removal of topsoil, overburden in varying thicknesses is stripped
from above coal seams. Stripping operations are usually conducted
by means of large, earth-moving machines called draglines, or by
fleets of trucks, scrapers and power shovels. The exposed coal
is fractured by blasting and is loaded into haul trucks or onto
overland conveyors for transportation to processing and loading
facilities. Coal delivered by rail from Decker originates on the
Burlington Northern Railroad. Coal delivered by rail from Black
Butte originates on the Union Pacific Railroad. Coal is also
hauled by trucks from Black Butte to the nearby Jim Bridger Power
Plant. Coal is delivered by trucks from Walnut Creek to the
adjacent facilities of the Texas-New Mexico Power Company.
Customers. The coal produced from the KCP mines is sold
primarily to electric utilities, which burn coal in order to
produce steam to generate electricity. Approximately 89% of
sales are made under long-term contracts, and the remainder are
made on the spot market. Approximately 79%, 80% and 80% of KCP's
revenues in 1997, 1996 and 1995, respectively, were derived from
long-term contracts with Commonwealth Edison Company (with Decker
and Black Butte) and The Detroit Edison Company (with Decker).
The primary customer of Walnut Creek is the Texas-New Mexico
Power Company.
Contracts. Customers enter into long-term contracts for
coal primarily to secure a reliable source of supply at a
predictable price. KCP's major long-term contracts have
remaining terms ranging from 1 to 30 years. A majority of KCP's
long-term contracts provide for periodic price adjustments. The
price is typically adjusted through the use of various indices
for items such as materials, supplies, and labor. Other portions
of the price are adjusted for changes in production taxes,
royalties, and changes in cost due to new legislation or
regulation. In most cases, these cost items are directly passed
through to the customer as incurred. In most cases the price is
also adjusted based on the heating content of the coal.
Decker has a sales contract with Detroit Edison Company that
provides for the delivery of a minimum of 36 million tons of low
sulphur coal during the period 1998 through 2005, with annual
shipments ranging from 5.2 million tons in 1998 to 1.7 million
tons in 2005.
KCP and its mining ventures have entered into various
agreements with Commonwealth Edison Company ("Commonwealth"),
which stipulate delivery and payment terms for the sale of coal.
The agreements as amended provide for delivery of 88 million tons
during the period 1998 through 2014, with annual shipments
ranging from 1.8 million tons to 13.1 million tons. These
deliveries include 15 million tons of coal reserves previously
sold to Commonwealth. Since 1993, the amended contract between
Commonwealth and Black Butte provides that Commonwealth's
delivery commitments will be satisfied, not with coal produced
from the Black Butte mine, but with coal purchased from three
unaffiliated mines in the Powder River Basin of Wyoming. The
contract amendment allows Black Butte to purchase alternate
source coal at a price below its production costs, and to pass
the cost savings through to Commonwealth while maintaining the
profit margins available under the original contract.
The contract between Walnut Creek and Texas-New Mexico Power
Company provides for delivery of between 42 and 90 million tons
of coal during the period 1989 through 2027. The actual tons
provided will depend on the number of power units constructed and
operated by TNP. The maximum amount KCP is expecting to ship in
any one year is between 1.6 and 3.2 million tons.
KCP also has other sales commitments, including those with
Sierra Pacific, Idaho Power, Solvay Minerals, Pacific Power &
Light, Minnesota Power, and Mississippi Power, that provide for
the delivery of approximately 13 million tons through 2005.
Coal Production. Coal production began at the Decker, Black
Butte, and Walnut Creek mines in 1972, 1979, and 1989,
respectively. KCP's share of coal mined in 1997 at the Decker,
Black Butte, and Walnut Creek mines was 5.9, 1.0, and .9 million
tons, respectively.
Revenue. KCP's total revenue in 1997 was $222 million.
Revenue attributable to the Decker, Black Butte, and Walnut Creek
entities was $114 million, $89 million, and $17 million,
respectively.
Under a 1992 mine management agreement, KCP pays a KCG
subsidiary an annual fee equal to 30% of KCP's adjusted operating
income. The fee in 1997 was $32 million.
Backlog. At the end of 1997, the backlog of coal to be sold
under KCP's long-term contracts was approximately $1.4 billion,
based on December 1997 market prices. Of this amount, $213
million is expected to be sold in 1998.
Reserves. At the end of 1997, KCP's share of assigned coal
reserves at Decker, Black Butte, and Walnut Creek was 111, 39,
and 31 million tons, respectively. Of these amounts, KCP's share
of the committed reserves of Decker, Black Butte, and Walnut
Creek was 46, 2, and 23 million tons, respectively. Assigned
reserves represent coal that can be mined using KCP's current
mining practices. Committed reserves (excluding alternate source
coal) represent KCP's maximum contractual amounts. These coal
reserve estimates represent total proved and probable reserves.
Leases. The coal reserves and deposits of the mines are
held pursuant to leases with the federal government through the
Bureau of Land Management, with two state governments (Montana
and Wyoming), and with numerous private parties.
Competition. The coal industry is highly competitive. KCP
competes not only with other domestic and foreign coal suppliers,
some of whom are larger and have greater capital resources than
KCP, but also with alternative methods of generating electricity
and alternative energy sources. In 1996, KCP's production
represented 1.5% of total U.S. coal production. Demand for KCP's
coal is affected by economic, political and regulatory factors.
For example, recent "clean air" laws may stimulate demand for low
sulphur coal. KCP's western coal reserves generally have a low
sulphur content (less than one percent) and are currently useful
principally as fuel for coal-fired steam-electric generating
units.
KCP's sales of its western coal, like sales by other western
coal producers, typically provide for delivery to customers at
the mine. A significant portion of the customer's delivered cost
of coal is attributable to transportation costs. Most of the
coal sold from KCP's western mines is currently shipped by rail
to utilities outside Montana and Wyoming. The Decker and Black
Butte mines are each served by a single railroad. Many of their
western coal competitors are served by two railroads and such
competitors' customers often benefit from lower transportation
costs because of competition between railroads for coal hauling
business. Other western coal producers, particularly those in
the Powder River Basin of Wyoming, have lower stripping ratios
(that is, the amount of overburden that must be removed in
proportion to the amount of minable coal) than the Black Butte
and Decker mines, often resulting in lower comparative costs of
production. As a result, KCP's production costs per ton of coal
at the Black Butte and Decker mines can be as much as four and
five times greater than production costs of certain competitors.
KCP's production cost disadvantage has contributed to its
agreement to amend its long-term contract with Commonwealth
Edison Company to provide for delivery of coal from alternate
source mines rather than from Black Butte. Because of these cost
disadvantages, KCP does not expect that it will be able to enter
into long-term coal purchase contracts for Black Butte and Decker
production as the current long-term contracts expire. In
addition, these cost disadvantages may adversely affect KCP's
ability to compete for spot sales in the future.
Environmental Regulation. The Company is required to comply
with various federal, state and local laws and regulations
concerning protection of the environment. KCP's share of land
reclamation expenses in 1997 was $3.6 million. KCP's share of
accrued estimated reclamation costs was $100 million at the end
of 1997. The Company does not expect to make significant capital
expenditures for environmental compliance in 1998. The Company
believes its compliance with environmental protection and land
restoration laws will not affect its competitive position since
its competitors in the mining industry are similarly affected by
such laws.
CALENERGY COMPANY, INC.
CalEnergy develops, owns, and operates electric power
production facilities, particularly those using geothermal
resources, in the United States, the Philippines, and Indonesia.
In December 1996, CalEnergy and Level 3 acquired Northern
Electric plc, an English electric utility company. CalEnergy is
a Delaware corporation formed in 1971 and has its headquarters in
Omaha, Nebraska. CalEnergy common stock is traded on the New
York, Pacific, and London Stock Exchanges. In 1997, CalEnergy
had revenue of $2.3 billion and a net loss of $84 million. At the
end of 1997, CalEnergy had total assets of $7.5 billion, debt of
$3.5 billion, and stockholders' equity of $1.4 billion.
At the end of 1997, Level 3 owned approximately 24% of the
common stock of CalEnergy. Under generally accepted accounting
principles, an investor owning between 20% and 50% of a company's
equity, generally uses the equity method. Under the equity
method, Level 3 reports its proportionate share of CalEnergy's
earnings, even though it has received no dividends from
CalEnergy. Level 3 keeps track of the carrying value of its
CalEnergy investment. "Carrying value" is the purchase price of
the investment, plus the investor's proportionate share of the
investee's earnings, less the amortized portion of goodwill, less
any dividends paid. At December 27, 1997 the carrying value of
Level 3's CalEnergy shares was $337 million. On January 2, 1998,
Level 3 sold its entire interest in CalEnergy along with its
interests in several development projects and Northern Electric
plc. to CalEnergy for approximately $1.16 billion.
OTHER BUSINESSES
SR91 Tollroad. Level 3 has invested $12 million for a 65%
equity interest and $4.3 million loan to California Private
Transportation Company, L.P. which developed, financed, and
currently operates the 91 Express Lanes, a ten mile, four lane
tollroad in Orange County, California. The fully automated
highway uses an electronic toll collection system and variable
pricing to adjust tolls to demand. Capital costs at completion
were $130 million, $110 million of which was funded with limited
recourse debt. Revenue collected over the 35-year franchise
period is used for operating expenses, debt repayment, and profit
distributions. The tollroad opened in December 1995 and achieved
operating break-even in 1996. Approximately 100,000 customers
have registered to use the tollroad and weekday volumes typically
exceed 29,000 vehicles per day.
United Infrastructure Company. UIC was an equal partnership
between Kiewit Infrastructure Corp., a wholly owned subsidiary of
Level 3, and Bechtel Infrastructure Enterprises, Inc.
("Bechtel"). UIC was formed in 1993 to develop North American
infrastructure projects. During 1996, UIC began to focus
primarily on water infrastructure projects, principally through
U.S. Water, a partnership formed with United Utilities PLC, a
U.K. company. As part of the strategic decision to concentrate
on its information services business and the Expansion Plan, on
December 31, 1997 Level 3 sold its entire interest in UIC to
Bechtel for $10 million.
Kiewit Mutual Fund. Kiewit Mutual Fund, a Delaware business
trust and a registered investment company, was formed in 1994.
Initially formed to manage the Company's internal investments,
shares in Kiewit Mutual Fund are now available for purchase by
the general public. The Fund's investors currently include
individuals and unrelated companies, as well as
Company-affiliated joint ventures, pension plans, and
subsidiaries. Kiewit Mutual Fund has six series: Money Market
Portfolio, Government Money Market Portfolio, Short-Term
Government Portfolio, Intermediate-Term Bond Portfolio,
Tax-Exempt Portfolio, and the Equity Portfolio. In February
1997, the Fund adopted a master- feeder structure. Each of the
Portfolios invests in a corresponding series of the Kiewit
Investment Trust, which now manages the underlying securities
holdings. The structure will allow smaller mutual funds and
institutional investors to pool their assets with Kiewit
Investment Trust, providing lower expense ratios for all
participants. The registered investment adviser of Kiewit
Investment Trust is Kiewit Investment Management Corp., a
subsidiary of Level 3 (60%) and KCG (40%). At the end of 1997,
Kiewit Mutual Fund had net assets of $1.3 billion. As part of
the strategic decision to concentrate on its information services
business and the Expansion Plan, it is anticipated that Level 3
will sell its interest in Kiewit Investment Management Corp. to
the Construction Group.
Other. In February 1997, Level 3 purchased an office
building in Aurora, Colorado for $22 million. By investing in
real estate, Level 3 defers taxes on $40 million
of taxable gain otherwise recognizable with respect to the
Whitney Benefits litigation settlement in 1995. Level 3 may make
additional real estate investments in 1998 with a view toward
deferring the balance of that taxable gain. Level 3 has also
made investments in several development-stage companies, but does
not expect earnings from these companies in 1998.
GENERAL INFORMATION
Year 2000. The Company. The Company has conducted a review
of its computer systems to identify those systems that could be
affected by the "Year 2000" computer issue, and has developed and
is implementing a plan to resolve the issue. The Year 2000 issue
results from computer programs written with date fields of two
digits, rather than four digits, thus resulting in the inability
of the computer programs to distinguish between the year 1900 and
2000.
The Company expects that its Year 2000 compliance project
will be completed before the Year 2000 date change. During the
execution of this project, the Company has and will continue to
incur internal staff costs as well as consulting and other
expenses. These costs will be expensed, as incurred, in
compliance with GAAP. The expenses associated with this project,
as well as the related potential effect on the Company's earnings
is not expected to have a material effect on its future operating
results or financial condition. There can be no assurance,
however, that the Year 2000 problem will not adversely affect the
Company and its business.
PKSIS. PKS Computer Services, Inc., the computer
outsourcing subsidiary of PKSIS, has developed a comprehensive
approach to address the potential operational risks associated
with the Year 2000, and began to implement remediation plans in
1997. As part of its plans PKS Computer Services is: working
with its key suppliers to verify their operational viability
through the Year 2000; reviewing building infrastructure
components that may be affected by the Year 2000 issue, which
components include fire alarms systems, security systems, and
automated building controls; identifying hardware inventories
that are affected by date logic that is not Year 2000 compliant,
which hardware includes mainframe computers, mid-range computers,
micro-computers, and network hardware. To the extent that
vendors identify items that are not Year 2000 compliant, PKS
Computer Services will work with the hardware vendor to develop a
plan that will enable continuous operations through the Year
2000.
PKS Computer Services is responsible for providing an
operating environment in which its customers applications are
run. As a result, PKS Computer Services will confirm the system
software inventories that it is responsible for managing. PKS
Computer Services will then develop a plan with each of its
customers that indicate that they intend to be customers in the
year 2000 to provide for Year 2000 compliance.
PKS Computer Services believes that many of the required
changes for hardware and operating environments will be included
in the costs that are incurred for annual maintenance.
PKS Systems Integration LLC provides a wide variety of
information technology services to its customers. In fiscal year
1997 approximately 80% of the revenue generated by PKSIS related
to projects involving Year 2000 assessment and renovation
services performed by PKS Systems Integration for its customers.
These contracts generally require PKS Systems Integration to
identify date affected fields in certain application software of
its customers and, in many cases, PKS Systems Integration
undertakes efforts to remediate those date-affected fields so
that the applicable applications are able to process date-related
information occurring on or before the Year 2000. Thus, Year
2000 issues affect many of the services PKS Systems Integration
provides to its customers. This exposes PKS Systems Integration
to potential risks that may include problems with services
provided by PKS Systems Integration to its customers and the
potential for claims arising under PKS Systems Integration
customer contracts. PKS Systems Integration attempts to
contractually limit its exposure to liability for Year 2000
compliance issues. However, there can be no assurance as to the
effectiveness of such contractual limitations.
The expenses associated with this project by PKSIS, as well
as the related potential effect on PKSIS's earnings is not
expected to have a material effect on its future operating
results or financial condition. There can be no assurance,
however, that the Year 2000 problem, and any loss incurred by any
customers of PKSIS as a result of the Year 2000 problem will not
materially and adversely affect PKSIS and its business.
Environmental Protection. Compliance with federal, state,
and local provisions regulating the discharge of materials into
the environment, or otherwise relating to the protection of the
environment, has not and is not expected to have a material
effect upon the capital expenditures, earnings, or competitive
position of the Company and its subsidiaries.
Employees. At the end of 1997, the Company and its
majority-owned subsidiaries employed approximately 17,700 people
- - 16,200 in construction and materials operations, 500 by coal
mining companies, 800 at PKSIS, and 200 in corporate and Level 3
positions. This does not include the employees of the C-TEC
Companies.
ITEM 2. PROPERTIES.
The properties used in the construction segment are
described under a separate heading in Item 1 above. Properties
relating to the Company's coal mining segment are described as
part of the general business description of the coal mining
business. Level 3 has announced that it has acquired 46 acres in
the Northwest corner of the Interlocken office park and will
build a campus facility that is expected to eventually encompass
over 500,000 square feet of office space. Interlocken is located
within the City of Broomfield, Colorado, and within Boulder
County, Colorado. It is anticipated that the first phase of this
facility will be constructed by the end of June 1999. In
addition, Level 3 has leased approximately 50,000 square feet of
temporary office space in Louisville, Colorado to allow for the
relocation of the majority of its employees (other than those of
PKSIS) while its permanent facilities are under construction.
The Company considers its properties to be adequate for its
present and foreseeable requirements.
ITEM 3. LEGAL PROCEEDINGS.
General. The Company and its subsidiaries are parties to
many pending legal proceedings. Management believes that any
resulting liabilities for legal proceedings, beyond amounts
reserved, will not materially affect the Company's financial
condition, future results of operations, or future cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
At a special meeting of stockholders held on December 8,
1997, the following matters were submitted to a vote.
1. Ratification of the decision of the PKS Board to
separate the construction business of PKS and the diversified
business of PKS into two independent companies through the
declaration of a dividend of eight-tenths of one share of newly
created Class R Convertible Common Stock, par value $.01 per
share ("Class R stock"), of PKS with respect to each outstanding
share of Class C Construction & Mining Group Restricted
Redeemable Convertible Exchangeable Common Stock, par value
$.0625 per share ("Class C stock"), of PKS, and mandatory
exchange of each outstanding share of Class C stock for one
outstanding share of Common Stock, par value $.01 per share, of
PKS Holdings, Inc. (collectively, the "Transaction").
Class C stock Class D stock
Affirmative votes: 9,031,714 21,673,495
Negative votes: 30,926 185,412
Abstentions: 11,020 64,227
2. Approval of amendments to the PKS Certificate (the
"Initial Certificate Amendments"), to: (i) create the Class R
Stock to be distributed in the Transaction; (ii) increase from
50,000,000 to 500,000,000 the number of shares of Class D
Diversified Group Convertible Exchangeable Common Stock, par
value $.0625 per share ("Class D stock"), which PKS is authorized
to issue; (iii) designate 10 shares of Class D stock as "Class D
Stock, Non-Redeemable Series"; and (iv) eliminate the requirement
that the Certificate of Incorporation of PKS Holdings as in
effect at the time of the Share Exchange be substantially similar
to the PKS Certificate.
Class C stock Class D stock
Affirmative votes: 9,030,927 21,735,628
Negative votes: 28,676 147,676
Abstentions: 14,057 39,830
3. Approval of amendments to the PKS Certificate to be
effected only if the Transaction is consummated, to: (i)
redesignate Class D stock as "Common Stock, par value $.01 per
share", and Class D Stock, Non-Redeemable Series as "Common
Stock, Non-Redeemable Series"; (ii) authorize the issuance of
series of preferred stock, the terms of which are to be
determined by the board of directors; (iii) modify the repurchase
rights to which the holders of Class D stock are entitled; (iv)
delete the provisions regarding Class C stock; (v) classify the
board of directors; (vi) prohibit stockholder action by written
consent; (vii) empower the board of directors, exclusively, to
call special meetings of the stockholders; (viii) require a
supermajority vote of stockholders to amend the by-laws; and (ix)
make certain other non-substantive changes consistent with the
implementation of the foregoing.
Class C stock Class D stock
Affirmative votes: 9,011,554 21,472,115
Negative votes: 30,696 381,726
Abstentions: 31,410 69,293
4. Approval of the amendment and restatement of the Peter
Kiewit Sons', Inc. 1995 Class D stock Plan.
Class C stock Class D stock
Affirmative votes: 8,958,084 21,268,757
Negative votes: 70,566 536,914
Abstentions: 45,010 117,463
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below shows information as of March 15, 1998 about
each director and executive officer of the Company, including his
business experience during the past five years. The Company's
directors and officers are elected annually and each was elected
on June 7, 1997 to serve until his successor is elected and
qualified or until his death, resignation or removal.
Name Business Experience Age PKS Director Since
Walter Scott, Jr.* Chairman of the Board and 66 09/27/79- Chairman
President, PKS (for more 04/22/64- Director
than the past five years);
also a director of Berkshire
Hathaway, Inc., Burlington
Resources, Inc., CalEnergy,
ConAgra, Inc., Commonwealth
Telephone Enterprises, Inc.,
RCN Corporation, U.S. Bancorp
and Valmont Industries, Inc.
Peter Kiewit, Jr. Attorney, of counsel to the 71 01/13/66
law firm of Gallagher &
Kennedy of Phoenix, Arizona
(for more than the past five
years)
William L. Grewcock* Vice Chairman, PKS (for more 72 01/11/68
than the past five years)
Robert B. Daugherty Director (and formerly 75 01/08/86
Chairman of the Board and
Chief Executive Officer)
Valmont Industries, Inc.
(for more than the past
five years)
Charles M. Harper Former Chairman of the 69 01/08/86
Board and Chief Executive
Officer of RJR Nabisco
Holdings Corp. Currently
a director (and formerly
Chairman of the Board and
Chief Executive Officer)
of ConAgra, Inc. and also
a director of E.I. DuPont
de Nemours and Company,
Norwest Corp. and Valmont
Industries, Inc.
Kenneth E. Stinson* Executive Vice President, 55 01/07/87
PKS (for more than the
past five years); Chairman
since 1993) and CEO (since
1992), KCG; also a director
of ConAgra, Inc. and Valmont
Industries, Inc.
Richard Geary* Executive Vice President, 62 04/29/88
KCG; President of Kiewit
Pacific Co., a KCG
construction subsidiary
(for more than the past five years)
George B. Toll, Jr.* Executive Vice President, 61 06/05/93
KCG (since 1994); Vice
President, Kiewit
Pacific Co., a KCG
construction subsidiary
(1992-1994)
James Q. Crowe* President and Chief 48 06/05/93
Executive Officer,
Level 3 (since August 1,
1997); Chairman of the
Board, WorldCom, Inc., an
International
telecommunications company
(January 1997-July 1997);
Chairman of the Board, MFS
Communications Company, Inc.,
an international
telecommunications company
(1992-1996) (MFS was a
Diversified Group subsidiary
until 1995); also a director
of Commonwealth Telephone
Enterprises, Inc., RCN
Corporation, and InaCom
Communications, Inc.
Richard R. Jaros Executive Vice President 46 06/05/93
(1993-1997) and Chief
Financial Officer (1995-1997),
PKS; President of Level 3
(1996-1997); President and
COO of CalEnergy (1992-1993);
also a director of CalEnergy,
Commonwealth Telephone
Enterprises, Inc., RCN
Corporation and WorldCom, Inc.
Richard W. Colf* Vice President, Kiewit 54 06/03/95
Pacific Co., a KCG
construction subsidiary
(for more than the past
five years)
Bruce E. Grewcock* Executive Vice President, 44 06/04/94
KCG (since 1996); Chairman
(since 1996), President
(1992-1996) and Sr. Vice
President (1992) of Kiewit
Mining Group Inc.; also a
director of Kinross Gold
Corporation
Tait P. Johnson* President, Gilbert 48 06/03/95
Industrial Corporation, a
KCG construction subsidiary
(for more than the past five
years); President (1992-1996),
Gilbert Southern Corp., a KCG
construction subsidiary
Allan K. Kirkwood* Senior Vice President, 54 06/07/97
Kiewit Pacific Co., a KCG
construction subsidiary
(for more than the past
five years)
Identified by asterisks are the ten persons currently
serving as executive officers of PKS. Executive officers are
those directors who are employed by PKS or its subsidiaries.
Bruce E. Grewcock is the son of William L. Grewcock.
The PKS Board has an Audit Committee, a Compensation
Committee and an Executive Committee.
The Audit Committee members are Messrs. Johnson, Kirkwood
and Kiewit. The functions of the Audit Committee are to
recommend the selection of the independent auditors; review the
results of the annual audit; inquire into important internal
control, accounting and financial matters; and report and make
recommendations to the full PKS Board. The Audit Committee had
four meetings in 1997.
The Compensation Committee members are Messrs. Daugherty,
Harper, and Kiewit, none of whom are employees of PKS. This
committee reviews the compensation of the executive officers of
PKS. This committee has also assumed the functions of the former
Management Compensation Committee, the purpose of which was to
review the compensation, securities ownership, and benefits of
the employees of PKS other than its executive officers. The
Compensation Committee had one formal meeting in 1997.
The Executive Committee members are Messrs. Scott
(Chairman), William Grewcock, Stinson, and Crowe. This committee
exercises the powers of the PKS Board between meetings of the PKS
Board, except powers assigned to other committees. During 1997,
the Executive Committee had no formal meetings, acted by written
consent action in lieu of a meeting on two occasions, and had
several informal meetings.
PKS does not have a nominating committee. The PKS
Certificate provides that the incumbent directors elected by
holders of Class C Stock may nominate a slate of Class C
directors to be elected by holders of Class C Stock and the
incumbent directors elected by holders of Class D Stock may
nominate a slate of directors to be elected by holders of Class D
Stock, for election at the annual meeting of stockholders.
The PKS Board had six formal meetings in 1997 and acted by
written consent action on six occasions. In 1997, no director
attended less than 75% of the meetings of the PKS Board and the
committees of which he was a member.
Directors who are employees of PKS or its subsidiaries do
not receive directors' fees. Non-employee directors are paid
annual directors' fees of $30,000, plus $1,200 for attending each
meeting of the PKS Board, and $1,200 for attending each meeting
of a committee of the PKS Board.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information. As of December 27, 1997, the Company's
common stock is not listed on any national securities exchange or
the Nasdaq National Market. However, the Class D stock is
currently quoted on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board. During the fourth quarter of
1997, the only quarter during which this trading occurred, the
range of the high and low bid information for the Class D stock
was $20.41 to $29.00. The Company has announced that the common
stock of Level 3 Communications, Inc. (renamed from Peter Kiewit
Sons', Inc. in connection with the Transaction) will begin
trading on the Nasdaq National Market on April 1, 1998.
Company Repurchase Duty. Pursuant to the current terms of
the PKS Certificate, the Company is generally required to
repurchase shares at a formula price upon demand. Under the PKS
Certificate effective January 1992, the Company has three classes
of common stock: Class B Construction & Mining Group Nonvoting
Restricted Redeemable Convertible Exchangeable Common Stock
("Class B"), Class C stock, and Class D stock. There are no
outstanding Class B stock; the last Class B stock were converted
into Class D stock on January 1, 1997. Class C stock can be
issued only to Company employees and can be resold only to the
Company at a formula price based on the year-end book value of
the Construction Group. The Company is generally required to
repurchase Class C stock for cash upon stockholder demand. Class
D stock has a formula price based on the year-end book value of
the Diversified Group. The Company must generally repurchase
Class D stock for cash upon stockholder demand at the formula
price, unless the Class D stock become publicly traded.
Formula values. The formula price of the Class D stock is
based on the book value of Level 3 and its subsidiaries, plus
one-half of the book value, on a stand-alone basis, of the parent
company, PKS. The formula price of the Class C stock is based on
the book value of the Construction Group and its subsidiaries,
plus one-half of the book value of the unconsolidated parent
company. A significant element of the Class C formula price is
the subtraction of the book value of property, plant, and
equipment used in construction activities ($122 million in 1997).
Conversion. Under the PKS Certificate, Class C stock is
convertible into Class D stock at the end of each year. Between
October 15 and December 15 of each year a Class C stockholder may
elect to convert some or all of his or her shares. Conversion
occurs on the following January 1. The conversion ratio is the
relative formula prices of Class C and Class D stock determined
as of the last Saturday in December, that is, the last day in the
Company's fiscal year. Class D stock may be converted into Class
C stock only as part of an annual offering of Class C stock to
employees. Instead of purchasing the offered shares for cash, an
employee owning Class D stock may convert such shares into Class
C stock at the applicable conversion ratio.
Restrictions. Ownership of Class C stock is generally
restricted to active Company employees. Upon retirement,
termination of employment, or death, Class C stock must be resold
to the Company at the applicable formula price, but may be
converted into Class D stock if the terminating event occurs
during the annual conversion period. Class D stock is not
subject to ownership or transfer restrictions.
Dividends and Prices. During 1996 and 1997 the Company
declared or paid the following dividends on its common stock.
The table also shows the stock price after each dividend payment
or other valuation event.
Dividend Dividend
Declared Dividend Paid Per Share Class Price Adjusted Stock Price
Oct. 27, 1995 Jan. 5, 1996 $0.60 C Dec. 30, 1995 $32.40
Apr. 26, 1996 May 1, 1996 0.60 C May 1, 1996 31.80
Oct. 25, 1996 Jan. 4, 1997 0.70 C Dec. 28, 1996 40.70
Apr. 23, 1997 May 1, 1997 0.70 C May 1, 1997 40.00
Oct. 22, 1997 Jan. 5, 1998 0.80 C Dec. 27, 1997 51.20
Oct. 27, 1995 Jan. 5, 1996 0.50 D Dec. 30, 1995 9.90*
Oct. 25, 1996 Jan. 4, 1997 0.50 D Dec. 28, 1996 10.85*
D Dec. 27, 1997 11.65*
* All stock prices for the Class D stock reflect a dividend of
four shares of Class D stock for each outstanding share of Class
D stock that was effective on December 26, 1997.
The Company's current dividend policy is to pay a regular
dividend on Class C stock of about 15% to 20% of the prior year's
ordinary earnings of the Construction Group, with any special
dividends to be based on extraordinary earnings. Although the
PKS Board announced in August 1993 that the Company did not
intend to pay regular dividends on Class D stock for the
foreseeable future, the PKS Board declared a special dividend of
$0.50 per share of Class D stock in both October 1995 and 1996.
A dividend of 4 shares of Class D Stock for each share of
Class D Stock was effected on December 26, 1997.
Stockholders. On March 15, 1998, and after giving effect to
a dividend of 4 shares of Class D Stock for each outstanding
share of Class D stock effected on December 26, 1997, the Company
had the following numbers of stockholders and outstanding shares
for each class of its common stock:
Class of Stock Stockholders Shares Outstanding
B - -
C 996 7,681,020
D 2,121 146,943,752
Recent Sales of Unregistered Securities. On April 1, 1997,
the Company sold 10,000 shares of Class D stock to Charles Harper
and Robert Daugherty and 8,000 shares of Class D stock to Peter
Kiewit Jr. at a sale price of $49.50 per share. Each of Messrs
Harper, Daugherty and Kiewit are members of the PKS Board of
Directors. The sale was effected pursuant to an exemption from
registration under the Securities Act of 1933 contained in
Section 4(2) of such Act.
ITEM 6. SELECTED FINANCIAL DATA.
PETER KIEWIT SONS', INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The Selected Financial Data of Peter Kiewit Sons', Inc., the
Kiewit Construction & Mining Group ("C Stock") and the
Diversified Group ("D Stock") appear below and on the next two
pages. The consolidated data of PKS are presented below with the
exception of per common share data which is presented in the
Selected Financial Data of the respective Groups.
(dollars in millions, Fiscal Year Ended
except per share amounts) 1997 1996 1995 1994 1993
Results of Operations:
Revenue (1) $ 332 $ 652 $ 580 $ 537 $ 267
Earnings from continuing
operations 83 104 126 28 174
Net earnings (2) 248 221 244 110 261
Financial Position:
Total assets (1) 2,779 3,066 2,945 4,048 3,236
Current portion of
long-term debt (1) 3 57 40 30 11
Long-term debt, less
current portion (1) 137 320 361 899 452
Stockholders' equity (3) 2,230 1,819 1,607 1,736 1,671
(1) In October 1993, the Company acquired 35% of the outstanding
shares of C-TEC Corporation that had 57% of the available
voting rights. On December 28, 1996 the Company owned 48%
of the outstanding shares and 62% of the voting rights.
As a result of the C-TEC restructuring, the Company owns less
than 50% of the outstanding shares and voting rights of the
three entities, and therefore accounted for each entity using
the equity method in 1997. The Company consolidated C-TEC
from 1993 through 1996.
The financial position and results of operations of Kiewit
Construction & Mining Group have been classified as
discontinued operations due to the pending spin-off from
Peter Kiewit Sons', Inc.
In September 1995, the Company dividended its investment in
MFS to Class D shareholders. MFS' results of operations have
been classified as a single line item on the statements of
earnings. MFS is consolidated in the 1993 and 1994 balance
sheets.
In January 1994, MFS, issued $500 million of 9.375% Senior
Discount Notes.
In September 1997, Level 3 agreed to sell its energy segment to
CalEnergy Company, Inc. The transaction closed on January 2,
1998.
(2) In 1993, through two public offerings, the Company sold 29%
of its subsidiary, MFS, resulting in a $137 million after-tax
gain. In 1995 and 1994, additional MFS stock transactions
resulted in $2 million and $35 million after-tax gains to the
Company and reduced its ownership in MFS to 66% and 67%.
(3) The aggregate redemption value of common stock at December
27, 1997 was $2.1 billion.
KIEWIT CONSTRUCTION & MINING GROUP
SELECTED FINANCIAL DATA
The following selected financial data for each of the years in
the period 1993 to 1997 have been derived from audited financial
statements. The historical financial information for the Kiewit
Construction & Mining and Diversified Groups supplements the
consolidated financial information of PKS and, taken together,
includes all accounts which comprise the corresponding
consolidated financial information of PKS.
(dollars in millions, Fiscal Year Ended
except per share amounts) 1997 1996 1995 1994 1993
Results of Operations:
Revenue $ 2,764 $ 2,303 $ 2,330 $ 2,175 $ 1,783
Net earnings 155 108 104 77 80
Per Common Share:
Net earnings
Basic 15.99 10.13 7.78 4.92 4.63
Diluted 15.35 9.76 7.62 4.86 4.59
Dividends (1) 1.50 1.30 1.05 0.90 0.70
Stock price (2) 51.20 40.70 32.40 25.55 22.35
Book value 64.38 51.02 42.90 31.39 27.43
Financial Position:
Total assets 1,341 1,038 976 967 889
Current portion of
long-term debt 5 - 2 3 4
Long-term debt, less
current portion 22 12 9 9 10
Stockholders' equity (3) 652 562 467 505 480
(1) The 1997, 1996, 1995, 1994 and 1993 dividends include $.80,
$.70, $.60, $.45 and $.40 for dividends declared in 1997,
1996, 1995, 1994 and 1993, respectively, but paid in
January of the subsequent year.
(2) Pursuant to the Certificate of Incorporation, the stock
price calculation is computed annually at the end of the
fiscal year.
(3) Ownership of the Class C Stock is restricted to certain
employees conditioned upon the execution of repurchase
agreements which restrict the employees from transferring
the stock. PKS is generally committed to purchase all
Class C Stock at the amount computed, when put to PKS by a
stockholder, pursuant to the Certificate of Incorporation.
The aggregate redemption value of the Class C Stock at
December 27, 1997 was $527 million.
DIVERSIFIED GROUP
SELECTED FINANCIAL DATA
The following selected financial data for each of the years in
the period 1993 to 1997 have been derived from audited financial
statements. The historical financial information for the
Diversified Group and Kiewit Construction & Mining Group
supplements the consolidated financial information of PKS and,
taken together, includes all accounts which comprise the
corresponding consolidated financial information of PKS.
(dollars in millions, Fiscal Year Ended
except per share amounts) 1997 1996 1995 1994 1993
Results of Operations:
Revenue (1) $ 332 $ 652 $ 580 $ 537 $ 267
Earnings from continuing operations 83 104 126 28 174
Net earnings (2) 93 113 140 33 181
Per Common Share:
Earnings from continuing operations
Basic .66 .90 1.17 .27 1.74
Diluted .66 .90 1.17 .27 1.74
Net earnings
Basic .74 .97 1.29 .32 1.82
Diluted .74 .97 1.29 .32 1.81
Dividends (3) - .10 .10 - .10
Stock price (4) 11.65 10.85 9.90 12.05 11.88
Book value 11.65 10.85 9.90 12.07 11.90
Financial Position:
Total assets (1) 2,127 2,504 2,478 3,543 2,756
Current portion of long-term debt (1) 3 57 40 30 11
Long-term debt,less current portion (1) 137 320 361 899 452
Stockholders' equity (5) 1,578 1,257 1,140 1,231 1,191
(1) In October 1993, the Group acquired 35% of the outstanding
shares of C-TEC Corporation that had 57% of the available
voting rights. At December 28, 1996, the Group owned 48% of
the outstanding shares and 62% of the voting rights.
As a result of the C-TEC restructuring, the Group owns less
than 50% of the outstanding shares and voting rights of each
of the three entities, and therefore accounted for each
entity using the equity method in 1997. The Company
consolidated C-TEC from 1993 to 1996.
In September 1995, the Group dividended its investment in MFS to
Class D shareholders. MFS' results of operations have been
classified as a single line item on the statements of
earnings. MFS is consolidated in the 1993 and 1994 balance
sheets.
In January 1994, MFS issued $500 million of 9.375% Senior
Discount Notes.
In September 1997, the Group agreed to sell its energy segment
to CalEnergy Company, Inc. The transaction closed on January
2, 1998.
(2) In 1993, through two public offerings, the Group sold 29% of
MFS, resulting in a $137 million after-tax gain. In 1995 and
1994, additional MFS stock transactions resulted in $2
million and $35 million after-tax gains to the Group and
reduced its ownership in MFS to 66% and 67%.
(3) The 1996, 1995 and 1993 dividends include $.10 for
dividends declared in 1996, 1995 and 1993 but paid in
January of the subsequent year.
(4) Pursuant to the Certificate of Incorporation, the stock price
calculation is computed annually at the end of the fiscal
year.
(5) Unless Class D Stock becomes publicly traded, PKS is
generally committed to purchase all Class D Stock at the
amount computed, in accordance with the Certificate of
Incorporation, when put to PKS by a stockholder. The
aggregate redemption value of the Class D Stock at December
27, 1997 was $1,578 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALLYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This item contains information about Peter Kiewit Sons', Inc.
(the "Company") as a whole. Separate reports containing
management's discussion and analysis of financial condition and
results of operations for the Kiewit Construction & Mining Group
and Diversified Group have been filed as Exhibits 99.A
and 99.B to this Form 10-K. A copy of Exhibit 99.A will be
furnished without charge upon the written request of a
stockholder addressed to: Stock Registrar, Peter Kiewit Sons',
Inc., 1000 Kiewit Plaza, Omaha, Nebraska 68131. Exhibit 99.B
can be obtained by contacting Investor Relations, Level 3 Communications,
Inc., 3555 Farnam Street, Omaha, Nebraska 68131.
The following discussion of Results of Operations should be
read in conjunction with the segment information contained in
Note 13 of the Consolidated Financial Statements.
This document contains forward looking statements and
information that are based on the beliefs of management as well
as assumptions made by and information currently available to the
Company. When used in this document, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions, as
they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and
are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results
may vary materially from those described in this document.
Results of Operations 1997 vs. 1996
Coal Mining. Revenue from the Group's coal mines declined 5%
in 1997 compared to 1996. Alternate source coal revenue declined
by $16 million in 1997. The mine's primary customer,
Commonwealth Edison, accelerated its contractual commitments in
1996 for alternate source, thus reducing its obligations in 1997.
In addition to the decline in tonnage shipped, the price of coal
sold to Commonwealth declined 1%. Revenue attributable to other
contracts increased by approximately $4 million. The actual
amount of coal shipped to these customers increased 5% in 1997,
but the price at which it was sold was 4% lower than 1996.
Margin, as a percentage of revenue, declined 11% from 1996 to
1997. Margins in 1996 were higher than normal due to the
additional high margin alternate source coal sold to Commonwealth
in 1996 and the refund of premiums from a captive insurance
company that insured against black lung disease. The decline in
Commonwealth shipments and an overall decline in average selling
price, adversely affected the results for 1997. If current
market conditions continue, the Group expects a decline in coal
revenue and earnings after 1998 as certain long-term contracts
begin to expire.
Information Services. Revenue increased by 124% to $94
million in 1997 from $42 million in 1996. Revenue from computer
outsourcing services increased 20% to $49 million in 1997 from
$41 million in 1996. The increase was due to new computer
outsourcing contracts signed in 1997. Revenue for systems
integration grew to $45 million in 1997 from less than $1 million
in 1996. Strong demand for Year 2000 renovation services fueled
the growth for systems integration's revenues.
Margin, as a percent of revenue, decreased to 28% in 1997 from
41% in 1996 for the computer outsourcing business. The reduction
of the gross margin was due to up-front migration costs
associated with new contracts and significant increases in
personnel costs due to the tightening supply of computer
professionals. Gross margin for the systems integration business
was approximately 40% in 1997. A comparison to 1996 gross margin
is not meaningful due to the start-up nature of the business.
General and Administrative Expenses. Excluding C-TEC,
general and administrative expenses increased 20% to $114 million
in 1997. The increase was primarily attributable to a $41
million increase in the information services business' general
and administrative expenses. The majority of the increase is
attributable to additional compensation expense that was incurred
due to the conversion of a subsidiary's option and SAR plans to the
Class D Stock option plan. The remainder of the increase relates to
the increased expenses for new sales offices established in 1997 for the
systems integration business and the additional personnel hired in 1997
to implement the expansion plan.
Exclusive of the information services business, general and
administrative expenses decreased 26% to $62 million in 1997. A
decrease in professional services and the mine management fees
were partially offset by increased compensation expense. Due to
the favorable resolution of certain environmental and legal
matters, costs that were previously accrued for these issues were
reversed in 1997. Partially offsetting this reduction were
legal, tax and consulting expenses associated with the CalEnergy
transaction and the separation of the Construction and Mining
Group and Diversified Group.
Equity Losses. The losses for the Group's equity investments
increased from $9 million in 1996 to $43 million in 1997. Had
the C-TEC entities been accounted for using the equity method in
1996, the losses would have increased to $13 million. The
expenses associated with the deployment and marketing of the
advanced fiber networks in New York, Boston and Washington D.C.,
and the costs incurred in connection with the buyout of a
marketing contract with minority shareholders are primarily
responsible for the increase in equity losses attributable to RCN
from $6 million in 1996 to $26 million in 1997. The Group's
share of Cable Michigan's losses decreased to $6 million in 1997
from $8 million in 1996. This improvement is attributable to the
gains recognized on the sale of Cable Michigan's Florida cable
systems. Commonwealth Telephone's earnings were consistent with
that of 1996. The Group recorded equity earnings of $9 million
in each year attributable to Commonwealth Telephone. The Group
also recorded equity losses attributable to several developing
businesses.
Investment Income. Investment income increased 7% in 1997
after excluding C-TEC's $14 million of investment income in 1996.
Gains recognized on the sale of marketable securities, primarily
within the Kiewit Mutual Fund ("KMF"), increased from $3 million
in 1996 to $9 million in 1997. In 1997, KMF repositioned the
securities within its portfolios to more closely track the
overall market. Partially offsetting these additional gains was
a decline in interest income due to an overall reduction of yield
earned by the KMF portfolios.
Interest Expense. Interest expense increased significantly in
1997 after excluding $28 million of interest attributable to C-
TEC in 1996. CPTC, the owner-operator of a privatized tollroad
in California, incurred interest costs of approximately $9
million and $11 million in 1996 and 1997. In 1996, interest of
$5 million was capitalized due to the construction of the
tollroad. Construction was completed in August 1996, and all
interest incurred subsequent to that date was charged against
earnings. Interest associated with the financing of the Aurora,
Colorado property of $1 million, also contributed to the increase
in interest expense.
Other Income. Other income in 1996 includes $2 million of
other expenses attributable to C-TEC. Excluding these losses,
other income declined from $8 million in 1996 to $1 million in
1997. The absence of gains on the sale of timberland properties
and other assets, which accounted for $6 million of income in
1996, is responsible for the decline.
Income Tax (Provision) Benefit. The effective income tax rate
for 1997 is less than the expected statutory rate of 35% due
primarily to prior year tax adjustments, partially offset by the
effect of nondeductible compensation expense associated with the
conversion of the information services option and SAR plans to
the Class D Stock plan. In 1996, the effective rate was also
lower than the statutory rate due to prior year tax adjustments.
These adjustments were partially offset by nondeductible costs
associated with goodwill amortization and taxes on foreign
operations. In 1997 and 1996, the Group settled a number of
disputed tax issues related to prior years that have been
included in prior year tax adjustments.
Discontinued Operations - Construction. The Construction and
Mining Group's operations can be separated into two components;
construction and materials. Construction revenues increased $414
million during 1997 compared to 1996. The consolidation of ME
Holding Inc. (due to the increase in ownership from 49% to 80%)
("ME Holding") contributed $261 million, almost two-thirds of the
increase. In addition to ME Holding several large projects and
joint ventures became fully mobilized during the latter part of
the year and were well into the "peak" construction phase.
Material revenues increased 19% to $290 million in 1997 from
$243 million in 1996. The acquisition of additional plant sites
accounts for 22% of the increase in sales. The remaining
increase was a result of the strong market for material products
in Arizona. This raised sales volume from existing plant sites
and allowed for slightly higher selling prices. The inclusion of
$10 million of revenues from the Oak Mountain facility in Alabama
also contributed to the increase.
Construction margins increased to 13% of revenue in 1997 as
compared to 10% in 1996. The favorable resolution of project
uncertainties, several change order settlements, and cost savings
or early completion bonuses received during the year contributed
to this increase.
Material margins decreased from 10% of revenue in 1996 to 4% in
1997. Losses at the Oak Mountain facility in Alabama were the
source of the decrease. The materials margins from sources other
than Oak Mountain remained stable as higher unit sales and
selling prices were offset by increases in raw materials costs.
General and administrative expenses of the Construction Group
increased 11% in 1997 after deducting $17 million of expenses
attributable to ME Holding. Compensation and profit sharing
expenses increased $9 million and $2 million, respectively, from
1996. The increase in these costs is a direct result of higher
construction earnings.
The effective income tax rates in 1997 and 1996 for the
Construction Group differ from the expected statutory rate of 35%
primarily due to state income taxes and prior year tax
adjustments.
Discontinued Operations - Energy. Income from discontinued
operations increased to $29 million in 1997 from $9 million in
1996. The acquisition of Northern Electric, plc. in late 1996 and the
commencement of operations at the Mahanagdong geothermal facility
in July, 1997 were the primary factors that resulted in the
increase.
In October 1997, CalEnergy sold approximately 19.1 million
shares of its common stock. This sale reduced the Group's
ownership in CalEnergy to approximately 24% but increased its
proportionate share of CalEnergy's equity. It is the Group's
policy to recognize gains or losses on the sale of stock by its
investees. The Group recognized an after-tax gain of
approximately $44 million from transactions in CalEnergy stock in
the fourth quarter of 1997.
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 is 23%
of the difference between the value of Northern Electric, plc. at
the time of privatization and the utility's current value based
on profits over a period of up to four years. CE Electric
recorded an extraordinary charge of approximately $194 million
when the tax was enacted in July, 1997. The total after-tax
impact to Level 3, directly through its investment in CE Electric
and indirectly through its interest in CalEnergy, was $63
million.
Results of Operations 1996 vs. 1995
Coal Mining. Revenue and net earnings improved primarily due
to increased alternate source tons sold to Commonwealth Edison
Company in 1996 and the liquidation of a captive insurance
company which insured against black lung disease. Upon
liquidation, the Group received a refund of premiums paid plus
interest in excess of reserves established by the Group for this
liability. Since 1993, the amended contract with Commonwealth
provided that delivery commitments would be satisfied with coal
produced by unaffiliated mines in the Powder River Basin in
Wyoming. Coal produced at the Group's mines did not change
significantly from 1995 levels
Information Services. Revenue increased 17% to $42 million in
1996 from $36 million in 1995. The increase was primarily due to
new computer outsourcing contracts signed in 1996. Less than $1
million of revenue was generated by the operations of the new
systems integration business, started in February, 1996.
Margin, as a percent of revenue, for the outsourcing business
decreased to 41% in 1996 from 45% in 1995. The reduction of the
margin was primarily due to up-front migration costs for new
customers which were recognized as an expense when incurred.
Telecommunications. Revenue for the telecommunications segment
increased 13% to $367 million for fiscal 1996. C-TEC's telephone
group's $10 million, or 8%, increase in sales and C-TEC's cable
group's $33 million or 26% increase in revenue were the primary
contributors to the improved results. The increase in telephone
group revenue is due to higher intrastate access revenue from the
growth in access minutes, an increase of 13,000 access lines, and
higher internet access and video conferencing sales. Cable group
revenue increased primarily due to higher average subscribers and
the effects of rate increases in April 1995 and February 1996.
Subscriber counts increased primarily due to the acquisition of
Pennsylvania Cable Systems, formerly Twin County Trans Video,
Inc., in September 1995, and the consolidation of Mercom, Inc.
since August 1995. Pennsylvania Cable Systems and Mercom account
for $23 million of the increase in cable revenue in 1996.
The 1996 operating expenses for the telecommunications business
increased $38 million or 18% compared to 1995. The telephone
group experienced a 9% increase in expenses and the cable group's
costs increased 31%. The increase for the telephone group was
primarily attributable to higher payroll expenses resulting from
additional personnel, wage increases and higher overtime. Also
contributing to the increase, were fees associated with the
internet access services and consulting services for a variety of
regulatory and operational matters. The cable group's increase
was due to increased depreciation, amortization and compensation
expenses associated with the acquisition of Pennsylvania Cable
Systems and the consolidation of Mercom's operations. Also
contributing to the higher costs were rate increases for existing
programming and the costs for additional programming.
General and Administrative Expenses. General and
administrative expenses declined 5% to $181 million in 1996.
Decreases in expenses associated with legal and environmental
matters were partially offset by higher mine management fees paid
to the Construction & Mining Group, the costs attributable to C-
TEC and the opening of the SR91 toll road. C-TEC's corporate
overhead and other costs increased approximately 13% in 1996.
This increase is attributable to costs associated with the
development of the RCN business in New York and Boston, the
acquisition of Pennsylvania Cable Systems, the consolidation of
Mercom and the investigation of the feasibility of various
restructuring alternatives.
Equity Earnings, net. Losses attributable to the Group's
equity investments increased to $9 million in 1996 from $5
million in 1995. The additional losses were attributable to an
enterprise engaged in the renewable fuels business and to C-TEC's
investment in MegaCable S.A. de C.F., Mexico's second largest
cable television operator.
Investment Income, net. Investment income increased 24% in
1996 compared to 1995. Increased gains on the sale of marketable
and equity securities and interest income were partially offset
by a slight decline in dividend income.
Interest Expense, net. Interest expense in 1996 increased 43%
compared to 1995. The increase was primarily due to interest on
the CPTC debt that was capitalized through July 1996, and C-TEC's
redeemable preferred stock, issued in the Pennsylvania Cable
Systems acquisition, that began accruing interest in 1996.
Gain on Subsidiary's Stock Transactions, net. The issuance of
MFS stock for acquisitions by MFS and the exercise of MFS
employee stock options resulted in a $3 million net gain to the
Group in 1995.
Other, net. The decline of other income in 1996 was primarily
attributable to the 1995 settlement of the Whitney Benefits
litigation.
Income Tax Benefit (Provision). The effective income tax rate
for 1996 differs from the statutory rate of 35% primarily because
of adjustments to prior year tax provisions, partially offset by
state taxes and nondeductible amounts associated with goodwill
amortization. In 1995, the rate was lower than 35% due primarily
to $93 million of income tax benefits from the reversal of
certain deferred tax liabilities originally recognized on gains
from MFS stock transactions that were no longer required due to
the tax-free spin-off of MFS, and adjustments to prior year tax
provisions.
Discontinued Operations - Construction. Revenue from
construction decreased 1% to $2,303 million in 1996. This
resulted from the completion of several major projects during the
year, while many new contracts were still in the start-up phase.
KCG's share of joint venture revenue remained at 30% of total
revenues in 1996. Revenue from materials increased by less than
1% in 1996. Increased demand for aggregates in the Arizona
market was offset by a decline in precious metal sales. KCG sold
its gold and silver operations in Nevada to Kinross Gold
Corporation ("Kinross") and essentially liquidated its metals
inventory in 1995.
Opportunities in the construction and materials industry
continued to expand along with the economy. Because of the
increased opportunities, KCG was able to be selective in the
construction projects it pursued. Gross margins for construction
increased from 8% in 1995 to 10% in 1996. This resulted from the
completion of several large projects and increased efficiencies
in all aspects of the construction process. Gross margins for
materials declined from 13% in 1995 to 10% in 1996. The lack of
higher margin precious metals sales in 1996 combined with
slightly lower construction materials margins produced the
reduction in operating margin.
In 1995, the exchange of KCG's gold and silver operations in
Nevada for 4,000,000 shares of common stock of Kinross led to a
$21 million gain for KCG. The gain was the difference between
KCG's book value in the gold and silver operations and the market
value of the Kinross shares at the time of the exchange. Other
income was also primarily comprised of mining management fees
from the Diversified Group, of $37 million and $30 million in
1996 and 1995, and gains on the disposition of property, plant
and equipment and other assets of $17 million and $ 12 million in
1996 and 1995.
The effective income tax rate for 1996 differs from the
statutory rate of 35% primarily because of adjustments to prior
year tax provisions and state taxes. In 1995, the rate was
higher than 35% due primarily to state income taxes.
Discontinued Operations - Energy. Income from discontinued
operations declined in 1996 by 36% to $9 million. Losses
attributable to the Group's interest in the Casecnan project,
additional development expenses for international activities, and
the costs associated with the Northern Electric transaction were
partially offset by increased equity earnings from CalEnergy.
Financial Condition - December 27, 1997
The Group's working capital, excluding C-TEC and discontinued
operations, increased $392 million or 106% during 1997. This is
due to the $182 million of cash generated by operations,
primarily coal operations, and the significant financing
activities described below.
Investing activities include $452 million to purchase
marketable securities, $42 million of investments and $26 million
of capital expenditures, including $14 million for the existing
information services business and $6 million for a corporate jet.
The investments primarily include the Group's $22 million
investment in the Pavilion Towers office complex, located in
Aurora, Colorado, and $15 million of investments in developing
businesses. Funding a portion of these activities was the sale
of marketable securities of $167 million.
Sources of financing include $138 million for the issuance of
Class D Stock, $72 million for the exchange of Class C stock for
Class D stock and $16 million for the financing for Pavilion
Towers. Uses consist primarily of $12 million for the payment
of dividends, and $2 million of payments on long-term debt.
Prior to the execution of an agreement with CalEnergy in
September, 1997, the Group invested $31 million in the Dieng,
Patuha and Bali power projects in Indonesia.
In October 1996, the PKS Board of Directors directed PKS
management to pursue a listing of Class D Stock as a way to
address certain issues created by PKS' two-class capital stock
structure and the need to attract and retain the best management
for PKS' businesses. During the course of its examination of the
consequences of a listing of Class D Stock, management concluded
that a listing of Class D Stock would not adequately address
these issues, and instead began to study a separation of the
Construction and Mining Group and the Diversified Group. At the
regular meeting of the Board on July 23, 1997, management
submitted to the Board for consideration a proposal for
separation of the Construction and Mining Group and Diversified
Group through a spin-off of the Construction and Mining Group
("the Transaction"). At a special meeting on August 14, 1997,
the Board approved the Transaction.
In connection with the sale of approximately 10 million Class D shares
to employees in 1997, the Company has retained the right to purchase
the relevant Class D shares at the then current Class D Stock price
if the Transaction is definitely abandoned by formal action of the
PKS Board or the employees voluntarily terminate their employment
on various dates prior to January 1, 1999.
The separation of the Construction and Mining Group and the
Diversified Group was contingent upon a number of conditions,
including the favorable ratification by a majority of both Class
C and Class D shareholders and the receipt by the Company of an
Internal Revenue Service ruling or other assurance acceptable to
the Board that the separation would be tax-free to U.S.
shareholders. On December 8, 1997, PKS' Class C and Class D
shareholders approved the transaction and on March 5, 1998 PKS
received a favorable ruling from the Internal Revenue Service.
The Transaction is anticipated to be effective on March 31, 1998.
Level 3 has recently decided to substantially increase its
emphasis on and resources to its information services to
business. Pursuant to the plan, Level 3 intends to expand
substantially its current information services business, through
the expansion of its existing business and the creation, through
a combination of construction, leasing and purchase of facilities
and other assets, of a substantial facilities-based internet
communications network.
Using this network Level 3 intends to provide (a) a range of
internet access services at varying capacity levels and, as
technology development allows, at specified levels of quality of
service and security and (b) a number of business oriented
communications services which may include fax service, which are
transmitted in part over private or limited access Transmission
Control Protocol/Internet Protocol ("TCP/IP") networks and are
offered at lower prices than public telephone network-based fax
service, and voice message storing and forwarding over the same
TCP/IP-based networks.
Level 3 believes that over time, a substantial number of
businesses will convert existing computer application systems to
computer systems which communicate using TCP/IP and are accessed
by users employing Web browsers. Level 3 further believes that
businesses will prefer to contract for assistance in making this
conversion with those vendors able to provide a full range of
services from initial consulting to internet access with
requisite quality and security levels.
Level 3 anticipates that the capital expenditures required to
implement this expansion plan will be substantial. Level 3
estimates that these costs may be in excess of $500 million in
1998 and could exceed $1.5 billion in 1999. Level 3's current
financial condition, borrowing capacity and proceeds from the
CalEnergy transaction described below should be sufficient for
immediate operating, implemention and investing activities.
However, Level 3 expects to raise capital from both the equity
and debt markets due to the significant capital requirements of
the information services expansion plan.
In connection with the Expansion Plan, Level 3 expects to
devote substantially more management time and capital resources
to its information services business with a view to making the
information services business, over time, the principal business
of Level 3. In that respect, management is conducting a
comprehensive review of the existing Level 3 businesses to
determine how those businesses will complement Level 3's focus on
information services. If it is decided that an existing business
is not compatible with the information services business and if a
suitable buyer can be found, Level 3 may dispose of that
business.
In January 1998, Level 3 and CalEnergy closed the sale of Level
3's energy assets to CalEnergy. Level 3 received proceeds of
$1,159 million and expects to recognize an after-tax gain of
approximately $324 million in 1998. The after-tax proceeds from
this transaction of approximately $967 million will be used to
fund the expansion plan of the information services business.
In January 1998, Class C shareholders converted 2.3 million
shares, with a redemption value of $122 million, into 10.5
million shares of Class D Stock.
In February 1998, Level 3 announced that it was moving its
corporate headquarters to Broomfield, Colorado, a northwest
suburb of Denver. The campus facility is expected to encompass
over 500,000 square feet of office space at a construction cost
of over $70 million. Level 3 is leasing space in the Denver area
while the campus is under construction. The first phase of the
complex is scheduled for completion in the summer of 1999.
In March 1998, PKS announced that its Class D Stock will begin
trading on April 1 on the Nasdaq National Market under the symbol
"LVLT". The Nasdaq listing will follow the separation of Level 3
and the Construction Group of PKS, which is expected to be
completed on March 31, 1998. In connection with the separation,
PKS' construction subsidiary will be renamed "Peter Kiewit Sons',
Inc." and PKS Class D Stock will become the common stock of Level
3 Communications, Inc.
PKS' certificate of incorporation gives stockholders the
right to exchange their Class C Stock for Class D Stock under a
set conversion formula. That right will be eliminated as a
result of the separation of Level 3 and the Construction Group.
To replace that conversion right, Class C stockholders received
6.5 million shares of a new Class R stock in January, 1998, which
is convertible into Class D Stock in accordance with terms
ratified by stockholders in December 1997.
The PKS Board of Directors has approved in principle a plan
to force conversion of all shares of Class R stock outstanding.
Due to certain provisions of the Class R stock, conversion will
not be forced prior to May 1998, and the final decision to force
conversion would be made by Level 3's Board of Directors at that
time. Level 3's Board may choose not to force conversion if it
were to decide that conversion is not in the best interests of
the stockholders of Level 3. If, as currently anticipated, Level
3's Board determines to force conversion of the Class R stock on
or before June 30, 1998, certain adjustments will be made to the
cost sharing and risk allocation provisions of the separation
agreement between Level 3 and the Construction business.
If Level 3's Board of Directors determines to force
conversion of the Class R stock, each share of Class R stock will
be convertible into $25 worth of Level 3 (Class D) common stock,
based upon the average trading price of the Level 3 common stock
on the Nasdaq National Market for the last fifteen trading days
of the month prior to the determination by the Board of Directors
to force conversion. When the spin-off occurs, Level 3 will
increase paid in capital and reduce retained earnings by the fair
value of the Class R shares.
Immediately prior to the spin-off of the Kiewit Construction
and Mining Group, the Company will recognize a gain equal to the
difference between the carrying value of the Construction and
Mining Group and its fair value. The Company will then reflect
the fair value of Kiewit Construction and Mining Group as a
dividend to shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements and supplementary financial information
for Peter Kiewit Sons', Inc. and Subsidiaries begin on page P1.
Separate financial statements and other information pertaining to
the Kiewit Construction & Mining Group and the Diversified
Group have been filed as Exhibits 99.A and 99.B to this report.
The Company will furnish a copy of such exhibits without charge
upon the written request of a stockholder addressed to Stock
Registrar, Peter Kiewit Sons', Inc., 1000 Kiewit Plaza, Omaha,
Nebraska 68131.
The financial statements of an equity investee (RCN) are required
by Rule 3.09 and are incorporated by reference from RCN's Form 10-K for
the year ended December 31, 1997, filed under Commission File No. 000-22825.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Part III is incorporated by
reference to the Company's definitive proxy statement for the
1998 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission. However, certain information
is set forth under the caption "Directors and Executive Officers
of the Registrant" following Item 4 above.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial statements and financial statement schedules
required to be filed for the registrant under Items 8 or 14 are
set forth following the index page at page P1.
Exhibits filed as a part of this report are listed below.
Exhibits incorporated by reference are indicated in parentheses.
Exhibit Number Description
3.1 Restated Certificate of Incorporation,
effective January 8, 1992 (Exhibit 3.1 to
Company's Form 10-K for 1991).
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of Peter Kiewit Sons', Inc., effective
December 8, 1997.
3.4 By-laws, composite copy, including all amendments, as of
March 19, 1993 (Exhibit 3.4 to Company's Form 10-K for
1992).
10.1 Separation Agreement, dated December 8, 1997, by and among
PKS, Kiewit Diversified Group Inc., PKS Holdings, Inc. and
Kiewit Construction Group Inc.
10.2 Amendment No. 1 to Separation Agreement, dated March 18,
1997, by and among PKS, Kiewit Diversified Group Inc., PKS
Holdings, Inc. and Kiewit Construction Group Inc.
21 List of subsidiaries of the Company.
23 Consents of Coopers & Lybrand LLP
27 Financial data schedules.
99.A Kiewit Construction & Mining Group Financial Statements and
Other Information.
99.B Diversified Group Financial Statements and Other
Information.
(b) No reports on Form 8-K were filed by the Company during the
fourth quarter of 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 30th day of March, 1998.
PETER KIEWIT SONS', INC.
By: /s/ Walter Scott, Jr.
Name: Walter Scott, Jr.
Title: Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
indicated on the 30th day of March, 1998.
/s/ Walter Scott, Jr. Chairman of the Board and President
Walter Scott, Jr. (principal executive officer)
/s/ R. Douglas Bradbury Executive Vice President of Level 3
R. Douglas Bradbury Communications, Inc.
(principal financial officer)
/s/ Eric J. Mortensen Controller
Eric J. Mortensen (principal accounting officer)
/s/ Richard W. Colf /s/ Richard R. Jaros
Richard W. Colf, Director Richard R. Jaros,
Director
/s/ James Q. Crowe /s/ Tait P. Johnson
James Q. Crowe, Director Tait P. Johnson,
Director
/s/ Robert B. Daugherty /s/ Allan K. Kirkwood
Robert B. Daugherty, Director Allan K. Kirkwood,
Director
/s/ Richard Geary /s/ Peter Kiewit, Jr.
Richard Geary, Director Peter Kiewit, Jr.,
Director
/s/ Bruce E. Grewcock /s/ Kenneth E. Stinson
Bruce E. Grewcock, Director Kenneth E. Stinson,
Director
/s/ William L. Grewcock /s/ George B. Toll, Jr.
William L. Grewcock, Director George B. Toll, Jr.,
Director
/s/ Charles M. Harper
Charles M. Harper, Director
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Index to Financial Statements
Report of Independent Accountants
Financial Statements as of December 27, 1997 and December 28, 1996
and for the three years ended December 27, 1997:
Consolidated Statements of Earnings
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
Schedules not indicated above have been omitted because of the
absence of the conditions under which they are required or because
the information called for is shown in the consolidated financial
statements or in the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Peter Kiewit Sons', Inc.
We have audited the consolidated financial statements of Peter
Kiewit Sons', Inc. and Subsidiaries as listed in the index on the
preceding page of this Form 10-K. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Peter Kiewit Sons', Inc. and Subsidiaries as of
December 27, 1997 and December 28, 1996, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 27, 1997 in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Omaha, Nebraska
March 30, 1998
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
For the three years ended December 27, 1997
(dollars in millions, except per share data) 1997 1996 1995
Revenue $ 332 $ 652 $ 580
Cost of Revenue (175) (384) (345)
------ ------ -----
157 268 235
General and Administrative Expenses (114) (181) (190)
------ ------ -----
Operating Earnings 43 87 45
Other (Expense) Income:
Equity losses, net (43) (9) (5)
Investment income, net 45 56 45
Interest expense, net (15) (33) (23)
Gain on subsidiary's stock transactions, net - - 3
Other, net 1 6 125
------ ------ -----
(12) 20 145
Equity Loss in MFS - - (131)
------ ------ -----
Earnings Before Income Taxes, Minority Interest
and Discontinued Operations 31 107 59
Income Tax Benefit (Provision) 48 (3) 79
Minority Interest in Net Loss (Income)
of Subsidiaries 4 - (12)
------ ------ -----
Income from Continuing Operations 83 104 126
Discontinued Operations:
Construction, net of income tax
(expense) of ($107), ($72) and ($60) 155 108 104
Energy, net of income tax benefit (expense)
of $1, ($9) and ($8) 10 9 14
------ ------ -----
Income from Discontinued Operations 165 117 118
------ ------ -----
Net Earnings $ 248 $ 221 $ 244
====== ====== =====
Earnings Per Share:
Continuing Operations:
Class D Stock
Basic $ .66 $ .90 $1.17
====== ====== =====
Diluted $ .66 $ .90 $1.17
====== ====== =====
Net Income:
Class C Stock
Basic $15.99 $10.13 $7.78
====== ====== =====
Diluted $15.35 $ 9.76 $7.62
====== ====== =====
Class D Stock
Basic $ .74 $ .97 $1.29
====== ====== =====
Diluted $ .74 $ .97 $1.29
====== ====== =====
See accompanying notes to consolidated financial statements.
PETER KIEWIT SONS', INC AND SUBSIDIARIES
Consolidated Balance Sheets
December 27, 1997 and December 28, 1996
(dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 87 $ 147
Marketable securities 678 372
Restricted securities 22 17
Receivables, less allowance of $-, and $3 42 76
Investment in discontinued operations - energy 643 608
Other 22 26
------- ------
Total Current Assets 1,494 1,246
Property, Plant and Equipment, at cost:
Land 15 18
Buildings and leasehold improvements 122 159
Equipment 275 810
------- ------
412 987
Less accumulated depreciation and amortization (228) (345)
------- ------
Net Property, Plant and Equipment 184 642
Investments 383 189
Investments in Discontinued Operations-Construction 652 562
Intangible Assets, net 21 353
Other Assets 45 74
------- ------
$ 2,779 $3,066
======= ======
See Note 17 for 1997 pro forma balance sheet information.
See accompanying notes to consolidated financial statements.
PETER KIEWIT SONS', INC. AND SUBSIDAIRIES
Consolidated Balance Sheets
December 27, 1997 and December 28, 1996
(continued)
(dollars in millions) 1997 1996
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 31 $ 79
Current portion of long-term debt:
Telecommunications - 55
Other 3 2
Accrued reclamation and other mining costs 19 19
Deferred income taxes 15 5
Other 21 87
------ ------
Total Current Liabilities 89 247
Long-Term Debt, less current portion:
Telecommunications - 207
Other 137 113
Deferred Income Taxes 83 148
Accrued Reclamation Costs 100 98
Other Liabilities 139 216
Minority Interest 1 218
Stockholders' Equity:
Preferred stock, no par value, authorized
250,000 shares:
no shares outstanding in 1997 and 1996 - -
Common stock, $.0625 par value, $2.1
billion aggregate redemption value:
Class B, authorized 8,000,000 shares:
- outstanding in 1997 and 263,468
outstanding in 1996 - -
Class C, authorized 125,000,000 shares:
10,132,343 outstanding in 1997 and 10,743,173
outstanding in 1996 1 1
Class D, authorized 500,000,000 shares:
135,517,140 outstanding in 1997 and 115,901,215
outstanding in 1996 8 1
Class R, authorized 8,500,000 shares:
- outstanding in 1997 and 1996 - -
Additional paid-in capital 427 235
Foreign currency adjustment (7) (7)
Net unrealized holding gain 2 23
Retained earnings 1,799 1,566
------ ------
Total Stockholders' Equity 2,230 1,819
------ ------
$2,779 $3,066
====== ======
See Note 17 for 1997 pro forma balance sheet information.
See accompanying notes to consolidated financial statements.
PETER KIEWIT SONS', INC. AND SUBSIDAIRIES
Consolidated Statements of Cash Flows
For the three years ended December 27, 1997
(dollars in millions) 1997 1996 1995
Cash flows from continuing operations:
Income from continuing operations $ 83 $ 104 $ 126
Adjustments to reconcile income from
continuing operations to net
cash provided by continuing operations:
Depreciation, depletion and amortization 24 132 96
Gain on sale of property, plant and
equipment, and other investments (9) (3) (7)
Gain on subsidiary's stock transactions, net - - (3)
Compensation expense attributable
to stock options 21 - -
Equity losses, net 43 10 130
Minority interest in subsidiaries (4) - 12
Retirement benefits paid (7) (6) (2)
Federal income tax refunds 146 - 35
Deferred income taxes (103) (68) (152)
Change in working capital items:
Receivables (9) (1) 11
Other current assets (1) 6 -
Payables (3) 9 (3)
Other liabilities (5) 13 34
Other 6 - (4)
------ ------ ------
Net cash provided by continuing operations 182 196 273
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 167 378 383
Purchases of marketable securities (452) (311) (440)
Increase in restricted securities (2) (2) (2)
Investments and acquisitions, net of
cash acquired (42) (59) (136)
Proceeds from sale of property, plant
and equipment, and other investments 1 7 14
Capital expenditures (26) (117) (118)
Other 3 (8) (2)
------ ------ ------
Net cash used in investing activities $ (351) $ (112) $ (301)
See accompanying notes to consolidated financial statements.
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three years ended December 27, 1997
(continued)
(dollars in millions) 1997 1996 1995
Cash flows from financing activities:
Long-term debt borrowings $ 17 $ 38 $ 49
Payments on long-term debt, including
current portion (2) (60) (49)
Issuances of common stock 138 - 2
Issuances of subsidiaries' stock - 1 -
Repurchases of common stock - (11) (3)
Dividends paid (12) (11) -
Exchange of Class C Stock for Class
D Stock, net 72 20 155
------ ------ ------
Net cash provided by (used in)
financing activities 213 (23) 154
Cash flows from discontinued operations:
Discontinued energy operations 3 5 8
Investments in discontinued energy operations (31) (282) (101)
Proceeds from sales of discontinued
packaging operations - - 29
------ ------ ------
Net cash used in discontinued operations (28) (277) (64)
Cash and cash equivalents of C-TEC in 1997
and MFS in 1995 at beginning of year (76) - (22)
Effect of exchange rates on cash - - 2
------ ------ ------
Net change in cash and cash equivalents (60) (216) 42
Cash and cash equivalents at beginning of year 147 363 321
------ ------ ------
Cash and cash equivalents at end of year $ 87 $ 147 $ 363
====== ====== ======
Supplemental disclosure of cash
flow information:
Taxes paid $ 62 $ 55 $ 132
Interest paid 13 38 33
Noncash investing and financing activities:
Conversion of CalEnergy convertible
debentures to common stock $ - $ 66 $ -
Dividend of investment in MFS - - 399
Issuance of C-TEC redeemable preferred stock
for acquisition - - 39
See accompanying notes to consolidated financial statements.
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the three years ended December 27, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Net
Class Class Unrealized
B&C D Additional Foreign Holding
(dollars in Common Common Paid-in Currency Gain Retained
millions) Stock Stock Capital Adjustment (Loss) Earnings Total
Balance at
December 31, 1994 $ 1 $ 1 $ 182 $ (7) $ (8) $ 1,567 $1,736
Issuances of stock - - 29 - - - 29
Repurchases of stock - - (1) - - (5) (6)
Foreign currency
adjustment - - - 1 - - 1
Net unrealized
holding gain - - - - 25 - 25
Net earnings - - - - - 244 244
Dividends:(a)
Class C ($1.05
per common share) - - - - - (12) (12)
Class D ($.10 per
common share) - - - - - (11) (11)
MFS Dividend - - - - - (399) (399)
----- ----- ----- ----- ----- ----- -----
Balance at
December 30, 1995 $ 1 1 210 (6) 17 1,384 1,607
Issuances of stock - - 27 - - - 27
Repurchases of stock - - (2) - - (14) (16)
Foreign currency
adjustment - - - (1) - - (1)
Net unrealized
holding gain - - - - 6 - 6
Net earnings - - - - - 221 221
Dividends: (b)
Class C ($1.30
per common share) - - - - - (13) (13)
Class D ($.10 per
common share) - - - - - (12) (12)
----- ----- ----- ----- ----- ----- -----
Balance at
December 28, 1996 $ 1 $ 1 $ 235 $ (7) $ 23 $1,566 $1,819
</TABLE>
See accompanying notes to consolidated financial statements
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the three years ended December 27,1997
(continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Net
Class Class Unrealized
B&C D Additional Foreign Holding
(dollars in Common Common Paid-in Currency Gain Retained
millions) Stock Stock Capital Adjustment (Loss) Earnings Total
Balance at
December 28, 1996 $ 1 $ 1 $ 235 $ (7) $ 23 $1,566 $1,819
Issuances of stock - - 172 - - - 172
Repurchases of stock - - - - - (2) (2)
Option Activity - - 27 - - - 27
Class D Stock Split - 7 (7) - - - -
Foreign currency
adjustment - - - - - - -
Net unrealized
holding loss - - - - (21) - (21)
Net earnings - - - - - 248 248
Dividends: (c)
Class C ($1.50 per
common share) - - - - - (13) (13)
---- ---- ----- ----- ---- ------ ------
Balance at
December 27, 1997 $ 1 $ 8 $ 427 $ (7) $ 2 $1,799 $2,230
==== ==== ===== ===== ==== ====== ======
</TABLE>
(a) Includes $.60 and $.10 per share for dividends on Class C and
Class D Stock, respectively, declared in 1995 but paid in
January 1996.
(b) Includes $.70 and $.10 per share for dividends on Class C and
Class D Stock, respectively, declared in 1996 but paid in
January 1997.
(c) Includes $.80 per share for dividends on Class C declared in
1997 but paid in January 1998.
See accompanying notes to consolidated financial statements.
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of
Peter Kiewit Sons', Inc. and subsidiaries in which it has
control ("PKS" or "the Company"), which are engaged in
enterprises primarily related to construction, coal mining,
energy generation, information services, and telecommunications.
Fifty-percent-owned mining joint ventures are consolidated on a
pro rata basis. Investments in other companies in which the
Company exercises significant influence over operating and
financial policies, including construction joint ventures and
energy projects, are accounted for by the equity method. The
Company accounts for its share of the operations of the construction
joint ventures on a pro rata basis in the consolidated statements
of earnings. All significant intercompany accounts and
transactions have been eliminated.
In 1997, the Company agreed to sell its energy assets to
CalEnergy Company, Inc. ("CalEnergy") and to spin-off the
construction business. Therefore, the assets and
liabilities, and results of operations, of both businesses
have been classified as discontinued operations on the
consolidated balance sheet, statements of earnings and cash
flows. (See notes 2 and 3)
On September 5, 1997, C-TEC Corporation ("C-TEC") announced that
its board of directors had approved the planned restructuring
of C-TEC into three publicly traded companies. The
transaction was effective September 30, 1997. As a result of
the restructuring plan, the Company owns less than 50% of the
outstanding shares and voting rights of each entity, and
therefore has accounted for each entity using the equity
method as of the beginning of 1997. In accordance with
Generally Accepted Accounting Principles, C-TEC's financial
position, results of operations and cash flows are
consolidated in the 1996 and 1995 financial statements.
The results of operations of MFS Communications Company, Inc.
("MFS"), (which later merged into WorldCom Inc.) prior to its
spin-off on September 30, 1995, have been classified as a
single line item on the statements of earnings
The Company invests in the portfolios of the Kiewit Mutual Fund,
("KMF"), a registered investment company. KMF is not
consolidated in the Company's financial statements.
Description of Business Groups
Holders of Class C Stock ("Construction & Mining Group") and
Class D Stock ("Diversified Group") are stockholders of PKS.
The Construction & Mining Group ("KCG") contains the
Company's traditional construction and materials operations
performed by Kiewit Construction Group Inc. The Diversified
Group through Level 3 Communications, Inc. (formerly Kiewit
Diversified Group Inc.) ("Level 3") contains coal mining
properties owned by Kiewit Coal Properties Inc., energy
investments, including a 24% interest in CalEnergy and a 30%
interest in CE Electric UK plc ("CE Electric"), investments
in international energy projects, information services
businesses, telecommunications companies owned by C-TEC, as
well as other assets. 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 groups.
Construction Contracts
KCG operates generally within the United States and Canada as a
general contractor and engages in various types of
construction projects for both public and private owners.
Credit risk is minimal with public (government) owners since
KCG ascertains that funds have been appropriated by the
governmental project owner prior to commencing work on public
projects. Most public contracts are subject to termination
at the election of the government. In the event of
termination, KCG is entitled to receive the contract price on
completed work and reimbursement of termination related
costs. Credit risk with private owners is minimized because
of statutory mechanics liens, which give KCG high priority in
the event of lien foreclosures following financial
difficulties of private owners.
The construction industry is highly competitive and lacks firms
with dominant market power. A substantial portion of KCG's
business involves construction contracts obtained through
competitive bidding. The volume and profitability of KCG's
construction work depends to a significant extent upon the
general state of the economies in which it operates and the
volume of work available to contractors. KCG's construction
operations could be adversely affected by labor stoppages or
shortages, adverse weather conditions, shortages of supplies,
or other governmental action.
KCG recognizes revenue on long-term construction contracts and
joint ventures on the percentage-of-completion method based
upon engineering estimates of the work performed on
individual contracts. Provisions for losses are recognized on
uncompleted contracts when they become known. Claims for
additional revenue are recognized in the period when allowed.
It is at least reasonably possible that engineering estimates
of the work performed on individual contracts will be revised
in the near term.
Coal Sales Contracts
Level 3's coal is sold primarily under long-term contracts with
electric utilities, which burn coal in order to generate
steam to produce electricity. A substantial portion of Level
3's coal sales were made under long-term contracts during
1997, 1996 and 1995. The remainder of Level 3's sales are
made on the spot market where prices are substantially lower
than those in the long-term contracts. As the long-term
contracts expire, a higher proportion of Level 3's sales
will occur on the spot market.
The coal industry is highly competitive. Level 3 competes not
only with other domestic and foreign coal suppliers, some of
whom are larger and have greater capital resources than Level
3, but also with alternative methods of generating
electricity and alternative energy sources. Many of Level
3's competitors are served by two railroads and, due to the
competition, often benefit from lower transportation costs
than Level 3 which is served by a single railroad.
Additionally, many competitors have lower stripping ratios
than Level 3, often resulting in lower comparative costs of
production.
Level 3 is also required to comply with various federal, state
and local laws concerning protection of the environment.
Level 3 believes its compliance with environmental protection
and land restoration laws will not affect its competitive
position since its competitors are similarly affected by such
laws.
Level 3 and its mining ventures have entered into various
agreements with its customers which stipulate delivery and
payment terms for the sale of coal. Prior to 1993, one of
the primary customers deferred receipt of certain commitments
by purchasing undivided fractional interests in coal reserves
of Level 3 and the mining ventures. Under the agreements,
revenue was recognized when cash was received. The
agreements with this customer were renegotiated in 1992. In
accordance with the renegotiated agreements, there were no
sales of interests in coal reserves subsequent to January 1,
1993. Level 3 has the obligation to deliver the coal
reserves to the customer in the future if the customer
exercises its option. If the option is exercised, Level 3
presently intends to deliver coal from unaffiliated mines.
In the opinion of the management, Level 3 has sufficient coal
reserves to cover the above sales commitments.
Level 3's coal sales contracts are with several electric utility
and industrial companies. In the event that these customers
do not fulfill contractual responsibilities, Level 3 would
pursue the available legal remedies.
Information Services Revenue
Information services revenue is primarily derived from the
computer outsourcing business and the systems integration
business. Level 3 provides outsourcing service, typically
through contracts ranging from 3-5 years, to firms that
desire to focus their resources on their core businesses.
Under these contracts, Level 3 recognizes revenue in the
month the service is provided. The systems integration
business helps customers define, develop and implement cost-
effective information systems. Revenue from these services
is billed on a time and materials basis or percentage of
completion basis depending on the extent of the services
provided.
Telecommunications Revenue
In 1996 and 1995 C-TEC's most significant operating groups are
its local telephone service and cable system operations.
C-TEC's telephone network access revenues are derived from
net access charges, toll rates and settlement arrangements
for traffic that originates or terminates within C-TEC's
local telephone company. Revenues from telephone services
and basic and premium cable programming services are recorded
in the month the service is provided.
The telecommunications industry is subject to local, state and
federal regulation. Consequently, the ability of the
telephone and cable groups to generate increased volume and
profits is largely dependent upon regulatory approval to
expand customer bases and increase prices.
Competition for the cable group's services traditionally has come
from broadcast television, video rentals and direct broadcast
satellite received on home dishes. Future competition is
expected from telephone companies.
Concentration of credit risk with respect to accounts receivable
are limited due to the dispersion of customer base among
geographic areas and remedies provided by terms of contracts
and statutes.
As noted previously, the investment in C-TEC has been
accounted for using the equity method in 1997.
Depreciation and Amortization.
Property, plant and equipment are recorded at cost. Depreciation
and amortization for the majority of the Company's property,
plant and equipment are computed on accelerated and
straight-line methods. Depletion of mineral properties is
provided primarily on an units-of-extraction basis determined
in relation to estimated reserves.
Intangible Assets
Intangible assets primarily include amounts allocated upon
purchase of existing operations, franchises and subscriber
lists. These assets are amortized on a straight-line basis
over the expected period of benefit, which does not exceed 40
years.
Long Lived Assets
The Company reviews the carrying amount of long lived assets for
impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable.
Measurement of any impairment would include a comparison of
estimated future operating cash flows anticipated to be
generated during the remaining life of the asset to the net
carrying value of the asset.
Reserves for Reclamation
Level 3 follows the policy of providing an accrual for
reclamation of mined properties, based on the estimated cost
of restoration of such properties, in compliance with laws
governing strip mining. It is at least reasonably possible
that the estimated cost of restoration will be revised in the
near-term.
Foreign Currencies
Generally, local currencies of foreign subsidiaries are the
functional currencies for financial reporting purposes.
Assets and liabilities are translated into U.S. dollars at
year-end exchange rates. Revenue and expenses are translated
using average exchange rates prevailing during the year.
Gains or losses resulting from currency translation are
recorded as adjustments to stockholders' equity.
Subsidiary and Investee Stock Activity
The Company recognizes gains and losses from the sale, issuance
and repurchase of stock by its subsidiaries.
Earnings Per Share
In 1997, the Company adopted 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 per
share data presented. Basic earnings per share have been
computed using the weighted average number of shares during
each period. Diluted earnings per share is computed by
including stock options and convertible debentures considered
to be dilutive common stock equivalents.
Potentially dilutive stock options are calculated in accordance
with the treasury stock method which assumes that proceeds
from the exercise of all options are used to repurchase
common stock at the average market value. The number of
shares remaining after the proceeds are exhausted represent
the potentially dilutive effect of the options. The
potentially dilutive convertible debentures are calculated in
accordance with the "if converted" method. This method
assumes that the after-tax interest expense associated with
the debentures is an addition to income and the debentures
are converted into equity with the resulting common shares
being aggregated with the weighted average shares
outstanding.
The following details the earnings per share calculations for
Class D Stock and Class C Stock:
Class D Stock 1997 1996 1995
Income from continuing operations
available to common shareholders
(in millions) $ 83 $ 104 $ 126
Add: Interest expense, net of tax
effect associated with convertible
debentures - - -*
-------- -------- --------
Income from continuing operations
for fully diluted shares 83 104 126
Income from discontinued operations 10 9 14
--------- -------- --------
Net Income $ 93 $ 113 $ 140
========= ======== ========
Total number of weighted average shares
outstanding used to compute basic
earnings per share (in thousands) 124,647 116,006 108,594
Additional dilutive stock options 539 311 -
Additional dilutive shares assuming
conversion of convertible debentures - - 257
--------- ------- -------
Total number of shares used to
compute diluted earnings per share 125,186 116,317 108,851
========= ======= =======
Continuing Operations:
Basic earnings per share $ .66 $ .90 $ 1.17
========= ======= =======
Diluted earnings per share $ .66 $ .90 $ 1.17
========= ======= =======
Discontinued Operations:
Basic earnings per share $ .08 $ .07 $ .12
========= ======= =======
Diluted earnings per share $ .08 $ .07 $ .12
========= ======= =======
Net Income:
Basic earnings per share $ .74 $ .97 $ 1.29
========= ======= =======
Diluted earnings per share $ .74 $ .97 $ 1.29
========= ======= =======
*Interest expense attributable to convertible debentures was
less than $1 million in 1995.
Class C Stock 1997 1996 1995
Net income available to common
shareholders (in millions) $ 155 $ 108 $ 104
Add: Interest expense, net of tax effect
associated with convertible debentures 1 -* -*
-------- ------- --------
Net income for diluted shares $ 156 $ 108 $ 104
======== ======= ========
Total number of weighted average
shares outstanding used to compute
basic earnings per share (in thousands) 9,728 10,656 13,384
Additional dilutive shares assuming
conversion of convertible debentures 441 437 312
-------- -------- --------
Total number of shares used to
compute diluted earnings per share 10,169 11,093 13,696
======== ======== ========
Net Income
Basic earnings per share $ 15.99 $ 10.13 $ 7.78
======== ======== ========
Diluted earnings per share $ 15.35 $ 9.76 $ 7.62
======== ======== ========
*Interest expense attributable to convertible debentures was
less than $1 million in 1996 and 1995.
Stock Dividend
Effective December 26, 1997, the PKS Board of Directors
approved a dividend of four shares of Class D Stock for every
one share of Class D Stock held. All share information and
per share data have been restated to reflect this dividend.
Income Taxes
Deferred income taxes are provided for the temporary
differences between the financial reporting basis and tax
basis of the Company's assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to reverse.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive
Income", which requires that changes in comprehensive income
be shown in a financial statement that is displayed with the
same prominence as other financial statements.
Also in 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information",
which changes the way public companies report information
about segments. SFAS No. 131, which is based on the
management approach to segment reporting includes
requirements to report selected segment information
quarterly, and entity wide disclosures about products and
services, major customers, and geographic data.
These statements are effective for financial statements for
periods beginning after December 15, 1997. Management does
not expect adoption of these statements to materially affect
the Company's financial statements.
Reclassifications
Where appropriate, items within the consolidated financial
statements and notes thereto have been reclassified from
previous years to conform to current year presentation.
Fiscal Year
The Company's fiscal year ends on the last Saturday in December.
There were 52 weeks in fiscal years 1997, 1996 and 1995.
(2) Reorganization
In October 1996, the PKS Board of Directors directed PKS
management to pursue a listing of Class D Stock as a way to
address certain issues created by PKS' two-class capital
stock structure and the need to attract and retain the best
management for PKS' businesses. During the course of its
examination of the consequences of a listing of Class D
Stock, management concluded that a listing of Class D Stock
would not adequately address these issues, and instead began
to study a separation of the Construction and Mining Group
and the Diversified Group. At the regular meeting of the
Board on July 23, 1997, management submitted to the Board for
consideration a proposal for separation of the Construction
and Mining Group and Diversified Group through a spin-off of
the Construction and Mining Group ("the Transaction"). At a
special meeting on August 14, 1997, the Board approved the
Transaction.
The separation of the Construction and Mining Group and the
Diversified Group was contingent upon a number of conditions,
including the favorable ratification by a majority of both
Class C and Class D shareholders and the receipt by the
Company of an Internal Revenue Service ruling or other
assurance acceptable to the Board that the separation would
be tax-free to U.S. shareholders. On December 8, 1997, PKS'
Class C and Class D shareholders approved the transaction
and on March 5, 1998 PKS received a favorable ruling from the
Internal Revenue Service. The Transaction is anticipated to
be effective on March 31, 1998. As a result of these events
the Company has reflected the financial position and results of
operations of the Kiewit Construction and Mining Group as discontinued
operations on the consolidated balance sheets and consolidated
statements of earnings for all periods presented. The activities
of the Construction and Mining Group have been removed from the
statements of cash flows. The financial statements of Kiewit
Construction and Mining Group can be found in Exhibit 99.A of
this document.
The following is summarized financial information of the
Kiewit Construction and Mining Group:
Operations (dollars in millions) 1997 1996 1995
Revenue $ 2,764 $ 2,303 $ 2,330
Net income 155 108 104
Financial Position (dollars in millions) 1997 1996
Current assets $ 1,057 $ 764
Other assets 284 274
-------- -------
Total assets $ 1,341 $ 1,038
======== =======
Current liabilities 579 397
Other liabilities 99 79
Minority interest 11 -
------- -------
Total liabilities 689 476
------- -------
Net assets $ 652 $ 562
======= =======
Immediately prior to the spin-off of the Kiewit Construction and
Mining Group, the Company will recognize a gain equal to the
difference between the carrying value of the Construction and
Mining Group and its fair value. The Company will then reflect
the fair value of Kiewit Construction and Mining Group as a dividend
to shareholders.
Level 3 has recently decided to substantially increase its
emphasis on and resources to its information services business.
Pursuant to the plan, Level 3 intends to expand substantially
its current information services business, through the
expansion of its existing business and the creation, through a
combination of construction, leasing and purchase of facilities
and other assets, of a substantial facilities-based internet
communications network (the "Expansion Plan").
Using the network Level 3 intends to provide (a) a range of
internet access services at varying capacity levels and, as
technology development allows, at specified levels of quality
of service and security and (b) a number of business oriented
communications services which may include fax service, which
are transmitted in part over private or limited access
Transmission Control Protocol/Internet Protocol ("TCP/IP")
networks and are offered at lower prices than public telephone
network-based fax service, and voice message storing and
forwarding over the same TCP/IP-based networks.
(3) Discontinued Energy Operations:
In connection with the Expansion Plan, Level 3 expects to devote
substantially more management time and capital resources to its
information services business with a view to making the
information services business, over time, the principal
business of Level 3. In that respect, the management is
conducting a comprehensive review of the existing Level 3
businesses to determine how those businesses will complement
Level 3's focus on information services. If it is decided that
an existing business is not compatible with the information
services business and if a suitable buyer can be found, Level 3
may dispose of that business.
On September 10, 1997, Level 3 and CalEnergy entered into an
agreement whereby CalEnergy contracted to purchase Level 3's
energy investments for $1,155 million, subject to adjustments.
These energy investments include approximately 20.2 million
shares of CalEnergy common stock (assuming the exercise of 1
million options held by Level 3), Level 3's 30% ownership
interest in CE Electric and Level 3's investments, made jointly
with CalEnergy, in international power projects in Indonesia
and the Philippines. The transaction was subject to the
satisfactory completion of certain provisions of the agreement
and closed on January 2, 1998. These assets comprised the
energy segment of Level 3. Therefore, the Company has
reflected these assets, the earnings and losses attributable to
these assets, and the related cash flow items as discontinued
operations on the balance sheets, statements of earnings and
cash flows for all periods presented.
In order to fund the purchase of these assets, CalEnergy sold,
in October 1997, approximately 19.1 million shares of its
common stock at a price of $37.875 per share. This sale
reduced Level 3's ownership in CalEnergy to approximately 24%
but increased its proportionate share of CalEnergy's equity.
It is the Company's policy to recognize gains or losses on the
sale of stock by its investees. Level 3 recognized an after-
tax gain of approximately $44 million from transactions in
CalEnergy stock in the fourth quarter of 1997.
The Agreement with CalEnergy included a provision whereby
CalEnergy and Level 3 shared equally any proceeds from the
offering above or below a specified amount. The offering was
conducted at a price above that provided in the agreement and
therefore, Level 3 received additional proceeds of $16 million
at the time of closing.
Level 3 expects to recognize an after-tax gain on the
disposition of its energy assets in 1998 of approximately $324
million. The after-tax proceeds from the transaction of
approximately $967 million will be used to fund the expansion
plan of the information services business.
The following is summarized financial information for
discontinued energy operations:
Income from Discontinued Operations 1997 1996 1995
Operations
Equity in:
CalEnergy earnings, net $ 16 $ 20 $ 10
CE Electric earnings, net 17 (2) -
International energy projects earnings, net 5 (5) 6
Investment income from CalEnergy - 5 6
Income tax expense (9) (9) (8)
----- ----- ------
Income from operations $ 29 $ 9 $ 14
===== ===== ======
CalEnergy Stock Transactions
Gain on investee stock activity $ 68 $ - $ -
Income tax expense (24) - -
----- ----- ------
$ 44 $ - $ -
===== ===== ======
Extraordinary Loss - Windfall Tax
Level 3's share from CalEnergy $ (39) $ - $ -
Level 3's share from CE Electric (58) - -
Income tax benefit 34 - -
----- ----- ------
Extraordinary loss $ (63) $ - $ -
===== ===== ======
Investments in Discontinued Operations 1997 1996
Investment in CalEnergy $ 337 $ 292
Investment in CE Electric 135 176
Investment in international energy projects 186 149
Restricted securities 2 8
Deferred income tax liability (17) (17)
------- -------
Total $ 643 $ 608
======= =======
At December 27, 1997, Level 3 owned 19.2 million shares or 24%
of CalEnergy's outstanding common stock and had a cumulative
investment in CalEnergy common stock of $337 million. CalEnergy
common stock is traded on the New York Stock Exchange. On
December 27, 1997, the market value of Level 3's
investment in CalEnergy common stock was $548 million.
The following is summarized financial information of CalEnergy
Company, Inc.:
Operations (dollars in millions) 1997 1996 1995
Revenue $ 2,271 $ 576 $ 399
Income before extraordinary item 52 92 62
Extraordinary item - Windfall tax (136) - -
Level 3's share:
Income before extraordinary item 18 22 13
Goodwill amortization (2) (2) (3)
------- ------ -----
Equity in income of CalEnergy before
extraordinary item $ 16 $ 20 $ 10
======= ====== =====
Extraordinary item - Windfall tax $ (39) $ - $ -
======= ====== =====
Financial Position (dollars in millions) 1997 1996
Current assets $ 2,053 $ 945
Other assets 5,435 4,768
--------- --------
Total assets 7,488 5,713
Current liabilities 1,440 1,232
Other liabilities 4,494 3,301
Minority interest 134 299
--------- --------
Total liabilities 6,068 4,832
--------- --------
Net assets $ 1,420 $ 881
========= ========
Level 3's share:
Equity in net assets $ 337 $ 267
Goodwill - 25
--------- --------
Investment in CalEnergy $ 337 $ 292
========= ========
In December 1996, CE Electric, which is 70% owned by CalEnergy
and 30% owned by Level 3, acquired majority ownership of the
outstanding ordinary share capital of Northern Electric, plc.
pursuant to a tender offer (the "Tender Offer") commenced in
the United Kingdom by CE Electric in November 1996. As of
March 1997, CE Electric effectively owned 100% of Northern's
ordinary shares.
As of December 27, 1997, CalEnergy and Level 3 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 and a revolving facility agreement obtained by CE
Electric. Level 3 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
is 23% of the difference between the value of Northern
Electric, plc. at the time of privatization and the utility's
current value based on profits over a period of up to four
years. CE Electric recorded an extraordinary charge of
approximately $194 million when the tax was enacted in July
1997. The total after-tax impact to Level 3 directly through
its investment in CE Electric and indirectly through its
interest in CalEnergy, was $63 million.
The following is summarized financial information of CE
Electric as of December 31, 1997 and December 31, 1996:
Operations (dollars in millions) 1997 1996
Revenue $ 1,564 $ 37
Income before extraordinary item 58 -
Extraordinary item - Windfall tax (194) -
Level 3's share:
Income before extraordinary item $ 17 $ -
Management fee paid to CalEnergy - (2)
-------- ------
17 (2)
======== ======
Extraordinary item - Windfall tax $ (58) $ -
======== ======
Financial Position (dollars in millions) 1997 1996
Current assets $ 419 $ 583
Other assets 2,519 1,772
------- -------
Total assets 2,938 2,355
Current liabilities 1,166 785
Other liabilities 1,265 718
Preferred stock 56 153
Minority interest - 112
------- ------
Total liabilities 2,487 1,768
------- ------
Net assets $ 451 $ 587
======= ======
Level 3's Share:
Equity in net assets $ 135 $ 176
======= ======
CE Electric's 1995 and 1996 operating results prior to the
acquisition were not significant relative to Level 3's results
after giving effect to certain pro forma adjustments related to
the acquisitions, primarily increased amortization and interest
expense.
In 1993, Level 3 and CalEnergy formed a venture to develop power
projects outside of the United States. Since 1993,
construction has begun on the Mahanagdong, Casecnan and Dieng
power projects. The Mahanagdong project is a 165 MW geothermal
power facility located on the Philippine island of Leyte. The
Casecnan project is a combined irrigation and 150 MW
hydroelectric power generation facility located on the island
of Luzon in the Philippines. Dieng Unit I is a 55 MW
geothermal facility on the Indonesian island of Java. An
additional five units are expected to be constructed on a
modular basis at the Dieng site, as geothermal resources are
developed. In June 1997, Level 3 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 Level 3.
Generally, costs associated with the development, financing and
construction of the international energy projects have been
capitalized by each of the projects and will be amortized over
the life of each project.
The following is summarized financial information for the
international energy projects:
Financial Position
(dollars in millions) Mahanagdong Casecnan Dieng Other Total
1997
Current assets $ 42 $ 334 $ 87 $ 67 $ 530
Other assets 252 148 240 171 811
------ ------ ----- ------ -----
Total assets 294 482 327 238 1,341
Current liabilities 11 12 88 61 172
Other liabilities 186 372 123 56 737
------- ------ ----- ------ -----
Total liabilities
(with recourse only
to the projects) 197 384 211 117 909
------- ------ ----- ------ -----
Net assets $ 97 $ 98 $ 116 $ 121 $ 432
======= ====== ===== ====== =====
Level 3's share:
Equity in net assets $ 48 $ 49 $ 46 $ 43 $ 186
======= ====== ===== ====== =====
1996
Current assets $ 1 $ 441 $ 15 $ 10 $ 467
Other assets 239 51 118 36 444
------- ------ ----- ----- -----
Total assets 240 492 133 46 911
Current liabilities 15 9 24 11 59
Other liabilities 153 372 35 - 560
------- ------ ----- ----- -----
Total liabilities
(with recourse only
to the projects) 168 381 59 11 619
------- ------- ------ ----- -----
Net assets $ 72 $ 111 $ 74 $ 35 $ 292
======= ======= ====== ===== =====
Level 3's share:
Equity in net assets $ 36 $ 55 $ 36 $ 17 $ 144
Loan to Project - - 5 - 5
------- ------- ------ ----- -----
$ 36 $ 55 $ 41 $ 17 $ 149
======= ======= ====== ===== =====
In late 1995, the Casecnan joint venture closed financing for
the construction of the project with bonds issued by the
project company. The difference between the interest expense
on the debt and the interest earned on the unused funds prior
to payment of construction costs resulted in a loss to the
venture of $12 million in 1997 and 1996. Level 3's share of
these losses were $6 million in each year. The Mahanagdong
facility commenced operation in July, 1997. Level 3's
proportionate share of the earnings attributable to Mahanagdong
was $7 million 1997. No income or losses were incurred by the
international projects in 1995. In addition to the equity
earnings and losses, Level 3 has project development and
insurance expenses, and received management fee income related
to the international projects in all years.
In late 1995, a Level 3 and CalEnergy venture, CE Casecnan
Water and Energy Company, Inc. ("CE Casecnan") closed financing
and commenced construction of a $495 million irrigation and
hydroelectric power project located on the Philippine island of
Luzon. Level 3 and CalEnergy each made $62 million of equity
contributions to the project.
The CE Casecnan project was being constructed on a joint and
several basis by Hanbo Corporation and Hanbo Engineering &
Construction Co. Ltd. On May 7, 1997, CE Casecnan announced
that it had terminated the Hanbo Contract. In connection with
the contract termination, CE Casecnan made a $79 million draw
request under the letter of credit issued by Korea First Bank
("KFB") to pay for certain transition costs and other damages
under the Hanbo Contract. KFB failed to honor the draw
request; the matter is being litigated. 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 CE
Casecnan project. Level 3 does not expect the outcome of the
litigation to affect its financial position due to the
transaction with CalEnergy.
(4) MFS Spin-off
In September 1995, the PKS Board of Directors approved a plan to
make a tax-free distribution of its entire ownership interest
in MFS to the Class D stockholders (the "Spin-off") effective
on September 30, 1995. Shares were distributed on the basis of
approximately .348 shares of MFS Common Stock and approximately
.130 shares of MFS Preferred Stock for each share of
outstanding Class D Stock.
The net investment in MFS distributed on September 30, 1995 was
approximately $399 million.
Operating results of MFS through September 30, 1995 are
summarized as follows:
(dollars in millions) 1995
Revenue $ 412
Loss from operations (176)
Net loss (196)
Level 3's share of loss in MFS (131)
Included in the income tax benefit on the statement of earnings
for the year ended December 30, 1995, is $93 million of tax
benefits from the reversal of certain deferred tax liabilities
recognized on gains from previous MFS stock transactions that
were not taxed due to the Spin-off.
(5) Gain on Subsidiary's Stock Transactions, net
Stock issuances by MFS for acquisitions and employee stock
options, reduced Level 3's ownership in MFS prior to the Spin-
off in 1995 to 66% from 67% in 1994. As a result, Level 3
recognized a gain of $3 million in 1995 representing the
increase in Level 3's proportionate share of MFS' equity.
Deferred income taxes had been established on this gain prior
to the Spin-off.
(6) Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to determine
classification and fair values of financial instruments:
Cash and Cash Equivalents
Cash equivalents generally consist of funds invested in the
Kiewit Mutual Fund-Money Market Portfolio and highly liquid
instruments purchased with an original maturity of three months
or less. The securities are stated at cost, which approximates
fair value.
Marketable Securities, Restricted Securities and Non-current
Investments
Level 3 has classified all marketable securities, restricted
securities and marketable non-current investments not accounted
for under the equity method as available-for-sale. Restricted
securities primarily include investments in various portfolios
of the Kiewit Mutual Fund that are restricted to fund certain
reclamation liabilities of its coal mining ventures. Due to
the anticipated increase in capital expenditures, Level 3 has
reclassified its investments in marketable equity securities
from non-current to current in 1997. The amortized cost of the
securities used in computing unrealized and realized gains and
losses is determined by specific identification. Fair values
are estimated based on quoted market prices for the securities
on hand or for similar investments. Net unrealized holding
gains and losses are reported as a separate component of
stockholders' equity, net of tax.
At December 27, 1997 and December 28, 1996 the amortized cost,
unrealized holding gains and losses, and estimated fair values
of marketable securities, restricted securities and marketable
non-current investments were as follows:
Unrealized Unrealized
Amortized Holding Holding Fair
(dollars in millions) Cost Gains Losses Value
1997:
Marketable Securities:
Kiewit Mutual Fund:
Short-term government $ 234 $ - $ - $ 234
Intermediate term bond 195 3 - 198
Tax exempt 154 3 - 157
Equity 7 4 - 11
Collateralized mortgage
obligations - 1 - 1
Equity securities 48 9 - 57
Other securities 20 - - 20
------ ----- ----- ------
$ 658 $ 20 $ - $ 678
Restricted Securities:
Kiewit Mutual Fund:
Intermediate term bond $ 10 $ - $ - $ 10
Equity 12 - - 12
------ ----- ----- ------
$ 22 $ - $ - $ 22
====== ===== ===== ======
1996:
Marketable Securities:
Kiewit Mutual Fund:
Short-term government $ 100 $ - $ - $ 100
Intermediate term bond 65 2 - 67
Tax exempt 126 2 - 128
Equity 5 2 - 7
Corporate debt securities
(held by C-TEC) 47 - - 47
Collateralized mortgage
obligations - 1 - 1
Other securities 20 2 - 22
------ ----- ----- -----
$ 363 $ 9 $ - $ 372
====== ===== ===== =====
Restricted Securities:
Kiewit Mutual Fund:
Intermediate term bond $ 8 $ - $ - $ 8
Equity 7 2 - 9
------ ----- ----- ----
$ 15 $ 2 $ - $ 17
====== ===== ===== ====
Non-current investments:
Equity securities $ 49 $ 26 $ - $ 75
====== ===== ===== ====
Other securities consist of bonds issued by the Casecnan
project and purchased by Level 3.
For debt securities, amortized costs do not vary significantly
from principal amounts. Realized gains and losses on sales of
marketable and equity securities were $9 million and $- million
in 1997, $3 million and $- million in 1996, and $1 million and
$2 million in 1995.
At December 27, 1997, the contractual maturities of the debt
securities are as follows:
(dollars in millions) Amortized Cost Fair Value
Other securities:
10+ years $ 20 $ 20
====== ======
Maturities for the mutual fund, equity securities and
collateralized mortgage obligations have not been presented as
they do not have a single maturity date.
Long-term Debt
The fair value of debt was estimated using the incremental
borrowing rates of Level 3 for debt of the same remaining
maturities. The fair value of the debt approximates the
carrying amount.
(7) Investments
Investments consist of the following at December 27, 1997 and
December 28, 1996:
(dollars in millions) 1997 1996
Commonwealth Telephone Enterprises Inc. $ 75 $ -
RCN Corporation 214 -
Cable Michigan 46 -
Pavilion Towers 22 -
Equity securities (Note 6) - 75
C-TEC investments:
Megacable S.A. de C.V. - 74
Other - 12
Other 26 28
------ ------
$ 383 $ 189
====== ======
On September 5, 1997, C-TEC announced that its board of
directors had approved the planned restructuring of C-TEC into
three publicly traded companies effective September 30, 1997.
Under the terms of the restructuring C-TEC shareholders
received stock in the following 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 consists 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, New York City and Washington D.C.
As a result of the restructuring, Level 3 owns less than 50% of
the outstanding shares and voting rights of each entity, and
therefore accounts for each entity using the equity method as
of the beginning of 1997. C-TEC's financial position, results
of operations and cash flows are consolidated in the 1996 and
1995 consolidated financial statements.
The following is summarized financial information of the three
entities created as result of the C-TEC restructuring:
Operations (dollars in millions) 1997 1996 1995
Commonwealth Telephone Enterprises
Revenue $ 197 $ 186 $ 174
Net income available to common stockholders 20 20 31
Level 3's share:
Net income 10 10 15
Goodwill amortization (1) (1) 1
------ ------ ------
Equity in net income $ 9 $ 9 $ 16
====== ====== ======
Cable Michigan
Revenue $ 81 $ 76 $ 60
Net loss available to common stockholders (4) (8) (10)
Level 3's share:
Net loss (2) (4) (5)
Goodwill amortization (4) (4) (4)
------ ------ -----
Equity in net loss $ (6) $ (8) $ (9)
====== ====== =====
RCN Corporation
Revenue $ 127 $ 105 $ 91
Net (loss) income available to
common stockholders (52) (6) 2
Level 3's share:
Net (loss) income (26) (3) 1
Goodwill amortization - (3) 1
------ ------ -----
Equity in net (loss) income $ (26) $ (6) $ 2
====== ====== =====
Commonwealth
Telephone Cable RCN
Enterprises Michigan Corporation
Financial Position (in millions) 1997 1996 1997 1996 1997 1996
Current assets $ 71 $ 51 $ 23 $ 10 $ 698 $ 143
Other assets 303 266 120 139 453 485
----- ----- ----- ----- ------ -----
Total assets 374 317 143 149 1,151 628
Current liabilities 76 59 16 24 70 57
Other liabilities 260 189 166 190 708 175
Minority interest - - 15 15 16 5
----- ----- ----- ----- ------ -----
Total liabilities 336 248 197 229 794 237
----- ----- ----- ----- ------ -----
Net assets (liabilities) $ 38 $ 69 $ (54) $ (80) $ 357 $ 391
===== ===== ===== ===== ====== =====
Level 3's Share:
Equity in net assets $ 18 $ 33 $ (26) $ (38) $ 173 $ 189
Goodwill 57 58 72 75 41 41
----- ----- ----- ----- ------ -----
$ 75 $ 91 $ 46 $ 37 $ 214 $ 230
===== ===== ===== ===== ====== ======
On December 27, 1997 the market value of Level 3's investments
in Commonwealth Telephone, Cable Michigan and RCN was $215
million, $76 million and $485 million, respectively.
In February 1997, Level 3 purchased the Pavillion Towers office
buildings in Aurora, Colorado for $22 million.
Investments in 1996 also include C-TEC's 40% ownership of
Megacable S.A. de C.V., Mexico's second largest cable operator,
accounted for using the equity method.
(8) Intangible Assets
Intangible assets consist of the following at December 27, 1997
and December 28, 1996:
(dollars in millions) 1997 1996
CPTC intangibles and other $ 23 $ 23
C-TEC:
Goodwill - 198
Franchise and subscriber lists - 229
Other - 34
------ ------
23 484
Less accumulated amortization (2) (131)
------ ------
$ 21 $ 353
====== ======
(9) Long-Term Debt
At December 27, 1997 and December 28, 1996, long-term debt was
as follows:
(dollars in millions) 1997 1996
CPTC Long-term Debt (with recourse only to CPTC):
Bank Note
(7.7% due 2008) $ 65 $ 65
Institutional Note
(9.45% due 2017) 35 35
OCTA Debt
(9.0% due 2006) 8 6
Subordinated Debt
(9.5% No Maturity) 6 2
------ ------
114 108
Other:
Pavilion Towers Debt (8.4% due 2007) 15 -
Capitalized Leases 6 1
Other 5 6
------- ------
26 7
C-TEC Long-term Debt (with recourse only to C-TEC):
Credit Agreement - National Bank for Cooperatives
(7.51% due 2009) - 110
Senior Secured Notes
( 9.65% due 1999) - 134
Term Credit Agreement - Morgan Guaranty
Trust Company (7% due 2002) - 18
-------- ------
- 262
-------- ------
140 377
Less current portion (3) (57)
-------- ------
$ 137 $ 320
======== ======
CPTC:
In August 1996, CPTC converted its construction financing note
into a term note with a consortium of banks ("Bank Debt"). The
interest rate on the Bank Debt is based on LIBOR plus a varying
rate with interest payable quarterly. Upon completion of the
SR91 toll road, CPTC entered into an interest rate swap
arrangement with the same parties. The swap expires in January
2004 and fixes the interest rate on the Bank Debt from 9.21% to
9.71% during the term of the swap agreement.
The institutional note is with Connecticut General Life
Insurance Company, a subsidiary of CIGNA Corporation. The note
converted into a term loan upon completion of the SR91 toll
road.
Substantially all the assets of CPTC and the partners' equity
interest in CPTC secure the term debt.
Orange County Transportation Authority holds $8 million of
subordinated debt which is due in varying amounts over 10
years. Interest accrues at 9% and is payable quarterly
beginning in 2000.
In July 1996, CPTC borrowed from the partners $2 million to
facilitate the completion of the project. In 1997, CPTC
borrowed an additional $4 million from the partners in order to
comply with equity maintenance provisions of the contracts with
the State of California and its lenders. The debt is generally
subordinated to all other debt of CPTC. Interest on the
subordinated debt compounds annually at 9.5% and is payable
only as CPTC generates excess cash flows.
CPTC capitalized interest of $- million, $5 million and $7
million in 1997, 1996 and 1995.
Other:
In June 1997, a mortgage with Metropolitan Life was
established. The Pavilion Towers building in Aurora, CO
collateralizes this debt.
Scheduled maturities of long-term debt through 2002 are as
follows (in millions): 1998 - $3; 1999 -$6; 2000 - $5; 2001 -
$6 and $8 in 2002.
(10) Income Taxes
An analysis of the income tax benefit (provision) attributable
to earnings from continuing operations before income taxes and
minority interest for the three years ended December 27, 1997
follows:
(dollars in millions) 1997 1996 1995
Current:
U.S. federal $ (54) $ (61) $ (66)
Foreign - (4) (4)
State (1) (6) (3)
------ ------ ------
(55) (71) (73)
Deferred:
U.S. federal 103 67 145
Foreign - - 3
State - 1 4
------- ------ ------
103 68 152
------- ------ ------
$ 48 $ (3) $ 79
======= ====== ======
The United States and foreign components of earnings from
continuing operations for tax reporting purposes, before equity
loss in MFS (recorded net of tax), minority interest and income
taxes follows:
(dollars in millions) 1997 1996 1995
United States $ 31 $ 106 $ 187
Foreign - 1 3
------ ------ ------
$ 31 $ 107 $ 190
====== ====== ======
A reconciliation of the actual income tax benefit (provision)
and the tax computed by applying the U.S. federal rate (35%) to
the earnings from continuing operations before equity loss in
MFS (recorded net of tax), minority interest and income taxes
for the three years ended December 27, 1997 follows:
(dollars in millions) 1997 1996 1995
Computed tax at statutory rate $ (11) $ (37) $ (67)
State income taxes (1) (3) -
Depletion 3 3 2
Goodwill amortization - (3) (2)
Tax exempt interest 2 2 2
Prior year tax adjustments 62 44 51
Compensation expense attributable
to options (7) - -
MFS deferred tax - - 93
Taxes on foreign operations - (2) 1
Other - (7) (1)
------ ------ ------
$ 48 $ (3) $ 79
====== ====== ======
During the three years ended December 27, 1997, the Company
settled a number of disputed tax issues related to prior years
that have been included in prior year tax adjustments.
Possible taxes, beyond those provided on remittances of
undistributed earnings of foreign subsidiaries, are not
expected to be material.
The components of the net deferred tax liabilities for the
years ended December 27, 1997 and December 28, 1996 were as
follows:
(dollars in millions) 1997 1996
Deferred tax liabilities:
Investments in securities $ 7 $ 11
Investments in joint ventures 33 45
Asset bases - accumulated depreciation 53 225
Coal sales 41 15
Other 16 16
----- ------
Total deferred tax liabilities 150 312
Deferred tax assets:
Compensation - retirement benefits 25 29
Investment in subsidiaries 8 2
Provision for estimated expenses 7 26
Net operating losses of subsidiaries - 6
Foreign and general business tax credits 3 67
Alternative minimum tax credits - 16
Other 9 19
Valuation allowances - (6)
----- ------
Total deferred tax assets 52 159
----- ------
Net deferred tax liabilities $ 98 $ 153
===== ======
(11) Stockholders' Equity
PKS is generally committed to purchase all common stock in
accordance with the Certificate of Incorporation. Issuances and
repurchases of common shares, including conversions, for the
three years ended December 27, 1997 were as follows:
Class Class
B&C Stock D Stock
Shares issued in 1995 1,021,875 530,610
Shares repurchased in 1995 136,057 210,735
Class B&C shares converted
to Class D shares 6,092,877 12,847,155
Shares issued in 1996 896,640 -
Shares repurchased in 1996 146,893 1,276,080
Class B&C shares converted
to Class D shares 623,475 2,052,425
Shares issued in 1997 893,924 13,113,015
Shares repurchased in 1997 44,256 14,805
Class B&C shares converted
to Class D shares 1,723,966 6,517,715
The 1996 activity includes 150,995 Class D shares converting to 47,007 Class
C shares. The 1997 activity includes 1,880 Class D shares converting to 510
Class C shares.
(12) Class D Stock Plan
In December 1997, stockholders approved amendments to the 1995
Class D Stock Plan ("the Plan"). The amended plan, among other
things, increases the number of shares reserved for issuance
upon the exercise of stock based awards to 35,000,000,
increases the maximum number of options granted to any one
participant to 5,000,000, provides for the acceleration of
vesting in the event of a change in control, allows for the
grant of stock based awards to directors of Level 3 and other
persons providing services to Level 3, and allows for the grant
of nonqualified stock options with an exercise price less than
the fair market value of Class D Stock.
In December 1997, Level 3 converted both option and stock
appreciation rights plans of a subsidiary, to the Class D Stock
plan. This conversion resulted in the issuance of 3.7 million
options to purchase Class D Stock at $9 per share. Level 3
recognized an expense, and a corresponding increase in equity,
as a result of the transaction. This increase in equity and
the conversion of the stock appreciation rights liability to equity
are reflected as option activity in the statement of Changes in
Stockholders' Equity. The options vest over three years and expire
in December 2002.
Level 3 has elected to adopt only the required disclosure
provisions and not the optional expense recognition provisions
under SFAS No. 123 "Accounting for Stock Based Compensation",
which established a fair value based method of accounting for
stock options and other equity instruments. The fair value of
the options outstanding was calculated using the Black-Scholes
method using risk-free interest rates ranging from 5.5% to
6.77% and expected lives of 75% of the total life of the option.
Level 3 used an expected volatility rate of 0%, which is
allowed for private entities under SFAS No. 123. Once Level 3's
stock is listed, volatility factors will be incorporated in
determining fair value. Level 3's net income and earnings per
share for 1997 and 1996 would have been reduced to the pro forma
amounts shown below had SFAS No. 123 been applied.
1997 1996
Net Income of Level 3
As Reported $ 93 $ 113
Pro Forma 93 112
Basic Earnings per Share
As Reported $ .74 $ .97
Pro Forma .74 .97
Diluted Earning per Share
As Reported $ .74 $ .97
Pro Forma .74 .96
The 1995 historical and pro forma and as reported amounts did not vary as
the options granted in 1995 had not vested.
Transactions involving stock options granted under the Plan are
summarized as follows:
Option Price Weighted Avg.
Shares Per Share Option Price
Balance December 31, 1994 - $ - $ -
Options granted 1,340,000 8.08 8.08
Options cancelled - - -
Options exercised - - -
---------
Balance December 30, 1995 1,340,000 $ 8.08 $ 8.08
======== ========
Options granted 895,000 $ 9.90 $ 9.90
Options cancelled (15,000) 8.08 8.08
Options exercised - - -
---------
Balance December 28, 1996 2,220,000 $8.08 - $9.90 $ 8.81
============= ========
Options granted 7,495,465 $9.00 - $10.85 $ 9.93
Options cancelled (53,000) $9.90 $ 9.90
Options exercised (2,318,465) $8.08 - $9.90 $ 8.93
----------
Balance December 27, 1997 7,344,000 $8.08 - $10.85 $ 9.91
========== ============== ========
Options exercisable
December 30, 1995 - $ - $ -
December 28, 1996 265,000 8.08 8.08
December 27, 1997 1,295,269 $8.08 - $9.90 8.70
The weighted average remaining life for the 7,344,000 options
outstanding on December 27, 1997 is 8.3 years.
(13) Industry and Geographic Data
The Company conducts its continuing operations primarily in
three reportable segments: information services, telecommunications
and coal mining. Other primarily includes CPTC and corporate overhead
not attributable to a specific segment and marketable securities.
Equity earnings is included due to the significant equity
investments in the telecommunications business.
In 1997, 1996 and 1995 Commonwealth Edison Company accounted
for 43%, 23% and 23% of Level 3's revenues.
Industry and geographic data for the construction and energy
businesses have been recorded under discontinued operations.
A summary of the Company's operations by industry and
geographic region is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Telecom-
Industry Data munications
(dollars in Information C-TEC Coal Discontinued
millions) Services Entities) Mining Other Operations Consolidated
1997
Revenue $ 94 $ - $ 222 $ 16 $ - $ 332
Operating
Earnings (16) - 82 (23) - 43
Equity Losses,
net - (23) - (20) - (43)
Identifiable
Assets 61 336 499 588 1,295 2,779
Capital
Expenditures 14 - 3 9 - 26
Depreciation,
Depletion &
Amortization 8 - 8 8 - 24
1996
Revenue $ 42 $ 367 $ 234 $ 9 $ - $ 652
Operating
Earnings (3) 31 94 (35) - 87
Equity Losses,
net (1) (1) - (7) - (9)
Identifiable
Assets 29 1,100 387 380 1,170 3,066
Capital
Expenditures 11 87 2 17 - 117
Depreciation,
Depletion &
Amortization 10 106 12 4 - 132
1995
Revenue $ 36 $ 325 $ 216 $ 3 $ - $ 580
Operating
Earnings 4 37 77 (73) - 45
Equity
Losses, net - (3) - (2) - (5)
Identifiable
Assets 34 1,143 368 614 786 2,945
Capital
Expenditures 6 72 4 36 - 118
Depreciation,
Depletion &
Amortization 5 81 7 3 - 96
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Telecom-
Geographic Data munications
(dollars in Information C-TEC Coal Discontinued
millions) Services Entities) Mining Other Operations Consolidated
1997
Revenue:
United States $ 94 $ - $ 222 $ 16 $ - $ 332
Other - - - - - -
------ ------- ------ ----- ------ --------
$ 94 $ - $ 222 $ 16 $ - $ 332
====== ======= ====== ===== ====== =======
Operating Earnings:
United States $ (16) $ - $ 82 $ (23) $ - $ 43
Other - - - - - -
----- ------- ------ ----- ------ -------
$ (16) $ - $ 82 $ (23) $ - $ 43
===== ======= ====== ===== ====== =======
Identifiable Assets:
United States $ 59 $ 336 $ 499 $ 588 $ 870 $ 2,352
Other 2 - - - 425 427
----- ------- ------ ----- ------ -------
$ 61 $ 336 $ 499 $ 588 $1,295 $ 2,779
===== ======= ====== ===== ====== =======
1996
Revenue:
United States $ 42 $ 367 $ 234 $ 9 $ - $ 652
Other - - - - - -
----- ------- ------ ----- ------ -------
$ 42 $ 367 $ 234 $ 9 $ - $ 652
===== ======= ====== ===== ====== =======
Operating Earnings:
United States $ (3) $ 31 $ 94 $ (35) $ - $ 87
Other - - - - - -
----- ------- ------ ----- ------- -------
$ (3) $ 31 $ 94 $ (35) $ - $ 87
===== ======= ====== ===== ======= =======
Identifiable Assets:
United States $ 29 $ 1,100 $ 387 $ 380 $ 761 $ 2,657
Other - - - - 409 409
----- ------- ------ ----- ------- -------
$ 29 $ 1,100 $ 387 $ 380 $ 1,170 $ 3,066
===== ======= ====== ===== ======= =======
1995
Revenue:
United States $ 36 $ 325 $ 216 $ 3 $ - $ 580
Other - - - - - -
----- ------- ------ ---- ------- -------
$ 36 $ 325 $ 216 $ 3 $ - $ 580
===== ======= ====== ==== ======= =======
Operating Earnings:
United States $ 4 $ 37 $ 77 $(73) $ - $ 45
Other - - - - - -
----- ------- ------ ---- ------- -------
$ 4 $ 37 $ 77 $(73) $ - $ 45
===== ======= ====== ==== ======= =======
Identifiable Assets:
United States $ 34 $ 1,143 $ 368 $614 $ 614 $ 2,773
Other - - - - 172 172
----- ------- ----- ---- ------- -------
$ 34 $ 1,143 $ 368 $614 $ 786 $ 2,945
===== ======= ===== ==== ======= =======
(14) Related Party Transactions
Level 3 receives certain mine management services from the
Construction & Mining Group. The expense for these services
was $32 million for 1997, $37 million for 1996 and $30 million
for 1995, and is recorded in general and administrative
expenses. The revenue earned by the Construction and Mining
Group is included in discontinued operations.
(15) Fair Value of Financial Instruments
The carrying and estimated fair values of Level 3's financial
instruments are as follows:
1997 1996
Carrying Fair Carrying Fair
(dollars in millions) Amount Value Amount Value
Cash and cash equivalents (Note 6) $ 87 $ 87 $ 147 $ 147
Marketable securities (Note 6) 678 678 372 372
Restricted securities (Note 6) 22 22 17 17
Investment in equity securities
(Notes 6 & 7) - - 75 75
Investment in C-TEC entities (Note 7) 335 776 355 315
Investments in discontinued
operations (Note 3) 643 854 608 960
Long-term debt (Notes 6 & 9) 140 140 377 384
(16) C-TEC Restructuring
The following is financial information of the Company had C-TEC
been accounted for utilizing the equity method as of December
27, 1997 and December 28, 1996 and for each of the three years
ended December 27, 1997. The 1997 financial statements include
C-TEC accounted for utilizing the equity method and are
presented here for comparative purposes only.
Operations (dollars in millions) 1997 1996 1995
Revenue $ 332 $ 285 $ 255
Cost of Revenue (175) (134) (133)
------ ------ ------
157 151 122
General and Administrative Expenses (114) (95) (114)
------ ------ ------
Operating Earnings 43 56 8
Other (Expense) Income:
Equity earnings (losses), net (43) (13) 7
Investment income, net 45 42 30
Interest expense, net (15) (5) (1)
Gain on subsidiary's stock transactions, net - - 3
Other, net 1 11 120
----- ----- ------
(12) 35 159
Equity Loss in MFS - - (131)
Earnings from Continuing Operations
before Income Taxes and Minority Interest 31 91 36
Income Tax Benefit 48 11 90
Minority Interest in Net Loss of Subsidiaries 4 2 -
----- ----- ------
Income from Continuing Operations 83 104 126
Income from Discontinued Operations 165 117 118
----- ----- ------
Net Earnings $ 248 $ 221 $ 244
===== ===== ======
Financial Position (dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 87 $ 71
Marketable securities 678 325
Restricted securities 22 17
Receivables 42 34
Investment in Discontinued Operations - Energy 643 608
Other 22 12
------- -------
Total Current Assets 1,494 1,067
Net Property, Plant and Equipment 184 174
Investments 383 458
Investments in Discontinued Operations-Construction 652 562
Intangible Assets, net 21 23
Other Assets 45 49
------- -------
$ 2,779 $ 2,333
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 31 $ 41
Current portion of long-term debt 3 2
Accrued reclamation and other mining costs 19 19
Other 36 27
------- --------
Total Current Liabilities 89 89
Long-term Debt, less current portion 137 113
Deferred Income Taxes 83 47
Accrued Reclamation Costs 100 98
Other Liabilities 139 163
Minority Interest 1 4
Stockholders' Equity 2,230 1,819
-------- --------
$ 2,779 $ 2,333
======== ========
(17) Pro Forma Information (unaudited).
The following information represents the pro forma financial
position of Level 3 after reflecting the impact of the
transactions with CalEnergy (Note 3), the conversion of Class C
shares to Class D shares (Note 19) and transactions related to
the spin-off of the Construction and Mining Group (Note 2), all
of which took place or are expected to happen in the first
quarter of 1998.
1997 1997
(dollars in millions) Historical Adjustments Pro Forma
Current Assets
Cash & marketable securities $ 765 $ 122 (a) $ 2,046
1,159 (b)
Investment in discontinued
operations - energy 643 (643)(b) -
Other current assets 86 86
------- ------ -------
Total Current Assets 1,494 638 2,132
Property, Plant & Equipment, net 184 184
Investment in Discontinued Operations -
Construction 652 (122)(a) -
350 (c)
(880)(d)
Other Non-current assets 449 449
------- ------ -------
$ 2,779 $ (14) $ 2,765
======= ====== =======
Current Liabilities $ 89 $ 192 (b) $ 281
Non-current Liabilities 459 459
Minority Interest 1 1
Stockholders' Equity 2,230 324 (b) 2,024
350 (c)
(880)(d)
------- ------- -------
$ 2,779 $ (14) $ 2,765
======= ======= =======
(a) Reflect conversion of 2.3 million Class C shares to 10.5
million Class D shares
(b) Reflect sale of energy assets to CalEnergy and related income
tax liability.
(c) Reflect fair value gain on the distribution of the
Construction and Mining Group.
(d) Reflect spin-off of the Construction and Mining Group.
(18) Other Matters
In connection with the sale of approximately 10 million Class D
shares to employees in 1997, the Company has retained the right
to purchase the relevant Class D shares at the then current Class
D Stock price if the Transaction is definitely abandoned by formal
action of the PKS Board or the employees voluntarily terminate their
employment on various dates prior to January 1, 1999.
In May 1995, the lawsuit titled Whitney Benefits, Inc. and
Peter Kiewit Sons' Co. v. The United States was settled. In
1983, plaintiffs alleged that the enactment of the Surface
Mining Control and Reclamation Act of 1977 had prevented the
mining of their Wyoming coal deposit and constituted a
government taking without just compensation. In settlement of
all claims, plaintiffs agreed to deed the coal deposits to the
government and the government agreed to pay plaintiffs $200
million, of which Peter Kiewit Sons' Co., a Level 3 subsidiary,
received approximately $135 million in June 1995 and recorded
it in other income on the statements of earnings.
The Company is involved in various other lawsuits, claims and
regulatory proceedings incidental to its business. Management
believes that any resulting liability, beyond that provided,
should not materially affect the Company's financial position,
future results of operations or future cash flows.
Level 3 leases various buildings and equipment under both
operating and capital leases. Minimum rental payments on
buildings and equipment subject to noncancelable operating
leases during the next 7 years aggregate $29 million.
It is customary in Level 3's industries to use various
financial instruments in the normal course of business. These
instruments include items such as letters of credit. Letters
of credit are conditional commitments issued on behalf of Level
3 in accordance with specified terms and conditions. As of
December 27, 1997, Level 3 had outstanding letters of credit of
approximately $22 million.
(19) Subsequent Events
In January 1998, approximately 2.3 million shares of Class C
Stock, with a redemption value of $122 million, were converted
into 10.5 million shares of Class D Stock.
In March 1998, PKS announced that its Class D Stock will begin
trading on April 1 on the Nasdaq National Market under the
symbol "LVLT". The Nasdaq listing will follow the separation
of the Level 3 and the Construction Group of PKS, which is
expected to be completed on March 31, 1998. In connection with
the separation, PKS' construction subsidiary will be renamed
"Peter Kiewit Sons', Inc." and PKS Class D stock will become
the common stock of Level 3 Communications, Inc.
PKS' certificate of incorporation gives stockholders the right to
exchange their Class C Stock for Class D Stock under a set
conversion formula. That right will be eliminated as a result
of the separation of Level 3 and the Construction Group. To
replace that conversion right, Class C stockholders received
6.5 million shares of a new Class R stock in January, 1998,
which is convertible into Class D Stock in accordance with
terms ratified by stockholders in December 1997.
The PKS Board of Directors has approved in principle a plan to
force conversion of all shares of Class R stock outstanding.
Due to certain provisions of the Class R stock, conversion will
not be forced prior to May 1998, and the final decision to
force conversion would be made by Level 3's Board of Directors
at that time. Level 3's Board may choose not to force
conversion if it were to decide that conversion is not in the
best interests of Level 3 stockholders. If, as currently
anticipated, Level 3's Board determines to force conversion of
the Class R stock on or before June 30, 1998, certain
adjustments will be made to the cost sharing and risk
allocation provisions of the separation agreement between Level
3 and the Construction business.
If Level 3's Board of Directors determines to force conversion of
the Class R stock, each share of Class R stock will be
convertible into $25 worth of Level 3 (Class D) common stock,
based upon the average trading price of the Level 3 common
stock on the Nasdaq National Market for the last fifteen
trading days of the month prior to the determination by the
Board of Directors to force conversion. When the spin-off occurs,
Level 3 will increase paid in capital and reduce retained earnings
by the fair value of the Class R shares.
</TABLE>
APPENDIX E-I
FORM OF CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
PETER KIEWIT SONS', INC.
Peter Kiewit Sons', Inc. (the "Corporation"), a corporation organized
under the laws of the State of Delaware, hereby certifies that the
following amendments to the Corporation's Restated Certificate of
Incorporation were duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware:
FIRST: ARTICLE FOURTH of the Corporation's Restated Certificate of
Incorporation is amended by deleting the first three paragraphs thereof,
and replacing them with the following:
CAPITAL STOCK
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 641,750,000 shares; of which
250,000 shares shall be Preferred Stock, with no par value per share; of
which 8,000,000 shares shall be Class B Construction & Mining Group
Nonvoting Restricted Redeemable Convertible Exchangeable Common Stock, par
value $0.0625 per share (the "Class B Stock"); of which 125,000,000 shares
shall be Class C Construction & Mining Group Restricted Redeemable
Convertible Exchangeable Common Stock, par value $0.0625 per share (the
"Class C Stock"); of which 500,000,000 shares shall be Class D Diversified
Group Convertible Exchangeable Common Stock, par value $0.0625 per share,
issuable in two series (the "Class D Stock"); and of which 8,500,000 shares
shall be Class R Convertible Common Stock, par value $0.01 per share (the
"Class R Stock").
Ten shares of the authorized but unissued shares of Class D Stock
as of the date of the filing of this Certificate of Amendment of the
Corporation's Restated Certificate of Incorporation are hereby designated
as Class D Stock, Non-Redeemable Series. The rights, powers, preferences,
privileges, qualifications and limitations of Class D Stock, Non-Redeemable
Series shall be identical to those of all other shares of Class D Stock,
except as described in ARTICLE NINTH hereof.
Shares of Class R Stock shall have such rights, powers,
preferences, privileges, qualifications and limitations as are set forth in
ARTICLE TENTH hereof, and all of the rights, powers, preferences,
privileges, qualifications and limitations of the other classes of capital
stock of the Corporation shall be subject to such rights, powers,
preferences, privileges, qualifications and limitations of the Class R
Stock.
Certain terms used herein, each of which is capitalized, are
defined in ARTICLE EIGHTH.
A description of certain of the different classes of stock and a
statement of the designations, powers, preferences, rights, qualifications,
limitations and restrictions of each of said classes of stock are as
follows:
SECOND: ARTICLE FOURTH of the Corporation's Restated Certificate of
Incorporation is amended by deleting subparagraph III(D)(1)(c) thereof in
its entirety.
THIRD: ARTICLE EIGHTH of the Corporation's Restated Certificate of
Incorporation is amended by deleting the definition of "Effective Time" in
its entirety.
FOURTH: The Corporation's Restated Certificate of Incorporation is
amended to insert a new ARTICLE NINTH to read as follows:
ARTICLE NINTH
SERIES OF CLASS D STOCK
Notwithstanding any other provision hereof (i) with respect to
the Class D Stock, other than the next paragraph of this ARTICLE NINTH, in
no event shall (a) any holder of Class D Stock, Non-Redeemable Series have
any right to require the Corporation to repurchase such holder's shares of
Class D Stock, Non-Redeemable Series; (b) Class D Stock, Non-Redeemable
Series be convertible into Class C Stock; (c) Class D Stock, Non-Redeemable
Series be subject to exchange for Class C Stock by the Corporation; or
(d) Class D Stock, Non-Redeemable Series be subject to any redemption, and
(ii) holders of Class D Stock, Non-Redeemable Series shall be entitled to
vote with, and on the same terms as, holders of Class C Stock for the
election and removal of Class C Directors.
In the event that the Class D Stock is Publicly Traded, (i) each
share of Class D Stock, Non-Redeemable Series shall automatically, and
without further action by or on behalf of the Corporation, the
Corporation's transfer agent or the holder of any share of Class D Stock,
Non-Redeemable Series, be converted into a share of Class D Stock which is
not Class D Stock, Non-Redeemable Series, and the rights, powers,
preferences, privileges, qualifications and limitations of such shares so
converted shall be identical to those of all other shares of Class D Stock
in all respects and (ii) Class D Stock, Non-Redeemable Series shall no
longer be designated as a separate series of Class D Stock.
FIFTH: The Corporation's Restated Certificate of Incorporation is
amended to insert a new ARTICLE TENTH to read as follows:
ARTICLE TENTH
CLASS R STOCK
A. Certain Definitions.
"Appraised Value" shall have the meaning given to it in paragraph
E.3. hereof.
"Attached Class R Stock" shall mean Class R Stock which is
attached to Construction Stock pursuant to the terms hereof.
"Attached Transfer" shall mean the simultaneous transfer to the
same transferee of a share of Class R Stock (or fraction thereof) and the
share of Construction Stock to which such share of Class R Stock (or
fraction thereof) is attached; provided that such transfer of such share of
Construction Stock is permitted by the Certificate of Incorporation of the
Corporation or PKS Holdings, as applicable.
"Base Conversion Value" shall mean $25.00.
"Base Price" shall mean $82.00 per share, subject to adjustment
as provided in paragraph F. hereof.
"Business Day" means any day other than a Saturday, a Sunday or a
day on which banking institutions in the City of New York or the city in
which the Corporation's transfer agent maintains its principle office or a
place of payment are authorized by law, regulation or executive order to
remain closed.
"Change of Control" shall mean the occurrence of any of the
following: (i) the sale, lease, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or a series of
related transactions, of all or substantially all of the assets of the
Corporation and its subsidiaries taken as a whole, to any "person" (as such
term is used in Section 13(d)(3) of the Exchange Act); (ii) the adoption of
a plan relating to the liquidation or dissolution of the Corporation;
(iii) the consummation of any transaction (including, without limitation,
any merger or consolidation) the result of which is that any "person" (as
defined above), becomes the "beneficial owner" (as such term is defined in
Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly,
of shares representing more than 50% of the total outstanding voting power
of the Corporation or the surviving corporation of any such merger or
consolidation (if other than the Corporation); (iv) the first day on which
a majority of the members of the Board of Directors are not Continuing
Directors; or (v) the adoption by the Board of Directors of a plan for the
distribution of all or substantially all of the assets of the Corporation
and its subsidiaries taken as a whole, to stockholders of the Corporation;
provided, however, that the Class C Exchange shall not be considered a
Change of Control.
"Class C Exchange" shall mean the exchange by the Corporation,
pursuant to the Separation Agreement, of one share of PKS Holdings Stock
for each outstanding share of Class C Stock.
"Construction Stock" shall mean (i) prior to the Class C
Exchange, Class C Stock, and (ii) after the Class C Exchange, PKS Holdings
Stock and any other capital stock to which Class R Stock may be attached as
provided in paragraph B.3. hereof.
"Continuing Director" shall mean, as of any date of
determination, any member of the Board of Directors of the Corporation who
(i) was a member of such Board of Directors immediately following the
consummation of the Class C Exchange or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board of Directors at the
time of such nomination or election.
"Conversion Condition" shall mean, with respect to a given share
of Class R Stock (or fraction thereof), the occurrence of the earliest of:
(i) the repurchase or redemption by the Corporation or PKS Holdings of the
share of Construction Stock to which it is attached; (ii) the exchange of
the share of Construction Stock to which it is attached into another class
of stock or securities of PKS Holdings intended to be issued primarily to
persons leaving employment of PKS Holdings; (iii) April 15, 2006; and
(iv) a Change of Control of the Corporation; provided, however, that the
Conversion Condition shall not be deemed to have occurred as a result of
the Class C Exchange.
"Conversion Ratio" shall have the meaning given to it in
paragraph E.
"Conversion Ratio Certificate" shall mean either a Private
Conversion Ratio Certificate or a Public Conversion Ratio Certificate, each
having the meaning given to it in paragraph E. hereof.
"Conversion Value" shall mean, as of any given date, the
Conversion Value set forth in the most recent Conversion Ratio Certificate
delivered pursuant to paragraph E. hereof on or prior to such date, subject
to any adjustment required by paragraph F. hereof. The Conversion Value set
forth in any such Conversion Ratio Certificate shall be equal to: (i) in
the event that the Trading Price is greater than or equal to the Base
Price, the Base Conversion Value; (ii) in the event that the Trading Price
is less than the Base Price, an amount equal to (a) the Base Conversion
Value minus (b) an amount equal to (x) the Excess Amount Factor, multiplied
by (y) the amount by which the Base Price exceeds the Trading Price;
provided, however, that in no event shall the Conversion Value be less than
the Minimum Value.
"Convertible Security" shall mean any right or warrant to
subscribe for or to purchase, or any option for the purchase of, shares of
Class D Stock or any stock, or other securities convertible into or
exchangeable for shares of Class D Stock; provided, however, that Class R
Stock shall not be a Convertible Security.
"Current Trading Value" of any Publicly Traded security on a
given date shall mean the arithmetic mean of the daily Mean Reported Prices
of such security for each Business Day during the period commencing on and
including the fourteenth Business Day preceding such date and ending on and
including such date.
"Excess Amount Factor" shall mean 1.0, subject to adjustment as
provided in paragraph F. hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934.
"Extraordinary Dividend" shall mean any dividend, or portion
thereof, on the Class D Stock (i) paid in property other than (a) cash, (b)
shares of Class D Stock or in a subdivision of the outstanding shares of
Class D Stock (by reclassification or otherwise) or (c) pursuant to any
rights agreement in connection with a stockholder rights plan approved by
the Board of Director or (ii) paid in cash, to the extent that such
dividend, together with all cash dividends paid on the Class D Stock during
the twelve-month period ending on the date of payment of such dividend
exceeds, on a per share basis, 10% of the Trading Price of the Class D
Stock as of the record date of such dividend; provided, however, that in no
event shall such excess be greater than the amount of such dividend.
"Fixed Conversion Value" shall mean $25.00, as adjusted pursuant
to paragraph F. hereof.
"Fixed Terms" shall mean each of the Fixed Conversion Value and
the Base Price, each as adjusted pursuant to paragraph F. hereof.
"Initial Issuance Date" shall mean the date of issuance of the
first share of Class R Stock (or fraction thereof) to be issued.
"Inverse Fixed Terms" shall mean each of the Excess Amount Factor
and the Minimum Conversion Liquidation Ratio, each as adjusted pursuant to
paragraph F. hereof.
"Investment Bank" shall mean any investment bank of national
reputation selected by the Board of Directors.
"Liquidation Ratio" shall mean, as of any date, a fraction, the
numerator of which is the product of (i) the number of shares of Class R
Stock outstanding as of such date and (ii) the Conversion Ratio, and the
denominator of which is sum of (a) the number of shares of Class D Stock
outstanding as of such date and (b) the numerator of such fraction;
provided, however, that in no event shall the Conversion Ratio used to
calculate such Liquidation Ratio be less than the Minimum Conversion
Liquidation Ratio.
"Mandatory Conversion Date" shall mean April 15, 2010.
"Mandatory Redemption Date" shall mean October 15, 1998, or such
later date as shall be determined by resolution of the Board of Directors,
a copy of which shall be made available to any stockholder of the
Corporation upon request thereby.
"Mean Reported Price" shall mean on a given day with respect to
any Publicly Traded security, the arithmetic mean between the highest
reported sales price and the lowest reported sales price, in each case
regular way, for such security, as reported on the Composite Quotation
System, or, if such security is not reported on the Composite Quotation
System, on the principal national securities exchange on which such
security is listed or admitted to trading, or if such security is not
listed or admitted to trading on any national securities exchange, reported
by the Nasdaq National Market or Nasdaq SmallCap Market, as appropriate, or
a similar organization if Nasdaq is no longer reporting such information.
"Minimum Conversion Liquidation Ratio" shall mean 0.25, as
adjusted pursuant to paragraph F. hereof.
"Minimum Value" shall mean $15.00.
"Permitted Transfer" shall mean any transfer of Class R Stock to
the Corporation or any designee of the Corporation, including the Mandatory
Redemption, a Forced Conversion or the Mandatory Conversion.
"PKS Holdings" shall mean PKS Holdings, Inc., together with its
successors and assigns.
"PKS Holdings Stock" shall mean common stock, par value $.01 per
share, of PKS Holdings.
"Private Conversion Period" shall mean the 25-day period
commencing on and including the first day following the Corporation's
mailing to the registered holders of Class R Stock of a Private Conversion
Ratio Certificate; provided, however, that in 2006 such term shall run
through May 15, 2006, regardless of the date of such mailing.
"Public Conversion Period" shall mean the period commencing on
and including the first Business Day of each calendar month, through and
including the fifth Business Day thereafter, except for the calendar month
of April 2010, for which the Public Conversion Period shall mean the period
from and including the first Business Day of such month, through and
including April 15, 2010.
"Regular Dividend" shall mean any dividend on the Class D Stock
paid in cash that is not an Extraordinary Dividend.
"Restricted Period Termination Date" shall mean, with respect to
a given share of Class R Stock (or fraction thereof), the date on which the
Conversion Condition with respect to such share of Class R Stock (or
fraction thereof) has been satisfied.
"Separation Agreement" shall mean that certain Separation
Agreement dated as of , 1997 among the Corporation, PKS
Holdings, Kiewit Diversified Group, Inc. and Kiewit Construction Group,
Inc.
"Trading Price" shall mean, as of any date, the Trading Price set
forth in the most recent Conversion Ratio Certificate, as described in
paragraphs E.3. and E.4. hereof.
B. Issuance and Attachment.
1. When issued, each share of Class R Stock (or fraction thereof)
shall attach to the share of Class C Stock with respect to which it was
distributed.
2. Upon the occurrence of the Class C Exchange, each share of
Class R Stock (or fraction thereof) attached to a share of Class C Stock
shall, automatically and without further action by or on behalf of the
Corporation, PKS Holdings, the Corporation's transfer agent or the holder
of such share of Class R Stock or Class C Stock, attach to the share of PKS
Holdings Stock for which such share of Class C Stock was exchanged.
3. In the event that the Corporation or PKS Holdings shall
(i) pay a dividend on Construction Stock in shares of Construction Stock,
(ii) subdivide its outstanding shares of Construction Stock, (iii) combine
its outstanding shares of Construction Stock into a smaller number of
shares of Construction Stock or (iv) issue any shares of capital stock in a
reclassification of Construction Stock (including any such reclassification
in connection with a consolidation or merger), shares of Class R Stock (or
fractions thereof) which were attached to Construction Stock immediately
prior to the occurrence of any such event shall, upon the effectiveness of
any such event, attach on a pro rata basis to (x) the Construction Stock
held by such holder to which such shares of Class R Stock (or fractions
thereof) were attached; and/or (y) any capital stock so issued having
ownership restrictions comparable to those applicable to the Class C Stock
at the time of the Class C Exchange to which such shares of Class R Stock
(or fractions thereof) were attached at such time, as appropriate.
Except as described in paragraph B.2. hereof, a share of Class R
Stock (or fraction thereof) shall detach from the share of Construction
Stock to which it is attached only upon the occurrence of (i) the
Conversion Condition with respect to such share of Class R Stock (or
fraction thereof), or (ii) a Permitted Transfer. If, at any time prior to
the first anniversary of the Class C Exchange, any holder, who had sold or
transferred to the Corporation prior to the Class C Exchange shares of
Class C Stock to which Class R Stock was attached, purchases or acquires
Construction Stock, the number of shares of Class R Stock (or fractions
thereof) held by such holder which are not attached to Construction Stock
multiplied by the Reattachment Ratio shall, unless otherwise determined by
the Board of Directors, immediately attach, without further action by or on
behalf of the Corporation, PKS Holdings, the Corporation's transfer agent
or the holder of such share of Construction Stock, to such newly purchased
or acquired shares of Construction Stock on a pro rata basis, and the
Conversion Condition and the Restricted Period Termination Date shall be
deemed not to have occurred with respect to such shares of Class R Stock
(and fractions thereof) so attached.
"Reattachment Ratio" shall mean the lesser of (i) 1.0 or (ii) a
fraction, the numerator of which equals the purchase price paid to the
Corporation or PKS Holdings, as applicable, for such newly purchased or
acquired shares of Construction Stock, and the denominator of which equals
the purchase price paid to such holder by the Corporation for such
repurchase of such shares of Class C Stock.
4. Certificates representing Attached Class R Stock shall contain
such legends as the Corporation shall deem appropriate.
C. Transfer Restrictions.
1. Except for an Attached Transfer, no share of Class R Stock (or
fraction thereof) may be transferred prior to the Class C Exchange other
than pursuant to the Mandatory Redemption. Following the Class C Exchange
and prior to the occurrence of the Restricted Period Termination Date for a
given share of Class R Stock (or fraction thereof), any attempted transfer
of such share of Class R Stock (or fraction thereof), except an Attached
Transfer, a Permitted Transfer or pursuant to the Mandatory Redemption,
shall be void and of no effect. Neither the Corporation nor its transfer
agent shall register any attempted transfer of any certificate representing
a share of Class R Stock (or fraction thereof) prior to the occurrence of
the Restricted Period Termination Date for such share of Class R Stock (or
fraction thereof), except an Attached Transfer or a Permitted Transfer. For
purposes hereof, neither the Class C Exchange, the attachment of Class R
Stock to PKS Holdings Stock upon the occurrence of the Class C Exchange nor
the reattachment of Class R Stock to PKS Holdings Stock pursuant to
paragraph B.3. hereof shall be considered a transfer of Class R Stock.
2. Following the Class C Exchange and the occurrence of the
Restricted Period Termination Date for a given share of Class R Stock (or
fraction thereof), such share of Class R Stock (or fraction thereof) shall
separate from the share of PKS Holdings Stock to which it was attached and,
until the close of business on the Mandatory Conversion Date, shall be
freely transferable, and the Corporation or its transfer agent shall from
time to time register the transfer of the certificate representing such
share of Class R Stock (or fraction thereof) upon the books of the
Corporation, upon surrender of such certificate, duly endorsed, accompanied
by documentation reasonably satisfactory to the Corporation evidencing that
the Restricted Period Termination Date has occurred with respect to such
Class R Stock (or fraction thereof).
3. In the event of an Attached Transfer or a Permitted
Transfer of a share of Class R Stock (or fraction thereof) following the
Class C Exchange and prior to the Restricted Period Termination Date of
such share of Class R Stock (or fraction thereof), the Corporation or its
transfer agent shall from time to time register such Attached Transfer or
Permitted Transfer of the certificate representing such share of Class R
Stock (or fraction thereof) upon the books of the Corporation, upon
surrender of such certificate, duly endorsed, accompanied by documentation
reasonably satisfactory to the Corporation evidencing the Attached Transfer
or Permitted Transfer, as the case may be, of such Class R Stock.
D. Optional Conversion.
1. Subject to the provisions hereof, each share of Class R Stock
may be converted, at the option of the holder thereof (an "Optional
Conversion"), into the number of fully paid and nonassessable shares of
Class D Stock which are not Class D Stock, Non-Redeemable Series, equal to
the Conversion Ratio then in effect, and each fraction of a share of Class
R Stock may be converted into the number of fully paid and nonassessable
shares of such Class D Stock equal to such fraction multiplied by the
Conversion Ratio then in effect. No share of Class R Stock (or fraction
thereof) may be converted into Class D Stock prior to the occurrence of the
Conversion Condition with respect to such share of Class R Stock (or
fraction thereof), except as provided in paragraph K. hereof.
2. Other than as set forth in paragraphs K. and L. hereof,
Class R Stock may not be converted into Class D Stock except as follows:
a) In the event that the Class D Stock is not Publicly
Traded, each share of Class R Stock (or fraction thereof) for which the
Conversion Condition has been met may be converted into Class D Stock on
any Business Day during any Private Conversion Period following the earlier
of (i) December 31, 1999, or (ii) a Change of Control; and
b) In the event that the Class D Stock is Publicly
Traded, each share of Class R Stock (or fraction thereof) for which the
Conversion Condition has been met may be converted into Class D Stock on
any Business Day during any Public Conversion Period after the Blackout
Period. The "Blackout Period" shall mean the 90-day period commencing on
the first day on which the Class D Stock is Publicly Traded; provided,
however, that the Board of Directors may, by resolution, extend the
Blackout Period up to 180 days from the first day on which the Class D
Stock is Publicly Traded if so requested by a managing underwriter of
Class D Stock in connection with an underwritten initial public offering
thereof. A copy of such resolution of the Board of Directors shall be made
available to any stockholder of the Corporation upon request thereby.
3. Upon the occurrence of any Mandatory Redemption, Forced
Conversion or Mandatory Conversion of Class R Stock or any liquidation of
the Corporation, the right of Optional Conversion shall terminate at the
close of business on the full Business Day next preceding the date fixed
for such Mandatory Redemption, Forced Conversion or Mandatory Conversion or
for the payment of any amounts distributable on liquidation to the holders
of Class R Stock.
4. The Corporation may issue fractions of shares of Class R
Stock. The Corporation shall not issue fractions of shares of Class D Stock
or scrip in lieu thereof upon conversion of Class R Stock. If any fraction
of a share of Class D Stock would, except for the provisions of this
paragraph D.4., be issuable upon conversion of any Class R Stock, the
Corporation shall in lieu thereof pay to the person entitled thereto an
amount in cash equal to the Trading Price then in effect multiplied by the
fraction represented by such fraction of a share of Class D Stock.
5. In order to exercise the Optional Conversion privilege, the
holder of any Class R Stock to be converted shall surrender such holder's
certificate or certificates therefor to the principal office of the
transfer agent for the Class R Stock (or if no transfer agent be at the
time appointed, then the Corporation at its principal office), and shall
give written notice to the Corporation at such office that the holder
elects to convert the Class R Stock represented by such certificates, or
any number thereof. Such notice shall also state the name or names (with
address) in which the certificate or certificates for shares of Class D
Stock which shall be issuable on such conversion, and for any shares of
Class R Stock (or fractions thereof) represented by the certificate or
certificates so surrendered which are not to be converted, shall be issued,
subject to any restrictions on transfer relating to such shares of the
Class R Stock (or fractions thereof). If so required by the Corporation,
certificates surrendered for conversion shall be duly endorsed and
accompanied by documentation satisfactory to the Corporation evidencing
that the Restricted Period Termination Date has occurred with respect to
such Class R Stock.
6. As soon as practicable after receipt during a Conversion
Period of such notice and documentation and the surrender of the
certificate or certificates for Class R Stock for which the Conversion
Condition has been met, as aforesaid, the Corporation shall cause to be
issued and delivered at such office to such holder, or on his or its
written order, a certificate or certificates for the number of full shares
of Class D Stock issuable on such conversion in accordance with the
provisions hereof, cash as provided in paragraph D.4. hereof in respect of
any fraction of a share of Class D Stock otherwise issuable upon such
conversion and a certificate or certificates for the number of shares of
Class R Stock (or fractions thereof) representing the shares of Class R
Stock (or fractions thereof) surrendered pursuant to paragraph D.5. hereof
but not so converted. Such shares of Class D Stock, when issued, shall be
fully paid and nonassessable and free from all taxes, liens, charges and
security interests created by or imposed upon the Corporation with respect
to the issuance and holding thereof.
7. The Corporation shall at all times when the Class R Stock
shall be outstanding reserve and keep available out of its authorized but
unissued Class D Stock, for the purposes of effecting the conversion of the
Class R Stock, such number of its duly authorized shares of Class D Stock
as shall from time to time be sufficient to effect the conversion of all
outstanding Class R Stock. Before taking any action which would cause an
adjustment reducing the Conversion Value below the then par value of the
shares of Class D Stock issuable upon conversion of the Class R Stock, the
Corporation shall take any corporate action which may, in the opinion of
its counsel, be necessary in order that the Corporation may validly and
legally issue fully paid and nonassessable shares of such Class D Stock at
such adjusted Conversion Value.
8. All shares of Class R Stock (and fractions thereof) which
shall have been surrendered for conversion as herein provided shall no
longer be deemed to be outstanding and all rights with respect to such
shares, including the rights, if any, to receive notices and to vote, shall
forthwith cease and terminate except only the right of the holder thereof
to receive shares of Class D Stock and cash for fractional shares of Class
D Stock in exchange therefor and payment of any accrued and unpaid
dividends thereon. Any shares of Class R Stock (and fractions thereof) so
converted shall be retired and canceled and shall not be reissued, and the
Corporation shall from time to time take such appropriate action as may be
necessary to reduce the authorized Class R Stock accordingly.
E. Determination of Conversion Ratio; Obligation of the Corporation
to Provide Conversion Ratio Certificates and Appraisals.
1. The Conversion Ratio, Conversion Value and Trading Price used
for any purpose, including with respect to the conversion of Class R Stock,
shall be as set forth in the most recent Conversion Ratio Certificate, and
shall in any case be as adjusted pursuant to paragraph F. hereof; provided,
however, that prior to the delivery of the first Conversion Ratio
Certificate, the Conversion Value shall be the Fixed Conversion Value, the
Trading Price shall be the Base Price and the Conversion Ratio shall be
equal to the Fixed Conversion Value divided by the Base Price, as each of
such terms shall be adjusted pursuant to the terms hereof.
2. The "Conversion Ratio" shall be equal to (i) the Conversion
Value divided by (ii) the Trading Price.
3. If, at the end of any fiscal year of the Corporation,
beginning with the end of the fiscal year ending in 1999, the Class D Stock
is not Publicly Traded, the Corporation shall, no earlier than 20 days nor
later than 60 days following the end of such fiscal year, cause to be
provided to each office designated for conversion of Class R Stock, a copy
of a certificate (the "Private Conversion Ratio Certificate") signed by two
officers of the Corporation setting forth the Conversion Ratio, Conversion
Value and Trading Price as of the end of such fiscal year, calculated in
each case pursuant to this paragraph E. In addition, if a Change of Control
occurs when the Class D Stock is not Publicly Traded, the Corporation shall
within 60 days following such Change of Control, cause to be provided to
each office designated for conversion of Class R Stock, such a Private
Conversion Ratio Certificate.
The "Trading Price" set forth in such Private Conversion Ratio
Certificate shall be the Appraised Value set forth in the most recent
Appraisal delivered to the Corporation and approved by the Board of
Directors.
If, at the end of any fiscal year of the Corporation, beginning
with the end of the fiscal year ending in 1999, the Class D Stock is not
Publicly Traded, the Corporation shall cause to be prepared and delivered
to the Board of Directors and approved by the Board of Directors, prior to
60 days following the end of such fiscal year, an appraisal (an
"Appraisal") of the per share value of the Class D Stock as of the last day
of such fiscal year by an Investment Bank. If a Change of Control occurs or
the Board of Directors should determine to cause a Forced Conversion, and
the Class D Stock is not Publicly Traded, the Corporation shall cause to be
prepared and delivered to the Board of Directors and approved by the Board
of Directors, within 60 days following such Change of Control or
determination of the Board of Directors, an Appraisal of the per share
value of the Class D Stock as of the date of such Change of Control or
determination of the Board of Directors. Such Investment Bank shall
determine the per share value of the Class D Stock as if the Class D Stock
was Publicly Traded and shall submit such per share value to the Board of
Directors for its approval. The value per share of the Class D Stock as
approved by the Board of Directors shall be the "Appraised Value." In
determining the Appraised Value, the Investment Bank shall place
substantial, but not exclusive, emphasis on valuations of comparable
companies in the public equity markets, and shall not take into account
factors such as control premiums, minority discounts or illiquidity
discounts that would not generally apply to such companies.
As promptly as practicable following its delivery of any Private
Conversion Ratio Certificate, the Corporation shall cause to be given to
each of the registered holders of Class R Stock at such holder's address
appearing upon the books of the Corporation a copy of such Private
Conversion Ratio Certificate by first class mail, postage prepaid.
4. During any period in which the Class D Stock is Publicly
Traded, the Corporation shall, on the last Business Day of each calendar
month, cause to be provided to each office designated for conversion of
Class R Stock, a copy of a certificate (the "Public Conversion Ratio
Certificate"), signed by two officers of the Corporation, setting forth the
Conversion Ratio, Conversion Value and Trading Price as of the close of
business on such Business Day, calculated in each case pursuant to this
paragraph E.
The "Trading Price" set forth in such Public Conversion Ratio
Certificate shall be equal to the Current Trading Value of one share of
Class D Stock as of the close of business on the last Business Day of such
calendar month. Notwithstanding anything herein to the contrary, if, during
any period being used to calculate such Current Trading Value (the
"Calculation Period"), any event has occurred to cause the Conversion Ratio
and/or the Conversion Value to be adjusted pursuant to paragraph F. hereof
(an "Adjustment Event"), the Corporation shall in good faith determine such
Conversion Ratio and/or the Conversion Value, as appropriate, so as to give
pro forma effect to the Adjustment Event immediately prior to the
Calculation Period.
The Corporation shall provide any holder of Class R Stock with a
copy of any Public Conversion Ratio Certificate upon request. Beginning on
the day on which the first Public Conversion Ratio Certificate is provided
pursuant to this paragraph E.4., the Corporation shall maintain a
reasonable means to allow holders to be informed of the value of the
Conversion Ratio as set forth in the most recent Public Conversion Ratio
Certificate on an immediate basis during business hours on each Business
Day on which Class R Stock is issued and outstanding.
5. All calculations and determinations required to be made by the
Corporation pursuant hereto shall be made by the Corporation in good faith.
All such calculations and determinations shall be conclusive unless
otherwise specifically provided hereby.
6. Conversion Ratio Certificates may, at the Corporation's
discretion, be prepared by an agent of the Corporation. In such case each
such Conversion Ratio Certificate shall be signed by an authorized
signatory of such agent and countersigned by two officers of the
Corporation.
7. Upon any conversion of Class R Stock into Class D Stock, in no
event shall any such Class R Stock be converted into Class D Stock,
Non-Redeemable Series.
F. Anti-dilution Provisions.
1. If the Corporation shall (a) pay a dividend on any of its
shares of capital stock (including Class D Stock) in shares of Class D
Stock, (b) subdivide its outstanding shares of Class D Stock, (c) combine
its outstanding shares of Class D Stock into a smaller number of shares of
Class D Stock or (d) in an event or manner other than as set forth in
paragraph F.4. below, issue any shares of its capital stock in a
reclassification of the Class D Stock (each, a "Conversion Term Adjustment
Event"):
a) Each of the Fixed Terms shall be adjusted to the
value determined by multiplying (x) the Fixed Term immediately prior to
such Conversion Term Adjustment Event, by (y) a fraction, the numerator of
which is the number of shares of Class D Stock outstanding immediately
prior to such Conversion Term Adjustment Event, and the denominator of
which is the number of shares of Class D Stock outstanding immediately
after such Conversion Term Adjustment Event; and
b) Each of the Inverse Fixed Terms shall be adjusted to
the value determined by multiplying (x) such Inverse Fixed Term immediately
prior to such Conversion Term Adjustment Event, by (y) a fraction, the
numerator of which is the number of shares of Class D Stock outstanding
immediately after such Conversion Term Adjustment Event, and the
denominator of which is the number of shares of Class D Stock outstanding
immediately prior to such Conversion Term Adjustment Event.
2. If the Corporation shall issue Convertible Securities to all
holders of its outstanding Class D Stock (other than pursuant to any rights
agreement in connection with a stockholder rights plan approved by the
Board of Directors), without payment of additional consideration by such
holders, entitling them (for a period expiring within 45 days after the
record date mentioned below) to subscribe for or purchase shares of Class D
Stock at a price per share that is lower than the Trading Price as set
forth in the most recent Conversion Ratio Certificate prior to the record
date mentioned below (or, if no Conversion Ratio Certificate has yet been
provided, equal to the Base Price immediately prior to such record date) (a
"Discounted Stock Adjustment Event"):
a) Each of the Fixed Terms shall be adjusted to the
value determined by multiplying (x) such term immediately prior to such
Discounted Stock Adjustment Event, by (y) a fraction, (i) the numerator of
which shall be the number of shares of Class D Stock outstanding on the
date of such Discounted Stock Adjustment Event plus the number of shares
which the aggregate offering price of the total number of shares of Class D
Stock so offered would purchase at the price per share of Class D Stock
equal to the Trading Price as set forth in the most recent Conversion Ratio
Certificate prior to the record date mentioned below (or, if no Conversion
Ratio Certificate has yet been provided, equal to the Base Price
immediately prior to such record date), and (ii) the denominator of which
shall be the number of shares of Class D Stock outstanding on the date of
such Discounted Stock Adjustment Event plus the number of additional shares
of Class D Stock offered for subscription or purchase.
b) Each of the Inverse Fixed Terms shall be adjusted to
the value determined by multiplying (x) such term immediately prior to such
Discounted Stock Adjustment Event, by (y) a fraction, (i) the numerator of
which shall be the number of shares of Class D Stock outstanding on the
date of such Discounted Stock Adjustment Event plus the number of
additional shares of Class D Stock offered for subscription or purchase,
and (ii) the denominator of which shall be the number of shares of Class D
Stock outstanding on the date of such Discounted Stock Adjustment Event
plus the number of shares which the aggregate offering price of the total
number of shares of Class D Stock so offered would purchase at the price
per share of Class D Stock equal to the Trading Price as set forth in the
most recent Conversion Ratio Certificate prior to the record date mentioned
below (or, if no Conversion Ratio Certificate has yet been provided, equal
to the Base Price immediately prior to such record date).
Such adjustment shall be made whenever such Convertible Securities are
issued, and shall become effective immediately on the date of issuance
retroactive to the record date for the determination of stockholders
entitled to receive such Convertible Securities.
3. If the Corporation shall pay any Regular Dividend or
Extraordinary Dividend (a "Dividend Adjustment Event"):
a) Each of the Fixed Terms shall be adjusted to such
value determined by multiplying (x) such term immediately prior to such
Dividend Adjustment Event, by (y) a fraction, (i) the numerator of which
shall be the Trading Price immediately prior to such Dividend Adjustment
Event minus the per share amount received by holders of Class D Stock in
connection with such dividend, and (ii) the denominator of which shall be
the Trading Price immediately prior to such Dividend Adjustment Event.
b) Each of the Inverse Fixed Terms shall be adjusted to
such value determined by multiplying (x) such term immediately prior to
such Dividend Adjustment Event, by (y) a fraction, (i) the numerator of
which shall be the Trading Price immediately prior to such Dividend
Adjustment Event, and (ii) the denominator of which shall be the Trading
Price immediately prior to such Dividend Adjustment Event minus the per
share amount received by holders of Class R Stock in connection with such
dividend.
Any non-cash portions of an Extraordinary Dividend set forth in this
paragraph F.3. shall be based upon the fair market value of such non-cash
portion at the time such Extraordinary Dividend is declared or paid, as
determined in good faith by the Board of Directors.
4. If any capital reorganization or reclassification of the
capital stock of the Corporation, or consolidation or merger of the
Corporation with another corporation, or share exchange involving the
outstanding shares of the Corporation's capital stock or the sale of all or
substantially all of its assets to another corporation shall be effected in
such a way that holders of Class D Stock shall be entitled to receive
stock, securities, cash or other property with respect to or in exchange
for Class D Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger, share exchange or sale, lawful and
adequate provision shall be made whereby the holders of the Class R Stock
shall have the right to acquire and receive upon conversion of the Class R
Stock (after and subject to the rights of holders of Preferred Stock, if
any), such shares of stock, securities, cash or other property issuable or
payable (as part of the reorganization, reclassification, consolidation,
merger, share exchange or sale) with respect to or in exchange for such
number of outstanding shares of Class D Stock as would have been received
upon conversion of the Class R Stock at the Conversion Ratio immediately
prior to such event. The Corporation shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof the
successor corporation (if other than the Corporation) resulting from such
consolidation or merger or the corporation purchasing such assets shall
assume by written instrument mailed or delivered to the holders of the
Class R Stock at the last address of each such holder appearing on the
books of the Corporation, the obligation to deliver to each such holder
such shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holder may be entitled to receive upon
conversion of such holder's shares of Class R Stock.
5. The Corporation shall not effect a reclassification of the
Class R Stock without the approval of holders of a majority of the shares
of Class R Stock.
6. The provisions of this paragraph F. shall not apply to any
Class D Stock issued, issuable or deemed outstanding pursuant hereto: (a)
to any person pursuant to any stock option, stock purchase or similar plan
or arrangement for the benefit of employees of the Corporation or its
subsidiaries in effect on the Initial Issuance Date or thereafter adopted
by the Board of Directors of the Corporation; (b) pursuant to options,
warrants and conversion rights in existence on the Initial Issuance Date;
or (c) on conversion of the Class R Stock.
7. In the event of:
a) the occurrence of any event causing the adjustment of
the Fixed Term or any Inverse Fixed Term pursuant to paragraphs F.1., F.2.
or F.3. hereof; or
b) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, including any
subdivision or combination of its outstanding shares of Class D Stock, or
consolidation or merger of the Corporation with, or sale of all or
substantially all of its assets to, another corporation; or
c) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation; or
d) the occurrence of a Change of Control;
then, in connection with such event, the Corporation shall give to the
holders of the Class R Stock:
(1) in the case of a), b) or c) above, at least twenty
(20) days prior written notice of the date on which the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in
respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, provided that if the
Class R Stock is Publicly Traded, such notice must be given prior to the
end of the Public Conversion Period prior to such record date;
(2) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, at least twenty (20) days prior written notice of the date when
the same shall take place. Such notice in accordance with the foregoing
clause shall also specify, in the case of any such dividend, distribution
or subscription rights, the date on which the holders of Class D Stock
shall be entitled thereto, and shall also specify the date on which the
holders of Class D Stock shall be entitled to exchange their Class D Stock
for securities or other property deliverable upon such reorganization,
reclassification consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be; and
(3) in the case of d) above, five days after such Change
of Control, unless notice is required sooner by (1) above; provided that if
stockholder approval is required to effect such Change of Control, notice
shall be provided concurrently with the notice to stockholders in
connection with obtaining such stockholder approval.
Each such written notice shall be given by first class mail, postage
prepaid, addressed to the holders of the Class R Stock at the address of
each such holder as shown on the books of the Corporation.
8. If any event occurs as to which, in the opinion of the Board of
Directors of the Corporation, the provisions of this paragraph F. are not
strictly applicable or if strictly applicable would not fairly protect the
rights of the holders of the Class R Stock in accordance with the essential
intent and principles of such provisions, then the Board of Directors shall
make an adjustment in the application of such provisions, in accordance
with such essential intent and principles, so as to protect such rights as
aforesaid. Upon the occurrence of any such adjustment pursuant to this
paragraph F.8., the Corporation shall give notice to the holders of Class R
Stock as provided in paragraph F.7(1), F.7(2) or F.7(3) hereof, as
appropriate. All calculations and determinations required to be made by the
Corporation pursuant hereto shall be made by the Corporation in good faith.
All such calculations and determinations shall be conclusive unless
otherwise specifically provided hereby.
G. Rank.
After the Class C Exchange, the Class R Stock shall, with respect to
dividend distributions and with respect to distributions of assets and
rights upon the liquidation, winding up and dissolution of the Corporation,
rank on a parity with Class D Stock and junior to Preferred Stock.
H. Dividends.
1. Prior to the Class C Exchange, no dividends may be declared or paid with
respect to Class R Stock. After (i) the Class C Exchange and (ii) dividends
payable on any Preferred Stock have been declared and set aside on any such
Preferred Stock having a preference over the Class D Stock and Class R
Stock with respect to the payment of such dividends, holders of Class R
Stock shall only be entitled to receive dividends, out of any assets or
funds legally available therefor, in an amount per share of Class R Stock
(and proportionally to such amount for fractional shares thereof) as set
forth below:
a) If and when a Regular Dividend is declared, an amount which is equal
to (i) the Conversion Ratio then in effect multiplied by (ii) the aggregate
per share amount of such Regular Dividend declared on a share of Class D
Stock; and
b) Subject to paragraph K. hereof, if and when an Extraordinary
Dividend is declared, an amount which is equal to (i) the Conversion Ratio
then in effect multiplied by (ii) one-fourth of the sum of (A) the
aggregate per share amount of all cash portions of such Extraordinary
Dividend plus (B) the aggregate per share amount (based upon the fair
market value of the non-cash portion of such Extraordinary Dividend at the
time such Extraordinary Dividend is declared or paid as determined in good
faith by the Board of Directors) of all non-cash portions of such
Extraordinary Dividend, in each case as declared on a share of Class D
Stock.
Such dividends shall be declared and paid contemporaneously with the
declaration and payment of the related dividend on the Class D Stock; and
the foregoing are the only times when dividends shall be declared and paid
with respect to the Class R Stock.
2. All dividends paid with respect to shares of Class R Stock pursuant to
this paragraph H. shall be paid pro rata and in like manner to all of the
holders entitled thereto.
3. No Regular or Extraordinary Dividends shall be declared by the Board of
Directors or paid or set apart for payment by the Corporation on Class D
Stock unless, contemporaneously therewith, a like ratable dividend
calculated in accordance with this paragraph H. is declared and paid, or
declared and a sum set apart sufficient for such payment, on the Class R
Stock, payable as set forth herein.
I. Liquidation Rights.
1. Prior to the Class C Exchange, in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation
("Liquidation"), the holders of Class R Stock then outstanding shall not be
entitled to receive any property, assets or funds of the Corporation.
2. In the event of a Liquidation following the Class C Exchange, holders of
Class R Stock then outstanding shall be entitled to be paid ratably out of
the assets and funds of the Corporation legally available for distribution
to its stockholders, after and subject to the payment in full of all
amounts required to be distributed to the holders of any Preferred Stock
upon such Liquidation, an amount equal to (a) the Liquidation Ratio then in
effect multiplied by (b) the aggregate amount of all assets and funds
remaining available for distribution to holders of Class D Stock and
Class R Stock.
J. Voting.
1. Prior to the Class C Exchange, except as required by law, holders
of Class R Stock shall not be entitled to vote on any matter.
2. After the Class C Exchange, each issued and outstanding share of
Class R Stock (and fraction thereof) shall be entitled to vote only (i) for
the election of directors, and (ii) as required by law. On matters on which
the holders of Class R Stock are entitled to vote, (a) each issued and
outstanding share of Class R Stock shall be entitled to the number of votes
equal to the Conversion Ratio as of the record date for determination of
stockholders entitled to vote on such matter, and (b) each issued and
outstanding fraction of a share of Class R Stock shall be entitled to (x)
such fraction, multiplied by (y) the number of votes equal to the
Conversion Ratio as of the record date for determination of stockholders
entitled to vote on such matter. Except as required by law, holders of
Class R Stock shall vote together with the holders of Class D Stock as a
single class on all matters on which holders of Class R Stock are entitled
to vote.
K. Forced Conversion.
1. In the event that the Board of Directors determines that the
Corporation should convert all issued and outstanding shares of Class R
Stock (and fractions thereof) into Class D Stock, the Corporation may at
its option, elect to cause all, but not less than all, shares of Class R
Stock (and fractions thereof) to be converted (a "Forced Conversion") into
Class D Stock at the Conversion Ratio (i) in the event that the Class D
Stock is not Publicly Traded, set forth in the Private Conversion Ratio
Certificate delivered pursuant to paragraph E.3. hereof as a result of such
determination by the Board of Directors, and (ii) in the event that the
Class D Stock is Publicly Traded, in effect on the date the Board of
Directors determines to cause such a conversion; provided, however, that if
such Conversion Ratio in effect was calculated using a Conversion Value of
less than $25.00, such Conversion Ratio shall be recalculated using a
Conversion Value of $25.00.
2. All holders of record of shares of Class R Stock (or fractions
thereof) will be given at least ten (10) days prior written notice of the
date fixed and the place designated for such conversion of Class R Stock
pursuant to this paragraph K. Such notice shall be sent by mail, first
class, postage prepaid, to each record holder of shares of Class R Stock
(or fractions thereof) at such holder's address appearing on the stock
register. On or before the date fixed for conversion each holder of shares
of Class R Stock (or fractions thereof) shall surrender his or its
certificate or certificates for all such shares to the Corporation at the
place designated in such notice, and shall thereafter receive certificates
for the number of shares of Class D Stock and cash in lieu of any
fractional share of Class D Stock to which such holder is entitled pursuant
to this paragraph K. On the date fixed for conversion, all rights with
respect to the Class R Stock so converted will terminate, except only the
rights of the holders thereof, upon surrender of their certificate or
certificates therefor, to receive certificates for the number of shares of
Class D Stock into which such Class R Stock has been converted, cash as
provided in paragraph D.4. hereof in respect of any fraction of a share of
Class D Stock otherwise issuable upon such conversion and payment of any
accrued and unpaid dividends thereon. If so required by the Corporation,
certificates surrendered for conversion shall be endorsed or accompanied by
written instrument or instruments of transfer, in form satisfactory to the
Corporation, duly executed by the registered holder or by his attorneys
duly authorized in writing. All certificates evidencing shares of Class R
Stock (or fractions thereof) which are required to be surrendered for
conversion in accordance with the provisions hereof shall, from and after
the date fixed for conversion, be deemed to have been retired and canceled
and the shares of Class R Stock (or fractions thereof) represented thereby
converted into Class D Stock for all purposes, notwithstanding the failure
of the holder or holders thereof to surrender such certificates on or prior
to such date. As soon as practicable after the date of such conversion and
the surrender of the certificate or certificates for Class R Stock as
aforesaid, the Corporation shall cause to be issued and delivered to such
holder, or on such holder's written order, a certificate or certificates
for the number of full shares of Class D Stock issuable on such conversion
in accordance with the provisions hereof, cash as provided in paragraph
D.4. hereof in respect of any fraction of a share of Class D Stock
otherwise issuable upon such conversion and payment of any accrued and
unpaid dividends thereon.
L. Mandatory Conversion.
1. Each share of Class R Stock (and fraction thereof) outstanding as
of the Mandatory Conversion Date shall, automatically, and without further
action by or on behalf of the Corporation, the Corporation's transfer agent
or the holder of such share of Class R Stock, be converted (the "Mandatory
Conversion") into shares of Class D Stock (and cash in lieu of any
fractions of shares of Class D Stock as provided in paragraph D.4. hereof)
at the Conversion Ratio in effect as of such Mandatory Conversion Date.
2. All holders of record of shares of Class R Stock (or fractions
thereof) will be given written notice at least ten (10) days prior to the
Mandatory Conversion Date stating the place designated for mandatory
conversion of all of such shares of Class R Stock pursuant to this
paragraph L. Such notice shall be sent by mail, first class, postage
prepaid, to each record holder of shares of Class R Stock (or fractions
thereof) at such holder's address appearing on the stock register. On or
before the Mandatory Conversion Date, each holder of Class R Stock shall
surrender his or its certificate or certificates for all such shares (or
fractions thereof) to the Corporation at the place designated in such
notice, and shall thereafter receive certificates for the number of shares
of Class D Stock and cash in lieu of any fractional shares of Class D Stock
to which such holder is entitled pursuant to this paragraph L. On the date
fixed for conversion, all rights with respect to the Class R Stock so
converted will terminate, except only the rights of the holders thereof,
upon surrender of their certificate or certificates therefor, to receive
certificates for the number of shares of Class D Stock into which such
Class R Stock has been converted, cash as provided in paragraph D.4. hereof
in respect of any fraction of a share of Class D Stock otherwise issuable
upon such conversion and payment of any accrued and unpaid dividends
thereon. If so required by the Corporation, certificates surrendered for
conversion shall be endorsed or accompanied by written instrument or
instruments of transfer, in form satisfactory to the Corporation, duly
executed by the registered holder or by his attorneys duly authorized in
writing. All certificates evidencing shares of Class R Stock (or fractions
thereof) which are required to be surrendered for conversion in accordance
with the provisions hereof shall, from and after the date fixed for
conversion, be deemed to have been retired and canceled and the shares of
Class R Stock (and fractions thereof) represented thereby converted into
Class D Stock for all purposes, notwithstanding the failure of the holder
or holders thereof to surrender such certificates on or prior to such date.
As soon as practicable after the date of such Mandatory Conversion and the
surrender of the certificate or certificates for Class R Stock as
aforesaid, the Corporation shall cause to be issued and delivered to such
holder, or on such holder's written order, a certificate or certificates
for the number of full shares of Class D Stock issuable on such conversion
in accordance with the provisions hereof, cash as provided in paragraph
D.4. hereof in respect of any fraction of a share of Class D Stock
otherwise issuable upon such conversion and payment of any accrued and
unpaid dividends thereon.
M. Mandatory Redemption. If the Class C Exchange (i) is abandoned by
the Board of Directors prior to the Class C Exchange, or (ii) has not
occurred by the close of business on the Mandatory Redemption Date, the
Corporation shall redeem (to the extent funds are legally available
therefor), all shares of Class R Stock (and fractions thereof) then
outstanding for a per share price equal to the par value thereof) (such
amount is hereinafter referred to as the "Redemption Price"). Such
Redemption Price shall be paid to each record holder of Class R Stock as of
the Mandatory Redemption Date, promptly after such date, by certified or
bank cashier's check, sent by mail, first class, postage prepaid, to each
record holder of shares of Class R Stock at such holder's address appearing
on the stock register. If the Corporation is unable at such date to redeem
all shares of Class R Stock (and fractions thereof) because funds are not
legally available therefor, then the Corporation shall redeem such shares
as soon thereafter as funds are legally available for redemption of such
shares.
N. Taxes. The Corporation shall pay all documentary stamp taxes
attributable to the initial issuance of Class R Stock and of the shares of
Class D Stock issuable upon conversion of Class R Stock; provided that the
Corporation shall not be required to pay any tax or taxes which may be
payable in respect of any transfer involved in the issue of any
certificates representing shares of Class R Stock (or fractions thereof) or
Class D Stock in a name other than the holder of the certificate or
certificates surrendered upon conversion of Class R Stock, and the
Corporation shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall
have paid to the Corporation the amount of such tax or shall have
established to the satisfaction of the Corporation that such tax has been
paid.
In witness whereof, Peter Kiewit Sons', Inc. has caused this
Certificate of Amendment to be signed by Matthew J. Johnson, its Vice President
this 8th day of December, 1997.
Peter Kiewit Sons', Inc.
By:/s/ Matthew J. Johnson
Name:Matthew J. Johnson
Title: Vice President
SEPARATION AGREEMENT
This Separation Agreement (this "Agreement") is entered into as
of December 8, 1997 by and among Peter Kiewit Sons', Inc., a
Delaware corporation ("PKS"), Kiewit Diversified Group Inc., a
Delaware corporation ("KDG"), PKS Holdings, Inc., a Delaware
corporation ("PKS Holdings"), and Kiewit Construction Group Inc.,
a Delaware corporation ("KCG", and together with PKS, KDG, and
PKS Holdings, collectively the "Parties" or individually a
"Party").
Recitals
The Board of Directors of PKS has approved, by a unanimous vote
of the Board, a series of transactions intended to separate the
construction businesses of PKS and the diversified businesses of
PKS into two separate and independent companies, and the
stockholders of PKS have ratified the action of the PKS Board.
PKS, KDG (the subsidiary of PKS that holds, directly or
indirectly, all of the diversified businesses of PKS), KCG (the
subsidiary of PKS that holds, directly or indirectly, all of the
construction businesses of PKS) and PKS Holdings (a subsidiary of
PKS formed to acquire from PKS all of the capital stock of KCG in
connection with the separation) want to provide for the principal
corporate transactions necessary to consummate the separation,
the relationships among the Parties after the separation, the
allocation of risks and responsibilities among the Parties after
the separation and certain other matters.
The Parties hereby agree as follows:
Agreement
ARTICLE I
DEFINITIONS
1.01 General. Terms used but not elsewhere defined in
this Agreement have the following meanings:
Affiliate: with respect to any Person, a Person that
directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, such
specified Person; provided, however, that for purposes of this
Agreement, no member of either Group will be deemed to be an
Affiliate of any member of the other Group.
Asset: any and all assets and properties, whether real,
personal or mixed, tangible or intangible, wherever located, and
whether or not recorded or reflected or required to be recorded
on the books and records or financial statements of any Person,
including, without limitation, the following: (i) cash, cash
equivalents, bank accounts, lock boxes and other deposit
arrangements, notes, deposits, letters of credit, performance and
surety bonds, trade accounts and other accounts and notes
receivable (whether current or non-current); (ii) certificates of
deposit, banker's acceptances, stock, debentures, evidences of
indebtedness, certificates of interest or participation in profit-
sharing agreements, collateral-trust certificates,
preorganization certificates or subscriptions, capital
contributions, joint venture and partnership interests,
transferable shares, investment contracts, voting-trust
certificates, fractional undivided interests in oil, gas or other
mineral rights, puts, calls, straddles, options and other
securities or equity interests of any kind or in any Person;
(iii) trade secrets, confidential information, registered and
unregistered trademarks, service marks, service names, trade
styles and trade names and associated goodwill; statutory, common
law and registered copyrights; domestic and foreign patents,
applications for any of the foregoing, rights to use the
foregoing and other rights in, to and under the foregoing; (iv)
rights under leases, contracts, licenses, permits, distribution
arrangements, sales and purchase agreements, other agreements and
business arrangements; (v) real estate, all interests in real
estate of whatever nature and buildings and other improvements
thereon; (vi) leasehold improvements, fixtures, trade fixtures,
machinery, equipment (including transportation and office
equipment), tools, dies and furniture; (vii) office supplies,
production supplies, spare parts, other miscellaneous supplies
and other tangible property of any kind; (viii) raw materials,
work-in-process, finished goods, consigned goods and other
inventories; (ix) prepayments or prepaid expenses; (x) claims,
causes of action, choses in action, rights of recovery and rights
of set-off of any kind; (xi) the right to receive mail, payments
on accounts receivable and other communications; (xii) lists of
advertisers, records pertaining to advertisers and accounts,
personnel records, lists and records pertaining to suppliers and
agents, and books, ledgers, files and business records of every
kind, whether in paper, microfilm, microfiche, computer tape or
disk, magnetic tape or any other form; (xiii) advertising
materials and other printed or written materials; (xiv) goodwill
as a going concern and other intangible properties; (xv) employee
contracts, including any rights thereunder to restrict an
employee from competing in certain respects; (xvi) licenses and
authorizations issued by any governmental authority; (xvii) all
apparatus, computers and other electronic data processing
equipment, fixtures, machinery, equipment, furniture, office
equipment, automobiles, trucks, aircraft, rolling stock, vessels,
motor vehicles and other transportation equipment, special and
general tools, test devices, prototypes and models and other
tangible personal property; (xviii) all written technical
information, data, specifications, research and development
information, engineering drawings, operating and maintenance
manuals, and materials and analyses prepared by consultants and
other third parties; (xix) all computer applications, programs
and other software, including operating software, network
software, firmware, middleware, design software, design tools,
systems documentation and instructions (excluding, for purposes
of the definition of Construction Assets, any property of PKSIS);
(xx) all cost information, sales and pricing data, customer
prospect lists, supplier records, customer lists, customer and
vendor data, correspondence and lists, product literature,
artwork, design, development and manufacturing files, vendor and
customer drawings, (xxi) formulations and specifications, quality
records and reports and other books, records, studies, surveys,
reports, plans and documents; and (xxii) except as otherwise
expressly provided herein, all rights under insurance policies
and all rights in the nature of insurance, indemnification or
contribution.
Certificate Amendments: the Initial Certificate Amendment
and the Post-Transaction Certificate Amendment.
Class C Stock: the Class C Construction & Mining Group
Restricted Redeemable Convertible Exchangeable Common Stock of
PKS, par value $.0625 per share.
Class D Stock: the Class D Diversified Group Convertible
Exchangeable Common Stock of PKS, par value $.0625 per share.
Class R Stock: the Class R Convertible Common Stock of PKS,
par value $.01 per share, proposed to be authorized pursuant to
the Initial Certificate Amendment and issued pursuant to the
Class R Distribution.
Class R Distribution: the distribution, as a dividend, by
PKS of the Class R Stock pursuant to Section 3.06.
Class R Distribution Record Date: January 2, 1998, or such
other date occurring after the Debenture Conversion Date but
before the Excess Purchase Date, which is selected by the PKS
Board as the record date for determining holders of record of
Class C Stock entitled to receive the Class R Distribution.
Code: the Internal Revenue Code of 1986, as amended, or any
successor legislation, together with the rules and regulations
promulgated thereunder.
Construction Assets: all of the Assets utilized immediately
prior to the Exchange Date by any member of the Construction
Group in connection with the Construction Business.
Construction Business: all of the businesses and operations
conducted at, or at any time before, the Exchange Date by PKS or
any Subsidiary of PKS, the principal focus of which are or were
construction or construction management activities.'
Construction Group: PKS Holdings, KCG and the Subsidiaries
of KCG as of the Exchange Date.
Construction Indemnitees: any member of the Construction
Group, any Construction Individual and any Affiliate of any
member of the Construction Group.
Construction Individual: any individual who at any time
prior to the Exchange Date was a director, officer or employee of
any member of the Construction Group, but solely to the extent
that any Loss incurred by such Person is incurred in that
capacity.
Construction Liabilities: all of the Liabilities arising
out of or resulting from the Construction Business, and any
Liability which any member of the Construction Group is obligated
to assume pursuant to Section 5.02.
Construction Securities Transactions: the offer to sell or
the sale of Class C Stock, PKS Holdings Stock or debentures
convertible into Class C Stock or PKS Holdings Stock.
Diversified Assets: all of the Assets utilized immediately
prior to the Exchange Date by any member of the Diversified Group
in connection with the Diversified Business.
Diversified Business: all of the businesses and operations
conducted at, or at any time before, the Exchange Date, by PKS,
other than the Construction Business.
Diversified Group: PKS, KDG and all of the Subsidiaries of
KDG as of the Exchange Date.
Diversified Indemnitees: any member of the Diversified
Group, any Diversified Individual and any Affiliate of any member
of the Diversified Group.
Diversified Individual: any individual who at any time
prior to the Exchange Date was a director, officer or employee of
any member of the Diversified Group, but solely to the extent
that any Loss incurred by such Person is incurred in that
capacity.
Diversified Liabilities: all of the Liabilities arising out
of or resulting from the Diversified Business, and any Liability
which any member of the Diversified Group is obligated to assume
pursuant to Section 5.02.
Diversified Securities Transaction: the offer to sell or
the sale of Class D Stock, Class R Stock or debentures
convertible into Class D Stock, including the issuance of any
stock option convertible into Class D Stock.
Dividend Condition: with respect to the distribution in
connection with the Class R Distribution and the distribution in
connection with the Share Exchange, a determination by the PKS
Board that such distribution by PKS will (a) comply with the PKS
Certificate, as then amended and/or restated, (b) will be made
out of surplus, within the meaning of Section 170 of the Delaware
General Corporation Law and (c) will not result in the insolvency
of PKS under applicable fraudulent conveyance or fraudulent
transfer statutes.
Exchange Act: the Securities Exchange Act of 1934, together
with the rules and regulations promulgated thereunder.
Exchange Date: the date on which the Share Exchange is
made, which will be a date determined by the PKS Board that
occurs after satisfaction of all of the conditions set forth in
Section 2.08.
Exchange Record Date: the date selected by the PKS Board
for determining holders of record of Class C Stock entitled to
receive PKS Holdings Stock in the Share Exchange.
Group: either of the Construction Group or the Diversified
Group.
Indemnifying Party: a Person who or which is obligated
under Article IV to provide indemnification.
Indemnitee: a Person entitled to indemnification under
Article IV.
Indemnity Payment: an amount that an Indemnifying Party is
required to pay to an Indemnitee pursuant to Article IV.
Information: all information whether or not patentable or
copyrightable, in written, oral, electronic or other tangible or
intangible forms, stored in any medium, including studies,
reports, records, books, contracts, instruments, surveys,
discoveries, ideas, concepts, know-how, techniques, designs,
specifications, drawings, blueprints, diagrams, models,
prototypes, samples, flow charts, disks, diskettes, tapes,
computer programs or other software, marketing plans, customer
names, communications by or to attorneys (including attorney-
client privileged communications), memos and other materials
prepared by attorneys or under their direction (including
attorney work product), computer data and other technical,
financial, employee or business information.
Initial PKS Certificate Amendment: an amendment to the PKS
Certificate in the form of Appendix E-I to the Joint
Prospectus/Proxy Statement.
Joint Prospectus/Proxy Statement: the joint
prospectus/proxy statement included in the Registration Statement
and mailed to the holders of Class C Stock and Class D Stock in
connection with the Transaction.
Liabilities: all debts, liabilities and obligations,
whether absolute or contingent, matured or unmatured, liquidated
or unliquidated, accrued or unaccrued, known or unknown, whenever
or however arising, and whether or not the same would properly be
reflected on a balance sheet, including all related costs and
expenses.
Losses: all losses, Liabilities, damages, actions, claims,
suits, demands, proceedings, inquiries, investigations, judgments
or settlements of any nature or kind, known or unknown, fixed,
accrued, absolute or contingent, liquidated or unliquidated,
including all related costs and expenses (legal, accounting or
otherwise as such costs are incurred) suffered by an Indemnitee.
PKS Board: the board of directors of PKS (or the executive
committee of the board of directors of PKS, if the executive
committee of the board of directors of PKS has the authority to
take the action required under this Agreement).
PKS Certificate: the Restated Certificate of Incorporation
of PKS, as in effect on the date of this Agreement.
PKS Holdings Certificate Amendment: an amendment to and
restatement of the Certificate of Incorporation of PKS Holdings
in the form of Appendix D to the Joint Prospectus/Proxy
Statement.
PKS Holdings Stock: the common stock of PKS Holdings, $.01
par value.
PKS Stockholders: the holders of Class C Stock, the holders
of Class D Stock and, if applicable, the holders of Class R
Stock, taken together.
PKSIS: PKS Information Services, Inc., a Delaware
corporation, and a Subsidiary of KDG.
Person: an individual, a partnership, a limited
partnership, a joint venture, a limited liability company, a
corporation, a trust, an unincorporated organization, any other
entity or a government or any department or agency thereof.
Post-Transaction PKS Certificate Amendment: an amendment to
and restatement of the PKS Certificate, as amended by the Initial
Certificate Amendment, in the form of Appendix E-II to the Joint
Prospectus/Proxy Statement.
Registration Statement: the registration statement filed by
PKS and PKS Holdings on Form S-4 (Registration No. 333-34627)
pursuant to the Securities Act, as amended from time to time.
Representative: with respect to any Person, any of such
Person's affiliates, directors, officers, employees, agents,
consultants, advisors, accountants, attorneys and
representatives.
SEC: the Securities and Exchange Commission.
Secretary of State: the Secretary of State of the State of
Delaware.
Securities Act: the Securities Act of 1933, as amended,
together with the rules and regulations promulgated thereunder.
Service: the United States Internal Revenue Service.
Separation Transactions: the transactions described in
Section 3.01 through 3.08 of this Agreement.
Share Exchange: the exchange of PKS Holdings Stock for
Class C Stock in accordance with the Exchange Provision (as
defined in Section 3.09).
Special Meeting: the special meeting of stockholders of PKS
held on December 8, 1997 to consider the matters described in
Section 2.02.
Stock Option Plan Amendment: an amendment to and
restatement of the 1995 Class D Stock Plan of PKS in the form
approved by the PKS Board on October 22, 1997, as amended by the
Executive Committee of the PKS Board on November 10, 1997.
Subsidiary: with respect to any specified Person, any
corporation or other legal entity of which such Person or any of
its Subsidiaries controls or owns, directly or indirectly, more
than 50% of the stock or other equity interest entitled to vote
on the election of members to the board or similar governing
body.
Tax: as defined in the Tax Allocation Agreement.
Tax Allocation Agreement: a tax allocation agreement
between the Diversified Group and the Construction Group to be
entered into as of the Exchange Date, in form and substance
mutually satisfactory to all of the Parties.
Termination Date: the date upon which the Transaction will
be abandoned if not consummated, which will be October 15, 1998,
unless that date is extended by a duly adopted resolution of the
PKS Board.
Third-Party Claim: any claim, suit, arbitration, inquiry,
proceeding or investigation by or before any court, any
governmental or other regulatory or administrative agency or
commission or any arbitration tribunal asserted by a Person who
is not a member of a Group.
Transaction: all of the transactions contemplated by this
Agreement, taken together.
ARTICLE II
CONDITIONS TO TRANSACTION; ABANDONMENT
2.01 Registration Statement/Joint Prospectus/Proxy
Statement. PKS and PKS Holdings have prepared and filed the
Registration Statement with the SEC, the SEC has declared the
Registration Statement effective, and PKS and PKS Holdings have
mailed the Joint Prospectus/Proxy Statement to all PKS
Stockholders.
2.02. Special Meeting. At the Special Meeting, PKS
submitted (i) the Transaction, (ii) the Initial PKS Certificate
Amendment, (iii) the Post-Transaction PKS Certificate Amendment
and (iv) the Stock Option Plan Amendment to votes of the PKS
Stockholders, and each matter was ratified or approved by the
requisite vote of the PKS Stockholders.
2.03 Ruling Request. PKS has submitted to the Service a
request for certain rulings in connection with the Transaction
(as amended from time to time by PKS, the "Ruling Request"). The
PKS Board may determine, at any time after the date of this
Agreement, to request an opinion of federal income tax counsel to
PKS, confirming any or all of the matters subject to the Ruling
Request, as the PKS Board deems appropriate (the "Tax Opinion").
If (a) either the Service denies the Ruling Request or the
Service does not grant the Ruling Request before the Termination
Date, and (b) the PKS Board has not requested and received the
Tax Opinion on or before the Termination Date, the Parties will
abandon the Transaction.
2.04 Nebraska Ruling Request. PKS is preparing for
submission to the State of Nebraska Department of Revenue a
request for certain rulings in connection with the Transaction
(as amended from time to time by PKS, the "Nebraska Ruling
Request"). The PKS Board may determine, at any time after the
date of this Agreement, to request an opinion of Nebraska tax
counsel to PKS, confirming any or all of the matters subject to
the Nebraska Ruling Request, as the PKS Board deems appropriate
(the "Nebraska Tax Opinion"). If (a) either the Nebraska Ruling
Request is denied or is not granted before the Termination Date,
and (b) the Nebraska Tax Opinion is not requested and received on
or before the Termination Date, the PKS Board will review the
benefits of the Transaction in light of the failure of the
Nebraska Department of Revenue to approve the Nebraska Ruling
Request or the failure of the PKS Board to request and receive
the Tax Opinion, and will abandon the Transaction if the PKS
Board determines, by a duly adopted resolution, that consummation
of the Transaction is no longer in the best interest of all PKS
Stockholders.
2.05 Termination Date. The Parties will abandon the
Transaction if the Share Exchange is not consummated on or before
the Termination Date.
2.06 PKS Board Right to Defer, Modify or Abandon
Transaction. Notwithstanding any other provision of this
Agreement, (a) prior to consummation of the Transaction, the
Parties will defer or modify the Transaction or this Agreement in
any respect deemed appropriate by the PKS Board, and (b) the
Parties will abandon the Transaction at any time if the PKS
Board, by a duly adopted resolution, determines that consummation
of the Transaction is no longer in the best interest of all PKS
Stockholders. Nothing herein shall limit or otherwise affect the
PKS Board's ability to proceed with the Transaction at a later
date.
2.07 Consequences of Abandonment. If the Parties
abandon the Transaction (whether pursuant to Section 2.03, 2.04,
2.05 or 2.06), Articles III, IV, V and VI of this Agreement will
terminate and have no further force or effect, the Parties will
not be obligated to consummate any of the Separation Transactions
that have not then been consummated, and only this Section 2.07
and Articles I, VII and VIII of this Agreement will remain
binding on the Parties and have any further force or effect.
2.08 Conditions to Share Exchange. The Share Exchange
will be consummated only if (a) PKS has received either the
rulings subject to the Ruling Request and/or the Tax Opinion, (b)
the Dividend Condition has been satisfied with respect to the
Share Exchange, (c) the Separation Transactions have been
consummated, and (d) the PKS Board has not determined to abandon
the Transaction. The condition set forth in clause (a) of the
preceding sentence shall not be waived.
ARTICLE III
THE SEPARATION TRANSACTIONS;
THE SHARE EXCHANGE
3.01 1997 Class C Stock Conversions. (a) Under Section
VI.D.(10) of the PKS Certificate, holders of Class C Stock may
convert any or all of their Class C Stock into Class D Stock by
tendering a written conversion notice to PKS between October 15,
1997 and December 15, 1997 (the "1997 Conversion Period"). Under
Section VI.D.(10)(f) of the PKS Certificate, PKS may elect, in
lieu of effecting the conversion, to purchase any shares of Class
C Stock so tendered by providing written notice to the tendering
stockholders of such election. If PKS makes such an election,
the tendering stockholder may withdraw the tender of the Class C
Stock if he is then eligible under Section VI.D.(1) of the PKS
Certificate to own Class C Stock (an "Eligible Class C
Stockholder").
(b) PKS intends to permit conversion of no more
than 3,000,000 shares of Class C Stock (the "Conversion Cap")
tendered during the 1997 Conversion Period and to repurchase (on
a pro rata basis among tendering holders of Class C Stock) shares
of Class C Stock tendered in excess of the Conversion Cap
("Excess Class C Stock"). PKS will notify holders of Excess
Class C Stock of their pro rata share of Excess Class C Stock
promptly after the end of the 1997 Conversion Period, and will
permit holders of Excess Class C Stock who have indicated to PKS
that they intend to remain Eligible Shareholders through April 1,
1998 to withdraw Excess Class C Stock in accordance with Section
VI.D.(10)(f) of the Certificate by providing written notice of
withdrawal on or before the fifteenth calendar day after the date
of such notice.
(c) PKS will purchase any Excess Class C Stock
not withdrawn pursuant to Section 3.01(b), and will permit
holders of any such Excess Class C Stock to elect either (i) to
receive cash in exchange for Excess Class C Stock so purchased in
accordance with Section VI.D.(10)(f) of the PKS Certificate, or
(ii) to receive unsecured promissory notes of PKS, maturing on
January 15, 1999 and bearing interest, payable at maturity, at a
rate of no less than 6% per annum ("Short Term Notes"), in
exchange for Excess Class C Stock. Each Short Term Note will
provide that the obligations under the Short Term Note will be
assumed by PKS Holdings if the Share Exchange is consummated.
PKS will not consummate the purchase of any Excess Class C Stock
until after the Class R Distribution Record Date, and all holders
of such Excess Class C Stock will be entitled to receive the
Class R Distribution with respect to such Excess Class C Stock.
(d) If PKS purchases Excess Class C Stock and the
Transaction is abandoned, PKS will file, within 90 calendar days
after the date upon which the Transaction is abandoned, a Form S-
8 registration statement under the Securities Act for an offering
of Class D Stock to holders of purchased Excess Class C Stock.
Upon filing of that registration statement, PKS will offer to
each such holder the opportunity to elect, within 30 calendar
days of the filing, to purchase, at the Class D Per Share Price
(as defined in the PKS Certificate) as of January 1, 1998, a
number of shares of Class D Stock equal to the number of shares
of Class D Stock into which his purchased Excess Class C Stock
could have been converted on the Conversion Date but for the
application of the Conversion Cap. The PKS Board may permit
holders to offset the purchase price for such shares of Class D
Stock against the outstanding principal amount and accrued
interest payable pursuant to a Short Term Note.
(e) On the date of consummation of the purchase of
all Excess Class C Stock (the "Excess Purchase Date"), KCG will
distribute to PKS cash in an amount equal to all cash payments
for Excess Class C Stock pursuant to Sections 3.01(b)(i).
(f) On the Exchange Date, PKS Holdings will assume
all of the obligations of PKS under each Short Term Note, if any.
(g) Within 30 calendar days after the expiration
of the 1997 Conversion Period, KCG will distribute to PKS, and
PKS will contribute to KDG, cash in an amount equal to the
aggregate Class C Per Share Price (as defined in the PKS
Certificate) of the Class C Stock converted into Class D Stock
during the 1997 Conversion Period (subject to adjustment
following delivery of audited financial statements for PKS for
1997, in a manner consistent with past practice).
3.02 Accelerated Conversion of Debentures. (a) PKS has
outstanding Series 1993 through Series 1996 Class C Convertible
Debentures (the "Debentures"). The Debentures are convertible
into Class C Stock, during a one month period in the fifth year
of their terms, at a rate specified in the Debentures. PKS will
accelerate the conversion period for the Debentures to permit
holders of the Debentures ("Converting Debenture Holders") to
tender for conversion, during a ten day period beginning on
December 16, 1997 and ending on December 25, 1997 (the "Debenture
Conversion Period"), any or all Debentures into Class C Stock at
the otherwise applicable conversion rate. PKS will issue all
Class C Stock with respect to all Debentures so elected to be
converted on December 26, 1997 (the "Debenture Conversion Date").
All Converting Debenture Holders will be entitled to receive the
Class R Distribution with respect to Class C Stock issued upon
conversion of the Debentures. Any Debentures not tendered for
conversion during the Debenture Conversion Period will remain
outstanding and governed by the original terms of the Debentures,
and holders of any such Debentures will not be entitled to
receive the Class R Distribution with respect to the Debentures
or the related Class C Stock. If the Transaction is consummated,
PKS and PKS Holdings will use their best efforts to agree upon an
arrangement whereby the financial benefits and burdens associated
with any Debentures remaining outstanding will be borne by PKS
Holdings.
(b) KCG or one of its Subsidiaries will make
available to each Converting Debenture Holder on the Debenture
Conversion Date, a loan in an amount equal to the principal
amount of each Debenture (a "Debenture Loan"). Each Debenture
Loan will be evidenced by a non-interest bearing promissory note
and secured pursuant to a pledge agreement in such forms as
determined by KCG. The entire principal balance of each
Debenture Loan will be due and payable on the earlier of the last
day of the conversion period of the related Debenture, as
originally issued and before any modification pursuant to Section
3.02(a), on the date of the sale or other disposition by the
Converting Debenture Holder of the related Class C Stock to PKS
(other than pursuant to the Share Exchange), or (if the Share
Exchange is consummated) the related PKS Holdings Stock to PKS
Holdings, or the termination of employment of the holder.
3.03 1997 Debentures. PKS issued, on or about November
1, 1997, its Series 1997 Class C Convertible Debentures (the
"1997 Debentures"). Each 1997 Debenture will provide that if the
Share Exchange is consummated, the 1997 Debentures automatically
will become, without any action by PKS, PKS Holdings or the
holder thereof, a debenture of PKS Holdings (the "Replacement
Debentures") convertible into the number of shares of PKS
Holdings Stock as it was previously convertible into Class C
Stock, and that PKS will no longer have any obligation or
liability under the 1997 Debentures. On or before the Exchange
Date, PKS and PKS Holdings will agree to a mutually acceptable
arrangement pursuant to which PKS Holdings will assume, or
otherwise become liable for, the obligations of PKS under the
related Indenture.
3.04 Sales of Class C Stock by Eligible Class C
Stockholders. (a) Under Section VI.D.3(a) of the PKS
Certificate, PKS is obligated to purchase, at the Class C Per
Share Price, any Class C Stock tendered for purchase during the
first fifteen calendar days of each month. On the Exchange Date,
PKS will deliver to PKS Holdings a schedule that sets forth the
name of each Eligible Class C Stockholder (determined as of the
Exchange Date) from whom PKS has purchased Class C Stock
("Purchased Class C Stock") between the Class R Distribution Date
and the Exchange Date (a "Selling Shareholder"), the date of such
purchase, the number of shares of Class C Stock so purchased and
the total amount paid to each such Eligible Class C Shareholder
for all shares of Class C Stock so purchased.
(b) PKS Holdings will promptly notify PKS if PKS
Holdings sells PKS Holdings Stock to any Selling Shareholder at
any time between the Exchange Date and the first anniversary of
the Exchange Date (a "Subsequent Sale"). PKS Holdings will take
any action reasonably requested by PKS to ensure that any Class R
Stock distributed to the Selling Shareholder with respect to
Purchased Class C Stock becomes attached to such shares of PKS
Holdings Stock purchased in a Subsequent Sale on a pro rata
basis, as contemplated by the Certificate Amendments.
(c) In connection with Subsequent Sales of PKS
Holdings Stock to Canadians ("Canadian Shareholders"), PKS
Holdings or a Subsidiary thereof may offer to provide loans to
such Canadian Shareholders, on terms acceptable to all Parties.
Within 30 calendar days after the date of each such loan, PKS
Holdings will provide PKS with a schedule that sets forth, in
detail reasonably acceptable to PKS, the terms and conditions of
any and all such loans.
3.05 Initial Certificate Amendment. PKS will file the
Initial Certificate Amendment with the Secretary of State as
promptly as practicable after the Special Meeting.
3.06 Class R Distribution. (a) Subject to the
satisfaction of the Dividend Condition with respect to the Class
R Distribution, PKS will declare a dividend, payable to holders
of Class C Stock as of the Class R Distribution Record Date, of
.8 of one share of Class R Stock for each share of Class C Stock
held as of the Class R Distribution Record Date.
(b) PKS will record the Class R Distribution,
and register all persons entitled to the Class R Distribution as
holders of Class R Stock, on the books and records maintained by
or on behalf of PKS for the registration of ownership of the
capital stock of PKS, effective as of the Class R Distribution
Record Date. PKS will not issue certificates or other
instruments to evidence Class R Stock unless and until the Share
Exchange is consummated. If the Share Exchange is consummated,
PKS will issue and distribute certificates evidencing the Class R
Stock. If the Class R Distribution is consummated, but the
Transaction is later abandoned, PKS will exercise its rights to
repurchase all of the Class R Stock under Section IX.M of the
Initial Certificate Amendment as promptly as practicable after
abandonment of the Transaction.
3.07 PKSIS Reorganization. On or before the Exchange
Date, KDG will cause PKSIS to undertake such corporate
reorganization as is then described in or contemplated by the
Ruling Request.
3.08 PKS Holdings Transactions. (a) From the date of
this Agreement to the Exchange Date, KCG will make such
distributions to PKS as are necessary to permit PKS to make such
capital contributions and provide such other funds to PKS
Holdings as may be necessary or desirable to permit PKS Holdings
to perform and discharge its obligations under this Agreement.
(b) On or before the Exchange Date, PKS, in its
capacity as the sole shareholder of PKS Holdings, (i) will adopt
the PKS Holdings Certificate Amendment, and (ii) will elect to
the board of directors of PKS Holdings those persons designated
as directors of PKS Holdings in the Joint Prospectus/Proxy
Statement, with such substitutions or additions as may be
approved by the PKS Board after the date of this Agreement.
(c) On the Exchange Date, PKS Holdings will file
the PKS Holdings Certificate Amendment with the Secretary of
State.
(d) On the Exchange Date, PKS will make a
capital contribution to PKS Holdings of (i) all of the capital
stock of KCG held by PKS, and (ii) such other assets as agreed to
by the Parties and described on a Schedule to be attached to the
Agreement on or before the Exchange Date. On the Exchange Date,
PKS Holdings will distribute to PKS a sufficient number of shares
of PKS Holdings Stock, evidenced by a single certificate, so
that, together with such shares previously issued to PKS, PKS
will hold shares of PKS Holdings Stock equal to the number of
shares of Class C Stock outstanding on the Exchange Record Date.
3.09 Share Exchange. (a) Not more than 60 calendar
days, but not less than 30 calendar days, prior to the Exchange
Date, PKS shall give each holder of Class C Stock the notice
contemplated by Section III.D.(3)(a) of the PKS Certificate (the
"Exchange Provision"). Each notice will set forth the Exchange
Record Date and the information required by the Exchange
Provision, and will establish such procedures for the Share
Exchange as are permitted by the Exchange Provision and otherwise
deemed appropriate by PKS.
(b) On the Exchange Date, PKS will exchange,
pursuant to the Exchange Provision, one share of the PKS Holdings
Common Stock received pursuant to Section 3.11(a) for each share
of Class C Common Stock outstanding as of the Exchange Date. On
and after the Exchange Date, all rights of holders of Class C
Stock will be governed by the Exchange Provisions.
(c) The Share Exchange will be consummated only
after consummation of all of the Separation Transactions intended
to be consummated on the Exchange Date.
3.10 Post-Transaction Certificate Amendment. If the
Share Exchange is consummated, PKS will file the Post-Transaction
Certificate Amendment with the Secretary of State on the Exchange
Date.
3.11 Certificate Surrender and Distribution. (a) As
promptly as practicable after the Exchange Date, PKS Holdings
will deliver to PKS, in exchange for the PKS Holdings Stock
certificate described in Section 3.08(d), certificates for PKS
Holdings Stock in names and denominations sufficient to permit
PKS to distribute certificates for PKS Holdings Stock to each
holder of Class C Stock in the same denominations as the Class C
Stock then held by such holder, subject, in each case, to
surrender by such holder in accordance with the Exchange
Provision of the certificates evidencing the related shares of
Class C Stock.
(b) PKS will coordinate delivery of share
certificates with any lending institution to which shares of
Class C Stock have been pledged. PKS will arrange for delivery of
the shares of Class C Stock to be exchanged and will, if directed
in writing by the holder of such shares of Class C Stock, deliver
shares of PKS Holdings Stock and Class R Stock directly to such
lending institution.
3.12 Class R Stock Provisions. (a) So long as any
shares of Class R Stock remain outstanding, PKS will take all
necessary action (i) to obtain and keep effective any and all
permits, consents and approvals of governmental agencies and
authorities and to make filings under federal and state
securities acts and laws, which may be or become requisite in
connection with the issuance, sale, transfer and delivery of the
shares of Class D Stock issued upon conversion of shares of Class
R Stock, and (ii) if the Class D Stock is Publicly Traded (as
defined in the PKS Certificate), to have the shares of Class D
Stock, immediately upon their issuance upon conversion of the
shares of Class R Stock, listed on each national securities
exchange, the NASDAQ National Market or the NASDAQ Small Cap
Market on which the Class D Stock is then listed or traded. So
long as any shares of Class R Stock remain outstanding and if
required in order to comply with the Securities Act or state
securities laws, PKS will file such post-effective amendments to
the Registration Statement as may be necessary to permit the
Corporation to deliver to each person converting shares of Class
R Stock a prospectus meeting the requirements of Section 10(a)(3)
of the Securities Act and otherwise complying therewith, and, if
required in order to comply with the Securities Act or state
securities laws, will deliver such a prospectus to each such
person.
(b) PKS will not, by amendment of the PKS
Certificate, or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities
or any voluntary action, seek to avoid the observance or
performance of any of its obligations with respect to the Class R
Stock.
(c) After the date upon which the Class R Stock
becomes convertible into Class D Stock, and in order to provide
holders of Class R Stock a means to determine the Conversion
Ratio when the Class D Stock is Publicly Traded (as both such
terms are defined in the PKS Certificate), PKS shall establish
reasonable measures intended to enable holders of Class R Stock
to obtain information at any time during normal business hours.
ARTICLE IV
INDEMNIFICATION
4.01 Indemnification. (a) From and after the Exchange
Date, PKS and KDG will indemnify, defend and hold harmless each
Construction Indemnitee from and against all Losses incurred or
suffered by any Construction Indemnitee arising out of or due to,
directly or indirectly, (i) any breach by PKS or KDG of any
obligation under this Agreement, (ii) the Diversified Assets,
(iii) the Diversified Business, (iv) Diversified Securities
Transactions, (v) Diversified Liabilities, (vi) the Covent
Liabilities (as defined in Section 5.10(f)) and (vii) such other
matters as are specifically agreed by the Parties and described
on a Schedule attached to the Agreement on or before the Exchange
Date.
(b) From and after the Exchange Date, PKS
Holdings and KCG will indemnify, defend and hold harmless each
Diversified Indemnitee from and against all Losses incurred or
suffered by any Diversified Indemnitee arising out of or due to,
directly or indirectly, (i) any breach by PKS Holdings or KCG of
any obligation under this Agreement, (ii) the Construction
Assets, (iii) the Construction Business, (iv) Construction
Securities Transactions, (v) Construction Liabilities, and (vi)
such other matters as are specifically agreed by the Parties and
described on a Schedule attached to the Agreement on or before
the Exchange Date.
(c) This Section 4.01 shall not apply to any
matter or item specifically covered by indemnification or risk
allocation provisions of the Continuing Agreements.
(d) If an Indemnitee realizes a Tax benefit or
detriment by reason of having incurred a Loss for which such
Indemnitee receives an Indemnity Payment from an Indemnifying
Party or by reason of receiving an Indemnity Payment, such
Indemnitee shall pay to such Indemnifying Party an amount equal
to the Tax benefit, or such Indemnifying Party shall pay to such
Indemnitee an additional amount equal to the Tax detriment
(taking into account any Tax detriment resulting from the receipt
of such additional amounts), as the case may be. If, in the
opinion of counsel to an Indemnifying Party reasonably
satisfactory in form and substance to the affected Indemnitee,
there is a substantial likelihood that the Indemnitee will be
entitled to a Tax benefit by reason of an Indemnifiable Loss, the
Indemnifying Party promptly shall notify the Indemnitee and the
Indemnitee promptly shall take any steps (including the filing of
such returns, amended returns or claims for refunds consistent
with the claiming of such Tax benefit) that, in the reasonable
judgment of the Indemnifying Party, are necessary and appropriate
to obtain any such Tax benefit. If, in the opinion of counsel to
an Indemnitee reasonably satisfactory in form and substance to
the affected Indemnifying Party, there is a substantial
likelihood that the Indemnitee will be subjected to a Tax
detriment by reason of an Indemnification Payment, the Indemnitee
promptly shall notify the Indemnifying Party and the Indemnitee
promptly shall take any steps (including the filing of such
returns or amended returns or the payment of Tax underpayments
consistent with the settlement of any Liability for Taxes arising
from such Tax detriment) that, in the reasonable judgment of the
Indemnitee, are necessary and appropriate to settle any
Liabilities for Taxes arising from such Tax detriment. If,
following a payment by an Indemnitee or an Indemnifying Party
pursuant to this Section 4.01(d) in respect of a Tax benefit or
detriment, there is an adjustment to the amount of such Tax
benefit or detriment, then each of the Indemnifying Party and the
Indemnitees shall make appropriate payments to the other to
reflect such adjustments.
(e) The amount which an Indemnifying Party is
required to pay to any Indemnitee pursuant to this Section 4.01
will be reduced (including retroactively) by any insurance
proceeds and other amounts actually recovered by such Indemnitee
in reduction of the related Loss, it being understood and agreed
that the members of each Group will use their commercially
reasonable efforts to collect any such proceeds or other amounts
to which they are entitled, without regard to whether it is the
Indemnifying Party hereunder. If an Indemnitee receives an
Indemnity Payment in respect of an Indemnifiable Loss and
subsequently receives insurance proceeds or other amounts in
respect of such Indemnifiable Loss, then such Indemnitee shall
pay to such Indemnifying Party an amount equal to the difference
between (i) the sum of the amount of such Indemnity Payment and
the amount of such insurance proceeds or other amounts actually
received and (ii) the amount of such Loss, adjusted (at such time
as appropriate adjustment can be determined) in each case to
reflect any premium adjustment attributable to such claim.
(f) No person other than an Indemnitee is
intended to be a beneficiary of the indemnification provisions
set forth above, and no insurer will be relieved thereby of any
obligation to pay any claims to which it is obligated or be
entitled to any right of subrogation with respect to any amount
paid hereunder.
4.02 Procedure for Indemnification. (a) If any
Indemnitee determines that it is or may be entitled to
indemnification by any Indemnifying Party (other than in
connection with any Third Party Claim), the Indemnitee will
deliver to the Indemnifying Party a written notice specifying, to
the extent reasonably practicable, the basis for its claim for
indemnification and the amount for which the Indemnitee
reasonably believes it is entitled to be indemnified. Within 60
calendar days after receipt of such notice, the Indemnifying
Party will pay the Indemnitee such amount in cash or other
immediately available funds unless the Indemnifying Party objects
to the claim for indemnification or the amount by written notice
setting forth the grounds therefor within such 60 calendar day
period. If the Indemnifying Party does not give the Indemnified
Party written notice objecting to such indemnity claim and
setting forth the grounds therefor within 60 calendar days after
receipt of such notice, the Indemnifying Party will be deemed to
have acknowledged its liability for such claim and the Indemnitee
may exercise any and all of its rights under applicable law to
collect such amount.
(b) If any Indemnitee receives notice of the
assertion of any Third-Party Claim with respect to which an
Indemnifying Party is obligated under this Agreement to provide
indemnification, such Indemnitee will give such Indemnifying
Party notice thereof promptly after becoming aware of such Third-
Party Claim; provided, however, that the failure of any
Indemnitee to give such notice will not relieve any Indemnifying
Party of its obligations under this Article IV, except to the
extent that such Indemnifying Party is actually prejudiced by
such failure to give notice. Such notice will describe such
Third-Party Claim in reasonable detail and, if practicable, will
indicate the estimated amount of the Indemnifiable Loss that has
been or may be sustained by such Indemnitee.
(c) An Indemnifying Party, at such Indemnifying
Party's own expense and through counsel chosen by such
Indemnifying Party (which counsel shall be reasonably
satisfactory to the Indemnitee), may elect to defend any Third-
Party Claim. If an Indemnifying Party elects to defend a Third-
Party Claim, then, within fifteen calendar days after receiving
notice of such Third-Party Claim (or sooner, if the nature of
such Third-Party Claim so requires), such Indemnifying Party will
notify the Indemnitee of its intent to do so, and such Indemnitee
shall cooperate in the defense of such Third-Party Claim. Such
Indemnifying Party will pay such Indemnitee's reasonable out-of-
pocket expenses incurred in connection with such cooperation.
After notice from an Indemnifying Party to an Indemnitee of its
election to assume the defense of a Third-Party Claim, such
Indemnifying Party will not be liable to such Indemnitee under
this Article IV for any legal or other expenses subsequently
incurred by such Indemnitee in connection with the defense
thereof; provided, however, that such Indemnitee will have the
right to employ one law firm as counsel to represent such
Indemnitee (which firm shall be reasonably acceptable to the
Indemnifying Party) if, in such Indemnitee's reasonable judgment,
either a conflict of interest between such Indemnitee and such
Indemnifying Party exists in respect of such claim or there may
be defenses available to such Indemnitee which are different from
or in addition to those available to such Indemnifying Party, and
in that event (i) the reasonable fees and expenses of such
separate counsel shall be paid by such Indemnitee and (ii) each
of such Indemnifying Party and such Indemnitee shall have the
right to run its own defense in respect of such claim. If an
Indemnifying Party elects not to defend against a Third-Party
Claim, or fails to notify an Indemnitee of its election as
provided in this Section 4.02 within the period of fifteen
calendar days described above, such Indemnitee may defend,
compromise and settle such Third-Party Claim; provided, however,
that no such Indemnitee may compromise or settle any such Third-
Party Claim without the prior written consent of the Indemnifying
Party, which consent shall not be withheld unreasonably.
Notwithstanding the foregoing, the Indemnifying Party shall not,
without the prior written consent of the Indemnitee, (i) settle
or compromise any Third-Party Claim or consent to the entry of
any judgment which does not include as an unconditional term
thereof the delivery by the claimant or plaintiff to the
Indemnitee of a written release from all liability in respect of
such Third-Party Claim or (ii) settle or compromise any Third-
Party Claim in any manner that in the reasonable judgment of the
Indemnifying Party, is likely to adversely affect the Indemnitee.
(d) If for any reason the indemnification
provided by this Agreement is unenforceable, the Indemnifying
Party will contribute to the amount payable by the Indemnitee as
a result of the related losses an amount appropriate to reflect
equitable considerations.
4.03 Remedies Cumulative. The remedies provided in this
Article IV will be cumulative and will not preclude assertion by
any Indemnitee of any other rights or the seeking of any other
remedies against any Indemnifying Party.
ARTICLE V
ADDITIONAL COVENANTS
5.01 Further Assurances. Each of the Parties will use
its best efforts to take, or cause to be taken, all actions, and
to do, or cause to be done, all things, reasonably necessary,
proper or advisable under applicable laws, regulations and
agreements to consummate and make effective the Transactions.
Each Party will cooperate with the other Parties, and execute and
deliver, or use its best efforts to cause to be executed and
delivered, all instruments, including instruments of conveyance,
assumption, assignment and transfer, and to make all filings
with, and to obtain all consents, approvals or authorizations of,
any governmental or regulatory authority or any other Person
under any permit, license, agreement, indenture or other
instrument, and take all such other actions as such Party may
reasonably be requested to take by any other Party, consistent
with the terms of this Agreement, in order to effectuate the
provisions and purposes of this Agreement.
5.02 Transfer of Assets; Assumption of Liabilities. (a)
The Parties intend that, upon consummation of the Share Exchange,
(i) one or more members of the Construction Group, and not any
member of the Diversified Group, will hold all right, title and
interest in and to all Construction Assets, and that one or more
members of the Construction Group, and not any member of the
Diversified Group, will have the sole liability for Construction
Group Liabilities; and (ii) one or more members of the
Diversified Group, and not any member of the Construction Group,
will hold all right, title and interest in and to all Diversified
Assets, and one or more members of the Diversified Group, and not
any member of the Construction Group, will have the sole
liability for all Diversified Group Liabilities.
(b) Prior to the Exchange Date, each Party will
take any action, and will cause their Subsidiaries to take any
action, requested by any member of the other Group entitled under
Section 5.02(a) to obtain an Asset or to be relieved of a
Liability, reasonably necessary to transfer any such Asset or to
assume any such Liability. If any such transfer or assumption of
Assets or Liabilities is not consummated on or before the
Exchange Date, the Party retaining such Asset or Liability will
hold such Asset in trust for the use and benefit of the Party
entitled thereto (at the expense of the Party entitled thereto),
or will retain such Liability for the account of the Party by
whom such Liability is to be assumed pursuant hereto, as the case
may be, and will take such other action as may be reasonably
requested by the Party to whom such Asset is to be transferred
(including licensing, contracting and leasing arrangements), or
by whom such Liability is to be assumed, in order to place such
Party, insofar as reasonably possible, in the same position as if
such Asset or Liability had been transferred as contemplated
hereby. If and when any such Asset or Liability becomes
transferable, such transfer will be effected as promptly as
possible.
(c) Notwithstanding any other provision of this
Agreement, this Agreement will not constitute an agreement to
transfer any Asset or assume any Liability if an assignment of
the Asset or the assumption of the Liability violates any law,
rule or regulation or constitutes a breach of any agreement
relating to such Asset or Liability.
5.03 No Representations or Warranties. Each Group
understands and agrees that no member of the other Group is, in
this Agreement, representing or warranting in any way as to the
Assets, the Business or the Liabilities of the Group or as to any
consents or approvals required in connection with the
consummation of the transactions contemplated by this Agreement,
it being agreed and understood that each Group is taking all of
its Assets "as is, where is" and that each Group will bear the
economic and legal risk that the title of any member of the Group
to any Assets shall be other than good and marketable and free
from encumbrances.
5.04 Terminated Agreements. On or before the Exchange
Date, the Parties will agree to a schedule of agreements,
contracts and arrangements that will terminate and have no
further force or effect as of the Exchange Date. Each Party
shall, at the reasonable request of another Party, take or cause
to be taken, such other actions as may be necessary to effect the
termination of such agreements.
5.05 Continuing Agreements. Neither this Agreement nor
the Share Exchange shall modify, amend or otherwise affect any
agreements contemplated by Section 5.11 or Section 5.12 or any
other agreement between a member or members of the Construction
Group, on one hand, and a member or members of the Diversified
Group, on the other hand (together, the "Continuing Agreements"),
except for those agreements terminated pursuant to the provisions
of Section 5.04. If there is a conflict between this Agreement
and a Continuing Agreement, the Continuing Agreement shall
control.
5.06 Intercompany Accounts. Effective as of the close
of business on the day prior to the Exchange Date, all
intercompany receivables or payables and loans then existing
between any member of one Group and any member of the other Group
will be settled by way of payment, cancellation or capital
contribution.
5.07 HSR Act. PKS Holdings will file any notification
and report forms and other material required by the Hart Scott
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act") with respect to the shares of PKS Holdings Stock to be
distributed in the Share Exchange prior to the Exchange Date, and
will seek early termination of the waiting period under the HSR
Act.
5.08 Kiewit Name. (a) Not later than the first business
day after the Exchange Date (i) PKS will change its corporate
name to another name not including "PKS" or "Kiewit" as part of
the name, and, (ii) except as provided in Section 5.08(b), will
cause all of its Subsidiaries to change their corporate names if
necessary to corporate names not including "PKS" or "Kiewit" as
part of the name. As soon as reasonably practicable after the
Exchange Date, and except as provided in Section 5.08(b), PKS
will use its best efforts to, and will cause its Subsidiaries to
use their best efforts to, cease using "PKS" or "Kiewit" in
connection with the business activities of the Diversified Group.
(b) Notwithstanding Section 5.08(a), (i) the
members of the Diversified Group will have the right to use "PKS"
or "Kiewit" for a period of one year from the Exchange Date to
the extent reasonably necessary in accordance with its past
practice in connection with legal, regulatory or contract matters
relating to Diversified Group business activities in existence on
the Exchange Date, and (ii) PKSIS and its current information
services Subsidiaries will not be required to comply with Section
5.08(a), and will have the right to continue to use "PKS" in
accordance with its past practice in connection with its
businesses until the second anniversary of the Exchange Date.
(c) As of the Exchange Date, PKS assigns, and
will cause each of its Subsidiaries to execute any agreement or
instrument reasonably requested by PKS Holdings to assign, any
and all of its right, title and interest in and to any corporate
name, trademark or tradename using "PKS" or "Kiewit," and any and
other proprietary rights to those names or related symbols.
5.09 Sales of Class C Stock. Except as contemplated by
Section 3.02, PKS will not offer to sell, sell or issue any Class
C Stock between the date of this Agreement and the Class R Record
Date.
5.10 Insurance. (a) As of the Exchange Date, directors
and officers of the members of the Construction Group will no
longer be covered by the directors and officers liability
insurance maintained by PKS for directors and officers of PKS and
its subsidiaries (the "PKS D&O Policy") for acts occurring on and
after the Exchange Date. PKS Holdings will obtain, effective not
later than the Exchange Date, directors and officers liability
insurance for all directors and officers of the members of the
Construction Group, on such terms and conditions and providing
such coverages as PKS Holdings deems appropriate. PKS shall
obtain a separate directors and officers liability insurance
policy ("Tail Policy") for all present and past directors and
officers of the Construction Group in effect for a minimum of 5
years from the Exchange Date. The cost of the premiums payable
with respect to the Tail Policy shall be allocated 82.5% to the
Diversified Group and 17.5% to the Construction Group.
(b) No Party shall, without the consent of the other
Parties, provide any insurance carrier with a release, or amend,
modify or waive any rights under any such policy or agreement, if
such release, amendment, modification or waiver would adversely
affect any rights or potential rights of another Group; provided,
however, that the foregoing shall not preclude a Party either
from presenting any claim or from exhausting any policy limit.
(c) This Agreement shall not be considered as an
attempted assignment of any policy of insurance or as a contract
of insurance and shall not be construed to waive any right or
remedy of the Parties in respect of any insurance policy or any
other contract or policy of insurance.
(d) From and after the Exchange Date, PKS Holdings shall
be entitled to the benefit of any reserves held by any insurance
carrier with respect to the Construction Liabilities, and PKS
shall be entitled to the benefit of any reserves held by any
insurance carrier with respect to the Diversified Liabilities.
(e) On or before the Exchange Date, the Parties will
agree upon the insurance policies in which PKS is the lead named
insured which will be amended to substitute PKS Holdings as the
lead named insured effective as of the Exchange Date. Each Party
shall, at the reasonable request of another Party, take or cause
to be taken, such other actions as may be necessary to effectuate
such change.
(f) By agreement dated November 30, 1992 (the "Transfer
Agreement"), Covent Vermont Insurance Company ("Covent"), then a
subsidiary of KDG, transferred to Global Surety and Insurance Co.
("Global"), a subsidiary of KCG, all reinsurance business
liabilities held by Covent ("Covent Liabilities"), in exchange
for certain cash payments and other consideration. It is the
intent of the Parties to reverse the transfer of the Covent
Liabilities, thereby returning to KDG all responsibility
originally held by Covent for the Covent Liabilities, and
releasing Global of any and all further liability and
responsibility for the Covent Liabilities. In this regard, the
Parties agree to work together to effect such reversal, effective
as soon as possible.
(g) Notwithstanding any other provision hereof, each
Group shall retain all rights of any insured party under each
insurance policy and insurance contract owned or maintained by
PKS under which any member of such Group is a named insured,
including any right of indemnity and the right to be defended by
or at the expense of the insurer. Each Party shall pay its
allocable share of any retrospectively-rated premiums arising out
of any claims made by such Party under such insurance policies.
(h) The Parties agree to cooperate and provide
reasonable assistance to each other with regard to any dispute
with any third party (including insurers or third-party
administrators) regarding any matter related to any of the above
insurance policies.
5.11 Unresolved Matters. The Parties agree to negotiate
in good faith and enter into on or before the Exchange Date,
mutually acceptable agreements or arrangements with respect to
certain unresolved matters, including the matters described below
(the "Unresolved Matters"), and will amend and restate this
Agreement to the extent necessary or desirable to conform with
those agreements or arrangements. The unresolved matters
include: (i) the lease by KDG of office space from KCG in the KCG
headquarters building at Kiewit Plaza, Omaha, Nebraska; (ii) the
provision by KCG of aircraft flight and maintenance services to
KDG; (iii) the provision by KCG of interim stock registrar and
transfer agent services to PKS; (iv) the treatment of employees
of KDG who are participants prior to the Exchange Date in the
401(k) and profit sharing plans maintained by KCG; (v) the
administration of the Kiewit Royalty Trust; (vi) the ownership of
Kiewit Investment Management Corp. (vii) modifications to the
mine management agreement dated January 8, 1992 by and between
Kiewit Coal Properties Inc. and Kiewit Mining Group Inc.; and
(viii) administration of insurance claims with respect to
policies maintained for the benefit of both Business Groups prior
to the Exchange Date.
5.12 Tax Allocation Agreement. The Parties agree to
negotiate in good faith and enter into the Tax Allocation
Agreement on or before the Exchange Date.
ARTICLE VI
INFORMATION
6.01 Access to Information. (a) As soon as practicable
following the Exchange Date, and to the extent requested, each
Group shall provide to the other Group any documents, contracts,
books, records and data (including but not limited to minute
books, stock registers, stock certificates and documents of
title) in its possession relating to such other Group or such
other Group's business and affairs; provided that if any such
documents, contracts, books, records or data relate to both
Groups or the business and operations of both Groups, each such
Group shall provide to the other Group true and complete copies
of such documents, contracts, books, records or data.
(b) After the Exchange Date, each Group will
afford to the other Group and to the other Group's
Representatives reasonable access and duplicating rights during
normal business hours to all Information within such Group's
possession relating to such other Group's businesses, insofar as
such access is reasonably required by such other Group. In
addition, PKS Holdings shall have access during such time to
Information of historical significance that relates to the
Construction Business. Without limiting the foregoing,
Information may be requested under this Section for audit,
accounting, claims, litigation and tax purposes, as well as for
purposes of fulfilling disclosure and reporting obligations.
6.02 Production of Witnesses. After the Exchange Date,
each Group will use reasonable efforts to make available to the
other Group its Representatives as witnesses to the extent that
any such Person may reasonably be required in connection with any
legal, administrative or other proceedings in which the
requesting Party may from time to time be involved and will
otherwise cooperate with the other Group, to the extent
reasonably required in connection with any such proceeding.
6.03 Retention of Records. Except as otherwise required
by law or agreed in writing, or as otherwise provided in the
Continuing Agreements, each Group will retain, for a period of at
least ten years following the Distribution Date, all significant
Information in such Group's possession or under its control
relating to the business of the other Group and, after the
expiration of such ten year period, prior to destroying or
disposing of any such Information, (a) the Group proposing to
dispose of or destroy any such Information shall provide no less
than 90 calendar days' prior written notice to the other Group,
specifying the Information proposed to be destroyed or disposed
of, and (b) if, prior to the scheduled date for such destruction
or disposal, the other Group requests in writing that any of the
Information proposed to be destroyed or disposed of be delivered
to such other Group, the Group proposing to dispose of or destroy
such Information promptly shall arrange for the delivery of the
requested Information to a location specified by, and at the
expense of, the requesting Group.
6.04 Reimbursement. Each Group providing information or
witnesses to the other Group, or otherwise incurring any expense
under Section 6.01, 6.02 or 6.03, including costs and expenses
paid to third parties for storage of Information on behalf of the
other Group, will be entitled to receive from the other Group,
upon the presentation of invoices therefor, payment for all out-
of-pocket costs and expenses as may be reasonably incurred in
providing such information, witnesses or cooperation.
6.05 Confidentiality. From and after the Exchange Date,
each Group will hold, and shall use its reasonable best efforts
to cause its Representatives to hold, in confidence all
Information concerning the other Party obtained by it prior to
the Exchange Date or furnished to it by such other Party pursuant
to this Agreement or the Continuing Agreements, and will not
release or disclose such Information to any other Person, except
its Representatives, who will be bound by the provisions of this
Section; provided, however, that each Group may disclose such
Information to the extent that (a) disclosure in the opinion of
such Group's counsel, is required or advisable under applicable
law (including the federal securities laws), or (b) such Group
can show that such Information was (i) available to such Group on
a nonconfidential basis prior to its disclosure by the other
Group, (ii) in the public domain through no fault of such Group
or (iii) lawfully acquired by such Party from other sources after
the time that it was furnished to such Party pursuant to this
Agreement or the Continuing Agreements. Notwithstanding the
foregoing, each Group will be deemed to have satisfied its
obligations under this Section with respect to any Information if
it exercises the same care with regard to such Information as it
takes to preserve confidentiality for its own similar
Information.
ARTICLE VII
EXPENSES
7.01 General. The Parties have agreed to allocate the
financial burden of Covered Expenses 82.5% to the Diversified
Group and 17.5% to the Construction Group (the "Expense Sharing
Ratio"), whether the Transaction is consummated or abandoned.
All other costs or expenses incurred by any Party in connection
with the Transaction will be borne by the Party incurring the
cost or expense.
7.02 Covered Expenses. (a) The following costs and
expenses incurred by any Party will be considered to be "Covered
Expenses":
(i) fees and expenses of U.S. corporate
counsel to PKS, Willkie Farr & Gallagher, Canadian corporate
counsel to PKS, Blake, Cassels & Graydon, and Delaware counsel to
PKS, Morris, Nichols, Arsht & Tunnel, in each case to the extent
allocated to the Transaction in accordance with Section 7.02(c);
(ii) fees and expenses of U.S. tax counsel to
PKS, Skadden Arps, Slate, Meagher & Flom, Canadian tax counsel to
PKS, Blake, Cassels & Graydon, and Nebraska tax counsel to PKS,
McGrath, North, Mullin & Kratz, P.C., in each case to the extent
allocated to the Transaction in accordance with Section 7.02(c);
(iii) fees and expenses of the certified
public accountants for PKS, Coopers & Lybrand, to the extent
allocated to the Transaction in accordance with Section 7.02(c);
(iv) fees and expenses of Gleacher NatWest,
financial advisor to PKS, incurred pursuant to the engagement
letter of Gleacher NatWest dated as of June 1, 1997, to the
extent allocated to the Transaction in accordance with Section
7.02(c);
(v) all registration fees or other similar
expenses payable to the SEC, any state securities commission, or
the Service, and all fees and expenses in connection with any
filing under the HSR Act;
(vi) all costs and expenses incurred in
connection with the printing and distribution of the Joint
Prospectus/Proxy Statement;
(vii) all costs and expenses of the proxy
solicitation and the Special Meeting;
(viii) a non-accountable cost allowance in an
amount to be mutually agreed upon by the Parties for costs and
expenses incurred by PKS Holdings in connection with the
Debenture Loans; and
(ix) a non-accountable cost allowance in an
amount to be mutually agreed upon by the Parties for costs and
expenses incurred by PKS Holdings in connection with certain
loans to its Canadian shareholders.
(b) The Parties acknowledge that certain of the
fees and expenses of the advisors described in (i), (ii), (iii)
and (iv) of Section 7.02(a) are to be incurred solely for the
account of certain of the Parties, and will not be considered to
be Covered Expenses. Each such Advisor will allocate its fees
and expenses between Covered Expenses and costs and expenses
incurred solely for the account of one of the Parties, and such
allocation will be binding on each of the Parties.
7.03 Actual Payment of Covered Expenses. KCG will make
actual payment of the Covered Expenses described in items (viii)
and (ix) of Section 7.02(a). KDG will make actual payment of all
other Covered Expenses ("Other Covered Expenses").
7.04 Covered Expense True-Up. KDG will prepare and
submit to KCG, within 120 calendar days after the date of
abandonment of the Transaction or the Exchange Date, as the case
may be, a schedule of the Other Covered Expenses, together with
such supporting documentation with respect to the Other Covered
Expenses as KCG reasonably requests. Within five calendar days
after the submission of that schedule, KDG will pay KCG in cash
an amount sufficient to ensure that the financial burden of the
Covered Expenses has been allocated between KCG and KDG in
proportion to the Expense Sharing Ratio.
ARTICLE VIII
MISCELLANEOUS
8.01 Complete Agreement. This Agreement, the Exhibits
and Schedules hereto and the agreements and other documents
referred to herein will constitute the entire agreement between
the Parties with respect to the subject matter hereof and will
supersede all previous negotiations, commitments and writings
with respect to such subject matter.
8.02 Survival of Agreements. All covenants and
agreements of the Parties contained in this Agreement will
survive the Share Exchange.
8.03 Governing Law. This Agreement will be governed by
and construed in accordance with the laws of the State of
Nebraska (other than the laws regarding choice of laws and
conflicts of laws) as to all matters, including matters of
validity, construction, effect, performance and remedies.
8.04 Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall
be given (and shall be deemed to have been duly given upon
receipt) by delivery in person, by cable telegram, telex or other
standard form of telecommunications, or by registered or
certified mail, postage prepaid, return receipt requested,
addressed as follows:
If to PKS or KDG:
Vice President - Legal
Kiewit Diversified Group Inc.
Suite 200
3555 Farnam Street
Omaha, NE 68131
with a copy to:
President
Kiewit Diversified Group Inc.
Suite 200
3555 Farnam Street
Omaha, NE 68131
If to PKS Holdings:
General Counsel
Kiewit Construction Group Inc.
1000 Kiewit Plaza
Omaha, NE 68131
with a copy to:
President
Kiewit Construction Group Inc.
1000 Kiewit Plaza
Omaha, NE 68131
8.05 Amendment and Modifications. This Agreement may be
amended, modified or supplemented, and any provision of this
Agreement may be waived, only by a written agreement signed by
all of the Parties.
8.06 Successors and Assigns; No Third-Party
Beneficiaries. This Agreement and all of the provisions hereof
will be binding upon and inure to the benefit of the Parties,
their successors and permitted assigns, but neither this
Agreement nor any of the rights, interest and obligations
hereunder may be assigned by any Party without the prior written
consent of each of the other Parties (which consent shall not be
unreasonably withheld). This Agreement is solely for the benefit
of the Parties (and Indemnitees) and is not intended to confer
any rights or remedies upon any other Persons.
8.07 Counterparts. This Agreement may be executed in
two or more counterparts, each of which will be deemed an
original, but all of which together will constitute one and the
same instrument.
8.08 Interpretation. (a) The Article and Section
headings contained in this Agreement are solely for the purpose
of reference, are not part of the agreement of the Parties and
shall not in any way affect the meaning or interpretation of this
Agreement.
(b) The Parties intend that the Share Exchange
will be a distribution pursuant to Section 355(a) and Section
368(a)(1)(D) of the Code, and all provisions of this Agreement
will be so interpreted.
8.09 Legal Enforceability. Any provision of this
Agreement which is prohibited or unenforceable in any
jurisdiction will, as to such jurisdiction, be ineffective to the
extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof. Any such
prohibition or unenforceability in any jurisdiction will not
invalidate or render unenforceable such provision in any other
jurisdiction. Each Party acknowledges that money damages would
be an inadequate remedy for any breach of the provisions of this
Agreement and agrees that the obligations of the Parties under
this Agreement will be specifically enforceable.
8.10 Dispute Resolution. Except to the extent that a
Party seeks injunctive relief to enforce any particular provision
of this Agreement, if, in the event of any dispute or controversy
arising out of this Agreement, its performance, or breach, the
Parties are unable to settle the dispute themselves, within
thirty (30) calendar days after the dispute arises, then the
dispute shall be referred for resolution by agreement between the
Chief Executive Officer of PKS Holdings and the President of PKS.
In the event that the foregoing officers are unable to resolve
such dispute within thirty (30) calendar days, then the Parties
shall be free to pursue any other rights or remedies to which
they may be entitled.
8.11 Schedules. All schedules referred to herein are a
part of this Agreement as if fully set forth herein.
IN WITNESS WHEREOF, the Parties have caused this Agreement
to be duly executed as of the date first above written.
PETER KIEWIT SONS', INC.
By /s/ Walter Scott, Jr.
Walter Scott, Jr., President
KIEWIT DIVERSIFIED GROUP INC.
By /s/ James Q. Crowe
James Q. Crowe, President
PKS HOLDINGS, INC.
By /s/ Kenneth E. Stinson
Kenneth E. Stinson, President
KIEWIT CONSTRUCTION GROUP INC.
By /s/ Kenneth E. Stinson
Kenneth E. Stinson, President
SEPARATION AGREEMENT SCHEDULES
The schedules listed below, dated March 31, 1998
("Schedules"), are attached to the Separation
Agreement by and among Peter Kiewit Sons', Inc., Kiewit
Diversified Group Inc., PKS Holdings, Inc. and Kiewit
Construction Group Inc. dated as of December 8, 1997,
as amended pursuant to a March 18, 1998 Amendment to
Separation Agreement (as amended, the "Separation
Agreement"). Subsequent to the execution of the
Separation Agreement, KDG changed its name to Level 3
Communications, Inc. and merged into Peter Kiewit
Sons', Inc., and Peter Kiewit Sons', Inc. changed its
name to Level 3 Communications, Inc. In addition, PKS
Holdings, Inc. changed its name to Peter Kiewit Sons',
Inc. For purposes of these Schedules, the Parties
identities prior to such transactions shall be
preserved. Capitalized terms used in the Schedules
shall have the meanings specified in the Separation
Agreement.
1. Schedule 3.08(d) - Capital Contributions
2. Schedule 4.01(a) -Diversified Group Indemnification Obligations
3. Schedule 4.01(b) - Construction Group Indemnification Obligations
4. Schedule 5.04 - Terminated Agreements
Schedule 3.08(d)
Capital Contributions
Except as otherwise provided in the Separation
Agreement, and the Continuing Agreements, the
unconsolidated (determined without regard to the
merger of KDG with and into PKS), Assets and
Liabilities of PKS as of March 31, 1998 shall be
allocated as provided in this Schedule.
1. PKS's remaining 10% interest in the Falcon 900
shall be contributed to PKS Holdings prior to
the Exchange Date.
2. PKS's interest in the Falcon 20 shall be
retained by PKS and allocated to KDG.
3. PKS's interest in the Leasehold Improvements
on the 15th Floor of the Kiewit Plaza
Building shall be contributed to PKS Holdings
prior to the Exchange Date.
4. PKS's obligations for Stockholder Notes shall
be assumed by PKS Holdings.
5. PKS's obligation for the Series 1997
Convertible Debentures shall be assumed by PKS
Holdings, as provided in the Separation
Agreement.
6. PKS's obligation for Deferred Compensation
shall be assumed by KDG.
7. All LB 775 Refunds and any other tax items
shall be allocated to PKS Holdings and KDG as
provided in the Tax Sharing Agreement.
8. The proceeds from the sale of a 40% interest
in the Falcon 900 to Bitterroot, Inc. shall be
contributed to KDG prior to the Exchange Date.
Effective immediately prior to the Exchange Date,
PKS Holdings shall distribute to PKS, or PKS shall
contribute to PKS Holdings, an amount mutually agreed
upon by the parties to equitably reflect the value of
Assets and Liabilities remaining after the foregoing
allocations of Assets and Liabilities.
Schedule 4.01(a)
Diversified Group Indemnification Obligations
Notwithstanding anything in the Separation
Agreement to the contrary, PKS and KDG will be liable
for, and shall indemnify and hold each Construction
Indemnitee harmless from and against: (a) all Losses
incurred or suffered by any Construction Indemnitee
arising out of or due to, directly or indirectly, the
Series 1993 Class D Convertible Debentures of PKS and
(b) 50% of the Losses incurred or suffered by any
Construction Indemnitee arising out of or due to,
directly or indirectly, the offer to sell or the sale
of any security of PKS prior to January 1, 1992.
The Parties further agree that any and all Losses
arising out of or due to, directly or indirectly,
Kiewit Investment Management Corp., the March 31, 1998
Stock Redemption Agreement between Level 3 Holdings
Inc. and Kiewit Investment Management Corp. or the
mine management agreement dated January 8, 1992 by and
between Kiewit Coal Properties Inc. and Kiewit Mining
Group Inc. shall not be covered by the indemnification
provisions of the Separation Agreement.
Schedule 4.01(b)
Construction Group Indemnification Obligations
Notwithstanding anything in the Separation
Agreement to the contrary, PKS Holdings and KCG will
be liable for, and shall indemnify and hold each
Diversified Indemnitee harmless from and against: (a)
all Losses incurred or suffered by any Diversified
Indemnitee arising out of or due to, directly or
indirectly, any Series of Class C Convertible
Debentures of PKS and (b) 50% of the Losses incurred
or suffered by any Diversified Indemnitee arising out
of or due to, directly or indirectly, the offer to
sell or the sale of any security of PKS prior to
January 1, 1992.
For purposes of this Schedule 4.01(b) and Section
4.01(b) of the Separation Agreement, "Losses" shall
not include any losses, Liabilities, damages, actions,
claims, suits, demands, proceedings, inquiries,
investigations, judgments or settlements, costs or
expenses which arise from or as a result of any
registration, sale, attempted sale, or other issuance
of any securities of PKS, any future Affiliate or
Subsidiary of PKS or any member of the Diversified
Group, or any inability to or delay in the
registration, sale or issuance of such securities, in
each case, occurring after the Exchange Date.
The Parties further agree that any and all Losses
arising out of or due to, directly or indirectly,
Kiewit Investment Management Corp., the March 31, 1998
Stock Redemption Agreement between Level 3 Holdings
Inc. and Kiewit Investment Management Corp. or the
mine management agreement dated January 8, 1992 by and
between Kiewit Coal Properties Inc. and Kiewit Mining
Group Inc. shall not be covered by the indemnification
provisions of the Separation Agreement.
Schedule 5.04
Terminated Agreements
Any Administrative Services Agreement between any
member of the Construction Group and any member of the
Diversified Group.
AMENDMENT TO SEPARATION AGREEMENT
This Amendment to Separation Agreement ("Amendment) is made
and entered into as of the 18th day of March, 1998, by and among
Peter Kiewit Sons', Inc., a Delaware corporation ("PKS"), Level 3
Communications, Inc. (formerly, Kiewit Diversified Group Inc.), a
Delaware corporation ("Level 3"), PKS Holdings, Inc., a Delaware
corporation ("PKS Holdings") and Kiewit Construction Group Inc.,
a Delaware corporation ("KCG," and together with PKS, Level 3,
and PKS Holdings, collectively the "Parties" or individually a
"Party").
PRELIMINARY STATEMENT. The Parties have previously entered
into a Separation Agreement dated as of December 8, 1997 (the
"Separation Agreement"), with respect to a series of transactions
(collectively, the "Transaction") intended to separate the
construction businesses of PKS and the diversified businesses of
PKS into two separate and independent companies. The Parties
desire to amend the Separation Agreement to provide for the
modification of certain cost allocation provisions thereof, in
the event of the occurrence of certain specified events.
NOW, THEREFORE, in consideration of the premises, the
Parties hereby agree as follows:
1. Section 1.01 of the Separation Agreement is hereby
amended by adding the following definitions:
"Conversion Event: the issuance of shares of Class D Stock in
exchange for all of the outstanding shares of Class R Stock
pursuant to the approval by the PKS Board, or any successor, of a
"Forced Conversion" ( as defined in the PKS Certificate)."
"Forced Conversion Date: the date of issuance of shares of Class
D Stock pursuant to the Conversion Event."
2. Section 3.06(b) of the Separation Agreement is hereby
amended in its entirety to read as follows:
"(b) PKS will record the Class R Distribution, and
register all persons entitled to the Class R Distribution as
holders of Class R Stock, on the books and records maintained by
or on behalf of PKS for the registration of ownership of the
capital stock of PKS, effective as of the Class R Distribution
Record Date. PKS will not issue certificates or other
instruments to evidence Class R Stock unless and until the Share
Exchange is consummated, and in any event, no sooner than June
30, 1998. If the Share Exchange is consummated, PKS will issue
and distribute certificates evidencing the Class R Stock. If the
Class R Distribution is consummated, but the Transaction is later
abandoned, PKS will exercise its rights to repurchase all of the
Class R Stock under Section IX.M of the Initial Certificate
Amendment as promptly as practicable after abandonment of the
Transaction."
3. Section 7.01 of the Separation Agreement is amended
in its entirety to read as follows:
"7.01 General. The Parties have agreed to allocate the
financial burden of Covered Expenses 82.5% to the Diversified
Group and 17.5% to the Construction Group (the "Expense Sharing
Ratio"), whether the Transaction is consummated or abandoned;
provided, however, that in the event that the Forced Conversion
Date occurs on or before July 15, 1998, the Expense Sharing Ratio
shall be modified so that the Construction Group incurs 100% of
the Covered Expenses. In such event, the Construction Group will
reimburse the Diversified Group for any Covered Expenses paid by
the Diversified Group prior to the Forced Conversion Date. All
other costs or expenses incurred by any Party in connection with
the Transaction will be borne by the Party incurring the cost or
expense."
4. A paragraph shall be added as Section 7.02 (c)of the
Separation Agreement and shall read in its entirety as follows:
"(d) The Parties acknowledge that in the event the
Forced Conversion Date occurs on or before July 15, 1998, and the
Expense Sharing Ratio is modified as provided in Section 7.01
above, any success fees, mark-ups, bonuses, equity participation
or amounts in excess of regularly billable hours, payable to the
advisors described in (i), (ii), (iii) and (iv) of Section
7.02(a), shall be incurred solely for the account of the
Diversified Group, and shall not be considered to be Covered
Expenses.
5. Section 7.04 of the Separation Agreement is amended in its
entirety to read as follows:
"7.04 Covered Expense True-Up. KDG will prepare and
submit to KCG, within 120 calendar days after the date of
abandonment of the Transaction or the Exchange Date, as the case
may be, a schedule of the Other Covered Expenses, together with
such supporting documentation with respect to the Other Covered
Expenses as KCG reasonably requests. Within five calendar days
after the submission of that schedule, KDG or KCG, as the case
may be, will pay KCG or KDG, as the case may be, in cash, an
amount sufficient to ensure that the financial burden of the
Covered Expenses has been allocated between KCG and KDG in
proportion to the Expense Sharing Ratio."
6. Unless otherwise specified, capitalized terms used
herein shall have the meanings specified in the Separation
Agreement.
7. Any other changes or modifications to the Separation
Agreement necessary to conform such agreement to this Amendment
are hereby deemed to be made. In all other respects, not
inconsistent with this Amendment, the terms of the Separation
Agreement, not specifically or by necessary implication amended
or modified hereby, shall be and remain in full force and effect
as modified hereby.
IN WITNESS WHEREOF, the Parties have caused this Amendment
to be duly executed as of the date first above written.
PETER KIEWIT SONS', INC.
By: /s/ Walter Scott, Jr.
Walter Scott, Jr., President
LEVEL 3 COMMUNICATIONS, INC.
By: /s/ James Q. Crowe
James Q. Crowe, President
PKS HOLDINGS, INC.
By: /s/ Kenneth E.Stinson
Kenneth E. Stinson, President
KIEWIT CONSTRUCTION GROUP INC.
By: /s/ Kenneth E. Stinson
Kenneth E. Stinson, President
PETER KIEWIT SONS', INC.
Kiewit Diversified Group Inc.
PKS Information Services, Inc.
PKS Systems Integration, Inc.
LexiBridge Corporation
PKS Systems Integration (Ireland) Ltd.
PKS Systems Integration (Brazil), Inc.
PKS Systems Integration (UK) Limited
AmSoft Information Services Limited
AmSoft Information Services (India) Private Limited
PKS Healthcare Systems, Inc.
Integrated Medical Networks L.L.C.
PKS Computer Services, Inc.
PKS Information Services do Brasil Ltda.
NET Twenty-One, Inc.
Level 3 Communications, LLC
Kiewit Diversified Holdings Inc.
Kiewit Infrastructure Corp.
United Infrastructure Company
Kiewit SR91 Corp.
Kiewit SR91 L.P.
Express Lanes, Inc.
Kiewit Telecom Holdings Inc.
RCN Corporation
Cable Michigan, Inc.
Commonwealth Telephone Enterprises, Inc.
Kiewit Investment Management Corp.
Peter Kiewit Sons' Co.
Kiewit Telecommunication Management Company
KFS Financial LLC
Retirement Foundations Inc.
Retirement Foundations Agency Inc.
Gateway Opportunity Fund
CompuCook
DKA
KMI Continental Land Resources, Inc.
KMI Continental High Value, Inc.
KMI Continental Lease 1, Inc.
KMI Continental Area 1, Inc.
Continental Holdings Inc.
Continental Forest Investments, Inc.
Continental Mineral Sales, Inc.
Continental Land Sales, Inc.
KMI Continental Timberlands, Inc.
KMI Continental Lignite, Inc.
KMI Continental Jeffersonville, Inc.
Continental Kiewit Inc.
CCC Canada Holding, Inc.
CFS Management Company
KMI Continental (Wakefield), Inc.
KMI Continental Lake City, Inc.
Kiewit Energy Group Inc.
Kiewit Coal Properties Inc.
Decker Coal Company, A Joint Venture
Black Butte Coal Company, A Joint Venture
Rosebud Coal Sales Company
Big Horn Coal Company
Kiewit Texas Mining Company
Walnut Creek Mining Company, A Partnership
BioClean Fuels Inc.
Kiewit Energy Company
CalEnergy Company, Inc.
Kiewit Energy U.K. Inc.
CE Electric Holdings
CE Electric UK plc
Northern Electric plc
American Pacific Finance Company II
Kiewit Energy Pacific Holdings Corp.
Kiewit Energy International (Bermuda) Ltd.
CE Luzon Geothermal Power Company, Inc.
(Philippines)
CE Casecnan Water & Energy Company, Inc.
(Philippines)
Himpurna California Energy Ltd. (Bermuda)
Patuha Power, Ltd. (Bermuda)
Bali Energy, Ltd. (Bermuda)
Slupo I B.V.
PKS Holdings, Inc.
Kiewit Construction Group Inc.
Kiewit Construction Company
Kiewit Pacific Co.
Kiewit Western Co.
Grow Tunneling Corp.
ME Holdings Inc.
Mass. Electric Construction Co.
Mass. Electric Securities Corp., Inc.
Kiewit Engineering Co.
Ben Holt Company
The Ben Holt International Co., Inc.
Kennebec Construction Company
Kiewit Industrial Co.
Southern Electrical Contractors, Inc.
Kiewit International Services Ltd. (inactive)
Kiewit International Inc.
Kiewit International Services Inc.
Peter Kiewit Sons Co. Ltd.
Canaan Corridor Constructors Corp.
Les Entreprises Kiewit Ltee
Kiewit Management Limited
Kiewit Asphalt Ventures Ltd.
MIL Offshore Inc.
Kiewit Engineering Canada Ltd.
Kiewit Industrial Canada Ltd.
V.K. Mason Construction Ltd.
V.K. Mason Inc.
Kiewit Mining Group Inc.
Kiewit Alabama Mining Company
Kiewit Mining Services Inc.
United Metro Materials Inc.
Western Equipment Co.
Sierra Ready Mix and Materials Co.
Show Low Ready Mix, Inc.
Show Low Acquisition Company
Quality Ready Mix, Inc.
Global Surety & Insurance Co.
Midwest Agencies, Inc.
Kiewit Support Services, Inc. (inactive)
Construcciones Kiewit, S.A. de C.V.
Kiewit Mazon Constructores, S.A. de C.V.
Servitec de Sonora, S.A. de C.V.
Gilbert Southern Corp.
Guernsey Stone and Construction Company
Twin Mountain Rock Company
Twin Mountain Construction II Company
Bentson Contracting Company
Gilbert Central Corp.
Gilbert Western Corp.
Gilbert Texas Construction Corp.
Gilbert Industrial Corporation
Gulf Marine Fabricators, Inc.
Aker Gulf Marine (Partnership)
Consent of Independent Accountants
We consent to the incorporation by reference in the
registration statement of Peter Kiewit Sons', Inc. on Form S-
8 (File No. 333-42465) of our reports dated March 30, 1998
on our audits of the consolidated financial statements of
Peter Kiewit Sons', Inc., the financial statements and financial
statement schedule of Kiewit Construction and Mining Group, a
business group of Peter Kiewit Sons', Inc., and the
financial statements of Diversified Group, a business group of
Peter Kiewit Sons', Inc. as of December 27, 1997 and December 28, 1996
and for each of the three years in the period ended December 27,
1997 which reports are included in this Annual Report on
Form 10-KA.
Coopers & Lybrand L.L.P.
Omaha, Nebraska
April 22, 1998
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statement
of Peter Kiewit Sons', Inc. on Form S-8 (File No. 333-42465) of our report
dated March 13, 1998, on our audits of the consolidated financial statements
and financial statement schedules of RCN Corporation and Subsidiaries as of
December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996
and 1995, which report is incorporated by reference in this Annual Report
on Form 10-KA.
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
April 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-K for the period ending December 27, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> DEC-27-1997
<CASH> 87
<SECURITIES> 700
<RECEIVABLES> 42
<ALLOWANCES> 0
<INVENTORY> 4
<CURRENT-ASSETS> 1,494
<PP&E> 412
<DEPRECIATION> 228
<TOTAL-ASSETS> 2,779
<CURRENT-LIABILITIES> 247
<BONDS> 137
0
0
<COMMON> 9
<OTHER-SE> 2,226
<TOTAL-LIABILITY-AND-EQUITY> 2,779
<SALES> 222
<TOTAL-REVENUES> 332
<CGS> 106
<TOTAL-COSTS> 175
<OTHER-EXPENSES> 114
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> 31
<INCOME-TAX> (48)
<INCOME-CONTINUING> 83
<DISCONTINUED> 165
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 248
<EPS-PRIMARY> $.74<F1>
<EPS-DILUTED> $.74<F2>
<FN>
<F1>$.74 REPRESENTS CLASS D STOCK EARNINGS PER SHARE, CLASS C STOCK EARNINGS PER
SHARE; $15.99.
<F2>$.74 REPRESENTS CLASS D STOCK EARNINGS PER SHARE, CLASS C STOCK EARNINGS PER
SHARE; $15.35.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the SEC documents
filed for the periods herein indicated and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS
12-MOS
<FISCAL-YEAR-END> DEC-28-1996 DEC-28-1996 DEC-28-1996 DEC-28-1996
DEC-30-1995
<PERIOD-END> DEC-28-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996
DEC-30-1995
<CASH> 320 449 426 367
457
<SECURITIES> 451 555 555 615
604
<RECEIVABLES> 377 383 369 301
341
<ALLOWANCES> 20 10 18 22
12
<INVENTORY> 18 16 17 19
18
<CURRENT-ASSETS> 1,404 1,692 1,638 1,556
1,666
<PP&E> 1,581 1,573 1,540 1,393
1,377
<DEPRECIATION> 774 750 735 717
710
<TOTAL-ASSETS> 3,548 3,595 3,496 3,384
3,463
<CURRENT-LIABILITIES> 631 720 633 594
666
<BONDS> 332 333 374 371
370
0 0 0 0
0
0 0 0 0
0
<COMMON> 2 2 2 2
2
<OTHER-SE> 1,801 1,743 1,680 1,617
1,605
<TOTAL-LIABILITY-AND-EQUITY> 3,548 3,595 3,496 3,384
3,463
<SALES> 2,490 1,850 1,183 555
2,547
<TOTAL-REVENUES> 2,904 2,157 1,387 656
2,902
<CGS> 2,129 1,607 1,042 503
2,230
<TOTAL-COSTS> 2,412 1,816 1,183 576
2,474
<OTHER-EXPENSES> 232 180 125 59
266
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 37 24 15 8
25
<INCOME-PRETAX> 305 220 118 39
245
<INCOME-TAX> 84 85 46 14
(11)
<INCOME-CONTINUING> 221 134 71 25
244
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 221 134 71 25
244
<EPS-PRIMARY> $10.13<F1> $7.18<F3> $3.46<F5>
$.66<F7> $7.78<F9>
<EPS-DILUTED> $9.76<F2> $6.97<F4> $3.36<F6>
$.65<F8> $7.62<F10>
<FN>
<F1>$10.13 represents Class C Stock Earnings Per Share, Class D Stock Earnings Per
Share; $4.86.
<F2>$9.76 represents Class C Stock Earnings Per Share, Class D Stock Earnings Per
Share; $4.85.
<F3>$7.18 represents Class C Stock Earnings Per Share, Class D Stock Earnings Per
Share; $2.52
<F4>$6.97 represents Class C Stock Earnings Per Share, Class D Stock Earnings Per
Share; $2.52.
<F5>$3.46 represents Class C Stock Earnings Per Share, Class D Stock Earnings Per
Share; $1.54.
<F6>$3.36 represents Class C Stock Earnings Per Share, Class D Stock Earnings Per
Share; $1.54.
<F7>$.66 represents Class C Stock Earnings Per Share, Class D Stock Earnings Per
Share; $.77.
<F8>$.65 represents Class C Stock Earnings Per Share, Class D Stock Earnings Per
Share; $.77.
<F9>$7.78 represents Class C Stock Earnings Per Share, Class D Stock Earnings Per
Share; $6.45.
<F10>$7.62 represents Class C Stock Earnings Per Share, Class D Stock Earnings Per
Share $6.44.
</FN>
</TABLE>
Table of Contents
Business Description
Market for Common Equity and Related Stockholder Matters
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and
Results Of Operations
Financial Statements and Supplementary Data
KIEWIT CONSTRUCTION & MINING GROUP
Kiewit Construction Group Inc. ("KCG") is primarily engaged
in the construction business. KCG is a wholly owned subsidiary
of Peter Kiewit Sons', Inc. ("PKS"). KCG is a Delaware
corporation formed in 1985. PKS is a Delaware corporation formed
in 1941. Both have principal offices in Omaha, Nebraska.
PKS has two principal classes of common stock, Class C
Construction & Mining Group Restricted Redeemable Convertible
Exchangeable Common Stock, par value $.0625 per share (the "Class
C stock") and Class D Diversified Group Convertible Exchangeable
Common Stock par value $.0625 per share (the Class D stock").
The value of Class C stock is linked to the Company's
construction and materials operations (the "Construction Group").
The value of Class D stock is linked to the operations of Level 3
Communications, Inc., a wholly owned subsidiary of PKS (the
"Diversified Group"), under the terms of the Company's charter.
All Class C shares and historically most Class D shares have been
owned by current and former employees of the Company and their
family members.
On December 8, 1997, the Company's stockholders ratified the
decision of the Company's Board of Directors (the "PKS Board") to
separate the business conducted by the Construction Group and the
business conducted by the Diversified Group (collectively, the
"Business Groups") into two independent companies. In connection
with the consummation of this transaction, the PKS Board declared
a dividend of eight-tenths of one share of the Company's newly
created Class R Convertible Common Stock, par value $.01 per
share ("Class R stock") with respect to each outstanding share of
Class C stock. The Class R stock is convertible in shares of
Class D stock pursuant to a defined formula. In addition, the
Company has announced that effective March 31, 1998, the Company,
through a resolution of the PKS Board, shall cause each
outstanding share of Class C stock to be mandatorily exchanged
(the "Share Exchange") pursuant to provisions of the PKS Restated
Certificate of Incorporation (the "PKS Certificate") for one
outstanding share of Common Stock, par value $.01 per share, of
PKS Holdings, Inc. ("PKS Holdings"), a recently formed, direct,
wholly owned subsidiary of PKS, to which the eight-tenths of one
share of Class R Stock would attach (collectively, the
"Transaction"). In connection with the consummation of the
Transaction, the Company will change its name to Level 3
Communications, Inc. and PKS Holdings, Inc. will change its name
to Peter Kiewit Sons', Inc. The Company has announced that the
PKS Board has approved in principle a plan to force conversion of
all 6,538,231 shares of Class R Stock outstanding. Due to
certain provisions of the Class R stock, conversion will not be
forced prior to May 1998, and the final decision to force
conversion would be made at that time. The decision may be made
not to force conversion if it were decided that conversion is not
in the best interest of the then stockholders of the Company.
The Transaction is intended to separate the Business Groups
into two independent companies. The PKS Board believes that
separation of the Business Groups will (i) permit Level 3 to
attract and retain the senior management and employees needed to
implement and develop Level 3's expansion plan (which is
discussed below), (ii) enable Level 3 to access the capital
markets in order to fund its expansion plan on more advantageous
terms than would be available to Level 3 as part of the Company,
(iii) enable Level 3 to pursue strategic investments and
acquisitions, as part of the expansion plan, which could be
foreclosed to Level 3 as part of the Company and (iv) allow the
directors and management of each Business Group to focus their
attention and financial resources on that Business Group's
business. Except for the anticipated effect of the Transaction
on the management of the construction business, the PKS Board
does not believe that the Transaction will have any other
significant effect on the construction business.
Additional financial information about the construction
segment, including revenue, operating earnings, identifiable
assets, capital expenditures and depreciation, depletion and
amortization, as well as foreign operations information, is
contained in Note 3 to Kiewit Construction & Mining Group's
financial statements.
KIEWIT CONSTRUCTION GROUP
CONSTRUCTION OPERATIONS
The construction business is conducted by operating
subsidiaries of Kiewit Construction Group Inc. (collectively,
"KCG"). KCG and its joint ventures perform construction services
for a broad range of public and private customers primarily in
the United States and Canada. New contract awards during 1997
were distributed among the following construction markets:
transportation (including highways, bridges, airports, railroads,
and mass transit) -- 62%, power, heat, cooling -- 18%, commercial
buildings -- 8%, water supply -- 2%, mining -- 2%, sewage and
waste disposal -- 1% and other markets -- 7%.
KCG primarily performs its services as a general contractor.
As a general contractor, KCG is responsible for the overall
direction and management of construction projects and for
completion of each contract in accordance with terms, plans, and
specifications. KCG plans and schedules the projects, procures
materials, hires workers as needed, and awards subcontracts. KCG
generally requires performance and payment bonds or other
assurances of operational capability and financial capacity from
its subcontractors.
Contract Types. KCG performs its construction work under
various types of contracts, including fixed unit or lump-sum
price, guaranteed maximum price, and cost-reimbursable contracts.
Contracts are either competitively bid and awarded or negotiated.
KCG's public contracts generally provide for the payment of a
fixed price for the work performed. Profit on a fixed-price
contract is realized on the difference between the contract price
and the actual cost of construction, and the contractor bears the
risk that it may not be able to perform all the work for the
specified amount. Construction contracts generally provide for
progress payments as work is completed, with a retainage to be
paid when performance is substantially complete. Construction
contracts frequently contain penalties or liquidated damages for
late completion and infrequently provide bonuses for early
completion.
Government Contracts. Public contracts accounted for 74% of
the combined prices of contracts awarded to KCG during 1997.
Most of these contracts were awarded by government and
quasi-government units under fixed price contracts after
competitive bidding. Most public contracts are subject to
termination at the election of the government. In the event of
termination, the contractor is entitled to receive the contract
price on completed work and payment of termination related costs.
Backlog. At the end of 1997, KCG had backlog (anticipated
revenue from uncompleted contracts) of $3.9 billion, an increase
from $2.3 billion at the end of 1996. Of current backlog,
approximately $1.0 billion is not expected to be completed during
1998. In 1997 KCG was low bidder on 226 jobs with total contract
prices of $3.5 billion, an average price of $15.3 million per
job. There were 19 new projects with contract prices over $25
million, accounting for 76% of the successful bid volume.
Competition. A contractor's competitive position is based
primarily on its prices for construction services and its
reputation for quality, timeliness, experience, and financial
strength. The construction industry is highly competitive and
lacks firms with dominant market power. In 1997 Engineering News
Record, a construction trade publication, ranked KCG as the 9th
largest U.S. contractor in terms of 1996 revenue and 12th largest
in terms of 1996 new contract awards. It ranked KCG 1st in the
transportation market in terms of 1996 revenue.
Joint Ventures. KCG frequently enters into joint ventures
to efficiently allocate expertise and resources among the
venturers and to spread risks associated with particular
projects. In most joint ventures, if one venturer is financially
unable to bear its share of expenses, the other venturers may be
required to pay those costs. KCG prefers to act as the sponsor
of its joint ventures. The sponsor generally provides the
project manager, the majority of venturer-provided personnel, and
accounting and other administrative support services. The joint
venture generally reimburses the sponsor for such personnel and
services on a negotiated basis. The sponsor is generally
allocated a majority of the venture's profits and losses and
usually has a controlling vote in joint venture decision making.
In 1997 KCG derived 70% of its joint venture revenue from
sponsored joint ventures and 30% from non-sponsored joint
ventures. KCG's share of joint venture revenue accounted for 28%
of its 1997 total revenue.
Demand. The volume and profitability of KCG's construction
work depends to a significant extent upon the general state of
the economies of the United States and Canada, and the volume of
work available to contractors. Fluctuating demand cycles are
typical of the industry, and such cycles determine to a large
extent the degree of competition for available projects. KCG's
construction operations could be adversely affected by labor
stoppages or shortages, adverse weather conditions, shortages of
supplies, or governmental action. The volume of available
government work is affected by budgetary and political
considerations. A significant decrease in the amount of new
government contracts, for whatever reasons, would have a material
adverse effect on KCG.
Locations. KCG structures its construction operations
around 20 principal operating offices located throughout the U.S.
and Canada, with headquarters in Omaha, Nebraska. Through its
decentralized system of management, KCG has been able to quickly
respond to changes in the local markets. At the end of 1997, KCG
had current projects in 33 states and 6 Canadian provinces. KCG
also participates in the construction of geothermal power plants
in the Philippines and Indonesia.
Properties. KCG has 20 district offices, of which 16 are in
owned facilities and 4 are leased. KCG owns or leases numerous
shops, equipment yards, storage facilities, warehouses, and
construction material quarries. Since construction projects are
inherently temporary and location-specific, KCG owns
approximately 950 portable offices, shops, and transport
trailers. KCG has a large equipment fleet, including
approximately 4,500 trucks, pickups, and automobiles, and 2,000
heavy construction vehicles, such as graders, scrapers, backhoes,
and cranes.
MATERIALS OPERATIONS
Several KCG subsidiaries, primarily in Arizona and Oregon,
produce construction materials, including ready-mix concrete,
asphalt, sand and gravel. KCG also has quarrying operations in
New Mexico and Wyoming, which produce landscaping materials and
railroad ballast. Kiewit Mining Group Inc. ("KMG"), a subsidiary
of KCG, provides mine management services to Kiewit Coal
Properties Inc., a subsidiary of PKS. KMG also owns a 48%
interest in an underground coal mine near Pelham, Alabama.
OTHER MATTERS
Under a 1992 mine management agreement, Kiewit Coal
Properties Inc. ("KCP"), a subsidiary of Level 3, pays a KCG
subsidiary an annual fee equal to 30% of KCP's adjusted operating
income. The fee in 1997 was $32 million. The Business Groups
are currently discussing a potential revision to the mine
management agreement for periods following the Transaction.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information. As of December 27, 1997, the Company's
common stock is not listed on any national securities exchange or
the Nasdaq National Market. However, the Class D stock is
currently quoted on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board. During the fourth quarter of
1997, the only quarter during which this trading occurred, the
range of the high and low bid information for the Class D stock
was $24.60 to $29.00. The Company has announced that the common
stock of Level 3 Communications, Inc. (renamed from Peter Kiewit
Sons', Inc. in connection with the Transaction) will begin
trading on the Nasdaq National Market on April 1, 1998.
Company Repurchase Duty. Pursuant to the current terms of
the PKS Certificate, the Company is generally required to
repurchase shares at a formula price upon demand. Under the PKS
Certificate effective January 1992, the Company has three classes
of common stock: Class B Construction & Mining Group Nonvoting
Restricted Redeemable Convertible Exchangeable Common Stock
("Class B"), Class C stock, and Class D stock. There are no
outstanding Class B stock; the last Class B stock were converted
into Class D stock on January 1, 1997. Class C stock can be
issued only to Company employees and can be resold only to the
Company at a formula price based on the year-end book value of
the Construction Group. The Company is generally required to
repurchase Class C stock for cash upon stockholder demand. Class
D stock has a formula price based on the year-end book value of
the Diversified Group. The Company must generally repurchase
Class D stock for cash upon stockholder demand at the formula
price, unless the Class D stock become publicly traded.
Formula values. The formula price of the Class D stock is
based on the book value of Level 3 and its subsidiaries, plus
one-half of the book value, on a stand-alone basis, of the parent
company, PKS. The formula price of the Class C stock is based on
the book value of the Construction Group and its subsidiaries,
plus one-half of the book value of the unconsolidated parent
company. A significant element of the Class C formula price is
the subtraction of the book value of property, plant, and
equipment used in construction activities ($122 million in 1997).
Conversion. Under the PKS Certificate, Class C stock is
convertible into Class D stock at the end of each year. Between
October 15 and December 15 of each year a Class C stockholder may
elect to convert some or all of his or her shares. Conversion
occurs on the following January 1. The conversion ratio is the
relative formula prices of Class C and Class D stock determined
as of the last Saturday in December, that is, the last day in the
Company's fiscal year. Class D stock may be converted into Class
C stock only as part of an annual offering of Class C stock to
employees. Instead of purchasing the offered shares for cash, an
employee owning Class D stock may convert such shares into Class
C stock at the applicable conversion ratio.
Restrictions. Ownership of Class C stock is generally
restricted to active Company employees. Upon retirement,
termination of employment, or death, Class C stock must be resold
to the Company at the applicable formula price, but may be
converted into Class D stock if the terminating event occurs
during the annual conversion period. Class D stock is not
subject to ownership or transfer restrictions.
Dividends and Prices. During 1996 and 1997 the Company
declared or paid the following dividends on its common stock.
The table also shows the stock price after each dividend payment
or other valuation event.
Dividend Dividend
Declared Dividend Paid Per Share Class Price Adjusted Stock Price
Oct. 27, 1995 Jan. 5, 1996 $0.60 C Dec. 30, 1995 $32.40
Apr. 26, 1996 May 1, 1996 0.60 C May 1, 1996 31.80
Oct. 25, 1996 Jan. 4, 1997 0.70 C Dec. 28, 1996 40.70
Apr. 23, 1997 May 1, 1997 0.70 C May 1, 1997 40.00
Oct. 22, 1997 Jan. 5, 1998 0.80 C Dec. 27, 1997 51.20
The Company's current dividend policy is to pay a regular
dividend on Class C stock of about 15% to 20% of the prior year's
ordinary earnings of the Construction Group, with any special
dividends to be based on extraordinary earnings. Although the
PKS Board announced in August 1993 that the Company did not
intend to pay regular dividends on Class D stock for the
foreseeable future, the PKS Board declared a special dividend of
$0.50 per share of Class D stock in both October 1995 and 1996.
A dividend of 4 shares of Class D Stock for each share of
Class D Stock was effected on December 26, 1997.
Stockholders. On March 15, 1998, and after giving effect to
a dividend of 4 shares of Class D Stock for each outstanding
share of Class D stock effected on December 26, 1997, the Company
had the following numbers of stockholders and outstanding shares
for each class of its common stock:
Class of Stock Stockholders Shares Outstanding
B - -
C 996 7,681,020
D 2,121 146,943,752
Recent Sales of Unregistered Securities. On April 1, 1997,
the Company sold 10,000 shares of Class D stock to Charles Harper
and Robert Daugherty and 8,000 shares of Class D stock to Peter
Kiewit Jr. at a sale price of $49.50 per share. Each of Messrs
Harper, Daugherty and Kiewit are members of the PKS Board of
Directors. The sale was effected pursuant to an exemption from
registration under the Securities Act of 1933 contained in
Section 4(2) of such Act.
SELECTED FINANCIAL DATA
The following selected financial data for each of the years in
the period 1993 to 1997 have been derived from audited financial
statements. The historical financial information for the Kiewit
Construction & Mining and Diversified Groups supplements the
consolidated financial information of PKS and, taken together,
includes all accounts which comprise the corresponding
consolidated financial information of PKS.
(dollars in millions, Fiscal Year Ended
except per share amounts) 1997 1996 1995 1994 1993
Results of Operations:
Revenue $ 2,764 $ 2,303 $ 2,330 $ 2,175 $ 1,783
Net earnings 155 108 104 77 80
Per Common Share:
Net earnings
Basic 15.99 10.13 7.78 4.92 4.63
Diluted 15.35 9.76 7.62 4.86 4.59
Dividends (1) 1.50 1.30 1.05 0.90 0.70
Stock price (2) 51.20 40.70 32.40 25.55 22.35
Book value 64.38 51.02 42.90 31.39 27.43
Financial Position:
Total assets 1,341 1,038 976 967 889
Current portion of
long-term debt 5 - 2 3 4
Long-term debt, less
current portion 22 12 9 9 10
Stockholders' equity (3) 652 562 467 505 480
(1) The 1997, 1996, 1995, 1994 and 1993 dividends include $.80,
$.70, $.60, $.45 and $.40 for dividends declared in 1997,
1996, 1995, 1994 and 1993, respectively, but paid in
January of the subsequent year.
(2) Pursuant to the Certificate of Incorporation, the stock
price calculation is computed annually at the end of the
fiscal year.
(3) Ownership of the Class C Stock is restricted to certain
employees conditioned upon the execution of repurchase
agreements which restrict the employees from transferring
the stock. PKS is generally committed to purchase all
Class C Stock at the amount computed, when put to PKS by a
stockholder, pursuant to the Certificate of Incorporation.
The aggregate redemption value of the Class C Stock at
December 27, 1997 was $527 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The financial statements of the Construction & Mining Group
(the "Group") include the financial position, results of
operations and cash flows for the construction business of Peter
Kiewit Sons', Inc. and certain PKS corporate assets and
liabilities and related transactions. The Group's share of
corporate assets and liabilities and related transactions
includes amounts to reflect certain financial activities,
corporate general and administrative costs and income taxes. See
Notes 1 and 5 to the Group's financial statements.
This document contains forward looking statements and
information that are based on the beliefs of management as well
as assumptions made by and information currently available to the
Group. When used in this document, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions, as
they relate to the Group or its management, are intended to
identify forward-looking statements. Such statements reflect the
current views of the Group with respect to future events and are
subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may
vary materially from those described in this document.
Results of Operations 1997 vs. 1996
Construction. The Construction and Mining Group's operations
can be separated into two components; construction and materials.
Construction revenues increased $414 million during 1997 compared
to 1996. The consolidation of ME Holding Inc. (due to the
increase in ownership from 49% to 80%) ("ME Holding") contributed
$261 million, almost two-thirds of the increase. In addition to
ME Holding, several large projects and joint ventures became
fully mobilized during the latter part of the year and were well
into the "peak" construction phase.
Material revenues increased 19% to $290 million in 1997 from
$243 million in 1996. The acquisition of additional plant sites
accounts for 22% of the increase in sales. The remaining
increase was a result of the strong market for material products
in Arizona. This raised sales volume from existing plant sites
and allowed for slightly higher selling prices. The inclusion of
$10 million of revenues from the Oak Mountain facility in Alabama
also contributed to the increase.
Contract backlog at December 1997 was $3.9 billion of which 7%
is attributable to foreign operations located primarily in
Indonesia and Canada. Domestic projects are spread
geographically throughout the U.S. Included in backlog is $668
million for the "I-15" project awarded in late March. The Group
is the sponsoring partner on the design-build joint venture
reconstructing 16 miles of Interstate 15 through the Salt Lake
City, Utah area. It is expected to be completed in December 2001
and includes an optional 10- year maintenance contract.
In September, a Presidential Decree was issued in Indonesia
affecting the start-up dates for a number of private power
projects. As a result of the Decree and the continued
fluctuations in the value of the Indonesian currency, several
projects in Indonesia for CalEnergy Company, Inc. ("CalEnergy"),
included in contract backlog at $76 million, could be terminated
by the Indonesian government or CalEnergy. The Group does not
anticipate that termination will have a material adverse effect
as payment has been received for all work performed and the costs
of demobilizing the projects would not be significant.
Construction margins increased to 13% of revenue in 1997 as
compared to 10% in 1996. The favorable resolution of project
uncertainties, several change order settlements, and cost savings
or early completion bonuses received during the year contributed
to this increase.
Material margins decreased from 10% of revenue in 1996 to 4% in
1997. Losses at the Oak Mountain facility in Alabama were the
source of the decrease. The materials margins from sources other
than Oak Mountain remained stable as higher unit sales and
selling prices were offset by increases in raw materials costs.
General and Administrative Expenses. General and
administrative expenses increased 11% in 1997 after deducting $17
million of expenses attributable to ME Holding. Compensation and
profit sharing expenses increased $9 million and $2 million,
respectively, from 1996. The increase in these costs is a direct
result of higher construction earnings.
Investment Income. Investment income declined 16% in 1997 to
$16 million. The decrease is primarily attributable to the
consolidation of ME Holding in 1997. In 1996, equity earnings
attributable to ME Holding was $4 million. Partially offsetting
this decline was a slight increase in income from the sale of
marketable securities.
Interest Expense. The decline in interest expense is due to
the absence of short-term borrowings which were repaid in 1996.
Other Income. Other income is primarily comprised of gains and
losses on the disposition of construction equipment and mine
management fees paid by the Diversified Group. A $6 million
increase in gains on the sale of equipment and additional
miscellaneous income were partially offset by a decline in mine
management fee income.
Provision for Income Taxes. The effective income tax rates in
1997 and 1996 differ from the expected statutory rate of 35%
primarily due to state income taxes and prior year tax
adjustments.
Results of Operations - 1996 vs. 1995
Construction. Revenue from construction decreased 1% to $2,303
million in 1996. This resulted from the completion of several
major projects during the year, while many new contracts were
still in the start-up phase. The Group's share of joint venture
revenue remained at 30% of total revenues in 1996. Contract
backlog at December 28, 1996 was $2.3 billion, of which 4% was
attributable to foreign operations, principally Canada and the
Philippines. Projects on the west coast accounted for 42% of the
total backlog. Revenue from materials increased by less than 1%
in 1996. Increased demand for aggregates in the Arizona market
was offset by a decline in precious metal sales. The Group sold
its gold and silver operations in Nevada to Kinross Gold
Corporation ("Kinross") and essentially liquidated its metals
inventory in 1995.
Opportunities in the construction and materials industry
continued to expand along with the economy. Because of the
increased opportunities, the Group was able to be selective in
the construction projects it pursued. Gross margins for
construction increased from 8% in 1995 to 10% in 1996. This
resulted from the completion of several large projects and
increased efficiencies in all aspects of the construction
process. Gross margins for materials declined from 13% in 1995
to 10% in 1996. The lack of higher margin precious metals sales
in 1996 combined with slightly lower construction materials
margins produced the reduction in operating margin.
General and Administrative Expenses. General and
administrative expenses increased 1% in 1996. Increases in
compensation and travel expenses were partially offset by lower
insurance, computer operations and other administrative expenses.
Investment Income. Investment income increased 12% in 1996
compared to 1995. The increase was primarily due to ME Holding's
equity earnings increasing from $2 million in 1995 to $4 million
in 1996 and $2 million from other equity investments. Partially
offsetting this increase was a slight decline in interest income,
due to a decrease in the average cash balance during the year.
Interest Expense. The increase in interest expense of $2
million in 1996 was primarily attributable to the short-term
borrowings outstanding during the year.
Other, net. In 1995, the exchange of the Group's gold and
silver operations in Nevada for 4,000,000 shares of common stock
of Kinross led to a $21 million gain for the Group. The gain
was the difference between the Group's book value in the gold and
silver operations and the market value of the Kinross shares at
the time of the exchange. Other income was also primarily
comprised of mine management fees from the Diversified Group, of
$37 million and $30 million in 1996 and 1995, and gains on the
disposition of property, plant and equipment and other assets of
$17 million and $12 million in 1996 and 1995.
Provision for Income Taxes. The effective income tax rate for
1996 differed from the statutory rate of 35% primarily because of
adjustments to prior year tax provisions and state taxes. In
1995, the rate was higher than 35% due primarily to state income
taxes.
Financial Condition - December 27, 1997
Working capital for the Group increased 30% to $478 million in
1997. Cash provided by operations, of $154 million, was
partially offset by investing and financing activities.
Investing activities include capital expenditures of $107 million
and investments and acquisitions of $21 million. Partially
funding these activities was the net sale of securities for $34
million and $36 million from the sale of property, plant and
equipment. Financing activities include $72 million to convert
Class C Stock to Class D Stock and $12 million paid in
dividends. These financing uses were partially offset by $34
million of proceeds from the sale of common stock, $8 million of
proceeds from long-term borrowings and $9 million of
distributions from investments.
The Group anticipates investing between $40 and $75 million
annually in its construction business. In 1997, the Group
invested $107 million in new equipment. This amount is higher
than normal primarily due to $25 million of equipment purchases
for a highway project located in a part of the country where
existing equipment was not available. The Group is also
exploring opportunities to acquire additional materials
businesses. Other long-term liquidity uses include the payment
of income taxes, repurchases 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.
In October 1997, the PKS Board of Directors declared a dividend
of $.80 per share on Class C Stock, payable on January 5, 1998.
Also in January 1998, approximately 2.3 million shares of Class C
Stock, with a redemption value of $122 million, were converted
into Class D Stock. During the first quarter of 1998, the Group
also repurchased $25 million of stock from Class C shareholders.
In order to partially fund these financing activities, the Group
borrowed $20 million in January, 1998. The Group expects to
repay these borrowings during the first half of 1998.
The separation of the Group from the Diversified Group, as
described below, will prohibit the conversion of Class C Stock to
Class D Stock in the future.
In October 1996, the PKS Board of Directors directed PKS
management to pursue a listing of Class D Stock as a way to
address certain issues created by PKS' two-class capital stock
structure and the need to attract and retain the best management
for PKS' businesses. During the course of its examination of the
consequences of a listing of Class D Stock, management concluded
that a listing of Class D Stock would not adequately address
these issues, and instead began to study a separation of the
Construction and Mining Group from the Diversified Group through
a spin-off of the Construction and Mining Group ("the
Transaction"). At a special meeting on August 14, 1997, the
Board approved the Transaction.
The separation of the Construction and Mining Group and the
Diversified Group was contingent upon a number of conditions,
including the favorable ratification by a majority of both Class
C and Class D shareholders and the receipt by the Company of an
Internal Revenue Service ruling or other assurance acceptable to
the Board that the separation would be tax-free to U.S.
shareholders. On December 8, 1997, PKS' Class C and Class D
shareholders approved the transaction and on March 5, 1998 PKS
received a favorable ruling from the Internal Revenue Service.
The Transaction is anticipated to be effective on March 31, 1998.
KIEWIT CONSTRUCTION & MINING GROUP
Index to Financial Statements
and Financial Statement Schedule
Report of Independent Accountants
Financial Statements as of December 27, 1997 and December 28, 1996 and
for the three years ended December 27, 1997:
Statements of Earnings
Balance Sheets
Statements of Cash Flows
Statements of Changes in Stockholders' Equity
Notes to Financial Statements
Financial Statement Schedule for the three years ended December 27, 1997:
II - Valuation and Qualifying Accounts and Reserves
Schedules not indicated above have been omitted because of the absence of the
conditions under which they are required or because the information called
for is shown in the financial statements or in the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Peter Kiewit Sons', Inc.
We have audited the financial statements and the financial statement schedule
of Kiewit Construction & Mining Group, a business group of Peter Kiewit
Sons', Inc. (as defined in Note 1 to these financial statements) as listed
in the index on the preceding page of this exhibit to Form 10-K. These
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, when read in
conjunction with the consolidated financial statements of Peter Kiewit Sons',
Inc. and Subsidiaries, present fairly, in all material respects, the
financial position of Kiewit Construction & Mining Group as of December 27,
1997 and December 28, 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 27, 1997 in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
March 30, 1998
KIEWIT CONSTRUCTION & MINING GROUP
Statements of Earnings
For the three years ended December 27, 1997
(dollars in millions, except per share data) 1997 1996 1995
Revenue $ 2,764 $ 2,303 $ 2,330
Cost of Revenue (2,427) (2,079) (2,127)
-------- ------- ------
337 224 203
General and Administrative Expenses (147) (117) (116)
-------- ------- ------
Operating Earnings 190 107 87
Other Income (Expense):
Investment Income 16 19 17
Interest Expense (3) (4) (2)
Other, net 59 58 62
-------- ------- ------
72 73 77
------- ------- ------
Earnings Before Income Taxes 262 180 164
Provision for Income Taxes (107) (72) (60)
------- ------- -------
Net Earnings $ 155 $ 108 $ 104
======= ======= =======
Net Earnings Per Share:
Basic $ 15.99 $ 10.13 $ 7.78
======= ======= =======
Diluted $ 15.35 $ 9.76 $ 7.62
======== ======= =======
See accompanying notes to financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Balance Sheets
December 27, 1997 and December 28, 1996
(dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 232 $ 173
Marketable securities 26 54
Receivables, less allowance of $9 and $17 430 289
Costs and earnings in excess of billings on
uncompleted construction contracts 119 80
Investment in construction joint ventures 176 91
Deferred income taxes 61 64
Other 13 13
------ -------
Total Current Assets 1,057 764
Property, Plant and Equipment, at cost:
Land 18 15
Buildings 40 37
Equipment 585 542
------ -------
643 594
Less accumulated depreciation and amortization (446) (429)
------ -------
Net Property, Plant and Equipment 197 165
Other Assets 87 109
----- -------
$1,341 $ 1,038
====== =======
See accompanying notes to financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Balance Sheets
December 27, 1997 and December 28, 1996
(continued)
(dollars in millions) 1997 1996
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, including retainage of
$37 and $33 $ 208 $ 164
Current portion of long-term debt 5 -
Accrued construction costs and billings in
excess of revenue on uncompleted contracts 217 112
Accrued insurance costs 76 81
Other 73 40
------ -------
Total Current Liabilities 579 397
Long-term Debt, less current portion 22 12
Other Liabilities 77 67
Minority Interest 11 -
Stockholders' Equity (Redeemable Common Stock,
$527 million aggregate redemption value):
10,132,343 shares outstanding in 1997 and
11,006,641 shares outstanding in 1996
Common equity 670 568
Foreign currency adjustment (7) (5)
Unrealized holding loss (11) (1)
------ ------
Total Stockholders' Equity 652 562
------ ------
$1,341 $1,038
====== ======
See accompanying notes to financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Statements of Cash Flows
For the three years ended December 27, 1997
(dollars in millions) 1997 1996 1995
Cash flows from operations:
Net earnings $ 155 $ 108 $ 104
Adjustments to reconcile net earnings to
net cash provided by operations:
Depreciation and amortization 66 61 56
Gain on sale of property, plant and
equipment and other investments (24) (17) (33)
Equity (earnings) loss, net 2 (8) (3)
Change in other noncurrent liabilities 18 18 6
Deferred income taxes - (6) -
Change in working capital items:
Receivables (113) 37 -
Costs and earnings in excess of
billings on uncompleted construction
contracts (39) (1) 23
Investment in construction joint ventures (82) (18) (4)
Other current assets 7 2 (3)
Accounts payable 27 (18) 3
Accrued construction costs and billings
in excess of revenue on
uncompleted contracts 102 1 5
Other liabilities 27 11 4
Other 8 (7) (6)
------ ----- -----
Net cash provided by operations 154 163 152
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 73 160 82
Purchases of marketable securities (39) (157) (42)
Proceeds from sale of property,
plant and equipment 36 25 15
Capital expenditures (107) (72) (79)
Investments and acquisitions, net of
cash acquired (21) (6) (10)
Distributions from investees 9 6 8
Sale of note receivable and other - 14 -
------ ----- -----
Net cash used in investing activities $ (49) $ (30) $ (26)
See accompanying notes to financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Statements of Cash Flows
For the three years ended December 27, 1997
(continued)
(dollars in millions) 1997 1996 1995
Cash flows from financing activities:
Long-term debt borrowings $ 8 $ 3 $ 3
Short-term debt borrowings, net - (45) 45
Payments on long-term debt, including
current portion - (2) (4)
Issuances of common stock 34 27 24
Repurchases of common stock (2) (5) (3)
Dividends paid (12) (12) (13)
Exchange of Class C Stock for
Class D Stock, net (72) (20) (155)
------ ------ ------
Net cash used in financing activities (44) (54) (103)
Effect of exchange rates on cash (2) - 1
------ ------ ------
Net change in cash and cash equivalents 59 79 24
Cash and cash equivalents at beginning
of year 173 94 70
------ ------ ------
Cash and cash equivalents at end of year $ 232 $ 173 $ 94
====== ====== ======
Supplemental disclosures of cash
flow information:
Taxes paid $ 94 $ 78 $ 69
Interest paid 2 2 2
Noncash investing activity:
Disposition of gold operations in
exchange for Kinross common stock, net $ - $ - $ 21
See accompanying notes to financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Statements of Changes in Stockholders' Equity
For the three years ended December 27, 1997
(dollars in millions, except per share data) 1997 1996 1995
Common equity:
Balance at beginning of year $ 568 $ 471 $ 513
Issuances of stock 34 27 24
Repurchases of stock (2) (5) (3)
Exchange of Class C Stock for Class D Stock, net (72) (20) (155)
Net earnings 155 108 104
Dividends (per share: $1.50 in 1997,
$1.30 in 1996 and $1.05 in 1995)(a) (13) (13) (12)
------ ------- -------
Balance at end of year 670 568 471
Other equity adjustments:
Balance at beginning of year (6) (4) (8)
Foreign currency adjustment (2) - 2
Unrealized holding (loss) gain (10) (2) 2
------ ------ ------
Balance at end of year (18) (6) (4)
------ ------ ------
Total stockholders' equity $ 652 $ 562 $ 467
====== ====== ======
(a) Dividends include $.80, $.70, and $.60 for dividends declared in 1997,
1996 and 1995 but paid in January of the subsequent year.
See accompanying notes to financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Notes to Financial Statements
(1) Basis of Presentation
The Class C Stock and the Class D Stock are designed to provide stockholders
with separate securities reflecting the performance of Peter Kiewit Sons',
Inc.'s ("PKS") construction and materials businesses ("Construction & Mining
Group") and its other businesses ("Diversified Group"), respectively.
Dividends on the Class C Stock are limited to the legally available funds of
PKS less the Class D formula value which is to be reduced by any dividends
on Class D Stock declared during the current year. Subject to this
limitation, the Board of Directors intends to declare and pay dividends on
the Class C Stock based primarily on the Construction & Mining Group's
separately reported financial condition and results of operations.
The financial statements of the Construction & Mining Group include the
financial position, results of operations and cash flows for PKS'
construction and materials businesses held by its wholly-owned
subsidiary, Kiewit Construction Group Inc., and certain PKS corporate
assets and liabilities and related transactions. These financial statements
have been prepared using the historical amounts included in the PKS
consolidated financial statements.
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 financial statements
and related notes should be read in conjunction with these financial
statements. (See Note 3)
(2) Summary of Significant Accounting Policies
Principles of Group Presentation
These financial statements include the accounts of the Construction & Mining
Group ("the Group"). The Group's and Diversified Group's financial
statements, taken together, comprise all the accounts included in the PKS
consolidated financial statements. All significant intercompany accounts
and transactions, except those directly between the Group and the
Diversified Group, have been eliminated. Investments in construction
joint ventures and other companies in which the Group exercises significant
influence over operating and financial policies are accounted for by the equity
method. The Group accounts for its share of the operations of the construction
joint ventures on a pro rata basis in the statements of earnings.
In 1997, the Group increased its ownership in ME Holding Inc. ("ME Holding")
an electrical contractor, from 49% to 80%. The Group consolidated ME
Holding in its 1997 financial statements and accounted for it using the
equity method in 1996 and 1995.
The Group invests in various portfolios of the Kiewit Mutual Fund, ("KMF"), a
registered investment company. KMF is not consolidated in the Group's
financial statements.
Construction Contracts
The Group operates generally within the United States and Canada as a general
contractor and engages in various types of construction projects for both
public and private owners. Credit risk is minimal with public (government)
owners since the Group ascertains that funds have been appropriated by the
governmental project owner prior to commencing work on public projects.
Most public contracts are subject to termination at the election of the
government. In the event of termination, the Group is entitled to receive
the contract price on completed work and reimbursement of termination
related costs. Credit risk with private owners is minimized because of
statutory mechanics liens, which give the Group high priority in the event
of lien foreclosures following financial difficulties of private owners.
The construction industry is highly competitive and lacks firms with dominant
market power. A substantial portion of the Group's business involves
construction contracts obtained through competitive bidding. The volume and
profitability of the Group's construction work depends to a significant
extent upon the general state of the economies in which it operates and the
volume of work available to contractors. The Group's construction
operations could be adversely affected by labor stoppages or shortages,
adverse weather conditions, shortages of supplies, or governmental
action.
The Group recognizes revenue on long-term construction contracts and joint
ventures on the percentage-of-completion method based upon engineering
estimates of the work performed on individual contracts. Provisions for
losses are recognized on uncompleted contracts when they become known.
Claims for additional revenue are recognized in the period when allowed.
It is at least reasonably possible that engineering estimates of the work
performed on individual contracts will be revised in the near term.
Assets and liabilities arising from construction activities, the operating
cycle of which extends over several years, are classified as current in the
financial statements. A one-year time period is used as the basis for
classification of all other current assets and liabilities.
Depreciation and Amortization
Property, plant and equipment are recorded at cost. Depreciation
and amortization are computed on accelerated and straight-line methods.
Foreign Currencies
The local currencies of foreign subsidiaries are the functional currencies for
financial reporting purposes. Assets and liabilities are translated into
U.S. dollars at year-end exchange rates. Revenue and expenses are translated
using average exchange rates prevailing during the year. Gains or losses
resulting from currency translation are recorded as adjustments to
stockholders' equity.
Earnings Per Share
In 1997, the Group adopted 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 per share data presented. Basic earnings per share have been computed
using the weighted average number of shares outstanding during each period.
Diluted earnings give effect to convertible debentures considered to be dilutive
common stock equivalents. Dilutive potential common shares are calculated
in accordance with the "if converted" method. This method assumes that the
after-tax interest expense associated with the debentures is an addition to
income and the debentures are converted into equity with the resulting common
shares being aggregated with the weighted average shares outstanding.
1997 1996 1995
Net income available to common
shareholders (in millions) $ 155 $ 108 $ 104
Add: Interest expense, net of tax effect
associated with convertible debentures 1 -* -*
------ ------- ---------
Net income for diluted shares $ 156 $ 108 $ 104
Total number of weighted average shares
outstanding used to compute basic earnings
per share (in thousands) 9,728 10,656 13,384
Additional dilutive shares assuming
conversion of convertible debentures 441 437 312
------ ------- --------
Total number of shares used to compute
diluted earnings per share 10,169 11,093 13,696
======= ======== ========
Net Income
Basic earnings per share $ 15.99 $ 10.13 $ 7.78
======= ======== ========
Diluted earnings per share $ 15.35 $ 9.76 $ 7.62
======= ======== ========
*Interest expense attributable to convertible debentures was less than $1
million in 1996 and 1995.
Income Taxes
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and tax basis of the Group's assets and
liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income", which requires that changes in
comprehensive income be shown in a financial statement that is displayed
with the same prominence as other financial statements.
Also in 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which changes the way public companies
report information about segments. SFAS No. 131, which is based on the
management approach to segment reporting includes requirements to report
selected segment information quarterly, and entity wide disclosures about
products and services, major customers, and geographic data.
These statements are effective for financial statements for periods beginning
after December 15, 1997. Management does not expect adoption of these
statements to materially affect the Group's financial statements.
Reclassifications
Where appropriate, items within the financial statements and notes thereto
have been reclassified from previous years to conform to current year
presentation.
Fiscal Year
The Group's fiscal year ends on the last Saturday in December. There were
52 weeks in fiscal years 1997, 1996 and 1995.
(3) Reorganization
In October 1996, the PKS Board of Directors directed PKS management to pursue
a listing of Class D Stock as a way to address certain issues created by
PKS' two-class capital stock structure and the need to attract and retain
the best management for PKS' businesses. During the course of its
examination of the consequences of a listing of Class D Stock, management
concluded that a listing of Class D Stock would not adequately address these
issues, and instead began to study a separation of the Construction and
Mining Group and the Diversified Group. At the regular meeting of the
Board on July 23, 1997, management submitted to the Board for consideration a
proposal for separation of the Construction and Mining Group from the
Diversified Group through a spin-off of the Construction and Mining Group
("the Transaction"). At a special meeting on August 14, 1997, the Board
approved the Transaction.
The separation of the Construction and Mining Group and the Diversified Group
was contingent upon a number of conditions, including the favorable
ratification by a majority of both Class C and Class D shareholders and the
receipt by PKS of an Internal Revenue Service ruling or other assurance
acceptable to the Board that the separation would be tax-free to U.S.
shareholders. On December 8, 1997, PKS' Class C and Class D shareholders
approved the transaction and on March 5, 1998 PKS received a favorable
ruling from the Internal Revenue Service. The Transaction is anticipated to
be effective on March 31, 1998.
(4) Acquisitions:
In April, 1997 the Group and a partner each invested $15 million to acquire a
96% interest in Oak Mountain Energy LLC, ("Oak Mountain"). Oak Mountain
then acquired the existing assets of an underground coal mine located in
Alabama for approximately $18 million and assumed approximately $14 million
of related liabilities. Oak Mountain used cash and $18 million of
nonrecourse bank borrowings to retire the existing debt and 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. Due to higher than
anticipated costs in modernizing and operating the mine, Oak Mountain
incurred operating losses in 1997. Production at the mine has been
significantly below anticipated levels, and as a result of this and other
factors, Oak Mountain is not in compliance with certain covenants of the
bank borrowings. Those events caused the Group to assess whether its
investment is impaired. Upon considering estimated cash flow levels, including
additional funding necessary to operate the mine, and assessments of the
fair value of the net assets of the mine based upon potential recovery
though a sale, the Group recognized an impairment loss of $8 million.
This loss along with the operating losses, reduced the Group's investment
to zero. The impairment has been included in Cost of Revenue in the
Statement of Earnings.
In 1997, the Group paid $5 million to increase its ownership in ME Holding from
49% to 80%. The Group's investment in ME Holding exceeds its proportionate
share of ME Holding equity by $3 million. The goodwill is being amortized
over 5 years.
Construction revenue for ME Holding was $247 million in 1996, however the net
operating results of ME Holding was not significant relative to the Group's
results in 1996.
(5) Corporate Activities
Financial Structure
PKS, in addition to specifically attributable items, has corporate assets,
liabilities and related income and expense which are not separately
identified with the ongoing operations 7of the Group or the Diversified
Group. The items attributable to the Group and the Group's 50% portion of
PKS are as follows:
(dollars in millions) 1997 1996
Cash and cash equivalents $ 8 $ 8
Marketable securities 3 5
Property, plant and equipment, net 5 5
Other assets 2 2
------ ------
Total Assets $ 18 $ 20
====== ======
Accounts payable $ 10 $ 8
Long-term debt and other noncurrent liabilities 17 13
------ ------
Total Liabilities $ 27 $ 21
====== ======
1997 1996 1995
Net investment expense $ 1 $ - $ -
Corporate General and Administrative Costs
A portion of PKS' corporate general and administrative costs has been
allocated to the Group based upon certain measures of business activity,
such as employment, investments and sales, which management believes to be
reasonable. The allocations were $1 million in 1997, 1996 and 1995.
Income Taxes
All domestic members of the PKS affiliated group are included in the
consolidated U.S. income tax return filed by PKS as allowed by the Internal
Revenue Code. Accordingly, the provision for income taxes and the related
payments or refunds of tax are determined on a consolidated basis.
The financial statement provision and actual cash tax payments have been
reflected in the Group's and the Diversified Group's financial statements in
accordance with PKS' tax allocation policy for such groups. In general,
such policy provides that the consolidated tax provision and related cash
flows and balance sheet amounts are allocated between the Group and the
Diversified Group, for group financial statement purposes, based principally
upon the financial income, taxable income, credits, preferences and other
amounts directly related to the respective groups. The provision for
estimated United States income taxes for the Group does not differ
materially from that which would have been determined on a separate return
basis.
(6) Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to determine classification
and fair values of financial instruments:
Cash and Cash Equivalents
Cash equivalents generally consist of funds invested in the Kiewit Mutual
Fund-Money Market Portfolio and highly liquid instruments purchased with an
original maturity of three months or less. The securities are stated at
cost, which approximates fair value.
Marketable Securities and Non-current Investments
The Group has classified all marketable securities and marketable non-current
investments not accounted for under the equity method as available-for-sale.
The amortized cost of the securities used in computing unrealized and
realized gains and losses is determined by specific identification. Fair
values are estimated based on quoted market prices for the securities on hand
or for similar investments. Net unrealized holding gains and losses are
reported as a separate component of stockholders' equity, net of tax.
The following summarizes the amortized cost, unrealized holding gains and
losses, and estimated fair values of marketable securities and marketable
non-current investments at December 27, 1997 and December 28, 1996.
Unrealized Unrealized
Amortized Holding Holding Fair
(dollars in millions) Cost Gains Losses Value
1997
Kiewit Mutual Fund:
Short-term government $ 10 $ - $ - $ 10
Intermediate term bond 1 - - 1
Tax exempt 1 - - 1
U.S. debt securities 14 - - 14
------ ------- ------- ------
$ 26 $ - $ - $ 26
====== ======= ======= ======
Non-current investments:
Equity securities $ 30 $ - $ (18) $ 12
====== ======= ====== ======
1996
Kiewit Mutual Fund:
Short-term government $ 22 $ - $ - $ 22
Intermediate term bond 10 - - 10
Tax exempt 9 - - 9
U.S. debt securities 13 - - 13
----- ------ ------ ------
$ 54 $ - $ - $ 54
===== ====== ====== ======
Non-current investments:
Equity securities $ 30 $ - $ (2) $ 28
===== ===== ===== ======
For debt securities, amortized costs do not vary significantly from principal
amounts. Realized gains and losses on sales of marketable securities were
each less than $1 million in 1997, 1996 and 1995.
The contractual maturities of the debt securities are as follows:
Amortized Cost Fair Value
U.S. debt securities:
less than 1 year $ 6 $ 6
1-5 years 8 8
------- --------
$ 14 $ 14
======= ========
Maturities for the mutual fund and equity securities have not been presented
as they do not have a single maturity date.
Long-term Debt
The fair value of debt was estimated using the incremental borrowing rates of
the Group for debt of the same remaining maturities and approximates the
carrying amount.
(7) Retainage on Construction Contracts
Receivables at December 27, 1997 and December 28, 1996 include approximately
$88 million and $86 million of retainage on uncompleted projects, the
majority of which is expected to be collected within one year. Included in
accounts receivable are $44 million and $53 million of securities which
are being held by the owners of various construction projects in lieu of
retainage. These securities are carried at fair value which is determined
based on quoted market prices for the securities on hand or for similar
investments. Net unrealized holding gains and losses, if any, are reported as
a separate component of stockholders' equity, net of tax.
(8) Investment in Construction Joint Ventures
The Group has entered into a number of construction joint venture
arrangements. Under these arrangements, if one venturer is financially
unable to bear its share of the costs, the other venturers will be required
to pay those costs.
Summary joint venture financial information follows:
Financial Position (dollars in millions) 1997 1996
Total Joint Ventures
Current assets $ 659 $ 435
Other assets (principally construction equipment) 123 47
------ ------
782 482
Current liabilities (515) (347)
------ ------
Net assets $ 267 $ 135
====== ======
Group's Share
Equity in net assets $ 156 $ 73
Receivable from joint ventures 20 18
------ ------
Investment in construction joint ventures $ 176 $ 91
====== ======
Operations (dollars in millions) 1997 1996 1995
Total Joint Ventures
Revenue $ 1,490 $ 1,370 $ 1,211
Costs 1,332 1,201 1,108
-------- ------- --------
Operating income $ 158 $ 169 $ 103
======== ======= ========
Group's Share
Revenue $ 786 $ 689 $ 691
Costs 690 621 625
------- ------ -------
Operating income $ 96 $ 68 $ 66
======= ====== =======
(9) Other Assets
Other assets consist of the following at December 27, 1997 and
December 28, 1996:
(dollars in millions) 1997 1996
ME Holding Inc. $ - $ 33
Equity securities of Kinross Gold Corporation
(Note 6) 12 28
Aker-Gulf Marine 18 15
Goodwill 23 15
Deferred income taxes 12 2
Other 22 16
------ -------
$ 87 $ 109
====== =======
Other assets include marketable equity securities classified as non-current,
an equity method investment in a partnership which fabricates offshore oil
platforms, and the net goodwill recognized in the APAC, ME Holdings and
other acquisitions. In 1997 ME Holding is accounted for as a consolidated
subsidiary. In 1996, ME Holding was accounted for using the equity method.
(10) Long-Term Debt
At December 27, 1997 and December 28, 1996, long-term debt consisted of a
portion of PKS' notes to former stockholders which have been allocated to
the Group and the Diversified Group and convertible debentures as follows:
(dollars in millions) 1997 1996
6.25%-8.75% Convertible debentures, 2003-2007 $ 13 $ 10
BICC Cables Corp. Note 6 -
ME Holdings Note 5 -
Stockholder notes and other 3 2
------ ------
27 12
Less current portion 5 -
------ ------
$ 22 $ 12
====== ======
The convertible debentures are convertible during October of the fifth year
preceding their maturity date. Each annual series may be redeemed in its
entirety prior to the due date except during the conversion period.
Debentures were converted into 51,314 and 59,935 shares of Class C Stock in
1997 and 1995, respectively. At December 27, 1997, 478,394 shares of Class
C Stock are reserved for future conversions.
In 1997, ME Holding borrowed $6 million from BICC Cables Corp. ("BICC").
BICC is affiliated with a joint venture partner of ME Holding. The note is
payable in full in 1999 and requires quarterly interest payments at a rate
equal to one month LIBOR. The proceeds from the note were used for working
capital requirements.
In 1997, the Group issued a note payable in the amount of $5 million, payable
on demand to the minority shareholder, as part of the ME Holding acquisition.
The note and accrued interest were paid on January 5, 1998.
Scheduled maturities of long-term debt through 2002 are as follows
(in millions): 1998 - $5; 1999 - $7; 2000 - $1; 2001 - $1 and $- in 2002.
(11) Income Taxes
An analysis of the (provision) benefit for income taxes relating to earnings
for the three years ended December 27, 1997 follows:
(dollars in millions) 1997 1996 1995
Current:
U.S. federal $ (88) $ (62) $ (58)
Foreign (9) (5) 4
State (10) (11) (6)
------- ------- ------
(107) (78) (60)
Deferred:
U.S. federal 1 7 6
Foreign (1) (3) (7)
State - 2 1
------- ------- ------
- 6 -
------- ------- ------
$ (107) $ (72) $ (60)
======= ======= ======
The United States and foreign components of earnings, for tax reporting
purposes, before income taxes follows:
(dollars in millions) 1997 1996 1995
United States $ 226 $ 155 $ 159
Foreign 36 25 5
------- ------- -------
$ 262 $ 180 $ 164
======= ======= =======
A reconciliation of the actual (provision) benefit for income taxes and the
tax computed by applying the U.S. federal rate (35%) to the earnings before
income taxes for the three years ended December 27, 1997 follows:
(dollars in millions) 1997 1996 1995
Computed tax at statutory rate $ (92) $ (63) $ (57)
State income taxes (8) (6) (8)
Prior year tax adjustments (5) (4) 5
Other (2) 1 -
------- ------ -------
$ (107) $ (72) $ (60)
======= ====== =======
Possible taxes, beyond those provided, on remittances of undistributed
earnings of foreign subsidiaries, are not expected to be material.
The components of the net deferred tax assets for the years ended December
27, 1997 and December 28, 1996 were as follows:
(dollars in millions) 1997 1996
Deferred tax assets:
Construction accounting $ 24 $ 15
Investments in construction joint ventures 26 30
Insurance claims 31 32
Compensation - retirement benefits 8 6
Other 7 10
------ ------
Total deferred tax assets 96 93
Deferred tax liabilities:
Investments in securities 1 7
Other 22 20
------ ------
Total deferred tax liabilities 23 27
------ ------
Net deferred tax assets $ 73 $ 66
====== ======
(12) Employee Benefit Plans
The Group makes contributions, based on collective bargaining agreements
related to its construction operations, to several multi-employer union
pension plans. These contributions are included in the cost of revenue.
Under federal law, the Group may be liable for a portion of future plan
deficiencies; however, there are no known deficiencies.
Substantially all employees of the Group are covered under the Group's profit
sharing plans. The expense related to these plans was $5 million in 1997 and
$3 million in 1996 and 1995.
(13) Stockholders' Equity
Ownership of the Class C Stock is restricted to certain employees conditioned
upon the execution of repurchase agreements which restrict the employees from
transferring the stock. PKS is generally committed to purchase all Class C
Stock at the amount computed pursuant to the Certificate of Incorporation.
Issuances and repurchases of common shares, including conversions, for the
three years ended December 27, 1997 were as follows:
Class C
Stock
Shares issued in 1995 1,021,875
Shares repurchased in 1995 6,228,934
Shares issued in 1996 896,604
Shares repurchased in 1996 770,368
Shares issued in 1997 893,924
Shares repurchased in 1997 1,768,222
(14) Industry and Geographic Data
The Group's operations are primarily conducted in one business segment;
construction contracting. The following is derived from geographic
information in the PKS consolidated financial statements as it relates to the
Group.
Geographic Data (dollars in millions) 1997 1996 1995
Revenue:
United States $ 2,594 $ 2,017 $ 2,007
Canada 90 175 237
Other 80 111 86
------- ------- -------
$ 2,764 $ 2,303 $ 2,330
======= ======= =======
Operating earnings:
United States $ 153 $ 86 $ 70
Canada 10 7 7
Other 27 14 10
------- ------- ------
$ 190 $ 107 $ 87
======= ======= ======
Identifiable assets:
United States $ 1,230 $ 924 $ 866
Canada 94 92 90
Other 17 22 20
------- ------ ------
$ 1,341 $1,038 $ 976
======= ====== ======
(15) Related Party Transaction
The Group performs certain mine management services for the Diversified Group.
The income from these services was $32 million in 1997, $37 million in 1996
and $30 million in 1995 and is recorded in other income in the statements
of earnings.
(16) Other Matters
In June 1995, the Group exchanged its interest in a wholly-owned subsidiary
involved in gold mining activities for 4,000,000 common shares of Kinross
Gold Corporation, a publicly traded corporation. The Group recognized a $21
million pre-tax gain on the exchange based on the difference between the
book value of the subsidiary and the fair market value of the Kinross stock on
the date of the transaction.
The Group is involved in various lawsuits and claims 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.
The Group leases various buildings and equipment under both operating and
capital leases. Minimum rental payments on buildings and equipment subject
to noncancellable operating leases during the next 23 years aggregate $18
million.
It is customary in the Group's industry to use various financial instruments
in the normal course of business. These instruments include items such as
letters of credit. Letters of credit are conditional commitments issued on
behalf of the Group in accordance with specified terms and conditions. The
Group has informal arrangements with a number of banks to provide such
commitments. As of December 27, 1997, the Group had outstanding letters of
credit of approximately $125 million.
(17) Subsequent Events
On December 31, 1997, the convertible debentures issued from 1993-1996 were
converted to equity as part of the reorganization. In conjunction with this
transaction, the Group provided non-interest bearing loans to the debenture
holders for a period equal to the original terms of the debentures.
In January 1998, approximately 2.3 million shares of Class C Stock, with a
redemption value of $122 million, were converted into approximately 10.5
million shares of Class D Stock. During the first quarter of 1998, the Group
also repurchased $25 million of stock from Class C stockholders. In order
to partially fund these financing activities, the Group incurred short-term
borrowings of $20 million in January, 1998. The Group expects to repay
these borrowings during the first half of 1998.
SCHEDULE II
KIEWIT CONSTRUCTION & MINING GROUP
Valuation and Qualifying Accounts and Reserves
Additions Amounts
Balance Charged to Charged Balance
Beginning Costs and to End of
(dollars in millions) of Period Expenses Reserves Other Period
Year ended December 27, 1997
Allowance for doubtful
trade accounts $ 17 $ 3 $ (11) $ - $ 9
Reserves:
Insurance claims 81 7 (12) - 76
Year ended December 28, 1996
Allowance for doubtful
trade accounts $ 10 $ 12 $ (5) $ - $ 17
Reserves:
Insurance claims 79 22 (20) - 81
Year ended December 30, 1995
Allowance for doubtful
trade accounts $ 7 $ 5 $ (2) $ - $ 10
Reserves:
Insurance claims 75 18 (14) - 79
TABLE OF CONTENTS
Business Description
Market for Common Equity and Related Stockholder Matters
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and
Results of
Operations
Financial Statements and Supplementary Data
Level 3 COMMUNICATIONS, INC.
Level 3 Communications, Inc. ("Level 3") is engaged in the
information services, telecommunications and coal mining
businesses. Level 3 is a wholly owned subsidiary of Peter Kiewit
Sons', Inc. ("PKS" or the "Company"). Level 3 is a Delaware
corporation that was incorporated in 1985. The Company has two
principal classes of common stock, Class C Construction & Mining
Group Restricted Redeemable Convertible Exchangeable Common
Stock, par value $.0625 per share (the "Class C stock") and Class
D Diversified Group Convertible Exchangeable Common Stock par
value $.0625 per share (the Class D stock"). The value of Class
C stock is linked to the Company's construction and materials
operations (the "Construction Group"). The value of Class D
stock is linked to the operations of Level 3 (the "Diversified
Group"), under the terms of the Company's charter (see Item 5
below). All Class C shares and historically most Class D shares
have been owned by current and former employees of the Company
and their family members. The Company was incorporated in
Delaware in 1941 to continue a construction business founded in
Omaha, Nebraska in 1884. The Company entered the coal mining
business in 1943 and the telecommunications business in 1988. In
1995, the Company distributed to its Class D stockholders all of
its shares of MFS Communications Company, Inc. ("MFS") (which
was later acquired by WorldCom, Inc.). Through subsidiaries, the
Company owns 48.5% of the common stock of Cable Michigan, Inc.,
48.4% of Commonwealth Telephone Enterprises, Inc., formerly known
as C-TEC Corporation ("C-TEC") and 46.1% of RCN Corporation
(collectively, the "C-TEC Companies"), the three companies that
resulted from the restructuring of C-TEC, which was completed in
September 1997. RCN Corporation, Cable Michigan, Inc. and
Commonwealth Telephone Enterprises, Inc. are publicly traded
companies and more detailed information about each of them is
contained in their separate Annual Reports on Form 10-K. Prior
to January 2, 1998, the Company was also engaged in the
alternative energy business through its ownership of 24% of the
voting stock of CalEnergy Company, Inc. ("CalEnergy") and certain
international development projects in conjunction with CalEnergy.
On December 8, 1997, the Company's stockholders ratified the
decision of the Company's Board of Directors (the "PKS Board") to
separate the business conducted by the Construction Group and the
business conducted by the Diversified Group (collectively, the
"Business Groups") into two independent companies. In connection
with the consummation of this transaction, the PKS Board declared
a dividend of eight-tenths of one share of the Company's newly
created Class R Convertible Common Stock, par value $.01 per
share ("Class R stock") with respect to each outstanding share of
Class C stock. The Class R stock is convertible in shares of
Class D stock pursuant to a defined formula. In addition, the
Company has announced that effective March 31, 1998, the Company,
through a resolution of the PKS Board, shall cause each
outstanding share of Class C stock to be mandatorily exchanged
(the "Share Exchange") pursuant to provisions of the PKS Restated
Certificate of Incorporation (the "PKS Certificate") for one
outstanding share of Common Stock, par value $.01 per share, of
PKS Holdings, Inc. ("PKS Holdings"), a recently formed, direct,
wholly owned subsidiary of PKS, to which the eight-tenths of one
share of Class R Stock would attach (collectively, the
"Transaction"). In connection with the consummation of the
Transaction, the Company will change its name to Level 3
Communications, Inc. and PKS Holdings, Inc. will change its name
to Peter Kiewit Sons', Inc. The Company has announced that the
PKS Board has approved in principle a plan to force conversion of
all 6,538,231 shares of Class R Stock outstanding. Due to
certain provisions of the Class R stock, conversion will not be
forced prior to May 1998, and the final decision to force
conversion would be made at that time. The decision may be made
not to force conversion if it were decided that conversion is not
in the best interest of the then stockholders of the Company.
The Transaction is intended to separate the Business Groups
into two independent companies. The PKS Board believes that
separation of the Business Groups will (i) permit Level 3 to
attract and retain the senior management and employees needed to
implement and develop Level 3's expansion plan (which is
discussed below), (ii) enable Level 3 to access the capital
markets in order to fund its expansion plan on more advantageous
terms than would be available to Level 3 as part of the Company,
(iii) enable Level 3 to pursue strategic investments and
acquisitions, as part of the expansion plan, which could be
foreclosed to Level 3 as part of the Company and (iv) allow the
directors and management of each Business Group to focus their
attention and financial resources on that Business Group's
business. Except for the anticipated effect of the Transaction
on the management of the construction business, the PKS Board
does not believe that the Transaction will have any other
significant effect on the construction business.
For 1997, Level 3 reports financial information about three
business segments: coal mining, energy generation and
distribution, and telecommunications. Additional financial
information about these segments, including revenue, operating
earnings, equity earnings, identifiable assets, capital
expenditures and depreciation, depletion and amortization, as
well as foreign operations information, is contained in Note 3 to
the Level 3's consolidated financial statements.
LEVEL 3 COMMUNICATIONS, INC.
Level 3 engages in the information services,
telecommunications, coal mining and energy businesses, through
ownership of operating subsidiaries, joint venture investments
and ownership of substantial positions in public companies.
Level 3 also holds smaller positions in a number of development
stage or startup ventures.
INFORMATION SERVICES
PKS Information Services, Inc. ("PKSIS") is a full service
information technology company that provides computer operations
outsourcing and systems integration services to customers located
throughout the United States as well as abroad. Utilizing all
computing environments from mainframes to client/server
platforms, PKSIS offers custom-tailored computer outsourcing
services. PKSIS also provides network and systems integration
and network management services for various computer platforms.
In addition, PKSIS develops, implements and supports applications
software. Through its subsidiary NET Twenty-One, Inc., PKSIS'
strategy is to focus on assisting its customers in "Web-enabling"
legacy software applications, that is, migrating computer
applications from closed computing and networking environments to
network platforms using Transmission Control Protocol/Internet
Protocol ("TCP/IP") technology that are then accessed using Web
browsers.
The computer outsourcing services offered by PKSIS through
its subsidiary PKS Computer Services, Inc. include networking and
computing services necessary both for older mainframe-based
systems and newer client/server-based systems. PKSIS provides
its outsourcing services to clients that desire to focus their
resources on core businesses, rather than expending capital and
incurring overhead costs to operate their own computing
environment. PKSIS believes that it is able to utilize its
expertise and experience, as well as operating efficiencies, to
provide its outsourcing customers with levels of service equal to
or better than those achievable by the customer itself, while at
the same time reducing the customer's cost for such services.
This service is particularly useful for those customers moving
from older computing platforms to more modern client/server
networks.
PKSIS' systems integration services help customers define,
develop and implement cost-effective information services. In
addition, through PKS Systems Integration, Inc., PKSIS offers
reengineering services that allow companies to convert older
legacy software systems to modern networked computing systems,
with a focus on reengineering software to enable older software
application and data repositories to be accessed by Hypertext
Markup Language (HTML)-based browsers ("Web browsers") over the
Internet or over private or limited access TCP/IP networks.
PKSIS, through its Suite 2000-SM line of services, provides
customers with a multi-phased service for converting programs and
application so that date-related information is accurately
processed and stored before and after the year 2000. Through the
process of converting a customer's legacy software for year 2000
compliance, PKSIS is able to provide additional insight and
advice to further stream-line and improve the customer's
information systems.
PKSIS has established a software engineering facility at the
National Technology Park in Limerick, Ireland, to undertake:
large scale development projects; system conversions; and code
restructuring and software re-engineering. PKSIS has also
established relationships with domestic and international
partners to provide such activities as well as establishing
recently a joint venture in India.
PKSIS' subsidiary, LexiBridge Corporation of Shelton,
Connecticut, provides customers with a combination of workbench
tools and methodology that provide a complete strategy for
converting mainframe-based application systems to client/server
architecture, while at the same time ensuring year 2000
compliance.
In 1997, 93% of PKSIS' revenue was from external customers
and the remainder was from affiliates.
Level 3 recently has determined to increase substantially
the emphasis it places on and the resources devoted to its
information services business, with a view to becoming a
facilities-based provider (that is, a provider of information
services that owns or leases a substantial portion of the plant,
property and equipment necessary to provide those services) of a
broad range of integrated information services to business (the
"Expansion Plan"). Pursuant to the Expansion Plan, Level 3
intends to expand substantially its current information services
business, through both the expansion of the business of PKSIS and
the creation, through a combination of construction, purchase and
leasing of facilities and other assets, of a substantial,
facilities-based communications network that utilizes Internet
Protocol or IP technology.
In order to grow and expand substantially the information
services it provides, Level 3 has developed a comprehensive plan
to construct, purchase and lease local and backbone facilities
necessary to provide a wide range of communications services over
a network that uses Internet Protocol based technology. These
services include:
A number of business-oriented communications services
using a combination of network facilities Level 3 would
construct, purchase and lease from third parties, which services may
include fax services that are transmitted in part over an Internet
Protocol network and are offered at a lower price than public
circuit- switched telephone network-based fax service and voice
message storing and forwarding that are transmitted in part
over the same Internet Protocol technology based network; and
After construction, purchase and lease of local and
backbone facilities, a range of Internet access services at
varying capacity levels and, as technology development allows, at
specified levels of quality of service and security.
Level 3 believes that, over time, a substantial number of
businesses will convert existing computer application systems
(which run on standalone or networked computing platforms
utilizing a wide variety of operating systems, applications and
data repositories) to computer systems that communicate using
Internet Protocol and are accessed by users employing Web
browsers. Level 3 believes that such a conversion will occur for
the following reasons:
Internet Protocol has become a de facto networking
standard supported by numerous hardware and software vendors
and, as such, provides a common protocol for connecting computers
utilizing a wide variety of operating systems;
Web browsers can provide a standardized interface to
data and applications and thus help to minimize costs of
training personnel to access and use these resources; and
As a packet-switched technology, in many instances,
Internet Protocol utilizes network capacity more efficiently
than the circuit-switched public telephone network.
Consequently, certain services provided over an Internet Protocol
network maybe less costly than the same services provided over public
switched telephone network.
Level 3 further believes that businesses will prefer to
contract for assistance in making this conversion with those
vendors able to provide a full range of services from initial
consulting to Internet access with requisite quality and security
levels.
Pursuant to the Expansion Plan, Level 3's strategy will be
to attempt to meet this customer need by: (i) growing and
expanding its existing capabilities in computer network systems,
consulting, outsourcing, and software reengineering, with
particular emphasis on conversion of legacy software systems to
systems that are compatible with Internet Protocol networks and
Web browsers access; and (ii) creating a national end-to-end
Internet Protocol based network through a combination of
construction, purchase and leasing of assets. Level 3 intends to
optimize its international network to provide Internet based
communications services to businesses at low cost and high
quality, and to design its network, to the extent possible, to
more readily include future technological upgrades than older,
less flexible networks owned by competitors.
To implement its strategy, Level 3 has formulated a long
term business plan that provides for the development of an end-to-
end network optimized for the Internet Protocol. Initially,
Level 3 will offer its services over facilities, both local and
national, that are in part leased from third parties to allow for
the offering of services during the construction of its own
facilities. Over time, it is anticipated that the portion of
Level 3's network that includes leased facilities will decrease
and the portion of facilities that have been constructed, and are
owned, by Level 3 will increase. Over the next 4 to 6 years, it
is anticipated that the Level 3 network will encompass local
facilities in approximately 40 North American markets, leased
backbone facilities in approximately 10 additional North American
markets, a national or inter-city network covering approximately
15,000 miles, the establishment of local facilities in
approximately 10 European and 4 Asian markets and an inter-city
network covering approximately 2,000 miles across Europe. Level
3 intends to design and construct its inter-city network using
multiple conduits. Level 3 believes that the spare conduits will
allow it to deploy future technological innovations and expand
capacity without incurring significant overbuild costs. The
foregoing description of the Level 3 network and the Expansion
Plan constitutes a forward-looking statement. The actual
configuration of the network, including the number of markets
served and the expanse of the inter-city networks will depend on
a variety of factors including Level 3's ability to: access
markets; design fiber optic network backbone routes; attract and
retain qualified personnel; design, develop and deploy enterprise
support systems that will allow Level 3 to build and operate a
packet switched network that interconnects with the public
switched network, install fiber optic cable and facilities;
obtain rights-of-way, building access rights, unbundled loops and
required government authorizations, franchises and permits; and
to negotiate interconnection and peering agreements.
The operations to be conducted as a result of the Expansion
Plan will be subject to extensive federal and state regulation.
Federal laws and Federal Communications Commission regulations
apply to interstate telecommunications while state regulatory
authorities exercise jurisdiction over telecommunications both
originating and terminating within a state. Generally,
implementation of the Expansion Plan will require obtaining and
maintaining certificates of authority from regulatory bodies in
most states where services are to be offered.
With respect to the Expansion Plan, Level 3 is devoting
substantially more management time and capital resources to its
information services business with a view to making the
information services business, over time, the principal business
of Level 3. In that respect, the management of Level 3 has been
conducting a comprehensive review of the existing Level 3
businesses to determine how those businesses will complement
Level 3's focus on information services businesses as a result of
the Expansion Plan. For example, the management of Level 3
negotiated the sale of its energy interests (see "- CalEnergy"
below) because it believed that the ongoing ownership by Level 3
of an interest in an energy businesses was not compatible with
its focus on the information services business, and because sale
of those assets provided a substantial portion of the money
necessary to fund the early stages of the Expansion Plan.
In addition, the Construction Group and Level 3 are
currently discussing a restructuring of the current mine
management arrangement between the two Business Groups. Level 3
also is reviewing its involvement in a number of start-up and
development stage businesses and recently completed the sale of
its interest in United Infrastructure Company ("UIC"). Level 3
is also currently discussing with the Construction Group the sale
of Kiewit Investment Management Corp. to the Construction Group.
Level 3 has no current intention, however, to sell, dispose or
otherwise alter its ownership interest in the C-TEC Companies.
C-TEC COMPANIES
On September 30, 1997, C-TEC completed a tax-free
restructuring, which divided C-TEC into three public companies: C-
TEC, which changed its name to Commonwealth Telephone
Enterprises, Inc. ("Commonwealth Telephone"), RCN Corporation
("RCN") and Cable Michigan, Inc. ("Cable Michigan").
Businesses of the C-TEC Companies. Commonwealth Telephone
owns the following businesses: Commonwealth Telephone Company
(the rural local exchange carrier business); Commonwealth
Communications (the communications engineering business); the
Pennsylvania competitive local exchange carrier business; and
long distance operations in certain areas of Pennsylvania. RCN
owns the following businesses: its competitive
telecommunications services operations in New York City and
Boston; its cable television operations in New York, New Jersey
and Pennsylvania; its 40% interest in Megacable S.A. de C.V.,
Mexico's second largest cable operator; and its long distance
operations (other than the operations in certain areas of
Pennsylvania). Cable Michigan owns and operates cable television
systems in the State of Michigan and owns a 62% interest in
Mercom, Inc., a publicly held Michigan cable television operator.
Ownership of the C-TEC Companies. In connection with the
restructuring and as a result of the conversion of certain shares
of C-TEC held by Level 3, Level 3 now holds 13,320,485 shares of
RCN common stock, 3,330,119 shares of Cable Michigan common
stock, and 8,880,322 shares of Commonwealth Telephone common
stock. Such ownership represents 48.5% of the outstanding common
stock of Cable Michigan, 48.4% of the outstanding common stock of
Commonwealth Telephone and 46.1% of the outstanding common stock
of RCN.
Each of the shares of RCN common stock, Cable Michigan
common stock and Commonwealth Telephone Common Stock is traded on
the National Association of Securities Dealers, Inc.'s National
Market (the "Nasdaq National Market").
In its filings with the Securities and Exchange Commission,
the board of directors of C-TEC concluded that the distributions
were in the best interests of the shareholders because the
distributions will, among other things, (i) permit C-TEC to raise
financing to fund the development of the RCN business on more
advantageous economic terms than the other alternatives
available, (ii) facilitate possible future acquisitions and joint
venture investments by RCN and Cable Michigan and possible future
offerings by RCN, (iii) allow the management of each company to
focus attention and financial resources on its respective
business and permit each company to offer employees incentives
that are more directly linked to the performance of its
respective business, (iv) facilitate the ability of each company
to grow in both size and profitability, and (v) permit investors
and the financial markets to better understand and evaluate C-
TEC's various businesses.
Accounting Method. Since the ownership by Level 3 of the
equity and voting rights of each of RCN, Cable Michigan and
Commonwealth Telephone at the end of 1997 was less than 50%,
under generally accepted accounting principles, Level 3 uses the
equity method to account for its investments in each of these
companies. Under the equity method, Level 3 reports its
proportionate share of each of Commonwealth Telephone's, RCN's
and Cable Michigan's earnings, even though it has received no
dividends from those companies. Level 3 keeps track of the
carrying value of its investment in each of the C-TEC Companies.
"Carrying value" is the purchase price of the investment, plus
the investor's proportionate share of the investee's earnings,
less the amortized portion of goodwill, less any dividends paid.
Level 3 purchased its C-TEC Companies shares at a premium over
the book value of the underlying net assets. This premium is
being amortized over a period of between 30 to 40 years. At
December 27, 1997 the carrying value of Level 3's Commonwealth
Telephone shares was $75 million, RCN shares was $214 million and
Cable Michigan shares was $46 million.
Description of the C-TEC Companies. RCN is developing
advanced fiber optic networks to provide a wide range of
telecommunications services including local and long distance
telephone, video programming and data services (including high
speed Internet access), primarily to residential customers in
selected markets in the Boston to Washington, D.C. corridor.
Cable Michigan is a cable television operator in the State of
Michigan which, as of December 31, 1997, served approximately
204,000 subscribers. These figures include the approximately
42,000 subscribers served by Mercom, a 62% owned subsidiary of
Cable Michigan. Clustered primarily around the Michigan
communities of Grand Rapids, Traverse City, Lapeer and Monroe
(Mercom), Cable Michigan's systems serve a total of approximately
400 municipalities in suburban markets and small towns.
Commonwealth Telephone Company is a Pennsylvania public utility
providing local telephone service to a 19 county, 5,067 square
mile service territory in Pennsylvania. The telephone company
services approximately 259,000 main access lines. The company
also provides network access, long distance, and billing and
collection services to interexchange carriers. The telephone
company's business customer base is diverse in size as well as
industry, with very little concentration. Commonwealth Long
Distance operates principally in Pennsylvania, providing switched
services and resale of several types of services, using the
networks of several long distance providers on a wholesale basis.
Commonwealth Communications Inc. provides telecommunications
engineering and facilities management services to large corporate
clients, hospitals and universities throughout the Northeastern
United States and sells, installs and maintains PBX systems in
Pennsylvania and New Jersey. In January 1995, C-TEC purchased a
40% equity position in Megacable, Mexico's second largest cable
television operator, serving approximately 174,000 subscribers in
12 cities.
For more information on the business of each of RCN, Cable
Michigan and Commonwealth Telephone, please see the individual
filings of Annual Reports on Form 10-K for each of such companies
as filed with the Securities and Exchange Commission.
COAL MINING
Level 3 is engaged in coal mining through its subsidiary,
Kiewit Coal Properties Inc. ("KCP"). KCP has a 50% interest in
three mines, which are operated by KCP. Decker Coal Company
("Decker") is a joint venture with Western Minerals, Inc., a
subsidiary of The RTZ Corporation PLC. Black Butte Coal Company
("Black Butte") is a joint venture with Bitter Creek Coal
Company, a subsidiary of Union Pacific Resources Group Inc.
Walnut Creek Mining Company ("Walnut Creek") is a general
partnership with Phillips Coal Company, a subsidiary of Phillips
Petroleum Company. The Decker mine is located in southeastern
Montana, the Black Butte mine is in southwestern Wyoming, and the
Walnut Creek mine is in east-central Texas.
Production and Distribution. The coal mines use the surface
mining method. During surface mining operations, topsoil is
removed and stored for later use in land reclamation. After
removal of topsoil, overburden in varying thicknesses is stripped
from above coal seams. Stripping operations are usually conducted
by means of large, earth-moving machines called draglines, or by
fleets of trucks, scrapers and power shovels. The exposed coal
is fractured by blasting and is loaded into haul trucks or onto
overland conveyors for transportation to processing and loading
facilities. Coal delivered by rail from Decker originates on the
Burlington Northern Railroad. Coal delivered by rail from Black
Butte originates on the Union Pacific Railroad. Coal is also
hauled by trucks from Black Butte to the nearby Jim Bridger Power
Plant. Coal is delivered by trucks from Walnut Creek to the
adjacent facilities of the Texas-New Mexico Power Company.
Customers. The coal produced from the KCP mines is sold
primarily to electric utilities, which burn coal in order to
produce steam to generate electricity. Approximately 89% of
sales are made under long-term contracts, and the remainder are
made on the spot market. Approximately 79%, 80% and 80% of KCP's
revenues in 1997, 1996 and 1995, respectively, were derived from
long-term contracts with Commonwealth Edison Company (with Decker
and Black Butte) and The Detroit Edison Company (with Decker).
The primary customer of Walnut Creek is the Texas-New Mexico
Power Company.
Contracts. Customers enter into long-term contracts for
coal primarily to secure a reliable source of supply at a
predictable price. KCP's major long-term contracts have
remaining terms ranging from 1 to 30 years. A majority of KCP's
long-term contracts provide for periodic price adjustments. The
price is typically adjusted through the use of various indices
for items such as materials, supplies, and labor. Other portions
of the price are adjusted for changes in production taxes,
royalties, and changes in cost due to new legislation or
regulation. In most cases, these cost items are directly passed
through to the customer as incurred. In most cases the price is
also adjusted based on the heating content of the coal.
Decker has a sales contract with Detroit Edison Company that
provides for the delivery of a minimum of 36 million tons of low
sulphur coal during the period 1998 through 2005, with annual
shipments ranging from 5.2 million tons in 1998 to 1.7 million
tons in 2005.
KCP and its mining ventures have entered into various
agreements with Commonwealth Edison Company ("Commonwealth"),
which stipulate delivery and payment terms for the sale of coal.
The agreements as amended provide for delivery of 88 million tons
during the period 1998 through 2014, with annual shipments
ranging from 1.8 million tons to 13.1 million tons. These
deliveries include 15 million tons of coal reserves previously
sold to Commonwealth. Since 1993, the amended contract between
Commonwealth and Black Butte provides that Commonwealth's
delivery commitments will be satisfied, not with coal produced
from the Black Butte mine, but with coal purchased from three
unaffiliated mines in the Powder River Basin of Wyoming. The
contract amendment allows Black Butte to purchase alternate
source coal at a price below its production costs, and to pass
the cost savings through to Commonwealth while maintaining the
profit margins available under the original contract.
The contract between Walnut Creek and Texas-New Mexico Power
Company provides for delivery of between 42 and 90 million tons
of coal during the period 1989 through 2027. The actual tons
provided will depend on the number of power units constructed and
operated by TNP. The maximum amount KCP is expecting to ship in
any one year is between 1.6 and 3.2 million tons.
KCP also has other sales commitments, including those with
Sierra Pacific, Idaho Power, Solvay Minerals, Pacific Power &
Light, Minnesota Power, and Mississippi Power, that provide for
the delivery of approximately 13 million tons through 2005.
Coal Production. Coal production began at the Decker, Black
Butte, and Walnut Creek mines in 1972, 1979, and 1989,
respectively. KCP's share of coal mined in 1997 at the Decker,
Black Butte, and Walnut Creek mines was 5.9, 1.0, and .9 million
tons, respectively.
Revenue. KCP's total revenue in 1997 was $222 million.
Revenue attributable to the Decker, Black Butte, and Walnut Creek
entities was $114 million, $89 million, and $17 million,
respectively.
Under a 1992 mine management agreement, KCP pays a KCG
subsidiary an annual fee equal to 30% of KCP's adjusted operating
income. The fee in 1997 was $32 million.
Backlog. At the end of 1997, the backlog of coal to be sold
under KCP's long-term contracts was approximately $1.4 billion,
based on December 1997 market prices. Of this amount, $213
million is expected to be sold in 1998.
Reserves. At the end of 1997, KCP's share of assigned coal
reserves at Decker, Black Butte, and Walnut Creek was 111, 39,
and 31 million tons, respectively. Of these amounts, KCP's share
of the committed reserves of Decker, Black Butte, and Walnut
Creek was 46, 2, and 23 million tons, respectively. Assigned
reserves represent coal that can be mined using KCP's current
mining practices. Committed reserves (excluding alternate source
coal) represent KCP's maximum contractual amounts. These coal
reserve estimates represent total proved and probable reserves.
Leases. The coal reserves and deposits of the mines are
held pursuant to leases with the federal government through the
Bureau of Land Management, with two state governments (Montana
and Wyoming), and with numerous private parties.
Competition. The coal industry is highly competitive. KCP
competes not only with other domestic and foreign coal suppliers,
some of whom are larger and have greater capital resources than
KCP, but also with alternative methods of generating electricity
and alternative energy sources. In 1996, KCP's production
represented 1.5% of total U.S. coal production. Demand for KCP's
coal is affected by economic, political and regulatory factors.
For example, recent "clean air" laws may stimulate demand for low
sulphur coal. KCP's western coal reserves generally have a low
sulphur content (less than one percent) and are currently useful
principally as fuel for coal-fired steam-electric generating
units.
KCP's sales of its western coal, like sales by other western
coal producers, typically provide for delivery to customers at
the mine. A significant portion of the customer's delivered cost
of coal is attributable to transportation costs. Most of the
coal sold from KCP's western mines is currently shipped by rail
to utilities outside Montana and Wyoming. The Decker and Black
Butte mines are each served by a single railroad. Many of their
western coal competitors are served by two railroads and such
competitors' customers often benefit from lower transportation
costs because of competition between railroads for coal hauling
business. Other western coal producers, particularly those in
the Powder River Basin of Wyoming, have lower stripping ratios
(that is, the amount of overburden that must be removed in
proportion to the amount of minable coal) than the Black Butte
and Decker mines, often resulting in lower comparative costs of
production. As a result, KCP's production costs per ton of coal
at the Black Butte and Decker mines can be as much as four and
five times greater than production costs of certain competitors.
KCP's production cost disadvantage has contributed to its
agreement to amend its long-term contract with Commonwealth
Edison Company to provide for delivery of coal from alternate
source mines rather than from Black Butte. Because of these cost
disadvantages, KCP does not expect that it will be able to enter
into long-term coal purchase contracts for Black Butte and Decker
production as the current long-term contracts expire. In
addition, these cost disadvantages may adversely affect KCP's
ability to compete for spot sales in the future.
Environmental Regulation. The Company is required to comply
with various federal, state and local laws and regulations
concerning protection of the environment. KCP's share of land
reclamation expenses in 1997 was $3.6 million. KCP's share of
accrued estimated reclamation costs was $100 million at the end
of 1997. The Company does not expect to make significant capital
expenditures for environmental compliance in 1998. The Company
believes its compliance with environmental protection and land
restoration laws will not affect its competitive position since
its competitors in the mining industry are similarly affected by
such laws.
CALENERGY COMPANY, INC.
CalEnergy develops, owns, and operates electric power
production facilities, particularly those using geothermal
resources, in the United States, the Philippines, and Indonesia.
In December 1996, CalEnergy and Level 3 acquired Northern
Electric plc, an English electric utility company. CalEnergy is
a Delaware corporation formed in 1971 and has its headquarters in
Omaha, Nebraska. CalEnergy common stock is traded on the New
York, Pacific, and London Stock Exchanges. In 1997, CalEnergy
had revenue of $2.3 billion and a net loss of $84 million. At the
end of 1997, CalEnergy had total assets of $7.5 billion, debt of
$3.5 billion, and stockholders' equity of $1.4 billion.
At the end of 1997, Level 3 owned approximately 24% of the
common stock of CalEnergy. Under generally accepted accounting
principles, an investor owning between 20% and 50% of a company's
equity, generally uses the equity method. Under the equity
method, Level 3 reports its proportionate share of CalEnergy's
earnings, even though it has received no dividends from
CalEnergy. Level 3 keeps track of the carrying value of its
CalEnergy investment. "Carrying value" is the purchase price of
the investment, plus the investor's proportionate share of the
investee's earnings, less the amortized portion of goodwill, less
any dividends paid. At December 27, 1997 the carrying value of
Level 3's CalEnergy shares was $337 million. On January 2, 1998,
Level 3 sold its entire interest in CalEnergy along with its
interests in several development projects and Northern Electric
plc. to CalEnergy for approximately $1.16 billion.
OTHER BUSINESSES
SR91 Tollroad. Level 3 has invested $12 million for a 65%
equity interest and $4.3 million loan to California Private
Transportation Company, L.P. which developed, financed, and
currently operates the 91 Express Lanes, a ten mile, four lane
tollroad in Orange County, California. The fully automated
highway uses an electronic toll collection system and variable
pricing to adjust tolls to demand. Capital costs at completion
were $130 million, $110 million of which was funded with limited
recourse debt. Revenue collected over the 35-year franchise
period is used for operating expenses, debt repayment, and profit
distributions. The tollroad opened in December 1995 and achieved
operating break-even in 1996. Approximately 100,000 customers
have registered to use the tollroad and weekday volumes typically
exceed 29,000 vehicles per day.
United Infrastructure Company. UIC was an equal partnership
between Kiewit Infrastructure Corp., a wholly owned subsidiary of
Level 3, and Bechtel Infrastructure Enterprises, Inc.
("Bechtel"). UIC was formed in 1993 to develop North American
infrastructure projects. During 1996, UIC began to focus
primarily on water infrastructure projects, principally through
U.S. Water, a partnership formed with United Utilities PLC, a
U.K. company. As part of the strategic decision to concentrate
on its information services business and the Expansion Plan, on
December 31, 1997 Level 3 sold its entire interest in UIC to
Bechtel for $10 million.
Kiewit Mutual Fund. Kiewit Mutual Fund, a Delaware business
trust and a registered investment company, was formed in 1994.
Initially formed to manage the Company's internal investments,
shares in Kiewit Mutual Fund are now available for purchase by
the general public. The Fund's investors currently include
individuals and unrelated companies, as well as
Company-affiliated joint ventures, pension plans, and
subsidiaries. Kiewit Mutual Fund has six series: Money Market
Portfolio, Government Money Market Portfolio, Short-Term
Government Portfolio, Intermediate-Term Bond Portfolio,
Tax-Exempt Portfolio, and the Equity Portfolio. In February
1997, the Fund adopted a master- feeder structure. Each of the
Portfolios invests in a corresponding series of the Kiewit
Investment Trust, which now manages the underlying securities
holdings. The structure will allow smaller mutual funds and
institutional investors to pool their assets with Kiewit
Investment Trust, providing lower expense ratios for all
participants. The registered investment adviser of Kiewit
Investment Trust is Kiewit Investment Management Corp., a
subsidiary of Level 3 (60%) and KCG (40%). At the end of 1997,
Kiewit Mutual Fund had net assets of $1.3 billion. As part of
the strategic decision to concentrate on its information services
business and the Expansion Plan, it is anticipated that Level 3
will sell its interest in Kiewit Investment Management Corp. to
the Construction Group.
Other. In February 1997, Level 3 purchased an office
building in Aurora, Colorado for $22 million. By investing in
real estate, Level 3 defers taxes on a portion of the $40 million
of taxable gain otherwise recognizable with respect to the
Whitney Benefits litigation settlement in 1995. Level 3 may make
additional real estate investments in 1998 with a view toward
deferring the balance of that taxable gain. Level 3 has also
made investments in several development-stage companies, but does
not expect earnings from these companies in 1998.
GENERAL INFORMATION
Year 2000. PKS Computer Services, Inc., the computer
outsourcing subsidiary of PKSIS, has developed a comprehensive
approach to address the potential operational risks associated
with the Year 2000, and began to implement remediation plans in
1997. As part of its plans PKS Computer Services is: working
with its key suppliers to verify their operational viability
through the Year 2000; reviewing building infrastructure
components that may be affected by the Year 2000 issue, which
components include fire alarms systems, security systems, and
automated building controls; identifying hardware inventories
that are affected by date logic that is not Year 2000 compliant,
which hardware includes mainframe computers, mid-range computers,
micro-computers, and network hardware. To the extent that
vendors identify items that are not Year 2000 compliant, PKS
Computer Services will work with the hardware vendor to develop a
plan that will enable continuous operations through the Year
2000.
PKS Computer Services is responsible for providing an
operating environment in which its customers applications are
run. As a result, PKS Computer Services will confirm the system
software inventories that it is responsible for managing. PKS
Computer Services will then develop a plan with each of its
customers that indicate that they intend to be customers in the
year 2000 to provide for Year 2000 compliance.
PKS Computer Services believes that many of the required
changes for hardware and operating environments will be included
in the costs that are incurred for annual maintenance.
PKS Systems Integration LLC provides a wide variety of
information technology services to its customers. In fiscal year
1997 approximately 80% of the revenue generated by PKSIS related
to projects involving Year 2000 assessment and renovation
services performed by PKS Systems Integration for its customers.
These contracts generally require PKS Systems Integration to
identify date affected fields in certain application software of
its customers and, in many cases, PKS Systems Integration
undertakes efforts to remediate those date-affected fields so
that the applicable applications are able to process date-related
information occurring on or before the Year 2000. Thus, Year
2000 issues affect many of the services PKS Systems Integration
provides to its customers. This exposes PKS Systems Integration
to potential risks that may include problems with services
provided by PKS Systems Integration to its customers and the
potential for claims arising under PKS Systems Integration
customer contracts. PKS Systems Integration attempts to
contractually limit its exposure to liability for Year 2000
compliance issues. However, there can be no assurance as to the
effectiveness of such contractual limitations.
The expenses associated with this project by PKSIS, as well
as the related potential effect on PKSIS's earnings is not
expected to have a material effect on its future operating
results or financial condition. There can be no assurance,
however, that the Year 2000 problem, and any loss incurred by any
customers of PKSIS as a result of the Year 2000 problem will not
materially and adversely affect PKSIS and its business.
Environmental Protection. Compliance with federal, state,
and local provisions regulating the discharge of materials into
the environment, or otherwise relating to the protection of the
environment, has not and is not expected to have a material
effect upon the capital expenditures, earnings, or competitive
position of the Company and its subsidiaries.
Employees. At the end of 1997, the Company and its
majority-owned subsidiaries employed approximately 17,700 people
- - 16,200 in construction and materials operations, 500 by coal
mining companies, 800 at PKSIS, and 200 in corporate and Level 3
positions. This does not include the employees of the C-TEC
Companies.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information. As of December 27, 1997, the Company's
common stock is not listed on any national securities exchange or
the Nasdaq National Market. However, the Class D stock is
currently quoted on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board. During the fourth quarter of
1997, the only quarter during which this trading occurred, the
range of the high and low bid information for the Class D stock
was $24.60 to $29.00. The Company has announced that the common
stock of Level 3 Communications, Inc. (renamed from Peter Kiewit
Sons', Inc. in connection with the Transaction) will begin
trading on the Nasdaq National Market on April 1, 1998.
Company Repurchase Duty. Pursuant to the current terms of
the PKS Certificate, the Company is generally required to
repurchase shares at a formula price upon demand. Under the PKS
Certificate effective January 1992, the Company has three classes
of common stock: Class B Construction & Mining Group Nonvoting
Restricted Redeemable Convertible Exchangeable Common Stock
("Class B"), Class C stock, and Class D stock. There are no
outstanding Class B stock; the last Class B stock were converted
into Class D stock on January 1, 1997. Class C stock can be
issued only to Company employees and can be resold only to the
Company at a formula price based on the year-end book value of
the Construction Group. The Company is generally required to
repurchase Class C stock for cash upon stockholder demand. Class
D stock has a formula price based on the year-end book value of
the Diversified Group. The Company must generally repurchase
Class D stock for cash upon stockholder demand at the formula
price, unless the Class D stock become publicly traded.
Formula values. The formula price of the Class D stock is
based on the book value of Level 3 and its subsidiaries, plus
one-half of the book value, on a stand-alone basis, of the parent
company, PKS. The formula price of the Class C stock is based on
the book value of the Construction Group and its subsidiaries,
plus one-half of the book value of the unconsolidated parent
company. A significant element of the Class C formula price is
the subtraction of the book value of property, plant, and
equipment used in construction activities ($122 million in 1997).
Conversion. Under the PKS Certificate, Class C stock is
convertible into Class D stock at the end of each year. Between
October 15 and December 15 of each year a Class C stockholder may
elect to convert some or all of his or her shares. Conversion
occurs on the following January 1. The conversion ratio is the
relative formula prices of Class C and Class D stock determined
as of the last Saturday in December, that is, the last day in the
Company's fiscal year. Class D stock may be converted into Class
C stock only as part of an annual offering of Class C stock to
employees. Instead of purchasing the offered shares for cash, an
employee owning Class D stock may convert such shares into Class
C stock at the applicable conversion ratio.
Restrictions. Ownership of Class C stock is generally
restricted to active Company employees. Upon retirement,
termination of employment, or death, Class C stock must be resold
to the Company at the applicable formula price, but may be
converted into Class D stock if the terminating event occurs
during the annual conversion period. Class D stock is not
subject to ownership or transfer restrictions.
Dividends and Prices. During 1996 and 1997 the Company
declared or paid the following dividends on its common stock.
The table also shows the stock price after each dividend payment
or other valuation event.
Dividend Dividend
Declared Dividend Paid Per Share Class Price Adjusted Stock Price
Oct. 27, 1995 Jan. 5, 1996 0.50 D Dec. 30, 1995 9.90*
Oct. 25, 1996 Jan. 4, 1997 0.50 D Dec. 28, 1996 10.85*
D Dec. 27, 1997 11.65*
* All stock prices for the Class D stock reflect a dividend of
four shares of Class D stock for each outstanding share of Class
D stock that was effective on December 26, 1997.
The Company's current dividend policy is to pay a regular
dividend on Class C stock of about 15% to 20% of the prior year's
ordinary earnings of the Construction Group, with any special
dividends to be based on extraordinary earnings. Although the
PKS Board announced in August 1993 that the Company did not
intend to pay regular dividends on Class D stock for the
foreseeable future, the PKS Board declared a special dividend of
$0.50 per share of Class D stock in both October 1995 and 1996.
A dividend of 4 shares of Class D Stock for each share of
Class D Stock was effected on December 26, 1997.
Stockholders. On March 15, 1998, and after giving effect to
a dividend of 4 shares of Class D Stock for each outstanding
share of Class D stock effected on December 26, 1997, the Company
had the following numbers of stockholders and outstanding shares
for each class of its common stock:
Class of Stock Stockholders Shares Outstanding
B - -
C 996 7,681,020
D 2,121 146,943,752
Recent Sales of Unregistered Securities. On April 1, 1997,
the Company sold 10,000 shares of Class D stock to Charles Harper
and Robert Daugherty and 8,000 shares of Class D stock to Peter
Kiewit Jr. at a sale price of $49.50 per share. Each of Messrs
Harper, Daugherty and Kiewit are members of the PKS Board of
Directors. The sale was effected pursuant to an exemption from
registration under the Securities Act of 1933 contained in
Section 4(2) of such Act.
SELECTED FINANCIAL DATA
The following selected financial data for each of the years in
the period 1993 to 1997 have been derived from audited financial
statements. The historical financial information for the
Diversified Group and Kiewit Construction & Mining Group
supplements the consolidated financial information of PKS and,
taken together, includes all accounts which comprise the
corresponding consolidated financial information of PKS.
(dollars in millions, Fiscal Year Ended
except per share amounts) 1997 1996 1995 1994 1993
Results of Operations:
Revenue (1) $ 332 $ 652 $ 580 $ 537 $ 267
Earnings from continuing operations 83 104 126 28 174
Net earnings (2) 93 113 140 33 181
Per Common Share:
Earnings from continuing operations
Basic .66 .90 1.17 .27 1.74
Diluted .66 .90 1.17 .27 1.74
Net earnings
Basic .74 .97 1.29 .32 1.82
Diluted .74 .97 1.29 .32 1.81
Dividends (3) - .10 .10 - .10
Stock price (4) 11.65 10.85 9.90 12.05 11.88
Book value 11.65 10.85 9.90 12.07 11.90
Financial Position:
Total assets (1) 2,127 2,504 2,478 3,543 2,756
Current portion of long-term debt (1) 3 57 40 30 11
Long-term debt,less current portion (1) 137 320 361 899 452
Stockholders' equity (5) 1,578 1,257 1,140 1,231 1,191
(1) In October 1993, the Group acquired 35% of the outstanding
shares of C-TEC Corporation that had 57% of the available
voting rights. At December 28, 1996, the Group owned 48% of
the outstanding shares and 62% of the voting rights.
As a result of the C-TEC restructuring, the Group owns less
than 50% of the outstanding shares and voting rights of each
of the three entities, and therefore accounted for each
entity using the equity method in 1997. The Company
consolidated C-TEC from 1993 to 1996.
In September 1995, the Group dividended its investment in MFS to
Class D shareholders. MFS' results of operations have been
classified as a single line item on the statements of
earnings. MFS is consolidated in the 1993 and 1994 balance
sheets.
In January 1994, MFS issued $500 million of 9.375% Senior
Discount Notes.
In September 1997, the Group agreed to sell its energy segment
to CalEnergy Company, Inc. The transaction closed on January
2, 1998.
(2) In 1993, through two public offerings, the Group sold 29% of
MFS, resulting in a $137 million after-tax gain. In 1995 and
1994, additional MFS stock transactions resulted in $2
million and $35 million after-tax gains to the Group and
reduced its ownership in MFS to 66% and 67%.
(3) The 1996, 1995 and 1993 dividends include $.10 for
dividends declared in 1996, 1995 and 1993 but paid in
January of the subsequent year.
(4) Pursuant to the Certificate of Incorporation, the stock price
calculation is computed annually at the end of the fiscal
year.
(5) Unless Class D Stock becomes publicly traded, PKS is
generally committed to purchase all Class D Stock at the
amount computed, in accordance with the Certificate of
Incorporation, when put to PKS by a stockholder. The
aggregate redemption value of the Class D Stock at December
27, 1997 was $1,578 million.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The financial statements of the Diversified Group ("the Group")
include the financial position, results of operations and cash
flows for the businesses of PKS other than its construction and
materials businesses, and include certain PKS corporate assets
and liabilities and related transactions. The Group's share of
corporate assets and liabilities and related transactions
includes amounts to reflect certain financial activities,
corporate general and administrative costs, common stock
transactions and income taxes. See Notes 1 and 6 to the Group's
financial statements.
This document contains forward looking statements and
information that are based on the beliefs of management as well
as assumptions made by and information currently available to the
Group. When used in this document, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions, as
they relate to the Group or its management, are intended to
identify forward-looking statements. Such statements reflect the
current views of the Group with respect to future events and are
subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may
vary materially from those described in this document.
Results of Operations 1997 vs. 1996
Coal Mining. Revenue from the Group's coal mines declined 5%
in 1997 compared to 1996. Alternate source coal revenue declined
by $16 million in 1997. The mines primary customer, Commonwealth
Edison, accelerated its contractual commitments in 1996 for
alternate source coal, thus reducing its obligations in 1997. In
addition to the decline in tonnage shipped, the price of coal
sold to Commonwealth declined 1% in 1997. Revenue attributable
to other contracts increased by approximately $4 million. The
actual amount of coal shipped to these customers increased 5% in
1997, but the price at which it was sold was 4% lower than 1996.
Margin, as a percentage of revenue, declined 11% from 1996 to
1997. Margins in 1996 were higher than normal due to the
additional high margin alternate source coal sold to Commonwealth
in 1996 and the refund of premiums from a captive insurance
company that insured against black lung disease. The decline in
Commonwealth shipments and an overall decline in average selling
price adversely affected the results for 1997. If current market
conditions continue, the Group will experience a decline in coal
revenue and earnings after 1998 as certain long-term contracts
begin to expire.
Information Services. Revenue increased by 124% to $94
million in 1997 from $42 million in 1996. Revenue from computer
outsourcing services increased 20% to $49 million in 1997 from
$41 million in 1996. The increase was due to new computer
outsourcing contracts signed in 1997. Revenue for systems
integration grew to $45 million in 1997 from less than $1 million
in 1996. Strong demand for Year 2000 renovation services fueled
the growth for systems integration's revenues.
Margin, as a percent of revenue, decreased to 28% in 1997 from
41% in 1996 for the computer outsourcing business. The reduction
of the gross margin was due to up-front migration costs
associated with new contracts and significant increases in
personnel costs due to the tightening supply of computer
professionals. Gross margin for the systems integration business
was approximately 40% in 1997. A comparison to 1996 gross margin
is not meaningful due to the start-up nature of the business.
General and Administrative Expenses. Excluding C-TEC,
general and administrative expenses increased 20% to $114 million
in 1997. The increase was primarily attributable to a $41
million increase in the information services business' general
and administrative expenses. The majority of the increase is
attributable to additional compensation expense that was incurred
due to the conversion of a subsidiary's option and SAR plans to the
Class D Stock option plan. The remainder of the increase relates
to the increased expenses for new sales offices established in 1997
for the systems integration business and the additional personnel
hired in 1997 to implement the expansion plan.
Exclusive of the information services business, general and
administrative expenses decreased 26% to $62 million in 1997. A
decrease in professional services and the mine management fees
were partially offset by increased compensation expense. Due to
the favorable resolution of certain environmental and legal
matters, costs that were previously accrued for these issues were
reversed in 1997. Partially offsetting this reduction were
legal, tax and consulting expenses associated with the CalEnergy
transaction and the separation of the Construction and Mining
Group and Diversified Group.
Equity Losses. The losses for the Group's equity investments
increased from $9 million in 1996 to $43 million in 1997. Had
the C-TEC entities been accounted for using the equity method in
1996, the losses would have increased to $13 million. The
expenses associated with the deployment and marketing of the
advanced fiber networks in New York, Boston and Washington D.C.,
and the costs incurred in connection with the buyout of a
marketing contract with minority shareholders are primarily
responsible for the increase in equity losses attributable to RCN
from $6 million in 1996 to $26 million in 1997. The Group's
share of Cable Michigan's losses decreased to $6 million in 1997
from $8 million in 1996. This improvement is attributable to the
gains recognized on the sale of Cable Michigan's Florida cable
systems. Commonwealth Telephone's earnings were consistent with
that of 1996. The Group recorded equity earnings of $9 million
in each year attributable to Commonwealth Telephone. The Group
also recorded equity losses attributable to several developing
businesses.
Investment Income. Investment income increased 7% in 1997
after excluding C-TEC's $14 million of investment income in 1996.
Gains recognized on the sale of marketable securities, primarily
within the Kiewit Mutual Fund ("KMF"), increased from $3 million
in 1996 to $9 million in 1997. In 1997, KMF repositioned the
securities within its portfolios to more closely track the
overall market. Partially offsetting these additional gains was
a decline in interest income due to an overall reduction of yield
earned by the KMF portfolios.
Interest Expense. Interest expense increased significantly in
1997 after excluding $28 million of interest attributable to C-
TEC in 1996. CPTC, the owner-operator of a privatized tollroad
in California, incurred interest costs of approximately $9
million and $11 million in 1996 and 1997. In 1996, interest of
$5 million was capitalized due to the construction of the
tollroad. Construction was completed in August 1996, and all
interest incurred subsequent to that date was charged against
earnings. Interest associated with the financing of the Aurora,
Colorado property of $1 million, also contributed to the increase
in interest expense.
Other Income. Other income in 1996 includes $2 million of
other expenses attributable to C-TEC. Excluding these losses,
other income declined from $8 million in 1996 to $1 million in
1997. The absence of gains on the sale of timberland properties
and other assets, which accounted for $6 million of income in
1996, is responsible for the decline.
Income Tax (Provision) Benefit. The effective income tax rate
for 1997 is less than the expected statutory rate of 35% due
primarily to prior year tax adjustments, partially offset by the
effect of nondeductible compensation expense associated with the
conversion of the information services option and SAR plans to
the Class D Stock plan. In 1996, the effective rate was also
lower than the statutory rate due to prior year tax adjustments.
These adjustments were partially offset by nondeductible costs
associated with goodwill amortization and taxes on foreign
operations. In 1997 and 1996, the Group settled a number of
disputed tax issues related to prior years that have been
included in prior year tax adjustments.
Discontinued Operations. Income from discontinued operations
increased to $29 million in 1997 from $9 million in 1996. The
acquisition of Northern Electric in late 1996 and the
commencement of operations at the Mahanagdong geothermal facility
in July, 1997 were the primary factors that resulted in the
increase.
In October 1997, CalEnergy sold approximately 19.1 million
shares of its common stock. This sale reduced the Group's
ownership in CalEnergy to approximately 24% but increased its
proportionate share of CalEnergy's equity. It is the Group's
policy to recognize gains or losses on the sale of stock by its
investees. The Group recognized an after tax gain of
approximately $44 million from transactions in CalEnergy stock in
the fourth quarter of 1997.
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 is 23%
of the difference between the value of Northern at the time of
privatization and the utility's current value based on profits
over a period of up to four years. CE Electric recorded an
extraordinary charge of approximately $194 million when the tax
was enacted on July 31, 1997. The total after-tax impact to the
Group, directly through its investment in CE Electric and
indirectly through its interest in CalEnergy, was $63 million.
Results of Operations 1996 vs. 1995
Coal Mining. Revenue and net earnings improved primarily due
to increased alternate source tons sold to Commonwealth Edison
Company in 1996 and the liquidation of a captive insurance
company which insured against black lung disease. Upon
liquidation, the Group received a refund of premiums paid plus
interest in excess of reserves established by the Group for this
liability. Since 1993, the amended contract with Commonwealth
provided that delivery commitments would be satisfied with coal
produced by unaffiliated mines in the Powder River Basin in
Wyoming. Coal produced at the Group's mines did not change
significantly from 1995 levels
Information Services. Revenue increased 17% to $42 million in
1996 from $36 million in 1995. The increase was primarily due to
new computer outsourcing contracts signed in 1996. Less than $1
million of revenue was generated by the operations of the new
systems integration business, started in February, 1996.
Margin as a percent of revenue for the outsourcing business
decreased to 41% in 1996 from 45% in 1995. The reduction of the
gross margin was primarily due to up-front migration costs for
new customers which were recognized as an expense when incurred.
Telecommunications. Revenue for the telecommunications segment
increased 13% to $367 million for fiscal 1996. C-TEC's telephone
group's $10 million, or 8%, increase in sales and C-TEC's cable
group's $33 million or 26% increase in revenue were the primary
contributors to the improved results. The increase in telephone
group revenue is due to higher intrastate access revenue from the
growth in access minutes, an increase of 13,000 access lines, and
higher internet access and video conferencing sales. Cable group
revenue increased primarily due to higher average subscribers and
the effects of rate increases in April 1995 and February 1996.
Subscriber counts increased primarily due to the acquisition of
Pennsylvania Cable Systems, formerly Twin County Trans Video,
Inc., in September 1995, and the consolidation of Mercom, Inc.
since August 1995. Pennsylvania Cable Systems and Mercom account
for $23 million of the increase in cable revenue in 1996.
The 1996 operating expenses for the telecommunications business
increased $38 million or 18% compared to 1995. The telephone
group experienced a 9% increase in expenses and the cable group's
costs increased 31%. The increase for the telephone group was
primarily attributable to higher payroll expenses resulting from
additional personnel, wage increases and higher overtime. Also
contributing to the increase, were fees associated with the
internet access services and consulting services for a variety of
regulatory and operational matters. The cable group's increase
was due to increased depreciation, amortization and compensation
expenses associated with the acquisition of Pennsylvania Cable
Systems and the consolidation of Mercom's operations. Also
contributing to the higher costs were rate increases for existing
programming and the costs for additional programming.
General and Administrative Expenses. General and
administrative expenses declined 5% to $181 million in 1996.
Decreases in expenses associated with legal and environmental
matters were partially offset by higher mine management fees paid
to the Construction & Mining Group, the costs attributable to C-
TEC and the opening of the SR91 toll road. C-TEC's corporate
overhead and other costs increased approximately 13% in 1996.
This increase is attributable to costs associated with the
development of the RCN business in New York and Boston, the
acquisition of Pennsylvania Cable Systems, the consolidation of
Mercom and the investigation of the feasibility of various
restructuring alternatives.
Equity Earnings, net. Losses attributable to the Group's
equity investments increased to $9 million in 1996 from $5
million in 1995. The additional losses were attributable to an
enterprise engaged in the renewable fuels business and to C-TEC's
investment in MegaCable S.A. de C.F., Mexico's second largest
cable television operator.
Investment Income, net. Investment income increased 24% in
1996 compared to 1995. Increasesd gains on the sale of
marketable and equity securities and interest income were
partially offset by a slight decline in dividend income.
Interest Expense, net. Interest expense in 1996 increased 43%
compared to 1995. The increase was primarily due to interest on
the CPTC debt that was capitalized through July 1996, and C-TEC's
redeemable preferred stock, issued in the Pennsylvania Cable
Systems acquisition, that began accruing interest in 1996.
Gain on Subsidiary's Stock Transactions, net. The issuance of
MFS stock for acquisitions by MFS and the exercise of MFS
employee stock options resulted in a $3 million net gain to the
Group in 1995.
Other, net. The decline of other income in 1996 was primarily
attributable to the 1995 settlement of the Whitney Benefits
litigation.
Income Tax Benefit (Provision). The effective income tax rate
for 1996 differs from the statutory rate of 35% primarily because
of adjustments to prior year tax provisions, partially offset by
state taxes and nondeductible amounts associated with goodwill
amortization. In 1995, the rate is lower than 35% due primarily
to $93 million of income tax benefits from the reversal of
certain deferred tax liabilities originally recognized on gains
from MFS stock transactions that are no longer required due to
the tax-free spin-off of MFS, and adjustments to prior year tax
provisions.
Discontinued Operations. Income from discontinued operations
declined in 1996 by 36% to $9 million. Losses attributable to
the Group's interest in the Casecnan project, additional
development expenses for international activities, and the costs
associated with the Northern Electric transaction were partially
offsest by increased equity earnings from CalEnergy.
Financial Condition - December 27, 1997
The Group's working capital, excluding C-TEC and discontinued
operations, increased $392 million or 106% during 1997. This is
due to the $182 million of cash generated by operations,
primarily coal operations, and the significant financing
activities described below.
Investing activities include $452 million to purchase
marketable securities, $42 million of investments and $26 million
of capital expenditures, including $14 million for the existing
information services business and $6 million for a corporate jet.
The investments primarily include the Group's $22 million
investment in the Pavilion Towers office complex, located in
Aurora, Colorado, and $15 million of investments in developing
businesses. Funding a portion of the activities was the sale of
marketable securities for $167 million.
Sources of financing include $138 million from the issuance of
Class D Stock, $72 million from the exchange of Class C stock for
Class D stock and $16 million from the financing for Pavilion
Towers. Uses consist primarily of $12 million for the payment
of dividends, and $2 million of payments on long-term debt.
Prior to the execution of an agreement with CalEnergy in
September, 1997, the Group invested $31 million in the Dieng,
Patuha and Bali power projects in Indonesia.
In October 1996, the PKS Board of Directors directed PKS
management to pursue a listing of Class D Stock as a way to
address certain issues created by PKS' two-class capital stock
structure and the need to attract and retain the best management
for PKS' businesses. During the course of its examination of the
consequences of a listing of Class D Stock, management concluded
that a listing of Class D Stock would not adequately address
these issues, and instead began to study a separation of the
Construction and Mining Group and the Diversified Group. At the
regular meeting of the Board on July 23, 1997, management
submitted to the Board for consideration a proposal for
separation of the Construction and Mining Group and Diversified
Group through a split-off of the Construction and Mining Group
("the Transaction"). At a special meeting on August 14, 1997,
the Board approved the Transaction.
The separation of the Construction and Mining Group and the
Diversified was contingent upon a number of conditions, including
the favorable ratification by a majority of both Class C and
Class D shareholders and the receipt by the Company of an
Internal Revenue Service ruling or other assurance acceptable to
the Board that the separation would be tax-free to U.S.
shareholders. On December 8, 1997, PKS' Class C and Class D
shareholders approved the transaction and on March 5, 1998 PKS
received a favorable ruling from the Internal Revenue Service.
The Transaction is anticipated to be effective on March 31, 1998.
In connection with the sale of approximately 10 million Class D shares
to employees in 1997, the Company has retained the right to purchase
the relevant Class D shares at the then current Class D Stock price
if the Transaction is definitively abandoned by formal action of the
PKS Board or the employees voluntarily terminate their employment on
various dates prior to January 1, 1999.
The Group has recently decided to substantially increase its
emphasis on and resources to its information services to
business. Pursuant to the plan, the Group intends to expand
substantially its current information services business, through
the expansion of its existing business and the creation, through
a combination of construction, leasing and purchase of facilities
and other assets, of a substantial facilities-based internet
communications network.
Using this network the Group intends to provide (a) a range of
internet access services at varying capacity levels and, as
technology development allows, at specified levels of quality of
service and security and (b) a number of business oriented
communications services which may include fax service, which are
transmitted in part over private or limited access Transmission
Control Protocol/Internet Protocol ("TCP/IP") networks and are
offered at a lower price than public telephone network-based fax
service, and voice message storing and forwarding over the same
TCP/IP-based networks.
The Group believes that over time, a substantial number of
businesses will convert existing computer application systems to
computer systems which communicate using TCP/IP and are accessed
by users employing Web browsers. The Group further believes that
businesses will prefer to contract for assistance in making this
conversion with those vendors able to provide a full range of
services from initial consulting to internet access with
requisite quality and security levels.
The Group anticipates that the capital expenditures required to
implement this expansion plan will be substantial. The Group
estimates that these costs may be in excess of $500 million in
1998 and could exceed $1.5 billion in 1999. The Group's current
financial condition, borrowing capacity and proceeds from the
CalEnergy transaction described below should be sufficient for
immediate implementing and investing activities including any
acquisitions. However, the Group expects to raise capital from
both the equity and debt markets due to the significant capital
requirements of the information services expansion plan.
In connection with the Expansion Plan, the Group expects to
devote substantially more management time and capital resources
to its information services business with a view to making the
information services business, over time, the principal business
of the Group. In that respect, the management is conducting a
comprehensive review of the existing Group businesses to
determine how those businesses will complement the Group's focus
on information services. If it is decided that an existing
business is not compatible with the information services business
and if a suitable buyer can be found, the Group may dispose of
that business.
In January 1998, the Group and CalEnergy closed the sale of the
Group's energy assets to CalEnergy. The Group received proceeds
of $1,159 million and expects to recognize an after-tax gain of
approximately $324 million in 1998. The after-tax proceeds from
this transaction of approximately $967 million will be used to
fund the expansion plan of the information services business.
In January 1998, Class C shareholders converted 2.3 million
shares, with a redemption value of $122 million, into 10.5
million shares of Class D Stock.
In February 1998, the Group announced that it was moving its
corporate headquarters to Broomfield, Colorado, a northwest suburb
of Denver. The campus facility is expected to encompass over
500,000 square feet of office space at a construction cost of over
$70 million. The Group is leasing space in the Denver area while
the campus is under construction. The first phase of the complex
is scheduled for completion in the summer of 1999.
In March 1998, PKS announced that its Class D Stock will begin
trading on April 1 on the Nasdaq National Market under the symbol
"LVLT." The Nasdaq listing will follow the separation of the
Group and the Construction Group of PKS, which is expected to be
completed on March 31, 1998. In connection with the separation,
PKS' construction subsidiary will be renamed "Peter Kiewit Sons',
Inc." and PKS Class D Stock will become the common stock of
Level 3 Communications, Inc.
PKS' certificate of incorporation gives stockholders the right to
exchange their Class C Stock for Class D Stock under a set
conversion formula. That right will be eliminated as a result of
the separation of the Group and the Construction Group. To
replace that conversion right, Class C stockholders received
shares of a new Class R stock in January, 1998, which is
convertible into Class D Stock in accordance with terms ratified
by stockholders in December 1997.
The PKS Board of Directors has approved in principle a plan to
force conversion of all shares of Class R stock outstanding. Due
to certain provisions of the Class R stock, conversion will not
be forced prior to May 1998, and the final decision to force
conversion would be made by the Level 3 Board of Directors at
that time. The Level 3 Board may choose not to force conversion
if it were decided that conversion is not in the best interests
of the stockholders of Level 3. If, as currently anticipated,
the Level 3 Board determines to force conversion of the Class R
stock on or before June 30, 1998, certain adjustments will be
made to the cost sharing and risk allocation provisions of the
separation agreement between Level 3 and the Construction
business.
If the Level 3 Board of Directors determines to force
conversion of the Class R stock, each share of Class R stock will
be convertible into $25 worth of Level 3 (Class D Stock) common
stock, based upon the average trading price of the Level 3 common
stock on the Nasdaq National Market for the last fifteen trading
days of the month prior to the determination by the Board of
Directors to force conversion. When the spin-off occurs, Level 3
will increase paid in capital and reduce retained earnings by the
fair value of the Class R shares.
DIVERSIFIED GROUP
Index to Financial Statements
Report of Independent Accountants
Financial Statements as of December 27, 1997 and December 28, 1996
and for the three years ended December 27, 1997:
Statements of Earnings
Balance Sheets
Statements of Cash Flows
Statements of Changes in Stockholders' Equity
Notes to Financial Statements
Schedules not indicated above have been omitted because of the
absence of the conditions under which they are required or because
the information called for is shown in the financial statements or
in the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Peter Kiewit Sons', Inc.
We have audited the financial statements of the Diversified Group,
a business group of Peter Kiewit Sons', Inc. (as defined in Note 1
to these financial statements) as listed in the index on the
preceding page of this exhibit to Form 10-K. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, when
read in conjunction with the consolidated financial statements of
Peter Kiewit Sons', Inc. and Subsidiaries, present fairly, in all
material respects, the financial position of the Diversified Group
as of December 27, 1997 and December 28, 1996 and the results of
its operations and its cash flows for each of the three years in
the period ended December 27, 1997 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Omaha, Nebraska
March 30, 1998
DIVERSIFIED GROUP
Statements of Earnings
For the three years ended December 27, 1997
(dollars in millions, except per share data) 1997 1996 1995
Revenue $ 332 $ 652 $ 580
Cost of Revenue (175) (384) (345)
------- ------- -------
157 268 235
General and Administrative Expenses (114) (181) (190)
------- ------- -------
Operating Earnings 43 87 45
Other (Expense) Income:
Equity losses, net (43) (9) (5)
Investment income, net 45 56 45
Interest expense, net (15) (33) (23)
Gain on subsidiary's stock transactions, net - - 3
Other, net 1 6 125
------- ------- -------
(12) 20 145
Equity Loss in MFS - - (131)
------- ------- -------
Earnings Before Income Taxes, Minority Interest
and Discontinued Operations 31 107 59
Income Tax Benefit (Provision) 48 (3) 79
Minority Interest in Net Loss (Income)
of Subsidiaries 4 - (12)
------- ------- -------
Income from Continuing Operations 83 104 126
Discontinued Operations:
Income from Operations, net of income tax
expense of ($9), ($9) and ($8) 29 9 14
Gain on Subsidiary's Stock Transactions, net
of income tax expense of ($24) 44 - -
Extraordinary Item - Windfall tax, net of
income tax benefit of $34 (63) - -
------- ------ --------
Income from Discontinued Operations 10 9 14
------- ------ -------
Net Earnings $ 93 $ 113 $ 140
======= ====== =======
Earnings Per Share:
Continuing Operations:
Basic $ .66 $ .90 $ 1.17
======= ====== =======
Diluted $ .66 $ .90 $ 1.17
======= ====== =======
Net Income:
Basic $ .74 $ .97 $ 1.29
======= ====== =======
Diluted $ .74 $ .97 $ 1.29
======= ====== =======
See accompanying notes to financial statements.
DIVERSIFIED GROUP
Balance Sheets
December 27, 1997 and December 28, 1996
(dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 87 $ 147
Marketable securities 678 372
Restricted securities 22 17
Receivables, less allowance of $-, and $3 42 76
Investments in discontinued operations 643 608
Other 22 26
-------- -------
Total Current Assets 1,494 1,246
Property, Plant and Equipment, at cost:
Land 15 18
Buildings and leasehold improvements 122 159
Equipment 275 810
-------- -------
412 987
Less accumulated depreciation and amortization (228) (345)
-------- -------
Net Property, Plant and Equipment 184 642
Investments 383 189
Intangible Assets, net 21 353
Other Assets 45 74
-------- --------
$ 2,127 $ 2,504
======== ========
See Note 19 for 1997 pro forma balance sheet information.
See accompanying notes to financial statements.
DIVERSIFIED GROUP
Balance Sheets
December 27, 1997 and December 28, 1996
(continued)
(dollars in millions) 1997 1996
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 31 $ 79
Current portion of long-term debt:
Telecommunications - 55
Other 3 2
Accrued reclamation and other mining costs 19 19
Deferred income taxes 15 5
Other 21 87
------- -------
Total Current Liabilities 89 247
Long-Term Debt, less current portion:
Telecommunications - 207
Other 137 113
Deferred Income Taxes 83 148
Accrued Reclamation Costs 100 98
Other Liabilities 139 216
Minority Interest 1 218
Stockholders' Equity (Redeemable Common Stock,
$1,578 million aggregated redemption value):
135,517,140 shares outstanding in 1997 and
115,901,215 shares outstanding in 1996
Common equity 1,565 1,235
Foreign currency adjustment - (2)
Net unrealized holding gain 13 24
------- -------
Total Stockholders' Equity 1,578 1,257
------- -------
$ 2,127 $ 2,504
======= =======
See Note 19 for 1997 pro forma balance sheet information.
See accompanying notes to financial statements.
DIVERSIFIED GROUP
Statements of Cash Flows
For the three years ended December 27, 1997
(dollars in millions) 1997 1996 1995
Cash flows from continuing operations:
Income from continuing operations $ 83 $ 104 $ 126
Adjustments to reconcile income from
continuing operations to net
cash provided by continuing operations:
Depreciation, depletion and amortization 24 132 96
Gain on sale of property, plant and
equipment, and other investments (9) (3) (7)
Gain on subsidiary's stock transactions, net - - (3)
Compensation expense attributable to stock options 21 - -
Equity losses, net 43 10 130
Minority interest in subsidiaries (4) - 12
Retirement benefits paid (7) (6) (2)
Federal income tax refunds 146 - 35
Deferred income taxes (103) (68) (152)
Change in working capital items:
Receivables (9) (1) 11
Other current assets (1) 6 -
Payables (3) 9 (3)
Other liabilities (5) 13 34
Other 6 - (4)
------ ------- -------
Net cash provided by continuing operations 182 196 273
Cash flows from investing activities:
Proceeds from sales and maturities of marketable
securities 167 378 383
Purchases of marketable securities (452) (311) (440)
Increase in restricted securities (2) (2) (2)
Investments and acquisitions, net
of cash acquired (42) (59) (136)
Proceeds from sale of property, plant
and equipment, and other investments 1 7 14
Capital expenditures (26) (117) (118)
Other 3 (8) (2)
------ ------- -------
Net cash used in investing activities $ (351) $ (112) $ (301)
See accompanying notes to financial statements.
DIVERSIFIED GROUP
Statements of Cash Flows
For the three years ended December 27, 1997
(continued)
(dollars in millions) 1997 1996 1995
Cash flows from financing activities:
Long-term debt borrowings $ 17 $ 38 $ 49
Payments on long-term debt, including
current portion (2) (60) (49)
Issuances of common stock 138 - 2
Issuances of subsidiaries' stock - 1 -
Repurchases of common stock - (11) (3)
Dividends paid (12) (11) -
Exchange of Class C Stock for
Class D Stock, net 72 20 155
------ ------ -------
Net cash provided by (used in)
financing activities 213 (23) 154
Cash flows from discontinued operations:
Discontinued energy operations 3 5 8
Investments in discontinued energy operations (31) (282) (101)
Proceeds from sales of discontinued
packaging operations - - 29
------ ------ -------
Net cash used in discontinued operations (28) (277) (64)
Cash and cash equivalents of C-TEC
in 1997 and MFS in 1995 at beginning of year (76) - (22)
Effect of exchange rates on cash - - 2
------- ------ -------
Net change in cash and cash equivalents (60) (216) 42
Cash and cash equivalents at beginning of year 147 363 321
------- ------ -------
Cash and cash equivalents at end of year $ 87 $ 147 $ 363
======= ====== =======
Supplemental disclosure of cash
flow information:
Taxes paid $ 62 $ 55 $ 132
Interest paid 13 38 33
Noncash investing and financing activities:
Conversion of CalEnergy convertible debentures
to common stock $ - $ 66 $ -
Dividend of investment in MFS - - 399
Issuance of C-TEC redeemable preferred stock
for acquisition - - 39
See accompanying notes to financial statements.
DIVERSIFIED GROUP
Statements of Changes in Stockholders' Equity
For the three years ended December 27, 1997
(dollars in millions, except per share data) 1997 1996 1995
Common equity:
Balance at beginning of year $ 1,235 $ 1,125 $ 1,238
Issuances of stock 138 - 5
Repurchases of stock - (11) (3)
Exchange of Class C Stock for Class D Stock, net 72 20 155
Net earnings 93 113 140
Stock option plan activity 27 - -
Dividend of investment in MFS - - (399)
Dividends (per share: $.10 in 1996 and 1995(a)) - (12) (11)
-------- -------- --------
Balance at end of year 1,565 1,235 1,125
Other equity adjustments:
Balance at beginning of year 22 15 (7)
Foreign currency adjustment 2 (1) (1)
Net unrealized holding gain (loss) (11) 8 23
-------- ------- -------
Balance at end of year 13 22 15
-------- ------- -------
Total stockholders' equity $ 1,578 $ 1,257 $ 1,140
======== ======= =======
(a) Dividend declared in 1996 and 1995 but paid in January of the
subsequent year.
See accompanying notes to financial statements.
DIVERSIFIED GROUP
Notes to Financial Statements
(1) Basis of Presentation
The Class C Stock and the Class D Stock are designed to provide
stockholders with separate securities reflecting the
performance of Peter Kiewit Sons', Inc.'s ("PKS") construction
and materials business ("Construction & Mining Group") and its
other businesses ("Diversified Group").
The financial statements of the Diversified Group include the
financial position, results of operations and cash flows for
PKS' businesses other than its Construction & Mining Group
businesses, held by a wholly-owned subsidiary, Level 3
Communications, Inc., (formerly Kiewit Diversified Group Inc.)
and certain PKS corporate assets and liabilities and related
transactions. These financial statements have been prepared
using the historical amounts included in the PKS consolidated
financial statements.
Although the financial statements of PKS' Diversified Group and
Construction & Mining 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 D Stock and Class C Stock are stockholders of
PKS. Accordingly, the PKS consolidated financial statements
and related notes should be read in conjunction with these
financial statements.
(2) Summary of Significant Accounting Policies
Principles of Group Presentation
These financial statements include the accounts of the
Diversified Group ("the Group"). The Group's and Construction &
Mining Group's financial statements, taken together, comprise
all of the accounts included in the PKS consolidated financial
statements. The Group's enterprises include information
services, telecommunications (C-TEC entities), coal mining and
California Private Transportation Company, L.P. ("CPTC"), the
owner-operator of the SR91 toll road in southern California.
The Group's only reportable segments are information services,
telecommunications and coal mining.
On September 5, 1997, C-TEC Corporation ("C-TEC") announced that
its board of directors had approved the planned restructuring
of C-TEC into three publicly traded companies. The transaction
was effective September 30, 1997. As a result of the
restructuring plan, the Group owns less than 50% of the
outstanding shares and voting rights of each entity, and
therefore has accounted for each entity using the equity method
as of the beginning of 1997. In accordance with Generally
Accepted Accounting Principles, C-TEC's financial position,
results of operations and cash flows are consolidated in the
1996 and 1995 financial statements.
Fifty-percent-owned mining joint ventures are consolidated on a
pro rata basis. Investments in other companies in which the
Group exercises significant influence over operating and
financial policies are accounted for by the equity method. All
significant intercompany accounts and transactions, except
those directly between the Group and the Construction & Mining
Group, have been eliminated.
The results of operations of MFS Communications Company, Inc.
("MFS"), (which later merged into WorldCom Inc.), prior to its
spin-off in September 1995, have been classified as a single
line item on the 1995 statement of earnings (See Note 5).
The Group invests in the portfolios of the Kiewit Mutual Fund,
("KMF"), a registered investment company. KMF is not
consolidated in the Group's financial statements.
Coal Sales Contracts
The Group's coal is sold primarily under long-term contracts
with electric utilities, which burn coal in order to generate
steam to produce electricity. A substantial portion of the
Group's coal sales were made under long-term contracts during
1997, 1996 and 1995. The remainder of the Group's sales are
made on the spot market where prices are substantially lower
than those in the long-term contracts. As the long-term
contracts expire, a higher proportion of the Group's sales will
occur on the spot market.
The coal industry is highly competitive. The Group competes
not only with other domestic and foreign coal suppliers, some
of whom are larger and have greater capital resources than the
Group, but also with alternative methods of generating
electricity and alternative energy sources. Many of the
Group's competitors are served by two railroads and, due to the
competition, often benefit from lower transportation costs than
the Group, which is served by a single railroad. Additionally,
many competitors have lower stripping ratios than the Group,
often resulting in lower comparative costs of production.
The Group is also required to comply with various federal,
state and local laws concerning protection of the environment.
The Group believes its compliance with environmental protection
and land restoration laws will not affect its competitive
position since its competitors are similarly affected by such
laws.
The Group and its mining ventures have entered into various
agreements with its customers which stipulate delivery and
payment terms for the sale of coal. Prior to 1993, one of the
primary customers deferred receipt of certain commitments by
purchasing undivided fractional interests in coal reserves of
the Group and the mining ventures. Under these
arrangements, revenue was recognized when cash was received.
The agreements with this customer were renegotiated in
1992. In accordance with the renegotiated agreements, there
were no sales of interests in coal reserves subsequent to
January 1, 1993. The Group has the obligation to deliver the
coal reserves to the customer in the future if the customer
exercises its option. If the option is exercised, the
Group presently intends to deliver coal from unaffiliated
mines. In the opinion of management, the Group has sufficient
coal reserves to cover the above sales commitments.
The Group's coal sales contracts are with several electric
utility and industrial companies. In the event that these
customers do not fulfill contractual responsibilities, the
Group would pursue the available legal remedies.
Telecommunications Revenue
In 1996 and 1995 C-TEC's most significant operating groups are
its local telephone service and cable system operations. C-
TEC's telephone network access revenues are derived from net
access charges, toll rates and settlement arrangements for
traffic that originates or terminates within C-TEC's local
telephone company. Revenues from telephone services and basic
and premium cable programming services are recorded in the
month service is provided.
The telecommunications industry is subject to local, state and
federal regulation. Consequently, the ability of the telephone
and cable groups to generate increased volume and profits is
largely dependent upon regulatory approval to expand customer
bases and increase prices.
Competition for the cable group's services traditionally has
come from broadcast television, video rentals and direct
broadcast satellite received on home dishes. Future
competition is expected from telephone companies.
Concentration of credit risk with respect to accounts
receivable is limited due to the dispersion of customer base
among geographic areas and remedies provided by the terms of
contracts and statutes.
As noted above, the investment in C-TEC has been accounted for
using the equity method in 1997. (See Note 9)
Information Services Revenue
Information services revenue is primarily derived from the
computer outsourcing business and the systems integration
business. The Group provides outsourcing service, typically
through contracts ranging from 3-5 years, to firms that desire
to focus their resources on their core businesses. Under these
contracts, the Group recognizes revenue in the month the
service is provided. The systems integration business helps
customers define, develop and implement cost-effective
information systems. Revenue from these services is billed on
a time and materials basis or percentage of completion basis
depending on the extent of the services provided.
Depreciation and Amortization
Property, plant and equipment are recorded at cost.
Depreciation and amortization for the majority of the Group's
property, plant and equipment are computed on accelerated and
straight-line methods. Depletion of mineral properties is
provided primarily on an units-of-extraction basis determined
in relation to estimated reserves.
Intangible Assets
Intangible assets primarily consist of amounts allocated upon
purchase of existing operations, franchises and subscriber
lists. These assets are amortized on a straight-line basis
over the expected period of benefit, which does not exceed 40
years.
Long Lived Assets
The Group reviews the carrying amount of long lived assets for
impairment whenever events or changes in circumstances
indicate that the carrying amount may not be
recoverable. Measurement of any impairment would include a
comparison of estimated future operating cash flows anticipated
to be generated during the remaining life of the asset to the
net carrying value of the asset.
Reserves for Reclamation
The Group follows the policy of providing an accrual for
reclamation of mined properties, based on the estimated cost of
restoration of such properties, in compliance with laws
governing strip mining. It is at least reasonably possible
that the estimated cost of restoration will be revised in the
near term.
Foreign Currencies
Generally, the local currencies of foreign subsidiaries are the
functional currencies for financial reporting purposes. Assets
and liabilities are translated into U.S. dollars at year-end
exchange rates. Revenue and expenses are translated using
average exchange rates prevailing during the year. Gains or
losses resulting from currency translation are recorded as
adjustments to stockholders' equity.
Subsidiary and Investee Stock Activity
The Group recognizes gains and losses from the sale, issuance
and repurchase of stock by its subsidiaries and equity
investees.
Earnings Per Share
In 1997, the Group adopted 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 per
share data presented. Basic earnings per share have been
computed using the weighted average number of shares
outstanding during each period . Diluted earnings per share
is computed by including stock options and convertible
debentures considered to be dilutive common stock equivalents.
Potentially dilutive stock options are calculated in accordance
with the treasury stock method which assumes that proceeds from
the exercise of all options are used to repurchase common stock
at the average market value. The number of shares remaining
after the proceeds are exhausted represent the potentially
dilutive effect of the options. The potentially dilutive
convertible debentures are calculated in accordance with the
"if converted" method. This method assumes that the after-tax
interest expense associated with the debentures is an addition
to income and the debentures are converted into equity with the
resulting common shares being aggregated with the weighted
average shares outstanding.
The following details the earnings per share calculations for
Class D Stock:
1997 1996 1995
Income from continuing operations
available to common shareholders
(in millions) $ 83 $ 104 $ 126
Add: Interest expense, net of tax
effect associated with convertible
debentures - - -*
------ ------- -------
Income from continuing operations
for fully diluted shares 83 104 126
Income from discontinued operations 10 9 14
------- -------- -------
Net Income $ 93 $ 113 $ 140
======= ======== =======
Total number of weighted average
shares outstanding used to compute
basic earnings per share
(in thousands) 124,647 116,006 108,594
Additional dilutive stock options 539 311 -
Additional dilutive shares assuming
conversion of convertible debentures - - 257
------- ------- -------
Total number of shares used to
compute diluted earnings per share 125,186 116,317 108,851
======== ======== ========
Continuing Operations:
Basic earnings per share $ .66 $ .90 $ 1.17
======== ======== ========
Diluted earnings per share $ .66 $ .90 $ 1.17
======== ======== ========
Discontinued Operations:
Basic earnings per share $ .08 $ .07 $ .12
======== ======== ========
Diluted earnings per share $ .08 $ .07 $ .12
======== ======== ========
Net Income:
Basic earnings per share $ .74 $ .97 $ 1.29
======== ======== ========
Diluted earnings per share $ .74 $ .97 $ 1.29
======== ======== ========
*Interest expense attributable to convertible debentures was
less than $1 million in 1995.
Stock Dividend
Effective December 26, 1997, the PKS Board of Directors approved
a dividend of four shares of Class D Stock for every one share
of Class D Stock held. All share information and per share
data have been restated to reflect this dividend.
Income Taxes
Deferred income taxes are provided on the temporary differences
between the financial reporting basis and the tax basis of the
Group's assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income", which
requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence
as other financial statements.
Also in 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which
changes the way public companies report information about
segments. SFAS No. 131, which is based on the management
approach to segment reporting includes requirements to report
selected segment information quarterly, and entity wide
disclosures about products and services, major customers, and
geographic data.
These statements are effective for financial statements for
periods beginning after December 15, 1997. Management does not
expect adoption of these statements to materially affect the
Group's financial statements.
Reclassifications
Where appropriate, items within the financial statements and
notes thereto have been reclassified from previous years to
conform to current year presentation.
Fiscal Year
The Group's fiscal year ends on the last Saturday in December.
There were 52 weeks in fiscal years 1997, 1996 and 1995.
(3) Reorganization
In October 1996, the PKS Board of Directors directed PKS
management to pursue a listing of Class D Stock as a way to
address certain issues created by PKS' two-class capital stock
structure and the need to attract and retain the best
management for PKS' businesses. During the course of its
examination of the consequences of a listing of Class D Stock,
management concluded that a listing of Class D Stock would not
adequately address these issues, and instead began to study a
separation of the Construction and Mining Group and the
Diversified Group. At the regular meeting of the Board on July
23, 1997, management submitted to the Board for consideration a
proposal for separation of the Construction and Mining Group
and Diversified Group through a split-off of the Construction
and Mining Group ("the Transaction"). At a special meeting on
August 14, 1997, the Board approved the Transaction.
The separation of the Construction and Mining Group and the
Diversified was contingent upon a number of conditions,
including the favorable ratification by a majority of both
Class C and Class D shareholders and the receipt by PKS of an
Internal Revenue Service ruling or other assurance acceptable
to the Board that the separation would be tax-free to U.S.
shareholders. On December 8, 1997, PKS' Class C and Class D
shareholders approved the transaction and on March 5, 1998 PKS
received a favorable ruling from the Internal Revenue Service.
The Transaction is anticipated to be effective on March 31,
1998.
The Group has recently decided to substantially increase its
emphasis on and resources to its information services business.
Pursuant to the plan, the Group intends to expand substantially
its current information services business, through the
expansion of its existing business and the creation, through a
combination of construction, leasing and purchase of facilities
and other assets, of a substantial facilities-based internet
communications network ("the Expansion Plan").
Using this network the Group intends to provide (a) a range of
internet access services at varying capacity levels and, as
technology development allows, at specified levels of quality
of service and security and (b) a number of business oriented
communications services which may include fax service, which
are transmitted in part over private or limited access
Transmission Control Protocol/Internet Protocol ("TCP/IP")
networks and are offered at lower prices than public telephone
network-based fax service, and voice message storing and
forwarding over the same TCP/IP-based networks.
(4) Discontinued Operations
In connection with the Expansion Plan, the Group expects to
devote substantially more management time and capital resources
to its information services business with a view to making the
information services business, over time, the principal
business of the Group. In that respect, management is
conducting a comprehensive review of the existing Group
businesses to determine how those businesses will complement
the Group's focus on information services. If it is decided
that an existing business is not compatible with the
information services business and if a suitable buyer can be
found, the Group may dispose of that business.
On September 10, 1997, the Group and CalEnergy Company, Inc.
("CalEnergy") entered into an agreement whereby CalEnergy
contracted to purchase the Group's energy investments for
$1,155 million, subject to adjustments. These energy
investments included approximately 20.2 million shares of
CalEnergy common stock (assuming the exercise of 1 million
options held by the Group), the Group's 30% ownership interest
in CE Electric UK, plc ("CE Electric") and the Group's
investments, made jointly with CalEnergy, in international
power projects in Indonesia and the Philippines. The
transaction was subject to the satisfactory completion of
certain provisions of the agreement and closed on January 2,
1998. These assets comprised the energy segment of the Group.
Therefore, the Group has reflected these assets, the earnings
and losses attributable to these assets, and the related cash
flow items as discontinued operations on the balance sheets,
statements of earnings and cash flows for all periods
presented.
In order to fund the purchase of these assets, CalEnergy sold,
in October 1997, approximately 19.1 million shares of its
common stock at a price of $37.875 per share. This sale
reduced the Group's ownership in CalEnergy to approximately 24%
but increased its proportionate share of CalEnergy's equity.
It is the Group's policy to recognize gains or losses on the
sale of stock by its investees. The Group recognized an after-
tax gain of approximately $44 million from transactions in
CalEnergy stock in the fourth quarter of 1997.
The Agreement with CalEnergy included a provision whereby
CalEnergy and the Group shared equally any proceeds from the
offering above or below a specified amount. The offering was
conducted at a price above that provided in the agreement and
therefore, the Group received additional proceeds of $16
million at the time of closing.
The Group expects to recognize an after-tax gain on the
disposition of its energy assets in 1998 of approximately $324
million. The after-tax proceeds from the transaction of
approximately $967 million will be used to fund the expansion
plan of the information services business.
The following is summarized financial information for
discontinued operations:
Income from Discontinued Operations 1997 1996 1995
Operations
Equity in:
CalEnergy earnings, net $ 16 $ 20 $ 10
CE Electric earnings, net 17 (2) -
International energy projects earnings, net 5 (5) 6
Investment income from CalEnergy - 5 6
Income tax expense (9) (9) (8)
----- ------ -----
Income from operations $ 29 $ 9 $ 14
===== ====== =====
CalEnergy Stock Transactions
Gain on investee stock activity $ 68 $ - $ -
Income tax expense (24) - -
----- ----- ----
$ 44 $ - $ -
===== ===== ====
Extraordinary Loss - Windfall Tax
Group's share from CalEnergy $ (39) $ - $ -
Group's share from CE Electric (58) - -
Income tax benefit 34 - -
----- ---- ----
Extraordinary loss $ (63) $ - $ -
===== ==== ====
Investments in Discontinued Operations 1997 1996
Investment in CalEnergy $ 337 $ 292
Investment in CE Electric 135 176
Investment in international energy projects 186 149
Restricted securities 2 8
Deferred income tax liability (17) (17)
------- -------
Total $ 643 $ 608
======= =======
At December 27, 1997, the Group owned 19.2 million shares or
24% of CalEnergy's outstanding common stock and had a
cumulative investment in CalEnergy common stock of $337
million. CalEnergy common stock is traded on the New York Stock
Exchange. On December 27, 1997, the market value of the
Group's investment in CalEnergy common stock was $548
million.
The following is summarized financial information of CalEnergy
Company, Inc.:
Operations (dollars in millions) 1997 1996 1995
Revenue $ 2,271 $ 576 $ 399
Income before extraordinary item 52 92 62
Extraordinary item - Windfall tax (136) - -
Group's share:
Income before extraordinary item 18 22 13
Goodwill amortization (2) (2) (3)
-------- ------ ------
Equity in income of CalEnergy before
extraordinary item $ 16 $ 20 $ 10
======== ====== ======
Extraordinary item - Windfall tax $ (39) $ - $ -
======== ====== ======
Financial Position (dollars in millions) 1997 1996
Current assets $ 2,053 $ 945
Other assets 5,435 4,768
-------- ------
Total assets 7,488 5,713
Current liabilities 1,440 1,232
Other liabilities 4,494 3,301
Minority interest 134 299
-------- -------
Total liabilities 6,068 4,832
-------- --------
Net assets $ 1,420 $ 881
======== ========
Group's share:
Equity in net assets $ 337 $ 267
Goodwill - 25
-------- --------
Investment in CalEnergy $ 337 $ 292
======== ========
In December 1996, CE Electric, which is 70% owned by CalEnergy
and 30% owned by the Group, acquired majority ownership of the
outstanding ordinary share capital of Northern Electric, plc.
pursuant to a tender offer (the "Tender Offer") commenced in
the United Kingdom by CE Electric in November 1996. As of
March 1997, CE Electric effectively owned 100% of Northern's
ordinary shares.
As of December 27, 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 a
term loan and a 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 is 23% of the
difference between the value of Northern Electric, plc. at the
time of privatization and the utility's current value based on
profits over a period of up to four years. CE Electric
recorded an extraordinary charge of approximately $194 million
when the tax was enacted in July 1997. The total after-tax
impact to the Group, directly through its investment in CE
Electric and indirectly through its interest in CalEnergy, was
$63 million.
The following is summarized financial information of CE Electric
as of December 31, 1997 and December 31, 1996:
Operations (dollars in millions) 1997 1996
Revenue $ 1,564 $ 37
Income before extraordinary item 58 -
Extraordinary item - Windfall tax (194) -
Group's share:
Income before extraordinary item $ 17 $ -
Management fee paid to CalEnergy - (2)
-------- ------
$ 17 $ (2)
======== ======
Extraordinary item - Windfall tax $ (58) $ -
======== ======
Financial Position (dollars in millions) 1997 1996
Current assets $ 419 $ 583
Other assets 2,519 1,772
------- -------
Total assets 2,938 2,355
Current liabilities 1,166 785
Other liabilities 1,265 718
Preferred stock 56 153
Minority interest - 112
------- -------
Total liabilities 2,487 1,768
------- -------
Net assets $ 451 $ 587
======= =======
Group's Share:
Equity in net assets $ 135 $ 176
======= =======
CE Electric's 1995 and 1996 operating results prior to the
acquisitions were not significant relative to the Group's
results after giving effect to certain pro forma adjustments
related to the acquisitions, primarily increased amortization
and interest expense.
In 1993, the Group and CalEnergy formed a venture to develop power
projects outside of the United States. Since 1993,
construction has begun on the Mahanagdong, Casecnan and Dieng
power projects. The Mahanagdong project is a 165 MW geothermal
power facility located on the Philippine island of Leyte. The
Casecnan project is a combined irrigation and 150 MW
hydroelectric power generation facility located on the island
of Luzon in the Philippines. Dieng Unit I is a 55 MW
geothermal facility on the Indonesian island of Java. An
additional five units are expected to be constructed on a
modular basis at the Dieng site, as geothermal resources are
developed. In June 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.
Generally, costs associated with the development, financing and
construction of the international energy projects have been
capitalized by each of the projects and will be amortized over
the life of each project.
The following is summarized financial information for the
international energy projects:
Financial Position
(dollars in millions) Mahanagdong Casecnan Dieng Other Total
1997
Current assets $ 42 $ 334 $ 87 $ 67 $ 530
Other assets 252 148 240 171 811
------- ------- ------ ----- -----
Total assets 294 482 327 238 1,341
Current liabilities 11 12 88 61 172
Other liabilities 186 372 123 56 737
------- ------- ------ ----- -----
Total liabilities
(with recourse only
to the projects) 197 384 211 117 909
------- -------- ------ ----- -----
Net assets $ 97 $ 98 $ 116 $ 121 $ 432
======= ======== ====== ===== =====
Group's share:
Equity in net assets $ 48 $ 49 $ 46 $ 43 $ 186
======= ======== ====== ===== =====
1996
Current assets $ 1 $ 441 $ 15 $ 10 $ 467
Other assets 239 51 118 36 444
------- ------- ----- ----- -----
Total assets 240 492 133 46 911
Current liabilities 15 9 24 11 59
Other liabilities 153 372 35 - 560
------- -------- ------ ----- -----
Total liabilities
(with recourse only
to the projects) 168 381 59 11 619
------- ------- ----- ------ -----
Net assets $ 72 $ 111 $ 74 $ 35 $ 292
======= ======= ===== ====== =====
Group's share:
Equity in net assets $ 36 $ 55 $ 36 $ 17 $ 144
Loan to Project - - 5 - 5
------- ------- ----- ----- -----
$ 36 $ 55 $ 41 $ 17 $ 149
======= ======= ===== ===== =====
In late 1995, the Casecnan joint venture closed financing for
the construction of the project with bonds issued by the
project company. The difference between the interest expense
on the debt and the interest earned on the unused funds prior
to payment of construction costs resulted in a loss to the
venture of $12 million in 1997 and 1996. The Group's share of
these losses were $6 million in each year. The Mahanagdong
facility commenced operation in July, 1997. The Group's
proportionate share of the earnings attributable to Mahanagdong
was $7 million 1997. No income or losses were incurred by the
international projects in 1995. In addition to the equity
earnings and losses, the Group incurred project development and
insurance expenses, and received management fee income related
to the international projects in all years.
In late 1995, a Group and CalEnergy venture, CE Casecnan Water
and Energy Company, Inc. ("CE Casecnan") closed financing and
commenced construction of a $495 million irrigation and
hydroelectric power project located in the Philippines island
of Luzon. The Group and CalEnergy each made $62 million of
equity contributions to the project.
The CE Casecnan project was being constructed on a joint and
several basis by Hanbo Corporation and Hanbo Engineering &
Construction Co. Ltd. On May 7, 1997, CE Casecnan announced
that it had terminated the Hanbo Contract. In connection with
the contract termination, CE Casecnan made a $79 million draw
request under the letter of credit issued by Korea First Bank
("KFB") to pay for certain transition costs and other damages
under the Hanbo Contract. KFB failed to honor the draw
request; the matter is being litigated. 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 CE
Casecnan project. The Group does not expect the outcome of the
litigation to affect its financial position due to the
transaction with CalEnergy.
(5) MFS Spin-off
In September 1995, the PKS Board of Directors approved a plan to
make a tax-free distribution of its entire ownership interest
in MFS to the Class D stockholders (the "Spin-off") effective
on September 30, 1995. Shares were distributed on the basis of
approximately .348 shares of MFS Common Stock and approximately
.130 shares of MFS Preferred Stock for each share of
outstanding Class D Stock.
The net investment in MFS distributed on September 30, 1995 was
approximately $399 million.
Operating results of MFS through September 30, 1995 are
summarized as follows:
(dollars in millions) 1995
Revenue $ 412
Loss from operations (176)
Net loss (196)
Group's share of loss in MFS (131)
Included in the income tax benefit on the statement of earnings
for the year ended December 30, 1995, is $93 million of tax
benefits from the reversal of certain deferred tax liabilities
recognized on gains from previous MFS stock transactions that
were not taxed due to the Spin-off.
(6) Corporate Activities
Financial Structure
PKS, in addition to specifically attributable items, has
corporate assets, liabilities and related income and expense
which are not separately identified with the ongoing operations
of the Group or the Construction & Mining Group. The items
attributable to the Group and the Group's 50% portion of PKS
are as follows:
(dollars in millions) 1997 1996
Marketable securities $ 3 $ 5
Property, plant and equipment, net 10 5
Other assets - 1
------ ------
Total Assets $ 13 $ 11
====== ======
Accounts payable $ 10 $ 17
Noncurrent liabilities 2 1
------ ------
Total Liabilities $ 13 $ 18
====== ======
1997 1996 1995
Other (expense) income (1) 1 -
Corporate General and Administrative Costs
A portion of PKS' corporate general and administrative costs
has been allocated to the Group based upon certain measures of
business activity, such as employment, investments and sales,
which management believes to be reasonable. These allocations
were $5 million, $6 million and $5 million in 1997, 1996 and
1995.
Income Taxes
All domestic members of the PKS affiliated group are included
in the consolidated U.S. income tax return filed by PKS as
allowed by the Internal Revenue Code. Accordingly, the
provision for income taxes and the related payments or refunds
of tax are determined on a consolidated basis.
The financial statement provision and actual cash tax payments
have been reflected in the Group's and Construction & Mining
Group's financial statements in accordance with PKS' tax
allocation policy for such groups. In general, such policy
provides that the consolidated tax provision and related cash
flows and balance sheet amounts are allocated between the Group
and the Construction & Mining Group, for group financial
statement purposes, based principally upon the financial
income, taxable income, credits, preferences and other
amounts directly related to the respective groups. The
provision for estimated United States income taxes for the
Group does not differ materially from that which would have
been determined on a separate return basis.
(7) Gain on Subsidiary's Stock Transactions, net
Stock issuances by MFS for acquisitions and employee stock
options, reduced the Group's ownership in MFS prior to the Spin-
off in 1995 to 66% from 67% in 1994. As a result, the Group
recognized a gain of $3 million in 1995 representing the
increase in the Group's proportionate share of MFS' equity.
Deferred income taxes had been established on this gain prior
to the Spin-off.
(8) Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to determine
classification and fair values of financial instruments:
Cash and Cash Equivalents
Cash equivalents generally consist of funds invested in the
Kiewit Mutual Fund-Money Market Portfolio and highly liquid
instruments purchased with an original maturity of three months
or less. The securities are stated at cost, which approximates
fair value.
Marketable Securities, Restricted Securities and Non-current
Investments
The Group has classified all marketable securities, restricted
securities and marketable non-current investments not accounted
for under the equity method as available-for-sale. Restricted
securities primarily include investments in various portfolios
of the Kiewit Mutual Fund that are restricted to fund certain
reclamation liabilities of its coal mining ventures. Due to
the anticipated increase in capital expenditures, the Group has
reclassified its investments in marketable equity securities
from non-current to current in 1997. The amortized cost of the
securities used in computing unrealized and realized gains and
losses is determined by specific identification. Fair values
are estimated based on quoted market prices for the securities
on hand or for similar investments. Net unrealized holding
gains and losses are reported as a separate component of
stockholders' equity, net of tax.
At December 27, 1997 and December 28, 1996 the amortized cost,
unrealized holding gains and losses, and estimated fair values
of marketable securities, restricted securities and marketable
non-current investments were as follows:
Unrealized Unrealized
Amortized Holding Holding Fair
(dollars in millions) Cost Gains Losses Value
1997:
Marketable Securities:
Kiewit Mutual Fund:
Short-term government $ 234 $ - $ - $ 234
Intermediate term bond 195 3 - 198
Tax exempt 154 3 - 157
Equity 7 4 - 11
Collateralized mortgage
obligations - 1 - 1
Equity securities 48 9 - 57
Other securities 20 - - 20
----- ------ ------ ------
$ 658 $ 20 $ - $ 678
===== ====== ====== ======
Restricted Securities:
Kiewit Mutual Fund:
Intermediate term bond $ 10 $ - $ - $ 10
Equity 12 - - 12
----- ------ ------ -----
$ 22 $ - $ - $ 22
===== ====== ====== =====
Unrealized Unrealized
Amortized Holding Holding Fair
(dollars in millions) Cost Gains Losses Value
1996:
Marketable Securities:
Kiewit Mutual Fund:
Short-term government $ 100 $ - $ - $ 100
Intermediate term bond 65 2 - 67
Tax exempt 126 2 - 128
Equity 5 2 - 7
Corporate debt securities
(held by C-TEC) 47 - - 47
Collateralized mortgage
obligations - 1 - 1
Other securities 20 2 - 22
------- ------- --------- ------
$ 363 $ 9 $ - $ 372
======= ======= ========= ======
Restricted Securities:
Kiewit Mutual Fund:
Intermediate term bond $ 8 $ - $ - $ 8
Equity 7 2 - 9
------- ------- --------- ------
$ 15 $ 2 $ - $ 17
======= ======= ========= ======
Non-current investments:
Equity securities $ 49 $ 26 $ - $ 75
======= ======= ========= ======
Other securities consist of bonds issued by the Casecnan
project and purchased by the Group.
For debt securities, amortized costs do not vary significantly
from principal amounts. Realized gains and losses on sales of
marketable and equity securities were $9 million and $- million
in 1997, $3 million and $- million in 1996, and $1 million and
$2 million in 1995.
At December 27, 1997, the contractual maturities of the debt
securities are as follows:
(dollars in millions) Amortized Cost Fair Value
Other securities:
10+ years $ 20 $ 20
====== ======
Maturities for the mutual fund, equity securities and
collateralized mortgage obligations have not been presented as
they do not have a single maturity date.
Long-term Debt
The fair value of debt was estimated using the incremental
borrowing rates of the Group for debt of the same remaining
maturities. The fair value of the debt approximates the
carrying amount.
(9) Investments
Investments consist of the following at December 27, 1997 and
December 28, 1996:
(dollars in millions) 1997 1996
Commonwealth Telephone Enterprises Inc. $ 75 $ -
RCN Corporation 214 -
Cable Michigan 46 -
Pavilion Towers 22 -
Equity securities (Note 8) - 75
C-TEC investments:
Megacable S.A. de C.V. - 74
Other - 12
Other 26 28
------ ------
$ 383 $ 189
====== ======
In September 1997, C-TEC announced that its board of directors
had approved the planned restructuring of C-TEC into three
publicly traded companies effective September 30, 1997. Under
the terms of the restructuring C-TEC shareholders received
stock in the following 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 consists 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, New York City and Washington D.C.
As a result of the restructuring, the Group owns less than 50%
of the outstanding shares and voting rights of each entity, and
therefore accounts for each entity using the equity method as
of the beginning of 1997. C-TEC's financial position, results
of operations and cash flows are consolidated in the 1996 and
1995 financial statements.
The following is summarized financial information of the three
entities created as result of the C-TEC restructuring:
Operations (dollars in millions) 1997 1996 1995
Commonwealth Telephone Enterprises
Revenue $ 197 $ 186 $ 174
Net income available to common stockholders 20 20 31
Group's share:
Net income 10 10 15
Goodwill amortization (1) (1) 1
------ ----- -----
Equity in net income $ 9 $ 9 $ 16
====== ===== =====
Cable Michigan
Revenue $ 81 $ 76 $ 60
Net loss available to common stockholders (4) (8) (10)
Group's share:
Net loss (2) (4) (5)
Goodwill amortization (4) (4) (4)
------ ------ ----
Equity in net loss $ (6) $ (8) $ (9)
====== ====== ====
RCN Corporation
Revenue $ 127 $ 105 $ 91
Net (loss) income available to
common stockholders (52) (6) 2
Group's share:
Net (loss) income (26) (3) 1
Goodwill amortization - (3) 1
------ ------ ----
Equity in net (loss) income $ (26) $ (6) $ 2
====== ====== ====
Commonwealth
Telephone Cable RCN
Enterprises Michigan Corporation
Financial Position (in millions) 1997 1996 1997 1996 1997 1996
Current assets $ 71 $ 51 $ 23 $ 10 $ 698 $ 143
Other assets 303 266 120 139 453 485
----- ----- ----- ----- ----- -----
Total assets 374 317 143 149 1,151 628
Current liabilities 76 59 16 24 70 57
Other liabilities 260 189 166 190 708 175
Minority interest - - 15 15 16 5
------ ----- ----- ---- ----- ----
Total liabilities 336 248 197 229 794 237
------ ----- ----- ---- ----- ----
Net assets (liabilities) $ 38 $ 69 $ (54) $(80) $ 357 $ 391
====== ===== ===== ==== ===== =====
Group's Share:
Equity in net assets $ 18 $ 33 $ (26) $(38) $ 173 $ 189
Goodwill 57 58 72 75 41 41
------ ----- ----- ---- ----- ----
$ 75 $ 91 $ 46 $ 37 $ 214 $ 230
====== ===== ===== ==== ===== =====
On December 27, 1997 the market value of the Group's
investments in Commonwealth Telephone, Cable Michigan and RCN
was $215 million, $76 million and $485 million, respectively.
In February 1997, the Group purchased the Pavillion Towers
office building in Aurora, Colorado for $22 million.
Investments in 1996 also include C-TEC's 40% ownership of
Megacable S.A. de C.V., Mexico's second largest cable operator,
accounted for using the equity method.
(10) Intangible Assets
Intangible assets consist of the following at December 27, 1997
and December 28, 1996:
(dollars in millions) 1997 1996
CPTC intangibles and other $ 23 $ 23
C-TEC:
Goodwill - 198
Franchise and subscriber lists - 229
Other - 34
------ -------
23 484
Less accumulated amortization (2) (131)
------ --------
$ 21 $ 353
====== ========
At December 27, 1997 and December 28, 1996, long-term debt was
as follows:
(dollars in millions) 1997 1996
CPTC Long-term Debt (with recourse only to CPTC):
Bank Note
(7.7% due 2008) $ 65 $ 65
Institutional Note
(9.45% due 2017) 35 35
OCTA Debt
(9.0% due 2006) 8 6
Subordinated Debt
(9.5% No Maturity) 6 2
------- -------
114 108
Other:
Pavilion Towers Debt (8.4% due 2007) 15 -
Capitalized Leases 6 1
Other 5 6
------- -------
26 7
C-TEC Long-term Debt (with recourse only to C-TEC):
Credit Agreement - National Bank for Cooperatives
(7.51% due 2009) - 110
Senior Secured Notes
( 9.65% due 1999) - 134
Term Credit Agreement - Morgan Guaranty Trust Company
(7% due 2002) - 18
------ ------
- 262
------ ------
140 377
Less current portion (3) (57)
------ ------
$ 137 $ 320
====== ======
CPTC:
In August 1996, CPTC converted its construction financing note
into a term note with a consortium of banks ("Bank Debt"). The
interest rate on the Bank Debt is based on LIBOR plus a varying
rate with interest payable quarterly. Upon completion of the
SR91 toll road, CPTC entered into an interest rate swap
arrangement with the same parties. The swap expires in January
2004 and fixes the interest rate on the Bank Debt from 9.21% to
9.71% during the term of the swap agreement.
The institutional note is with Connecticut General Life
Insurance Company, a subsidiary of CIGNA Corporation. The note
converted into a term loan upon completion of the SR91 toll
road.
Substantially all the assets of CPTC and the partners' equity
interest in CPTC secure the term debt.
Orange County Transportation Authority holds $8 million of
subordinated debt which is due in varying amounts over 10
years. Interest accrues at 9% and is payable quarterly
beginning in 2000.
In July 1996, CPTC borrowed from the partners $2 million to
facilitate the completion of the project. In 1997, CPTC
borrowed an additional $4 million from the partners in order to
comply with equity maintenance provisions of the contract with
the State of California and its lenders. The debt is payable
to the partners and is generally subordinated to all other debt
of CPTC. Interest on the subordinated debt compounds annually
at 9.5% and is payable only as CPTC generates excess cash
flows.
CPTC capitalized interest of $- million, $5 million and $7
million in 1997, 1996 and 1995.
Other:
In June 1997, a mortgage with Metropolitan Life was
established. The Pavilion Towers building in Aurora, CO
collateralizes this debt.
Scheduled maturities of long-term debt through 2002 are as
follows (in millions): 1998 - $3; 1999 -$6; 2000 - $5; 2001 -
$6 and $8 in 2002.
(12) Income Taxes
An analysis of the income tax benefit (provision) attributable
to earnings from continuing operations before income taxes and
minority interest for the three years ended December 27, 1997
follows:
(dollars in millions) 1997 1996 1995
Current:
U.S. federal $ (54) $ (61) $ (66)
Foreign - (4) (4)
State (1) (6) (3)
------- ------ ------
(55) (71) (73)
Deferred:
U.S. federal 103 67 145
Foreign - - 3
State - 1 4
------- ------ ------
103 68 152
------- ------ ------
$ 48 $ (3) $ 79
======= ====== ======
The United States and foreign components of earnings from
continuing operations for tax reporting purposes, before equity
loss in MFS (recorded net of tax), minority interest and income
taxes follows:
(dollars in millions) 1997 1996 1995
United States $ 31 $ 106 $ 187
Foreign - 1 3
------- ------ -----
$ 31 $ 107 $ 190
======= ====== =====
A reconciliation of the actual income tax benefit (provision)
and the tax computed by applying the U.S. federal rate (35%) to
the earnings from continuing operations before equity loss in
MFS (recorded net of tax), minority interest and income taxes
for the three years ended December 27, 1997 follows:
(dollars in millions) 1997 1996 1995
Computed tax at statutory rate $ (11) $ (37) $ (67)
State income taxes (1) (3) -
Depletion 3 3 2
Goodwill amortization - (3) (2)
Tax exempt interest 2 2 2
Prior year tax adjustments 62 44 51
Compensation expense attributable
to options (7) - -
MFS deferred tax - - 93
Taxes on foreign operations - (2) 1
Other - (7) (1)
------- ------- ------
$ 48 $ (3) $ 79
======= ======= ======
During the three years ended December 27, 1997, the Group
settled a number of disputed tax issues related to prior years
that have been included in prior year tax adjustments.
Possible taxes, beyond those provided on remittances of
undistributed earnings of foreign subsidiaries, are not
expected to be material.
The components of the net deferred tax liabilities for the
years ended December 27, 1997 and December 28, 1996 were as
follows:
(dollars in millions) 1997 1996
Deferred tax liabilities:
Investments in securities $ 7 $ 11
Investments in joint ventures 33 45
Asset bases - accumulated depreciation 53 225
Coal sales 41 15
Other 16 16
------- -------
Total deferred tax liabilities 150 312
Deferred tax assets:
Compensation - retirement benefits 25 29
Investment in subsidiaries 8 2
Provision for estimated expenses 7 26
Net operating losses of subsidiaries - 6
Foreign and general business tax credits 3 67
Alternative minimum tax credits - 16
Other 9 19
Valuation allowances - (6)
------- -------
Total deferred tax assets 52 159
------- -------
Net deferred tax liabilities $ 98 $ 153
======= =======
(13) Stockholders' Equity
PKS is generally committed to purchase all Class D Stock in
accordance with the Certificate of Incorporation. Issuances and
repurchases of common shares, including conversions, for the
three years ended December 27, 1997 were as follows:
Class
D Stock
Shares issued in 1995, including conversions
of 12,847,155 13,377,765
Shares repurchased in 1995 210,735
Shares issued in 1996, including conversions
of 2,052,245 2,052,425
Shares repurchased in 1996, including conversions
of 150,995 1,276,080
Shares issued in 1997, including conversions
of 6,517,715 19,630,730
Shares repurchased in 1997, including conversions
of 1,180 14,805
(14) Class D Stock Plan
In December 1997, stockholders approved amendments to the 1995
Class D Stock Plan ("the Plan"). The amended plan, among
other things, increases the number of shares reserved for
issuance upon the exercise of stock based awards to
35,000,000, increases the maximum number of options granted to
any one participant to 5,000,000, provides for the
acceleration of vesting in the event of a change in control,
allows for the grant of stock based awards to directors of the
Group and other persons providing services to the Group, and
allows for the grant of nonqualified stock options with an
exercise price of less than the fair market value of Class D
Stock.
In December 1997, the Group converted both option and stock
appreciation rights plans of a subsidiary, to the Group's
plan. This conversion resulted in the issuance of 3.7 million
options to purchase Class D Stock at $9 per share. The Group
recognized a one time expense, and a corresponding increase in
equity, as a result of the transaction. This increase in equity
and the conversion of the stock appreciation rights liability to
equity are reflected as option activity in the Statement of Changes
in Stockholders' Equity. The options vest over three years and
expire in December 2002.
The Group has elected to adopt only the required disclosure
provisions and not the optional expense recognition provisions
under SFAS No. 123 "Accounting for Stock Based Compensation",
which established a fair value based method of accounting for
stock options and other equity instruments. The fair value of
the options outstanding was calculated using the Black-Scholes
method using risk-free interest rates ranging from 5.5% to 6.77%
and expected lives of 75% of the term of the option. The Group
used an expected volatility rate of 0%, which is allowed for private
entities under SFAS No. 123. Once the Gruop's stock becomes listed,
volatility factors will be incorporated in determining fair value.
The Group's net income and earnings per share for 1997 and 1996
would have been reduced to the pro forma amounts shown below if
SFAS No. 123 had been applied.
1997 1996
Net Income
As Reported $ 93 $ 113
Pro Forma 93 112
Basic Earnings per Share
As Reported $ .74 $ .97
Pro Forma .74 .97
Diluted Earning per Share
As Reported $ .74 $ .97
Pro Forma .74 .96
The 1995 historical pro forma amounts did not vary as the options
granted in 1995 had not vested.
Transactions involving stock options granted under the Plan are
summarized as follows:
Option Price Weighted Avg.
Shares Per Share Option Price
Balance December 31, 1994 - $ - $ -
Options granted 1,340,000 8.08 8.08
Options cancelled - - -
Options exercised - - -
---------
Balance December 30, 1995 1,340,000 $ 8.08 $ 8.08
======== ========
Options granted 895,000 $ 9.90 $ 9.90
Options cancelled (15,000) 8.08 8.08
Options exercised - - -
---------
Balance December 28, 1996 2,220,000 $8.08 - $9.90 $ 8.81
============= ========
Options granted 7,495,465 $9.00 - $10.85 $ 9.93
Options cancelled (53,000) $ 9.90 $ 9.90
Options exercised (2,318,465) $8.08 - $ 9.90 $ 8.93
----------
Balance December 27, 1997 7,344,000 $8.08 - $10.85 $ 9.91
============== ========
Options exercisable
December 30, 1995 - $ - $ -
December 28, 1996 265,000 8.08 8.08
December 27, 1997 1,295,269 $8.08 - $9.90 8.70
The weighted average remaining life for the 7,344,000 options
outstanding on December 27, 1997 is 8.3 years.
(15) Industry and Geographic Data
The Group operates primarily in three reportable segments:
information services, telecommunications and coal mining.
Other primarily includes CPTC and corporate overhead not
attributable to a specific segment and marketable securities.
Equity earnings is included due to the significant equity
investments in the telecommunication business.
In 1997, 1996 and 1995 Commonwealth Edison Company accounted
for 43%, 23% and 23% of the Group's revenues.
A summary of the Group's operations by industry and geographic
region is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Telecom-
Industry Data Information munications Coal Discontinued
(dollars in Service (C-TEC Mining Other Operations Consolidated
millions) Entities)
1997
Revenue $ 94 $ - $ 222 $ 16 $ - $ 332
Operating
Earnings (16) - 82 (23) - 43
Equity Losses,
net - (23) - (20) - (43)
Identifiable
Assets 61 336 499 588 643 2,127
Capital
Expenditures 14 - 3 9 - 26
Depreciation,
Depletion &
Amortization 8 - 8 8 - 24
1996
Revenue $ 42 $ 367 $ 234 $ 9 $ - $ 652
Operating
Earnings (3) 31 94 (35) - 87
Equity Losses,
net (1) (1) - (7) - (9)
Identifiable
Assets 29 1,100 387 380 608 2,504
Capital
Expenditures 11 87 2 17 - 117
Depreciation,
Depletion &
Amortization 10 106 12 4 - 132
1995
Revenue $ 36 $ 325 $ 216 $ 3 $ - $ 580
Operating
Earnings 4 37 77 (73) - 45
Equity Losses,
net - (3) - (2) - (5)
Identifiable
Assets 34 1,143 368 614 319 2,478
Capital
Expenditures 6 72 4 36 - 118
Depreciation,
Depletion &
Amortization 5 81 7 3 - 96
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Telecom-
Geographic Data Information munications Coal Discontinued
(dollars in Services (C-TEC Mining Other Operations Consolidated
millions) Entities)
1997
Revenue:
United States $ 94 $ - $ 222 $ 16 $ - $ 332
Other - - - - - -
---- ----- ----- ----- ------ ------
$ 94 $ - $ 222 $ 16 $ - $ 332
==== ===== ===== ===== ====== ======
Operating Earnings:
United States $(16) $ - $ 82 $ (23) $ - $ 43
Other - - - - - -
---- ------ ----- ----- ------ ------
$(16) $ - $ 82 $ (23) $ - $ 43
==== ====== ===== ===== ====== ======
Identifiable Assets:
United States $ 59 $ 336 $ 499 $ 588 $ 321 $1,803
Other 2 - - - 322 324
---- ------ ----- ------ ------ ------
$ 61 $ 336 $ 499 $ 588 $ 643 $2,127
==== ====== ===== ====== ====== ======
1996
Revenue:
United States $ 42 $ 367 $ 234 $ 9 $ - $ 652
Other - - - - - -
----- ------ ----- ------ ------ ------
$ 42 $ 367 $ 234 $ 9 $ - $ 652
===== ====== ===== ====== ====== ======
Operating Earnings:
United States $ (3) $ 31 $ 94 $ (35) $ - $ 87
Other - - - - - -
----- ------ ----- ------ ------ ------
$ (3) $ 31 $ 94 $ (35) $ - $ 87
===== ====== ===== ====== ====== ======
Identifiable Assets:
United States $ 29 $1,100 $ 387 $ 380 $ 287 $2,183
Other - - - - 321 321
----- ------ ----- ------ ------ ------
$ 29 $1,100 $ 387 $ 380 $ 608 $2,504
===== ====== ===== ====== ====== ======
1995
Revenue:
United States $ 36 $ 325 $ 216 $ 3 $ - $ 580
Other - - - - - -
---- ------ ----- ----- ----- ------
$ 36 $ 325 $ 216 $ 3 $ - $ 580
==== ====== ===== ===== ===== ======
Operating Earnings:
United States $ 4 $ 37 $ 77 $ (73) $ - $ 45
Other - - - - - -
---- ------ ----- ----- ------ ------
$ 4 $ 37 $ 77 $ (73) $ - $ 45
==== ====== ===== ===== ====== ======
Identifiable Assets:
United States $ 34 $1,143 $ 368 $614 $ 223 $2,382
Other - - - - 96 96
---- ------ ----- ---- ----- ------
$ 34 $1,143 $ 368 $614 $ 319 $ 2,478
==== ====== ===== ==== ===== =======
</TABLE>
(16) Related Party Transactions
The Group receives certain mine management services from the
Construction & Mining Group. The expense for these services
was $32 million for 1997, $37 million for 1996 and $30 million
for 1995, and is recorded in general and administrative
expenses.
(17) Fair Value of Financial Instruments
The carrying and estimated fair values of the Group's financial
instruments are as follows:
1997 1996
Carrying Fair Carrying Fair
(dollars in millions) Amount Value Amount Value
Cash and cash equivalents (Note 8) $ 87 $ 87 $ 147 $ 147
Marketable securities (Note 8) 678 678 372 372
Restricted securities (Note 8) 22 22 17 17
Investments in C-TEC entities (Note 9) 335 776 355 315
Investment in equity securities (Notes 8 & 9) - - 75 75
Investments in discontinued operations (Note 4) 643 854 608 960
Long-term debt (Notes 8 & 11) 140 140 377 384
(18) C-TEC Restructuring
The following is financial information of the Group had C-TEC
been accounted for utilizing the equity method as of December
27, 1997 and December 28, 1996 and for each of the three years
ended December 27, 1997. The 1997 financial statements include
C-TEC accounted for utilizing the equity method and are
presented here for comparative purposes only.
Operations (dollars in millions) 1997 1996 1995
Revenue $ 332 $ 285 $ 255
Cost of Revenue (175) (134) (133)
------ ----- ------
157 151 122
General and Administrative Expenses (114) (95) (114)
------ ----- -----
Operating Earnings 43 56 8
Other (Expense) Income:
Equity earnings (losses), net (43) (13) 7
Investment income, net 45 42 30
Interest expense, net (15) (5) (1)
Gain on subsidiary's stock transactions, net - - 3
Other, net 1 11 120
------ ------ ------
(12) 35 159
Equity Loss in MFS - - (131)
------ ------- ------
Earnings from Continuing Operations
before Income Taxes and Minority Interest 31 91 36
Income Tax Benefit 48 11 90
Minority Interest in Net Loss of Subsidiaries 4 2 -
------- -------- -----
Income from Continuing Operations 83 104 126
Income from Discontinued Operations 10 9 14
------- -------- -----
Net Earnings $ 93 $ 113 $ 140
======= ======== =====
Financial Position (dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 87 $ 71
Marketable securities 678 325
Restricted securities 22 17
Receivables 42 34
Investments in Discontinued Operations 643 608
Other 22 12
------- ------
Total Current Assets 1,494 1,067
Net Property, Plant and Equipment 184 174
Investments 383 458
Intangible Assets, net 21 23
Other Assets 45 49
------- ------
$ 2,127 $1,771
======= ======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 31 $ 41
Current portion of long-term debt 3 2
Accrued reclamation and other mining costs 19 19
Other 36 27
------- ------
Total Current Liabilities 89 89
Long-term Debt, less current portion 137 113
Deferred Income Taxes 83 47
Accrued Reclamation Costs 100 98
Other Liabilities 139 163
Minority Interest 1 4
Stockholders' Equity 1,578 1,257
------- ------
$ 2,127 $ 1,771
======= =======
(19) Pro Forma Information (unaudited).
The following information represents the pro forma financial
position of the Group after reflecting the impact of the
transactions with CalEnergy (Note 4) and the conversion of
Class C shares to Class D shares (Note 21) both of which occurred
subsequent to the fiscal year end.
1997 1997
(dollars in millions) Historical Adjustments Pro Forma
Current Assets
Cash & marketable securities $ 765 $ 122 (a) $ 2,046
1,159 (b)
Investment in discontinued
Operations 643 (643)(b) -
Other current assets 86 86
------- ----- -------
Total Current Assets 1,494 638 2,132
Property, Plant & Equipment, net 184 184
Other Non-current assets 449 449
------- ----- --------
$ 2,127 $ 638 $ 2,765
======= ===== ========
Current Liabilities $ 89 $ 192 (b) $ 281
Non-current Liabilities 459 459
Minority Interest 1 1
Stockholders' Equity 1,578 122 (a) 2,024
324 (b)
-------- ----- --------
$ 2,127 $ 638 $ 2,765
======== ===== ========
(a) Reflect conversion of 2.3 million Class C shares to 10.5
million Class D shares.
(b) Reflect sale of energy assets to CalEnergy and related income
tax liability.
(20) Other Matters
In connection with the sale of approximately 10 million Class D shares
to employees in 1997, the Company has retained the right to purchase
the relevant Class D shares at the then current Class D Stock price if
the Transaction is definitively abandoned by formal action of the PKS
Board or the employees voluntarily terminate their employment on
various dates prior to January 1, 1999.
In May 1995, the lawsuit titled Whitney Benefits, Inc. and Peter
Kiewit Sons' Co. v. The United States was settled. In 1983,
plaintiffs alleged that the enactment of the Surface Mining
Control and Reclamation Act of 1977 had prevented the mining of
their Wyoming coal deposit and constituted a government taking
without just compensation. In settlement of all claims,
plaintiffs agreed to deed the coal deposits to the government and
the government agreed to pay plaintiffs $200 million, of which
Peter Kiewit Sons' Co., a Level 3 subsidiary, received
approximately $135 million in June 1995 and recorded it in other
income on the statements of earnings.
The Group is involved in various other 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.
The Group leases various buildings and equipment under both
operating and capital leases. Minimum rental payments on
buildings and equipment subject to noncancelable operating
leases during the next 7 years aggregate $29 million.
It is customary in the Group's industries to use various
financial instruments in the normal course of business. These
instruments include items such as letters of credit. Letters
of credit are conditional commitments issued on behalf of the
Group in accordance with specified terms and conditions. As of
December 27, 1997, the Group had outstanding letters of credit
of approximately $22 million.
(21) Subsequent Events
In January 1998, approximately 2.3 million shares of Class C
Stock, with a redemption value of $122 million, were converted
into 10.5 million shares of Class D Stock.
In March 1998, PKS announced that its Class D Stock will begin
trading on April 1 on the Nasdaq National Market under the
symbol "LVLT." The Nasdaq listing will follow the separation
of the Group and the Construction Group of PKS, which is
expected to be completed on March 31, 1998. In connection with
the separation, PKS' construction subsidiary will be renamed
"Peter Kiewit Sons', Inc." and PKS Class D stock will become
the common stock of Level 3 Communications, Inc.
PKS' certificate of incorporation gives stockholders the right
to exchange their Class C Stock for Class D Stock under a set
conversion formula. That right will be eliminated as a result
of the separation of the Group and the Construction Group. To
replace that conversion right, Class C stockholders received
6.5 million shares of a new Class R stock in January, 1998,
which is convertible into Class D Stock in accordance with
terms ratified by stockholders in December 1997.
The PKS Board of Directors has approved in principle a plan to
force conversion of all shares of Class R stock outstanding.
Due to certain provisions of the Class R stock, conversion will
not be forced prior to May 1998, and the final decision to
force conversion would be made by Level 3 Board of Directors at
that time. The Level 3 Board may choose not to force
conversion if it were to decide that conversion is not in the
best interests of the stockholders of Level 3. If, as
currently anticipated, the Level 3 Board determines to force
conversion of the Class R stock on or before June 30, 1998,
certain adjustments will be made to the cost sharing and risk
allocation provisions of the separation agreement between Level
3 and the Construction business.
If the Level 3 Board of Directors determines to force
conversion of the Class R stock, each share of Class R stock
will be convertible into $25 worth of Level 3 (Class D Stock)
common stock, based upon the average trading price of the Level
3 common stock on the Nasdaq National Market for the last
fifteen trading days of the month prior to the determination by
the Board of Directors to force conversion. When the spin-off occurs,
Level 3 will increase paid in capital and reduce retained earnings
by the fair value of the Class R shares.
