-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SdZz66NKuivdFVzkahdoe0EZVDOmLCbOw+6yeJAcl2c+PUkK/TicFIjTM5XYRF+o DNdPnM7K3rc62E3WJOlzEQ== 0000794323-97-000018.txt : 19971117 0000794323-97-000018.hdr.sgml : 19971117 ACCESSION NUMBER: 0000794323-97-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KIEWIT PETER SONS INC CENTRAL INDEX KEY: 0000794323 STANDARD INDUSTRIAL CLASSIFICATION: HEAVY CONSTRUCTION OTHER THAN BUILDING CONST - CONTRACTORS [1600] IRS NUMBER: 470210602 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15658 FILM NUMBER: 97720491 BUSINESS ADDRESS: STREET 1: 1000 KIEWIT PLZ STREET 2: 14TH FLOOR CITY: OMAHA STATE: NE ZIP: 68131 BUSINESS PHONE: 4023422052 MAIL ADDRESS: STREET 1: 1000 KIEWIT PLAZA STREET 2: 14TH FL CITY: OMAHA STATE: NE ZIP: 68131 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period__________to__________ Commission file number 0-15658 PETER KIEWIT SONS', INC. (Exact name of registrant as specified in its charter) Delaware 47-0210602 (State of Incorporation) (I.R.S. Employer Identification No.) 1000 Kiewit Plaza, Omaha, Nebraska 68131 (Address of principal executive offices) (Zip Code) (402)-342-2052 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of each class of the issuer's common stock, as of November 3, 1997: Class C Common Stock ................... 10,129,725 shares Class D Common Stock ................... 26,621,725 shares PETER KIEWIT SONS', INC. Part I - Financial Information Item 1. Financial Statements: Consolidated Condensed Statements of Operations Consolidated Condensed Balance Sheets Consolidated Condensed Statements of Cash Flows Notes to Consolidated Condensed Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II - Other Information Item 6. Exhibits and Reports on Form 8-K Signatures Index to Exhibits PETER KIEWIT SONS', INC. Consolidated Condensed Statements of Operations (unaudited) Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions, except per share data) 1997 1996 1997 1996 Revenue $ 896 $ 809 $ 2,180 $ 2,186 Cost of Revenue (785) (670) (1,877) (1,842) ------ ------ ------- ------- 111 139 303 344 General and Administrative Expenses (53) (53) (147) (177) ------ ------- ------- -------- Operating Earnings 58 86 156 167 Other Income (Expense): Equity Losses, net (12) (2) (17) (3) Investment Income, net 12 14 34 48 Interest Expense, net (5) (9) (13) (24) Other, net 9 5 29 19 ------- -------- ------ -------- 4 8 33 40 ------- -------- ------ -------- Income from Continuing Operations Before Income Taxes and Minority Interest 62 94 189 207 Provision for Income Taxes (23) (36) (73) (79) Minority Interest in Net Loss (Income) of Subsidiaries 1 - 2 (1) ------- -------- ------ ------- Income from Continuing Operations 40 58 118 127 Discontinued Operations: Income from Operations, net of income taxes of ($8), ($3), ($15) and ($6) 13 5 26 7 Extraordinary Item - Windfall tax, net of income tax benefit of $34 (63) - (63) - -------- -------- ----- ------ Income (Loss) from Discontinued Operations (50) 5 (37) 7 -------- -------- ----- ------ Net Earnings(Loss) $ (10) $ 63 $ 81 $ 134 ======== ======== ===== ====== Earnings Attributable to Class B&C Stock $ 34 $ 39 $ 84 $ 75 ======== ======== ===== ====== Earnings (Loss) Attributable to Class D Stock: Continuing Operations 6 19 34 52 Discontinued Operations (50) 5 (37) 7 -------- -------- ----- ------ $ (44) $ 24 $ (3) $ 59 ======== ======== ===== ====== See accompanying notes to consolidated condensed financial statements. PETER KIEWIT SONS', INC. Consolidated Condensed Statements of Operations (unaudited) Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions, except per share data) 1997 1996 1997 1996 Primary Earnings per Share: Class B&C $ 3.38 $ 3.64 $ 8.76 $ 7.18 ======== ======= ======= ====== Class D Continuing Operations $ .26 $ .76 $ 1.40 $ 2.19 Discontinued Operations: Income from Operations .55 .22 1.08 .33 Extraordinary Item (2.59) - (2.59) - -------- ------- ------- ------ Discontinued Operations (2.04) .22 (1.51) .33 -------- ------- ------- ------ Net Income (Loss) $ (1.78) $ .98 $ (.11) $ 2.52 ======== ======= ======= ====== Fully Diluted Earnings per Share: Class B&C $ 3.26 $ 3.53 $ 8.42 $ 6.97 ======== ======= ======= ====== Class D Continuing Operations $ .26 $ .76 $ 1.40 $ 2.19 Discontinued Operations: Income from Operations .55 .22 1.08 .33 Extraordinary Item (2.59) - (2.59) - -------- ------- ------- ------ Discontinued Operations (2.04) .22 (1.51) .33 -------- ------- ------- ------ Net Income (Loss) $ (1.78) $ .98 $ (.11) $ 2.52 ======== ======= ======= ====== Cash Dividends Declared per Common Share: Class B&C $ - $ - $ .70 $ .60 ======== ======= ======== ====== Class D $ - $ - $ - $ - ======== ======= ======== ====== See accompanying notes to consolidated condensed financial statements. PETER KIEWIT SONS', INC. Consolidated Condensed Balance Sheets September 30, December 28, 1997 1996 (dollars in millions, except per share data) (unaudited) Assets Current Assets: Cash and cash equivalents $ 522 $ 320 Marketable securities 373 426 Restricted securities 22 17 Receivables, less allowance of $15 and $20 463 357 Costs and earnings in excess of billings on uncompleted contracts 118 80 Investment in construction joint ventures 148 91 Deferred income taxes 46 59 Other 51 45 ------- ------- Total Current Assets 1,743 1,395 Property, Plant and Equipment, less accumulated depreciation and amortization of $665 and $774 391 807 Investments 531 283 Investments in Discontinued Operations 597 608 Intangible Assets, net 55 368 Other Assets 43 72 ------- ------- $ 3,360 $ 3,533 ======= ======= See accompanying notes to consolidated condensed financial statements. PETER KIEWIT SONS', INC. Consolidated Condensed Balance Sheets September 30, December 28, 1997 1996 (dollars in millions, except per share data) (unaudited) Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 268 $ 235 Current portion of long-term debt: Telecommunications - 55 Other 11 2 Accrued costs and billings in excess of revenue on uncompleted contracts 302 124 Accrued insurance costs 86 81 Other 83 140 ------- -------- Total Current Liabilities 750 637 Long-Term Debt, less current portion: Telecommunications - 207 Other 151 125 Deferred Income Taxes 158 146 Retirement Benefits 40 48 Accrued Reclamation Costs 100 99 Other Liabilities 182 234 Minority Interest 11 218 Stockholders' Equity: Preferred stock, no par value, authorized 250,000 shares: no shares outstanding - - Common stock, $.0625 par value, $1.8 billion aggregate redemption value: Class B, authorized 8,000,000 shares: -0- outstanding in 1997 and 263,468 in 1996 - - Class C, authorized 125,000,000 shares: 10,082,829 outstanding in 1997 and 10,743,173 in 1996 1 1 Class D, authorized 50,000,000 shares: 25,386,725 outstanding in 1997 and 23,219,744 in 1996 1 1 Additional paid-in capital 317 235 Foreign currency adjustment (8) (7) Net unrealized holding gain 18 23 Retained earnings 1,639 1,566 -------- ------- Total Stockholders' Equity 1,968 1,819 -------- ------- $ 3,360 $ 3,533 ======== ======= See accompanying notes to consolidated condensed financial statements. PETER KIEWIT SONS', INC. Consolidated Condensed Statements of Cash Flows (unaudited) Nine Months Ended September 30, (dollars in millions) 1997 1996 Cash flows from continuing operations: Net cash provided by continuing operations $ 341 $ 226 Cash flows from investing activities: Proceeds from sales and maturities of marketable securities 212 312 Purchases of marketable securities (193) (283) Change in restricted securities 4 2 Proceeds from sale of property, plant and equipment, and other investments 36 25 Capital expenditures (110) (138) Acquisitions and investments, net (53) (41) Other - 3 ------- ------- Net cash used in investing activities (104) (120) Cash flows from financing activities: Proceeds from long-term debt borrowings 21 35 Payments on long-term debt, including current portion (2) (40) Net change in short-term borrowings - (45) Repurchases of common stock (2) (15) Dividends paid (25) (25) Issuance of common stock 83 28 ------- -------- Net cash provided by (used in) financing activities 75 (62) Cash flows from discontinued operations: Discontinued operations - 3 Investments in discontinued operations (34) (55) ------- --------- Net cash used by discontinued operations (34) (52) Cash and cash equivalents of C-TEC at beginning of year (76) - ------- --------- Net change in cash and cash equivalents 202 (8) Cash and cash equivalents at beginning of period 320 457 ------- --------- Cash and cash equivalents at end of period $ 522 $ 449 ======= ========= Noncash investing activities from discontinued operations: Conversion of CalEnergy Convertible Debentures to CalEnergy Common Stock $ - $ 66 See accompanying notes to consolidated condensed financial statements. PETER KIEWIT SONS', INC. Notes to Consolidated Condensed Financial Statements 1. Basis of Presentation The consolidated condensed balance sheet of Peter Kiewit Sons', Inc. ("PKS") and subsidiaries (the "Company") at December 28, 1996 has been condensed from the Company's audited balance sheet as of that date. All other financial statements contained herein are unaudited and, in the opinion of management, contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of financial position and results of operations for the periods presented. The Company's accounting policies and certain other disclosures are set forth in the notes to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 28, 1996. On July 1, 1997, the Company paid $5 million to increase its ownership in ME Holding Inc. ("ME Holding") from 49% to 80%. The Company consolidated ME Holding in its 1997 financial statements and accounted for it using the equity method in 1996. The purchase price of $5 million was in the form of a note payable to the minority shareholder and is payable on demand. 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. C-TEC's financial position, results of operations and cash flows are consolidated in the 1996 consolidated condensed financial statements. Receivables at September 30, 1997 and December 28, 1996 include approximately $74 million and $86 million, respectively 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. The results of operations for the nine months ended September 30, 1997 are not necessarily indicative of the results to be expected for the full year. When appropriate, items within the consolidated condensed financial statements have been reclassified from the previous periods to conform to current year presentation. 2. Discontinued Operations On September 10, 1997, the Company and CalEnergy Company, Inc. ("CalEnergy") entered into an agreement whereby CalEnergy contracted to purchase the Company's energy investments for $1,155 million, subject to adjustments. These energy investments include approximately 20 million shares of CalEnergy common stock (assuming the exercise of 1 million options held by the Company), the Company's 30% ownership interest in CE Electric UK, plc ("CE Electric") and the Company's investments, made jointly with CalEnergy, in international power projects in Indonesia and the Philippines. The transaction is subject to the satisfactory completion of certain provisions of the agreement and is expected to close in early 1998. These assets comprise the energy segment of the Company. 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 consolidated condensed balance sheets and statements of operations and cash flows for all periods presented. The Company is no longer required to provide additional capital to these entities through the closing date. 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 Company's ownership in CalEnergy to approximately 23% but increased its proportionate share of CalEnergy's equity. It is the Company policy to recognize gains or losses on the sale of stock by its investees. The Company expects to recognize an after-tax gain of approximately $50 million from this transaction in the fourth quarter of 1997. The agreement with CalEnergy includes a provision whereby CalEnergy and the Company are to share 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 Company expects to receive additional proceeds of up to $20 million at the time of closing. The Company expects to recognize an after-tax gain on the disposition of its energy assets in 1998 of approximately $300 million. The after-tax proceeds from the transaction of approximately $960 million will be used to fund the expansion plan of the information services business. The following is summarized financial information for discontinued operations: Three Months Ended Nine Months Ended September 30, September 30, Income from Discontinued Operations 1997 1996 1997 1996 Operations Equity in: CalEnergy earnings, net $ 13 $ 7 $ 29 $ 14 CE Electric earnings, net 2 - 11 - Earnings in international energy projects 6 (1) 1 (6) CalEnergy debenture interest - 2 - 5 Income tax expense (8) (3) (15) (6) ------ ------ ------ ----- Income from operations $ 13 $ 5 $ 26 $ 7 ====== ====== ====== ===== Extraordinary Loss - Windfall Tax Company's share from CE Electric $ (58) $ - $ (58) $ - Company's share from CalEnergy (39) - (39) - Income tax benefit 34 - 34 - ------ ------ ------ ----- Extraordinary Loss $ (63) $ - $ (63) $ - ====== ====== ====== ===== In December 1996, CE Electric which is 70% owned by CalEnergy and 30% owned by the Company, acquired majority ownership of Northern Electric plc ("Northern") pursuant to a 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. 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 impact to the Company, directly through its investment in CE Electric and indirectly through its 30% interest in CalEnergy, was $63 million. The following summarizes the investments in discontinued operations: September 30, December 28, 1997 1996 (unaudited) Investment in CalEnergy $ 282 $ 292 Investment in CE Electric 129 176 Investment in international energy projects 184 157 Deferred income tax asset (liability) 2 (17) ------ ------ Total $ 597 $ 608 ====== ====== 3. Earnings Per Share: Primary and fully diluted earnings (loss) per share of common stock have been computed using the weighted average number of shares outstanding during each period after giving effect to common stock equivalents and other dilutive securities. In 1997, operations attributable to Class D Stock resulted in a loss. Therefore, the anti-dilutive effect of the Class D options was not included in the per share calculations. The number of shares used in computing earnings (loss) per share was as follows: Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Primary earnings per share: Class B&C 10,086,016 11,013,724 9,570,079 10,542,158 Class D 24,585,375 23,181,785 24,513,018 23,207,898 Fully diluted earnings per share: Class B&C 10,522,849 11,368,613 10,006,912 10,899,549 Class D 24,585,375 23,181,785 24,513,018 23,207,898 In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". The statement establishes standards for computing and presenting earnings per share and requires the restatement of prior period earnings per share data presented. This statement is effective for financial statements issued for periods ending after December 15, 1997 and earlier application is not permitted. Basic and diluted earnings per share, as defined in SFAS No. 128, are not expected to vary significantly from the primary and fully diluted earnings per share shown on the consolidated statements of operations. 4. Summarized Financial Information: Holders of Class B&C Stock (Construction & Mining Group) and Class D Stock (Diversified Group) are stockholders of PKS. The Construction & Mining Group ("KCG") contains the Company's construction and materials operations of Kiewit Construction Group Inc. The Diversified Group ("KDG") contains information services businesses operated by PKS Information Services, Inc., coal mining properties owned by Kiewit Coal Properties Inc., communications companies owned by Commonwealth Telephone Enterprises, Inc., RCN Corporation, Inc. and Cable Michigan, Inc., California Private Transportation Company, L.P. ("CPTC"), the owner-operator of the SR91 toll road in California, and miscellaneous investments. KDG also owns interests in CalEnergy, CE Electric and several international energy projects in Indonesia and the Philippines. These energy assets will be sold to CalEnergy in 1998 pending the satisfactory completion of certain provisions of the agreement. Corporate assets and liabilities which are not separately identified with the ongoing operations of the Construction & Mining Group or the Diversified Group are allocated equally between the two groups. A summary of the results of operations and financial position for the Construction & Mining Group and the Diversified Group follows. The summary information for December 28, 1996 was derived from the audited financial statements of the respective groups which were exhibits to the 1996 Form 10-K. All other summary information was derived from the unaudited financial statements of the respective groups which are exhibits to this Form 10-Q. All significant intercompany accounts and transactions, except those directly between the Construction & Mining Group and the Diversified Group, have been eliminated. (in millions, except per share data) Construction & Mining Group: Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Results of Operations: Revenue $ 824 $ 651 $ 1,968 $ 1,729 Net earnings 34 39 84 75 Primary earnings per share 3.38 3.64 8.76 7.18 Fully diluted earnings per share 3.26 3.53 8.42 6.97 September 30, December 28, 1997 1996 Financial Position: Working capital $ 389 $ 367 Total assets 1,384 1,042 Long-term debt, less current portion 17 12 Stockholders' equity 593 562 Included within the results of operations are mine management fees paid by the Diversified Group of $7 million and $9 million for the three months ended September 30, 1997 and 1996 and $23 million and $24 million for the nine months ended September 30, 1997 and 1996. (in millions, except per share data) Diversified Group: Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Results of Operations: Revenue $ 80 $ 165 $ 241 $ 482 Net income (loss): Continuing operations 6 19 34 52 Discontinued operations (50) 5 (37) 7 -------- ------- ------ ------ $ (44) $ 24 $ (3) $ 59 ======== ======= ====== ====== Primary and fully diluted earnings (Loss) per share: Continuing operations .26 .76 1.40 2.19 Discontinued operations (2.04) .22 (1.51) .33 -------- ------- ------ ------ $ (1.78) $ .98 $(.11) $ 2.52 ======== ======= ===== ====== September 30, December 28, 1997 1996 Financial Position: Working capital $ 604 $ 391 Total assets 2,013 2,511 Long-term debt, less current portion 134 320 Stockholders' equity 1,375 1,257 Included within the results of operations are mine management fees paid to the Construction & Mining Group of $7 million and $9 million for the three months ended September 30, 1997 and 1996 and $23 million and $24 million for the nine months ended September 30, 1997 and 1996. 5. Acquisitions: In December 1996, CE Electric which is 70% owned by CalEnergy and 30% owned by KDG, acquired majority ownership of the outstanding ordinary share capital of Northern Electric plc ("Northern") pursuant to a tender offer (the "Tender Offer") commenced in the United Kingdom by CE Electric in November 1996. As of March 1997, CE Electric effectively owned 100% of Northern's ordinary shares. As of September 30, 1997, CalEnergy and KDG had contributed to CE Electric approximately $410 million and $176 million, respectively, of the approximately $1.3 billion required to acquire all of Northern's ordinary and preference shares in connection with the Tender Offer. The remaining funds necessary to consummate the Tender Offer were provided by a term loan and a revolving facility agreement obtained by CE Electric. KDG has not guaranteed, and is not otherwise subject to recourse for, amounts borrowed under these facilities. The Company's investment in CE Electric and the earnings and losses associated with CE Electric are included in discontinued operations. In April 1997, KCG and a partner each invested $15 million to acquire a 96% interest in Oak Mountain Energy L.L.C. ("Oak Mountain"). Oak Mountain then acquired the existing assets of an underground coal mine in Alabama for approximately $18 million and assumed approximately $14 million of related liabilities. Oak Mountain intends to use the remaining cash and $30 million of nonrecourse bank borrowings to retire the existing debt and further develop and modernize the mine. Oak Mountain's results are consolidated with those of the Company on a pro-rata basis since the date of acquisition. The coal mine's results of operations prior to the acquisition were not significant relative to the Company's results. 6. Investments: KDG is able to defer the tax on $40 million of gain with respect to the 1995 Whitney Benefits litigation settlement by investing in real estate. In February 1997, KDG purchased an office building in Aurora, Colorado for $22 million. In June 1997, KDG closed a $16 million financing agreement with Metropolitan Life Insurance Company. The 15-year note is collateralized by the Aurora property and carries an interest rate of 8.38%. KDG has also begun construction on a second data center for the information services business in Phoenix, Arizona. The cost of the building, approximately $11 million, will be applied against the $40 million gain. KDG may make additional real estate investments to defer the remaining balance. In late 1995, a KDG 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. KDG and CalEnergy have 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. KDG does not expect the outcome of the litigation to affect its financial position due to the transactions contemplated with CalEnergy. The Company and CalEnergy had agreed to jointly develop and construct geothermal power facilities at the Dieng and Patuha sites in Indonesia. Dieng Unit 1 is being constructed and is expected to be placed in commercial operation later this year. An additional five units are expected to be constructed on a modular basis as the geothermal resources are developed. In June 1997, the Company and CalEnergy closed a $400 million revolving credit facility to finance the development and construction of the remaining Indonesian projects. The credit facility is collateralized by the Indonesian assets and is nonrecourse to the Company. The Company's investments in the international energy projects and the earnings and losses associated with these investments are included in discontinued operations. 7. C-TEC Restructuring: 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. The restructuring is expected to permit investors and the financial markets to better understand and evaluate C-TEC's various businesses. In addition, the restructuring has allowed C-TEC to raise capital on more efficient terms. In July 1997, C-TEC closed four separate credit facilities with a syndicate of banks aggregating $410 million and in October 1997, RCN issued $575 million of debt. These proceeds were used to refinance the cable group's existing Senior Secured Notes and to fund RCN's continued development. As a result of the restructuring, KDG 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 consolidated financial statements. The financial position of each entity at September 30, 1997 and December 28, 1996 (pro-forma) and KDG's proportionate share of the equity in each entity including allocated goodwill was as follows: Commonwealth Telephone Cable RCN Enterprises Michigan Corporation 1997 1996 1997 1996 1997 1996 Financial Position: Current assets $ 81 $ 51 $ 18 $ 10 $ 247 $ 143 Other assets 291 266 124 139 352 485 ----- ----- ----- ----- ----- ---- Total assets 372 317 142 149 599 628 Current liabilities 76 59 17 24 72 57 Other liabilities 262 189 163 190 138 175 Minority interest - - 15 15 15 5 ----- ----- ----- ----- ----- ---- Total liabilities 338 248 195 229 225 237 ----- ----- ----- ----- ----- ---- Net assets (liabilities) $ 34 $ 69 $ (53)$ (80) $ 374 $ 391 ===== ====== ===== ===== ===== ===== KDG's Share: Equity in net assets $ 17 $ 33 $ (26)$ (38)$ 181 $ 189 Goodwill 82 58 58 75 32 41 ----- ----- ----- ----- ------ ----- $ 99 $ 91 $ 32 $ 37 $ 213 $ 230 ===== ===== ===== ===== ====== ===== The results of operations for each entity for the nine months ended September 30, 1997 and 1996, and KDG's proportionate share, including goodwill amortization were as follows: Commonwealth Telephone Cable RCN Enterprises Michigan Corporation 1997 1996 1997 1996 1997 1996 Results of Operations: Revenue $ 145 $139 $ 61 $ 57 $ 92 $ 76 Net income (loss) available to common stockholders 18 17 (3) (7) (35) (1) KDG's Share: Net income (loss) $ 9 $ 8 $ (1) $ (3) $(17) $ - Goodwill amortization (1) (3) (3) (2) - (2) ------ ---- ----- ----- ---- ----- Equity in net income (loss) $ 8 $ 5 $ (4) $ (5) $(17) $ (2) ====== ==== ===== ===== ==== ===== The following is financial information of the Company had C-TEC been accounted for utilizing the equity method in the consolidated condensed financial statements as of December 28, 1996 and for the three and nine months ended September 30, 1996. The financial statements for 1997 include C-TEC accounted for utilizing the equity method. They are presented here for comparative purposes only. September 30, December 28, (dollars in millions) 1997 1996 Assets Current Assets: Cash and cash equivalents $ 522 $ 244 Marketable securities 373 379 Restricted securities 22 17 Receivables, less allowance of $15 and $17 463 315 Costs and earnings in excess of billings on uncompleted contracts 118 80 Investment in construction joint ventures 148 91 Deferred income taxes 46 49 Other 51 32 -------- -------- Total Current Assets 1,743 737 Property, Plant and Equipment, net 391 339 Investments 531 549 Investments in Discontinued Operations 597 608 Intangible Assets, net 55 38 Other Assets 43 47 -------- -------- $ 3,360 $ 2,788 ======== ======== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 268 $ 197 Current portion of long-term debt 11 2 Accrued costs and billings in excess of revenue on uncompleted contracts 302 112 Accrued insurance costs 86 81 Other 83 78 -------- -------- Total Current Liabilities 750 470 Long-Term Debt, less current portion 151 125 Deferred Income Taxes 158 45 Retirement Benefits 40 45 Accrued Reclamation Costs 100 99 Other Liabilities 182 181 Minority Interest 11 4 Total Stockholders' Equity 1,968 1,819 -------- --------- $ 3,360 $ 2,788 ======== ========= Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions) 1997 1996 1997 1996 Revenue $ 896 $ 719 $ 2,180 $ 1,913 Cost of Revenue (785) (611) (1,877) (1,659) ------- ------- ------- ------- 111 108 303 254 General and Administrative Expenses (53) (32) (147) (113) ------- ------- ------- ------- Operating Earnings 58 76 156 141 Other Income (Expense): Equity Earnings (Loss), net (12) 2 (17) (4) Investment Income, net 12 12 34 39 Interest Expense, net (5) (1) (13) (4) Other, net 9 4 29 24 ------- -------- ------- ------ 4 17 33 55 ------- -------- ------- ------ Income from Continuing Operations Before Income Taxes and Minority Interest 62 93 189 196 Provision for Income Taxes (23) (36) (73) (72) Minority Interest in Net Loss of Subsidiaries 1 1 2 3 --------- --------- ------- ------- Income from Continuing Operations 40 58 118 127 Income (Loss) from Discontinued Operations (50) 5 (37) 7 --------- ---------- ------- ------- Net Earnings (Loss) $ (10) $ 63 $ 81 $ 134 ========= ========== ======= ======= Nine Months Ended September 30, (dollars in millions) 1997 1996 Cash flows from continuing operations: Net cash provided by continuing operations $ 341 $ 164 Cash flows from investing activities: Proceeds from sales and maturities of marketable securities 212 223 Purchases of marketable securities (193) (261) Change in restricted securities 4 2 Proceeds from sale of property, plant and equipment, and other investments 36 25 Capital expenditures (110) (80) Acquisitions and investments, net (53) (15) Other - 3 ------- ------ Net cash used in investing activities (104) (103) Cash flows from financing activities: Proceeds from long-term debt borrowings 21 16 Payments on long-term debt including current portion (2) (6) Net change in short-term borrowings - (45) Repurchases of common stock (2) (15) Dividends paid (25) (24) Issuance of common stock 83 27 -------- ------- Net cash provided by (used in) financing activities 75 (47) Cash flows used in discontinued operations (34) (52) -------- ------- Net change in cash and cash equivalents 278 (38) Cash and cash equivalents at beginning of period 244 408 -------- ------- Cash and cash equivalents at end of period $ 522 $ 370 ======== ======= 8. Other Matters: In October 1996, the Board of Directors ("Board") directed the Company's management to pursue a listing of Class D Stock as a way to address certain issues created by the Company's two-class capital stock structure and the need to attract and retain the best management for the Company's 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 the Diversified Group through split off of KCG (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 would be 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. As a result, the restructuring will probably not occur until mid-year 1998. The Diversified Group probably will not seek to list its stock for public trading on a national securities exchange until it raises capital through a public equity offering or desires to have a listed equity security available for acquisitions. The Board will retain the right, even if the stockholders ratify the proposal and favorable tax treatment is satisfied, to abandon, defer or modify the Transaction if it believes that it would be in the best interests of all stockholders. If the Transaction is approved by the Company's shareholders, the historical financial statements of the Company will be restated to reflect the historical basis financial information of KCG as discontinued operations. The separation of KCG from the Company will be accounted for at fair value and following the Transaction the Company will continue to account for KDG's results on a historical cost basis. After the Transaction, the construction and materials business will be operated by the management of KCG which will continue to account for KCG's results on a historical cost basis in its separate financial statements. KDG has recently decided to substantially increase its emphasis on and resources to its information services business, with a view to becoming a facilities- based provider of a broad range of integrated information services to business. Pursuant to the plan, KDG 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, KDG 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 services, 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. KDG 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. KDG 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 Company is involved in various lawsuits, claims and regulatory proceedings incidental to its business. Management believes that any resulting liability for legal proceedings beyond that provided should not materially affect the Company's financial position, future results of operations or future cash flows. PETER KIEWIT SONS', INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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. Separate management's discussion and analysis of financial condition and results of operations for the Kiewit Construction & Mining Group and the Kiewit Diversified Group have been filed as part of Exhibits 99.A and 99.B to this report. The Company will furnish a copy of each exhibit without charge upon the written request addressed to Stock Registrar, Peter Kiewit Sons', Inc., 1000 Kiewit Plaza, Omaha, Nebraska 68131. Results of Operations- Third Quarter 1997 vs. Third Quarter 1996 Revenue from each of the Company's business segments for the three months ended September 30 comprised the following (in millions): 1997 1996 Construction $ 824 $ 651 Coal Mining 50 61 Telecommunications - 90 Information Services 27 11 Other 3 3 Eliminations (8) (7) ------- ------- $ 896 $ 809 ======= ======= Construction. KCG's construction operations can be separated into two components; construction and materials. Construction and materials revenue for the three months ended September 1997 increased 27%, or $173 million, from the same period in 1996. Construction revenues were up 26% compared to 1996. The consolidation of ME Holding in 1997 resulted in an additional $77 million of revenue for KCG. In addition to ME Holding, several large sole contracts and joint ventures became fully mobilized and entered into their peak construction phase of work. Materials revenue was up 32% in 1997. Strong market conditions and the acquisition of additional plant facilities in Arizona were responsible for approximately 66% of the increase in sales. The remaining sales growth was due to increases in cement costs which were passed on to customers. Contract backlog at September 30, 1997 was $3.7 billion of which 8% is attributable to foreign operations located in Canada and Indonesia. Domestic projects are spread geographically throughout the U.S. Included in backlog is $673 million for the "I-15" project awarded in late March. KCG 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 of 2001. Margins on construction projects for the third quarter of 1997 declined from 11% to 9% for the same period in 1996. The recognition of income on design-build contracts tends to be recognized later in the construction cycle due to the complexities of these types of projects. The awarding of several of these types of contracts in 1997, including "I-15", resulted in lower margins to the Company. The completion of the design-build San Joaquin toll road project in late 1996 contributed to the higher returns in that year. Material margins, as a percentage of revenue, in 1997 were unchanged from 1996. Coal Mining. Mining revenue declined 18% in the third quarter of 1997 compared to the same period in 1996. Commonwealth Edison Company ("Commonwealth") has the flexibility under the amended contract to accelerate or defer delivery of alternate source coal provided it accepts delivery of the aggregate minimum commitment at the end of each year. In early 1996, alternate source coal shipments fell below minimum levels. These shortfalls were partially made up in the second and third quarters of 1996. In 1997, the opposite scenario occurred. Commonwealth took delivery of more coal in the first quarter than was required but reduced its purchases in the second and third quarters. Overall, the Company's alternate source coal revenues declined $6 million for the quarter ended September 30, 1997. Spot coal sales also declined in 1997. In the third quarter of 1996, a customer bought out its remaining 1996 obligations. The customer was not required to take delivery of the coal by paying 60% of the contracted price. Costs as a percentage of revenue for the coal mining operations in the third quarter of 1997 were consistent with that of the prior year. The decline in revenue from the customer who bought out its obligations in 1996, and declines in higher margin alternate source coal sales, were offset by improved mining efficiencies at the Black Butte mine and a decline in costs as the 1996 costs include certain equipment write-offs. Information Services. The Company's information services business provides computer operations outsourcing and systems integration services to firms that desire to focus resources on their core business. Systems integration services include converting mainframe based systems to client/server architecture, Year 2000 compliance, code restructuring and software re-engineering. Revenue attributable to computer outsourcing and systems integration increased 146% to $27 million for the three months ended September 30, 1997 compared to the same period in 1996. The increase in revenue is attributable to signing several new outsourcing contracts in late 1996 and the increased focus of customers on Year 2000 compatibility, code restructuring and software re-engineering. The operating costs of the information services business doubled to $16 million in 1997 primarily due to its continued growth. Hardware, communications and personnel costs for the systems integration business increased significantly compared to the prior year. Operational efficiencies were recognized in 1997 through the increased utilization of existing computer hardware. General and Administrative Expenses. In 1997, general and administrative expenses no longer include the expenses of C-TEC but do include those of ME Holding. Had C-TEC and ME Holding been accounted for using the equity method in both years, general and administrative expenses would have been $48 million and $32 million in 1997 and 1996, respectively. The additional costs associated with the expanding information services business, the professional fees incurred for the CalEnergy transaction and the proposed separation of the Construction and Diversified groups and higher compensation costs all contributed to the increase in administrative expenses. Equity Losses, net. The telecommunications segment of the Company is now comprised of the three entities created in the C-TEC restructuring. The Company's voting rights in each of the three entities has fallen below 50% and each entity is now accounted for utilizing the equity method. Equity losses now exclude the earnings of ME Holding which is consolidated in 1997. Had these entities been accounted for under the equity method in both periods, equity losses would have been ($9) million in 1997 and $2 million in 1996. This decline is attributable to the losses incurred by RCN to develop the Boston, New York and Washington, D.C. markets. Investment Income, net. Investment income in 1996, excluding C-TEC investment income of $2 million, was consistent with that of 1997. The 1997 average portfolio balance and average interest rates for the period did not vary significantly from that of 1996. Interest Expense, net. Interest expense increased $4 million in 1997 excluding C-TEC's $8 million of interest expense in 1996. CPTC incurred $3 million of interest costs in the third quarter of 1996 of which $1 million was capitalized due to the construction of the toll road. In 1997, CPTC also incurred $3 million of interest costs all of which was charged against earnings. The interest on the debt incurred by KCG to purchase ME Holding and assumed in the Oak Mountain acquisition, and the debt incurred by KDG to purchase the real estate in Colorado also contributed to the increase in interest expense. Other, net. Other income increased 80% in 1997. Additional gains on the sale and disposition of construction equipment was the primary factor contributing to the increase in other income. Provision for Income Taxes. The effective income tax rates for the third quarter of 1997 and 1996 were 37% and 38%, respectively. These rates differ from the expected statutory rate of 35% primarily due to the state income taxes. Minority Interest in Net Loss (Income) of Subsidiaries. The losses associated with the SR91 toll road were partially offset by the income allocated to ME Holding's minority shareholders in the third quarter of 1997. In 1996, losses of ($2) million of CPTC were offset by the income of the C-TEC companies. Discontinued Operations. Equity earnings, net of tax, increased 160% in the third quarter of 1997. The Company's proportionate share of CalEnergy's earnings, net of tax, increased $4 million in the third quarter of 1997 to $8 million. The conversion of CalEnergy debentures to common stock and the exercise of options increased the Company's ownership interest in CalEnergy from 23% at July 1, 1996 to 30% at September 30, 1997. CalEnergy's earnings also increased primarily due to the completion and commencement of operations at the Salton Sea Unit IV geothermal facility, the purchase of three cogeneration facilities and the acquisition of Northern Electric all of which occurred in the last half of 1996 and the commencement of operations at the Mahanagdong geothermal facility in July, 1997. In addition to contributing to CalEnergy's earnings, the Company's proportionate share of Mahanagdong and Northern Electric, net of tax, also provided $2 million and $1 million of income. Partially offsetting these gains were losses attributable to the Casecnan project. The Casecnan loss during construction results from the variance in borrowing and investing interest rates on the funds generated by the project's debt offering in 1995. Also contained in discontinued operations is the extraordinary loss of $63 million, net of tax, from the Windfall tax imposed by the British government in 1997. Results of Operations - Nine Months 1997 vs. Nine Months 1996 Revenue from each of the Company's business segments for the nine months ended September 30 comprised the following (in millions): 1997 1996 Construction $ 1,968 $ 1,729 Coal Mining 165 172 Telecommunications - 273 Information Services 67 30 Other 9 7 Eliminations (29) (25) ------- ------- $ 2,180 $ 2,186 ======= ======= Construction. Construction and materials revenues for the nine months ended September 30, 1997 increased $239 million or 14% compared to the same period in 1996. Construction revenues were up 13% compared to 1996. The inclusion of ME Holding in the consolidated results in 1997 contributed $174 million to construction revenue. Material revenues also increased by 18% in 1997. Strong market conditions in Arizona and the acquisitions of additional facilities in Arizona and the Pacific Northwest were responsible for 60% of the sales growth in 1997. The remaining growth was due to higher cement costs in Arizona that were passed on to customers. Margins on construction projects as a percentage of revenue for the first nine months of 1997 increased from 9% to 10% due to change order settlements, cost efficiencies, and early completion bonuses. Materials margins as a percentage of revenues decreased slightly from 10% to 9% due to the increased cost of concrete. Coal Mining. Coal sales declined 4% during the first nine months of 1997. Alternate source coal sales decreased $6 million primarily due to the reduced contractual obligations of customers. Contracted coal sales also declined slightly in 1997. Reduced coal sales to Detroit Edison Company, which is temporarily behind in purchasing its 1997 contracted coal, is partially offset by additional sales to Mississippi Power. Operating costs as a percentage of revenue were virtually unchanged from the same period in 1996. The declines in higher margin alternate source coal sales and proceeds from a customer who had bought out its obligations, were offset by improved mining efficiencies at the Black Butte mine and a decline in costs as the 1996 costs include certain equipment write-offs. Information Services. Revenue for information services business increased 123% to $67 million for the nine months ended September 30, 1997. The increase in revenue is attributable to signing several new outsourcing contracts in late 1996 and the increased focus of customers on Year 2000 compatibility, code restructuring and software re-engineering. The operating costs of the information services business increased 86% to $41 million in 1997 primarily due to its continued growth. Hardware, communications and personnel costs all increased significantly compared to the prior year. Operational efficiencies were recognized in 1997 through the increased utilization of existing computer hardware. General and Administrative Expenses. General and administrative expenses in 1997 and 1996 would have been $137 million and $113 million had C-TEC and ME Holding been accounted for using the equity method in both years. Increases in the expenses associated with the information services business, compensation expenses and professional fees incurred for the proposed restructuring and the CalEnergy transaction led to the increase in general and administrative expenses. Equity Losses, net. Losses attributable to equity investees increased to ($14) in 1997 from ($4) in 1996 assuming ME Holding and C-TEC were accounted for using the equity method in both years. The costs of RCN's continued expansion into Boston, New York City and Washington D.C. and the $10 million of costs incurred in connection with the buyout of a marketing contract with minority shareholders are responsible for the increase in equity losses. Investment Income, net. Investment income, excluding C-TEC's $9 million of income in 1996, declined 13% in 1997. A reduction in the average portfolio balance for the period, due to significant investments in CE Electric and the international energy projects, and a decline in the gains recognized on sales of securities all contributed to the reduction in investment income. Interest Expense, net. Interest expense decreased in 1997 to $13 million from $24 million in 1996. In 1996, interest expense includes $20 million of expense attributable to C-TEC. In 1996, CPTC incurred $8 million of interest costs of which $6 million was capitalized prior to the commencement of operations on August 1, 1996. In 1997, CPTC incurred $8 million of interest, all of which was charged against earnings. The interest incurred by KCG to purchase ME Holding and assumed in the Oak Mountain transaction, and the borrowing by KDG for the Colorado property account for the remaining increase in interest expense. Other, net. Other income is primarily comprised of gains and losses on the sale and disposition of property, plant and equipment and other assets. Increased income from the sale of construction equipment of $7 million, and increases in miscellaneous income, led to the increase in other income. Provision for Income Taxes. The effective income tax rates of 39% in 1997 and 38% in 1996 differ from the expected statutory rate of 35% primarily due to state income taxes. Minority Interest in Net Loss (Income) of Subsidiaries. Minority interest in 1997 is now comprised of the earnings and losses attributable to the minority shareholders of CPTC and ME Holding. The income and (losses) that were allocated to CPTC's and ME Holding's minority shareholders were ($3) and $1 million in 1997. Discontinued Operations. Equity earnings, net of tax, increased significantly in 1997. The Company's proportionate share of CalEnergy's earnings, net of tax, increased $10 million in 1997 to $19 million. An increase in the Company's share of CalEnergy's earnings and improvement in those earnings, primarily due to the commencement of operations at a geothermal facility, and the acquisitions of three congeneration facilities and Northern Electric, contributed to the increase. The Company's proportionate share of Northern Electric, which was acquired in December 1996, provided $7 million of income after taxes. Also contained in discontinued operations is the extraordinary loss of $63 million, net of tax, from the Windfall tax imposed by the British government in 1997. Financial Condition - September 30, 1997 vs. December 28, 1996 Excluding C-TEC, the Company's working capital increased $256 million or 34% during the first nine months of 1997. The increase was mainly due to cash provided by operations, including $146 million of tax and interest refunds, and financing activities. The increase was partially offset by cash used to fund investing activities and discontinued operations. Investing activities include $53 million of investments, and $110 million of capital expenditures, including $89 million for construction equipment and $11 million for equipment of the information services business. The investments primarily include KDG's $22 million for a real estate investment and KCG's $15 million investment in Oak Mountain. These capital outlays were partially offset by $19 million of net proceeds from the sale of marketable securities and $36 million of proceeds from the sale of property, plant and equipment and other assets. Financing sources include $34 million and $49 million for the issuance of Class C Stock and Class D Stock, and $16 million and $2 million of long-term debt borrowing to finance KDG's real estate investment and to modernize KCG's Oak Mountain mine. Financing uses primarily consisted of $13 million of Class C dividends and $12 million of Class D dividends. Prior to the agreement with CalEnergy, the Company invested $34 million in the Dieng, Patuha and Bali power projects in Indonesia during 1997. In October 1996, the Board of Directors ("Board") directed the Company's management to pursue a listing of Class D Stock as a way to address certain issues created by the Company's two-class capital stock structure and the need to attract and retain the best management for the Company's 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 the Diversified Group through a split off of KCG. 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 would be 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. As a result, the restructuring will probably not occur until mid-year 1998. The Diversified Group probably will not seek to list its stock for public trading on a national securities exchange until it raises capital through a public equity offering or desires to have a listed equity security available for acquisitions. The Board will retain the right, even if the stockholders ratify the proposal and favorable tax treatment is satisfied, to abandon, defer or modify the Transaction if it believes that it would be in the best interests of all stockholders. The Company anticipates making significant investments in its construction and information services businesses. KDG has recently decided to substantially increase its emphasis on and resources to its information services business, with a view to becoming a facilities-based provider of a broad range of integrated information services to business. Pursuant to the plan, KDG 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, KDG 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 services, 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. KDG 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. KDG 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. KDG anticipates that the capital expenditures required to implement this expansion plan will be substantial. KDG anticipates that these costs may be in excess of $1 billion per year within approximately two years after the separation of KCG from the Company. Subsequent to September 30, 1997, the Company sold $67 million of Class D Stock to employees and declared a Class C Stock cash dividend of $.80 per share payable in January 1998. Long-term liquidity uses include payment of income taxes and repurchasing the Company's stock. The Company's current financial condition, borrowing capacity and proceeds from the CalEnergy transaction should be sufficient for immediate operating and investing activities. In late 1995, a KDG 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. KDG and CalEnergy have each made $62 million of equity contributions to the project. The Casecnan project was being constructed on a joint and several basis by Hanbo Corporation and Hanbo Engineering & Construction Co. Ltd. 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. KDG does not expect the outcome of the litigation to affect its financial position due to the transactions contemplated with CalEnergy. 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. The restructuring is expected to permit investors and the financial markets to better understand and evaluate C-TEC's various businesses. In addition, the restructuring has allowed C-TEC to raise capital on more efficient terms. In July 1997, C-TEC closed four separate credit facilities with a syndicate of banks aggregating $410 million and in October 1997, RCN issued $575 million of debt. These proceeds were used to refinance the cable group's existing Senior Secured Notes and to fund RCN's continued development. PETER KIEWIT SONS', INC. PART II - OTHER INFORMATION Item 6. Exhibits & Reports on Form 8-K (a) Exhibits filed as part of this report are listed below. Exhibit Number 11 Statement regarding computation of per share earnings 27 Financial Data Schedule 99.A Kiewit Construction & Mining Group Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 99.B Kiewit Diversified Group Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. (b) No reports on Form 8-K were filed by the Company during the third quarter of 1997. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PETER KIEWIT SONS', INC. Dated: November 14, 1997 \s\ Eric J. Mortensen Eric J. Mortensen Controller and Chief Accounting Officer PETER KIEWIT SONS', INC. INDEX TO EXHIBITS Exhibit No. 11 Statement regarding computation of per share earnings 27 Financial Data Schedule (For electronic filing purposes only) 99.A Kiewit Construction & Mining Group Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 99.B Kiewit Diversified Group Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. EX-11 2 Exhibit 11 Peter Kiewit Sons', Inc. Calculation or Earnings per Share For the three and six months ended September 30, 1997 and 1996 Class C Stock Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Actual weighted shares outstanding for the period 10,086,016 11,013,724 9,570,079 10,542,158 Dilutive stock options using average market price - - - - ---------- ---------- --------- ---------- Total number of shares used to compute primary earnings per share. 10,086,016 11,013,724 9,570,079 10,542,158 Additional dilutive stock options using ending market price - - - - Additional dilutive shares assuming conversion of convertible debentures 436,833 354,889 436,833 357,391 ---------- ---------- --------- --------- Total number of shares used to compute fully diluted earnings per share 10,522,849 11,368,613 10,006,912 10,899,549 ========== ========== ========== ========== Net income from continuing operations available to common shareholders $ 34,141 $ 40,078 $ 83,858 $ 75,726 Add: Interest expense, net of tax effect associated with convertible debentures 126 96 393 286 ---------- ----------- ---------- --------- Net income from continuing operations for fully diluted shares $ 34,267 $ 40,174 $ 84,251 $ 76,012 Discontinued operations: Income (Loss) from discontinued operations, net of tax - - - - Extraordinary Item - Windfall Tax - - - - ---------- ----------- --------- -------- Total Discontinued Operations $ - $ - $ - $ - ---------- ----------- --------- -------- Net Income $ 34,267 $ 40,174 $ 84,251 $ 76,012 ========== =========== ========= ======== Primary earnings per share: Continuing Operations 3.38 3.64 8.76 7.18 Discontinued Operations: Discontinued operations - - - - Extraordinary Item - Windfall tax - - - - ---------- ----------- --------- ------- Total Discontinued Operations $ - $ - $ - $ - ---------- ----------- --------- ------- Primary earnings per share: $ 3.38 $ 3.64 $ 8.76 $ 7.18 ========== =========== ========= ======= Fully diluted earnings per share Continuing operations 3.26 3.53 8.42 6.97 Discontinued operations: Discontinued operations - - - - Extraordinary Item - Windfall tax - - - - ---------- ----------- -------- ------- Total Discontinued Operations - - - - ---------- ----------- -------- ------- Fully diluted earnings per share $ 3.26 $ 3.53 $ 8.42 $ 6.97 ========== =========== ======== ======= Exhibit 11 Peter Kiewit Sons', Inc. Calculation or Earnings per Share For the three and six months ended September 30, 1997 and 1996 Class D Stock Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Actual weighted shares outstanding for the period 24,585,375 23,181,785 24,513,018 23,207,898 Dilutive stock options using average market price - - - - ---------- ---------- ---------- --------- Total number of shares used to compute primary earnings per share. 24,585,375 23,181,785 24,513,018 23,207,898 Additional dilutive stock options using ending market price - - - - Additional dilutive shares assuming conversion of convertible debentures - - - - ---------- ---------- ---------- ---------- Total number of shares used to compute fully diluted earnings per share. 24,585,375 23,181,785 24,513,018 23,207,898 ========== ========== ========== ========== Net income from continuing operations available to common shareholders $ 6,330 $ 17,638 $ 34,369 $ 50,972 Add: Interest expense, net of tax effect associated with convertible debentures - - - - ---------- ---------- ---------- --------- Net income from continuing operations for fully diluted shares $ 6,330 $ 17,638 $ 34,369 $ 50,972 ========== ========== ========== ========= Discontinued operations: Income (Loss) from discontinued operations, net of tax 13,478 5,119 26,406 7,589 Extraordinary Item - Windfall Tax (63,594) - (63,594) - ---------- --------- --------- ------- Total Discontinued Operations $ (50,116) $ 5,119 $ (37,188) $ 7,589 ---------- --------- --------- ------- Net Income $ (43,786) $ 22,757 $ (2,819) $58,561 ========== ========= ========= ======= Primary earnings per share: Continuing Operations 0.26 0.76 1.40 2.19 Discontinued Operations: Discontinue operations 0.55 0.22 1.08 0.33 Extraordinary Item - Windfall tax (2.59) - (2.59) - ---------- --------- --------- ------- Total Discontinued Operations $ (2.04) $ 0.22 $ (1.51) $ 0.33 ---------- --------- --------- ------- Primary earnings per share $ (1.78) $ 0.98 $ (0.11) $ 2.52 ========== ========= ========= ======= Fully diluted earnings per share Continuing operations 0.26 0.76 1.40 2.19 Discontinued operations: Discontinued operations 0.55 0.22 1.08 0.33 Extraordinary Item - Windfall tax (2.59) - (2,59) - ---------- --------- --------- ------ Total Discontinued Operations (2.04) - (1.51) - ---------- --------- --------- ------ Fully diluted earnings per share $ (1.78) $ 0.98 $ (0.11) $ 2.52 ========== ========= ========= ====== EX-27 3
5 This schedule contains summary financial information extracted from the Form 10-Q for the period ending September 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-27-1997 SEP-30-1997 522 395 478 15 11 1,743 1,056 665 3,360 750 151 2 0 0 1,966 3,360 2,106 2,180 1,833 1,877 147 0 13 189 36 118 (37) 0 0 81 $8.76 $8.42 $876 represents Class C Stock earnings per share. Class D earnings per share:Continuing Operations - $1.40, Discontinued Operations - ($1.51), Total - ($.11). $8.42 represents Class C Stock earnings per share. Class D Stock earnings per share: Continuing Operations - $1.40, Discontinued Operations - ($1.51), Total - - ($.11).
EX-99 4 Exhibit 99.A KIEWIT CONSTRUCTION & MINING GROUP Index to Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Statements: Condensed Statements of Earnings for the three months ended September 30, 1997 and 1996 and the nine months ended September 30, 1997 and 1996 Condensed Balance Sheets as of September 30, 1997 and December 28, 1996 Condensed Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 Notes to Condensed Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations KIEWIT CONSTRUCTION & MINING GROUP Condensed Statements of Earnings (unaudited) Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions, except per share data) 1997 1996 1997 1996 Revenue $ 824 $ 651 $ 1,968 $ 1,729 Cost of Revenue (751) (579) (1,781) (1,573) ------ ------- ------- ------- 73 72 187 156 General and Administrative Expenses (34) (26) (103) (85) ------ -------- ------- ------- Operating Earnings 39 46 84 71 Other Income (Expense): Investment Income, net 3 5 10 12 Interest Expense, net (2) - (3) (2) Other, net 15 12 50 41 ------ -------- ------ ------ 16 17 57 51 ------ -------- ------ ------ Earnings Before Income Taxes and Minority Interest 55 63 141 122 Provision for Income Taxes (21) (24) (56) (47) Minority Interest - - (1) - ------ --------- ------ ------ Net Earnings $ 34 $ 39 $ 84 $ 75 ====== ========= ====== ====== Primary Earnings per Share $ 3.38 $ 3.64 $ 8.76 $ 7.18 ====== ========= ====== ====== Fully Diluted Earnings per Share $ 3.26 $ 3.53 $ 8.42 $ 6.97 ====== ========= ====== ====== See accompanying notes to condensed financial statements. KIEWIT CONSTRUCTION & MINING GROUP Condensed Balance Sheets September 30, December 28, 1997 1996 (dollars in millions) (unaudited) Assets Current Assets: Cash and cash equivalents $ 249 $ 173 Marketable securities 34 54 Receivables, less allowance of $15 and $17 429 289 Costs and earnings in excess of billings on uncompleted contracts 118 80 Investment in construction joint ventures 148 91 Recoverable income taxes 25 6 Deferred income taxes 64 64 Other 15 13 -------- ------- Total Current Assets 1,082 770 Property, Plant and Equipment, less accumulated depreciation and amortization of $435 and $429 210 165 Investments 59 94 Other Assets 33 13 -------- -------- $ 1,384 $ 1,042 ======== ======== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable, including retainage of $35 and $33 $ 250 $ 164 Current portion of long-term debt 10 - Accrued construction costs and billings in excess of revenue on uncompleted contracts 299 112 Accrued insurance costs 86 81 Other 48 46 -------- --------- Total Current Liabilities 693 403 Long-Term Debt, less current portion 17 12 Other Liabilities 71 65 Minority Interest 10 - Stockholders' Equity ($403 million aggregate redemption value): 10,082,829 outstanding shares in 1997 and 11,006,641 in 1996 Common equity 606 568 Net unrealized holding loss (5) (1) Foreign currency adjustment (8) (5) -------- --------- Total Stockholders' Equity 593 562 -------- --------- $ 1,384 $ 1,042 ======== ========= See accompanying notes to condensed financial statements. KIEWIT CONSTRUCTION & MINING GROUP Condensed Statements of Cash Flows (unaudited) Nine Months Ended September 30, (dollars in millions) 1997 1996 Cash flows from operations: Net cash provided by operations $ 170 $ 117 Cash flows from investing activities: Proceeds from sales and maturities of marketable securities 51 174 Purchases of marketable securities (24) (165) Proceeds from sales of property, plant and equipment 34 21 Acquisitions and investments, net (16) (3) Capital expenditures (89) (60) Other - 3 ------ ---- Net cash used in investing activities (44) (30) Cash flows from financing activities: Proceeds from long-term debt borrowings 3 - Payments on long-term debt, including current portion - (2) Net change in short-term borrowings - (45) Issuance of common stock 34 27 Repurchases of common stock (2) (4) Dividends paid (13) (12) Exchange of Class B&C Stock for Class D Stock, net (72) (19) ------ ----- Net cash used in financing activities (50) (55) ------ ----- Net increase in cash and cash equivalents 76 32 Cash and cash equivalents at beginning of period 173 94 ------ ----- Cash and cash equivalents at end of period $ 249 $ 126 ====== ===== See accompanying notes to condensed financial statements. KIEWIT CONSTRUCTION & MINING GROUP Notes to Condensed Financial Statements 1. Basis of Presentation: The condensed balance sheet of Kiewit Construction & Mining Group (the "Group") at December 28, 1996 has been condensed from the Group's audited balance sheet as of that date. All other financial statements contained herein are unaudited and have been prepared using the historical amounts included in the Peter Kiewit Sons', Inc. ("PKS") consolidated condensed financial statements. The Group's accounting policies and certain other disclosures are set forth in the notes to the financial statements contained in PKS' Annual Report on Form 10-K as an exhibit for the year ended December 28, 1996. Although the financial statements of PKS' Construction & Mining Group and Diversified Group separately report the assets, liabilities and stockholders' equity of PKS attributed to each such group, legal title to such assets and responsibility for such liabilities will not be affected by such attribution. Holders of Class C Stock and Class D Stock are stockholders of PKS. Accordingly, the PKS consolidated condensed financial statements and related notes as well as those of the Kiewit Diversified Group should be read in conjunction with these financial statements. On July 1, 1997, the Group paid $5 million to increase its ownership in ME Holding Inc. ("ME Holding") from 49% to 80%. The Group consolidated ME Holding in its 1997 financial statements and accounted for it using the equity method in 1996. The purchase price of $5 million was in the form of a note payable to the minority shareholder and is payable on demand. Receivables at September 30, 1997 and December 28, 1996 include approximately $74 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 owners of various construction projects in lieu of retainage. The results of operations for the nine months ended September 30, 1997 are not necessarily indicative of the results to be expected for the full year. Where appropriate, items within the condensed financial statements have been reclassified from the previous periods to conform to current year presentation. 2. Earnings Per Share: Primary earnings per share of common stock have been computed using the weighted average number of shares outstanding during each period. In addition, fully diluted earnings per share reflect the dilutive effect of convertible debentures. The numbers of shares used in computing earnings per share were as follows: Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Primary 10,086,016 11,013,724 9,570,079 10,542,158 Fully Diluted 10,522,849 11,368,613 10,006,912 10,899,549 In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". The statement establishes standards for computing and presenting earnings per share and requires the restatement of prior period earnings per share data presented. This statement is effective for financial statements issued for periods ending after December 15, 1997 and earlier application is not permitted. Basic and diluted earnings per share, as defined in SFAS No. 128, are not expected to vary significantly from the primary and fully diluted earnings per share shown on the statements of earnings. 3. Summarized Financial Information: The Group's 50% portion of PKS' corporate assets and liabilities and related transactions, which are not separately identified with the ongoing operations of the Construction & Mining Group or the Diversified Group, and items attributable to the Group are as follows: (dollars in millions) September 30, December 28, 1997 1996 Cash and marketable securities $ 11 $ 13 Property, plant and equipment, net 5 5 Other assets 2 1 ------- ------- Total Assets $ 18 $ 19 ======= ======= Accounts payable $ 2 $ 8 Long-term debt, including current portion 11 12 ------- ------- Total Liabilities $ 13 $ 20 ======= ======= Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Other expense, net $ - $ - $ (1) $ (1) Corporate general and administrative costs have been allocated to the Group. These allocations were less than $1 million for the three and nine months ended September 30, 1997 and 1996. Mine management income from the Diversified Group was $7 million and $9 million for the three months ended September 30, 1997 and 1996 and $23 million and $24 million for the nine months ended September 30, 1997 and 1996. In April 1997, the Group and a partner each invested $15 million to acquire a 96% interest in Oak Mountain Energy L.L.C. ("Oak Mountain"). Oak Mountain then acquired the existing assets of an underground coal mine in Alabama for approximately $18 million and assumed approximately $14 million of related liabilities. Oak Mountain intends to use the remaining cash and $30 million of nonrecourse bank borrowings to retire the existing debt and further develop and modernize the mine. Oak Mountain's results are consolidated with those of the Group on a pro-rata basis since the date of acquisition. The coal mine's results of operations prior to the acquisition were not significant relative to the Group's results. 5. Other Matters: In October 1996, the PKS Board of Directors ("Board") 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 the 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 Group would be 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. As a result, the restructuring will probably not occur until mid-year 1998. The Diversified Group probably will not seek to list its stock for public trading on a national securities exchange until it raises capital through a public equity offering or desires to have a listed equity security available for acquisitions. The Board will retain the right, even if the stockholders ratify the proposal and favorable tax treatment is satisfied, to abandon, defer or modify the Transaction if it believes that it would be in the best interests of all stockholders. The Group is involved in various lawsuits, claims and regulatory proceedings incidental to its business. Management believes that any resulting liability, beyond that provided, should not materially affect the Group's financial position, future results of operations or future cash flows. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - Third Quarter 1997 vs. Third Quarter 1996 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. Revenue from each of the Group's business segments for the three months ended September 30 was (in millions): 1997 1996 Construction $ 741 $ 588 Materials 83 63 ------ ----- $ 824 $ 651 ====== ===== Construction and Materials. Construction and materials revenue for the three months ended September 1997 increased 27%, or $173 million, from the same period in 1996. Construction revenues were up 26% compared to 1996. The consolidation of ME Holdings in 1997 resulted in an additional $77 million of revenue for the Group. In addition to ME Holding, several large sole contracts and joint ventures became fully mobilized and entered into their peak construction phase of work. Materials revenue was up 32% in 1997. Strong market conditions and the acquisition of additional facilities in Arizona were responsible for approximately 66% of the increase in sales. The remaining sales growth was due to increases in cement costs which were passed on to customers. Contract backlog at September 30, 1997 was $3.7 billion of which 8% is attributable to foreign operations located in Canada and Indonesia. Domestic projects are spread geographically throughout the U.S. Included in backlog is $673 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 of 2001. Margins on construction projects for the third quarter of 1997 declined to 9% from 11% for the same period in 1996. The recognition of income on design-build contracts tends to be recognized later in the construction cycle due to the complexities of these types of projects. The awarding of several of these types of contracts in 1997, including "I-15", resulted in lower margins to the Group. The completion of the design-build San Joaquin toll road project in late 1996 contributed to the higher returns in that year. Material margins, as a percentage of revenue, in 1997 were unchanged from 1996. General and Administrative Expenses. The consolidation of ME Holding in 1997 accounted for 62% of the increase in general and administrative expenses. Excluding these costs, general and administrative expenses increased 12% in the period. Increases in compensation, travel and insurance expenses are responsible for the increase. Investment Income, net. Investment income declined $2 million in 1997. This decline is due to the consolidation of ME Holding in the 1997 financial statements. Equity earnings derived from the Group's investment in ME Holding in 1996 was $2 million. Interest Expense, net. The $2 million of interest expense in 1997 is attributable to the debt assumed in the Oak Mountain acquisition and debt incurred to purchase ME Holding. Other, net. Other income is primarily comprised of mine management income from the Diversified Group and gains and losses on the disposition of property, plant and equipment and other assets. Other income increased 25% in 1997 compared to 1996. Increases in gains on the disposal of equipment and other miscellaneous income were partially offset by a decline in mine management fee income. Provision for Income Taxes. The effective income tax rates of 38% in 1997 and 1996 are higher than the expected statutory rate of 35% primarily due to state income taxes. Results of Operations - Nine Months 1997 vs. Nine Months 1996 Revenue from each of the Group's business segments for the nine months ended September 30 was (in millions): 1997 1996 Construction $ 1,756 $ 1,549 Materials 212 180 --------- --------- $ 1,968 $ 1,729 ========= ========= Construction and Materials. Construction and materials revenues for the nine months ended September 30, 1997 increased $239 million or 14% compared to the same period in 1996. Construction revenues were up 13% compared to 1996. The inclusion of ME Holding in the consolidated results in 1997 contributed $174 million to construction revenue. Material revenues also increased by 18% in 1997.Strong market conditions in Arizona and the acquisitions of additional facilities in the Arizona and Pacific-Northwest were responsible for 60% of the sales growth in 1997. The remaining growth was due to higher cement costs in the Arizona market that were passed on to customers. Margins on construction projects as a percentage of revenue for the first nine months of 1997 increased from 9% to 10% due to change order settlements, cost efficiencies, and early completion bonuses. Materials margins as a percentage of revenues decreased slightly from 10% to 9% due to the increased cost of concrete. General and Administrative Expenses. General and administrative expenses increased 21% in 1997. This increase is primarily attributable to $10 million of overhead expenses included as a result of consolidating ME Holding. Also contributing to the increase were higher professional fees, compensation expenses and insurance costs. Interest Expense, net. The increase in interest expense in 1997 is attributable to the debt incurred to purchase ME Holding and assumed in the Oak Mountain acquisition. In 1996, the Group incurred short term debt to fund the conversion of Class C Stock to Class D Stock. These borrowings were repaid in the second quarter of 1996. Other, net. An increase in the gains on the sale and disposal of construction equipment to $23 million from $16 million, was primarily responsible for the increase in other income. Mine management fee and miscellaneous other income were relatively unchanged from the same period in 1996. Provision for Income Taxes. The effective income tax rate of 40% in 1997 and 39% in 1996 differ from the expected statutory rate of 35% primarily due to state income taxes. Financial Condition - September 30, 1997 vs. December 28, 1996 The Group's working capital increased $22 million or 6% during the first nine months of 1997. The increase was primarily due to $165 million of cash generated by operating activities, the issuance of common stock totaling $34 million, net proceeds from the sale of marketable securities of $27 million, proceeds from the sale of property, plant and equipment and other assets of $34 million and $3 million of debt borrowings. Partially offsetting these sources were capital expenditures of $89 million, investments and acquisitions, including $15 million for Oak Mountain, the exchange of Class B&C stock for Class D Stock and the repurchase of Class C Stock totaling $74 million, and dividend payments of $13 million. The Group typically anticipates investing between $40 and $75 million annually in its construction business, including opportunities to acquire additional businesses. Through September 30, 1997, the Group had invested $89 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. Other long term liquidity uses include the payment of income taxes, repurchases and conversions of common stock and the payment of dividends, including an $.80 per share dividend declared on October 22, 1997 and payable in January 1998. 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 1996, the PKS Board of Directors ("Board") 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 the Diversified Group through the 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 Group would be 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. As a result, the restructuring will probably not occur until mid-year 1998. The Diversified Group probably will not seek to list its stock for public trading on a national securities exchange until it raises capital through a public equity offering or desires to have a listed equity security available for acquisitions. The Board will retain the right, even if the stockholders ratify the proposal and favorable tax treatment is satisfied, to abandon, defer or modify the Transaction if it believes that it would be in the best interests of all stockholders. EX-99 5 Exhibit 99.B KIEWIT DIVERSIFIED GROUP Index to Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Statements: Condensed Statements of Operations for the three months ended September 30, 1997 and 1996 and the nine months ended September 30, 1997 and 1996 Condensed Balance Sheets as of September 30, 1997 and December 28, 1996 Condensed Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 Notes to Condensed Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations KIEWIT DIVERSIFIED GROUP Condensed Statements of Operations (unaudited) Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions, except per share data) 1997 1996 1997 1996 Revenue $ 80 $ 165 $ 241 $ 482 Cost of Revenue (42) (98) (126) (295) ----- ----- ----- ----- 38 67 115 187 General and Administrative Expenses (26) (36) (67) (116) ----- ----- ----- ----- Operating Earnings 12 31 48 71 Other Income (Expense): Equity Losses, net (12) (4) (18) (6) Investment Income, net 9 11 25 39 Interest Expense, net (3) (9) (10) (22) Other, net 1 2 3 3 ----- ----- ----- ---- (5) - - 14 ----- ----- ----- ---- Earnings from Continuing Operations Before Income Taxes and Minority Interest 7 31 48 85 Provision for Income Taxes (2) (12) (17) (32) Minority Interest in Net Loss (Income) of Subsidiaries 1 - 3 (1) ----- ----- ----- ---- Income from Continuing Operations 6 19 34 52 Discontinued Operations: Income from Operations, net of income taxes of($8),($3),($15) and ($6) 13 5 26 7 Extraordinary Item - Windfall tax, net of income tax benefit of $34 (63) - (63) - ------ ----- ----- ---- Income (Loss) from Discontinued Operations (50) 5 (37) 7 ------ ----- ----- ---- Net Earnings (Loss) $ (44) $ 24 $ (3) $ 59 ====== ===== ===== ==== Primary and Fully Diluted Earnings (Loss) Per Share Continuing Operations $ .26 $ .76 $1.40 $2.19 Discontinued Operations: Income from operations .55 .22 1.08 .33 Extraordinary Item (2.59) - (2.59) - ------ ----- ----- ---- Discontinued Operations (2.04) .22 (1.51) .33 ------ ----- ----- ----- Net Income (Loss) $(1.78) $ .98 $(.11) $2.52 ====== ===== ===== ===== See accompanying notes to condensed financial statements. KIEWIT DIVERSIFIED GROUP Condensed Balance Sheets September 30, December 28, 1997 1996 (dollars in millions) (unaudited) Assets Current Assets: Cash and cash equivalents $ 273 $ 147 Marketable securities 339 372 Restricted securities 22 17 Receivables, less allowance of $- and $3 45 76 Other 19 33 -------- -------- Total Current Assets 698 645 Property, Plant and Equipment, less accumulated depreciation and amortization of $230 and $345 181 642 Investments 472 189 Investments in Discontinued Operations 597 608 Intangible Assets, net 21 353 Other Assets 44 74 --------- -------- $ 2,013 $ 2,511 ========= ======== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 29 $ 79 Current portion of long-term debt: Telecommunications - 55 Other 1 2 Accrued costs and billings in excess of revenue on uncompleted contracts 3 12 Accrued reclamation and other mining costs 17 19 Other 44 87 --------- -------- Total Current Liabilities 94 254 Long-Term Debt, less current portion: Telecommunications - 207 Other 134 113 Deferred Income Taxes 156 148 Retirement Benefits 40 48 Accrued Reclamation Costs 99 98 Other Liabilities 114 168 Minority Interest 1 218 Stockholders' Equity ($1,377 million aggregate redemption value): 25,386,725 outstanding shares in 1997 and 23,219,744 in 1996 Common equity 1,351 1,235 Foreign currency adjustment - (2) Net unrealized holding gain 24 24 --------- -------- Total Stockholders' Equity 1,375 1,257 --------- -------- $ 2,013 $ 2,511 ========= ======== See accompanying notes to condensed financial statements. KIEWIT DIVERSIFIED GROUP Condensed Statements of Cash Flows (unaudited) Nine Months Ended September 30, (dollars in millions) 1997 1996 Cash flows from continuing operations: Net cash provided by continuing operations $ 167 $ 122 Cash flows from investing activities: Proceeds from sales and maturities of marketable securities 160 138 Purchases of marketable securities (168) (118) Change in restricted securities 4 2 Capital expenditures (20) (78) Acquisitions and investments, net (32) (54) Proceeds from sale of assets and other 1 7 ------ ------- Net cash used in investing activities (55) (103) Cash flows from financing activities: Proceeds from long-term debt borrowings 17 35 Payments on long-term debt, including current portion (2) (38) Exchange of Class B&C Stock for Class D Stock, net 72 19 Repurchases of common stock - (11) Dividends paid (12) (13) Issuance of common stock 49 1 ------ ------- Net cash provided by (used in) financing activities 124 (7) Cash flows from discontinued operations: Discontinued operations - 3 Investments in discontinued operations (34) (55) ------ ------- Net cash used in discontinued operations (34) (52) Cash and cash equivalents of C-TEC at beginning of year (76) - ------ ------- Net change in cash and cash equivalents 126 (40) Cash and cash equivalents at beginning of period 147 363 ------ ------- Cash and cash equivalents at end of period $ 273 $ 323 ====== ======= Noncash investing activities from discontinued operations: Conversion of CalEnergy Convertible Debentures to CalEnergy Common Stock $ - $ 66 See accompanying notes to condensed financial statements. KIEWIT DIVERSIFIED GROUP Notes to Condensed Financial Statements 1. Basis of Presentation: The condensed balance sheet of Kiewit Diversified Group ("Group") at December 28, 1996 has been condensed from the Group's audited balance sheet as of that date. All other financial statements contained herein are unaudited and have been prepared using historical amounts included in the Peter Kiewit Sons', Inc. ("PKS") consolidated condensed financial statements. The Group's accounting policies and certain other disclosures are set forth in the notes to the financial statements contained in PKS' Annual Report on Form 10-K as an exhibit for the year ended December 28, 1996. Although the financial statements of PKS' Construction & Mining Group and Diversified Group separately report the assets, liabilities and stockholders' equity of PKS attributed to each such group, legal title to such assets and responsibility for such liabilities will not be affected by such attribution. Holders of Class B&C Stock and Class D Stock are stockholders of PKS. Accordingly, the PKS consolidated condensed financial statements and related notes as well as those of the Kiewit Construction & Mining Group should be read in conjunction with these financial statements. 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. C-TEC's financial position, results of operations and cash flows are consolidated in the 1996 condensed financial statements. The results of operations for the nine months ended September 30, 1997 are not necessarily indicative of the results to be expected for the full year. Where appropriate, items within the condensed financial statements have been reclassified from the previous periods to conform to current year presentation. 2. Discontinued Operations 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 include approximately 20 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 is subject to the satisfactory completion of certain provisions of the agreement and is expected to close in early 1998. These assets comprise 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 condensed balance sheets and statements of operations and cash flows for all periods presented. The Group is no longer required to provide additional capital to these entities through the closing date. 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 23% 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 expects to recognize an after-tax gain of approximately $50 million from this transaction in the fourth quarter of 1997. The agreement with CalEnergy includes a provision whereby CalEnergy and the Group are to share 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 expects to receive additional proceeds of up to $20 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 $300 million. The after-tax proceeds from the transaction of approximately $960 million will be used to fund the expansion plan of the information services business. The following is summarized financial information for discontinued operations: Three Months Ended Nine Months Ended September 30, September 30, Income from Discontinued Operations 1997 1996 1997 1996 Operations Equity in: CalEnergy earnings, net $ 13 $ 7 $ 29 $ 14 CE Electric earnings, net 2 - 11 - International energy project earnings, net 6 (1) 1 (6) CalEnergy debenture interest - 2 - 5 Income tax expense (8) (3) (15) (6) ----- ---- ----- ----- Income from operations $ 13 $ 5 $ 26 $ 7 ===== ==== ===== ===== Extraordinary Loss - Windfall Tax Group's share from CE Electric $ (58) $ - $ (58) $ - Group's share from CalEnergy (39) - (39) - Income tax benefit 34 - 34 - ----- ---- ----- ----- Extraordinary loss $ (63) $ - $ (63) $ - ===== ==== ===== ===== In December 1996, CE Electric which is 70% owned by CalEnergy and 30% owned by the Group, acquired majority ownership of Northern Electric plc ("Northern") pursuant to a 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. 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 impact to the Group, directly through its investment in CE Electric and indirectly through its 30% interest in CalEnergy, was $63 million. The following summarizes the investments in discontinued operations: September 30, December 28, 1997 1996 (unaudited) Investment in CalEnergy $ 282 $ 292 Investment in CE Electric 129 176 Investment in international energy projects 184 157 Deferred income tax asset (liability) 2 (17) ------ ------ Total $ 597 $ 608 ====== ====== 3. Earnings Per Share: Primary and fully diluted earnings per share of common stock have been computed using the weighted average number of shares outstanding during each period after giving effect to stock options considered to be dilutive common stock equivalents. In 1997, the operations of the Group resulted in a loss. Therefore, the anti-dilutive effect of the Class D options was not included in the per share calculations. The number of shares used in computing both primary and fully diluted earnings per share were 24,585,375 and 23,181,785 for the three months ended September 30, 1997 and 1996 and 24,513,018 and 23,207,898 for the nine months ending on the same dates. In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". The statement establishes standards for computing and presenting earnings per share and requires the restatement of prior period earnings per share data presented. This statement is effective for financial statements issued for periods ending after December 15, 1997 and earlier application is not permitted. Basic and diluted earnings per share, as defined in SFAS No. 128, are not expected to vary significantly from the primary and fully diluted earnings per share shown on the statements of operations. 4. Summarized Financial Information: The Group's 50% portion of PKS' corporate assets and liabilities and related transactions, which are not separately identified with the ongoing operations of the Construction & Mining Group or the Diversified Group, and specifically attributable items are as follows: (dollars in millions) September 30, December 28, 1997 1996 Cash and marketable securities $ 14 $ 5 Property, plant and equipment, net 10 5 Other assets 9 1 ------- ------- Total Assets $ 33 $ 11 ======= ======= Accounts payable $ 14 $ 17 Long-term debt, including current portion 1 1 ------- ------- Total Liabilities $ 15 $ 18 ======= ======= Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Other expense, net $ - $ - $ (1) $ (1) Corporate general and administrative costs have been allocated to the Group. These allocations were $1 million for the three months ended September 30, 1997 and 1996 and $4 million for the nine months ended September 30, 1997 and 1996. Mine management fees paid to the Construction & Mining Group were $7 million and $9 million for the three months ended September 30, 1997 and 1996 and $23 million and $24 million for the nine months ended September 30, 1997 and 1996. 5. Acquisitions: 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. ("Northern") 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 September 30, 1997, CalEnergy and the Group had contributed to CE Electric approximately $410 million and $176 million, respectively, of the approximately $1.3 billion required to acquire all of Northern's ordinary and preference shares in connection with the Tender Offer. The remaining funds necessary to consummate the Tender Offer were provided by 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. The Group's investment in CE Electric and the earnings and losses associated with CE Electric are included in discontinued operations. 6. Investments: The Group is able to defer the tax on $40 million of gain with respect to the 1995 Whitney Benefits litigation settlement by investing in real estate. In February 1997, the Group purchased an office building in Aurora, Colorado for $22 million. In June 1997, the Group closed a $16 million financing agreement with Metropolitan Life Insurance Company. The 15-year note is collateralized by the Aurora property and carries an interest rate of 8.38%. The Group has also begun construction of a second data center for the information services business in Phoenix, Arizona. The cost of the building, approximately $11 million, will be applied against the $40 million gain. The Group may make additional real estate investments to defer the remaining balance. 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 on the Philippines island of Luzon. The Group and CalEnergy have 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 contemplated with CalEnergy. The Group and CalEnergy had agreed to jointly develop and construct geothermal power facilities at the Dieng and Patuha sites in Indonesia. Dieng Unit 1 is being constructed and is expected to be placed in commercial operation later this year. An additional five units are expected to be constructed on a modular basis as geothermal resources are developed. 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. The Group's investments in the international energy projects and the earnings and losses associated with these investments are included in discontinued operations. 7. C-TEC Restructuring: 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. The restructuring is expected to permit investors and the financial markets to better understand and evaluate C-TEC's various businesses. In addition, the restructuring has allowed C-TEC to raise capital on more efficient terms. In July 1997, C-TEC closed four separate credit facilities with a syndicate of banks aggregating $410 million and in October 1997, RCN issued $575 million of debt. These proceeds were used to refinance the cable group's existing Senior Secured Notes and to fund RCN's continued development. 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 consolidated financial statements. The financial position of each entity as of September 30, 1997 and December 28, 1996 (pro-forma) and the Group's proportionate share of the equity in each entity including allocated goodwill was as follows: Commonwealth Telephone Cable RCN Enterprises Michigan Corporation 1997 1996 1997 1996 1997 1996 Financial Position: Current assets $ 81 $ 51 $ 18 $ 10 $ 247 $ 143 Other assets 291 266 124 139 352 485 ----- ----- ---- ----- ------ ----- Total assets 372 317 142 149 599 628 Current liabilities 76 59 17 24 72 57 Other liabilities 262 189 163 190 138 175 Minority interest - - 15 15 15 5 ------ ----- ---- ---- ----- ----- Total liabilities 338 248 195 229 225 237 ------ ----- ---- ---- ----- ----- Net assets (liabilities) $ 34 $ 69 $ (53) $(80) $ 374 $ 391 ====== ===== ===== ==== ===== ===== Group's share: Equity in net assets $ 17 $ 33 $ (26) $(38) $ 181 $ 189 Goodwill 82 58 58 75 32 41 ------ ----- ----- ---- ----- ----- $ 99 $ 91 $ 32 $ 37 $ 213 $ 230 ====== ===== ===== ==== ===== ===== The results of operations for each entity for the nine months ended September 30, 1997 and 1996, and the Group's proportionate share, including goodwill amortization were as follows: Results of operations: Revenue $ 145 $ 139 $ 61 $ 57 $ 92 $ 76 Net income (loss) available to common stockholders 18 17 (3) (7) (35) (1) Group's share: Net income (loss) $ 9 $ 8 $ (1) $ (3) $(17) $ - Goodwill amortization (1) (3) (3) (2) - (2) ------ ----- ----- ---- ---- ---- Equity in net income (loss) $ 8 $ 5 $ (4) $ (5) $(17) $ (2) ====== ===== ===== ==== ==== ==== The following financial information of the Group is presented as if C-TEC had been accounted for utilizing the equity method in the condensed financial statements as of December 28, 1996 and for the three and nine months ended September 30, 1996. The 1997 financial statements include C-TEC accounted for utilizing the equity method and are presented here for comparative purposes only: September 30, December 28, (dollars in millions) 1997 1996 Assets Current Assets: Cash and cash equivalents $ 273 $ 71 Marketable securities 339 325 Restricted securities 22 17 Receivables 45 34 Other 19 19 -------- -------- Total Current Assets 698 466 Net Property, Plant and Equipment 181 174 Investments 472 458 Investments in Discontinued Operations 597 608 Intangible Assets, net 21 23 Other Assets 44 49 -------- -------- $ 2,013 $ 1,778 ======== ======== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 29 $ 41 Current portion of long-term debt 1 2 Accrued reclamation and other mining costs 17 19 Other 47 34 -------- -------- Total Current Liabilities 94 96 Long-term Debt, less current portion 134 113 Deferred Income Taxes 156 47 Retirement Benefits 40 45 Accrued Reclamation costs 99 98 Other Liabilities 114 118 Minority Interest 1 4 Stockholders' Equity 1,375 1,257 --------- -------- $ 2,013 $ 1,778 ========= ======== Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions) 1997 1996 1997 1996 Revenue $ 80 $ 75 $ 241 $ 209 Cost of Revenue (42) (39) (126) (112) ------ ----- ------ ----- 38 36 115 97 General and Administrative Expenses (26) (15) (67) (52) ------ ------ ------ ----- Operating Earnings 12 21 48 45 Other Income (Expense): Equity earnings, net (12) - (18) (7) Investment income, net 9 9 25 30 Interest expense, net (3) (1) (10) (2) Other, net 1 1 3 8 ------ ------ ------ ----- (5) 9 - 29 ------- ------ ------ ----- Earnings from Continuing Operations Before Income Taxes and Minority Interest 7 30 48 74 Provision for Income Taxes (2) (12) (17) (25) Minority Interest in Net Loss of Subsidiaries 1 1 3 3 ------ ------ ----- ----- Income from Continuing Operations 6 19 34 52 Income (Loss) from Discontinued Operations (50) 5 (37) 7 ------ ------- ----- ------ Net Earnings (Loss) $ (44) $ 24 $ (3) $ 59 ====== ======= ===== ====== Nine Months Ended September 30, (dollars in millions) 1997 1996 Cash flows from continuing operations: Net cash provided by continuing operations $ 167 $ 47 Cash flows from investing activities: Proceeds from sales and maturities of marketable securities and investments 160 5 Purchases of marketable securities (168) (52) Change in restricted securities 4 2 Capital expenditures (20) (20) Acquisitions and investment, net (32) (12) Other 1 4 ------- ------ Net cash used in investing activities (55) (73) Cash flows from financing activities: Proceeds from long-term debt borrowings 17 16 Payments on long-term debt, including current portion (2) (4) Repurchases of common stock - (11) Exchange of Class B&C Stock for Class D Stock 72 19 Payment of dividends (12) (12) Issuance of common stock 49 - -------- ------ Net cash provided by financing activities 124 8 Cash flows used in discontinued operations (34) (52) -------- ------ Net change in cash and cash equivalents 202 (70) Cash and cash equivalents at beginning of period 71 314 -------- ------ Cash and cash equivalents at end of period $ 273 $ 244 ======== ====== 8. Other Matters: In October 1996, the PKS Board of Directors ("Board") 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 the 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 Group would be 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. As a result, the restructuring will probably not occur until mid-year 1998. The Diversified Group probably will not seek to list its stock for public trading on a national securities exchange until it raises capital through a public equity offering or desires to have a listed equity security available for acquisitions. The Board will retain the right, even if the stockholders ratify the proposal and favorable tax treatment is satisfied, to abandon, defer or modify the Transaction if it believes that it would be in the best interests of all stockholders. The Group has recently decided to substantially increase its emphasis on and resources to its information services business, with a view to becoming a facilities-based provider of a broad range of integrated 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 services, 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 is involved in various lawsuits, claims and regulatory proceedings incidental to its business. Management believes that any resulting liability for legal proceedings beyond that provided should not materially affect the Group's financial position, future results of operations or future cash flows. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - Third Quarter 1997 vs. Third Quarter 1996 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. Revenue from each of the Group's business segments for the three months ended September 30 comprised the following (in millions): 1997 1996 Coal Mining $ 50 $ 61 Telecommunications - 90 Information Services 27 11 Other 3 3 ------- ------- $ 80 $ 165 ======= ======= Coal Mining. Mining revenue declined 18% in the third quarter of 1997 compared to the same period in 1996. Commonwealth Edison Company ("Commonwealth") has the flexibility under the amended contract to accelerate or defer delivery of alternate source coal provided it accepts delivery of the aggregate minimum commitment at the end of each year. In early 1996, alternate source coal shipments fell below minimum levels. These shortfalls were partially made up in the second and third quarters of 1996. In 1997, the opposite scenario occurred. Commonwealth took delivery of more coal in the first quarter than was required but reduced it purchases in the second and third quarters. Overall, the Group's alternate source coal revenues declined $6 million for the quarter ended September 30, 1997. Spot coal sales also declined in 1997. In the third quarter of 1996, a customer bought out its remaining 1996 obligations. The customer was not required to take delivery of the coal by paying 60% of the contracted price of the coal. Costs as a percentage of revenue for the coal mining operations in the third quarter of 1997 were consistent with that of the prior year. The decline in revenue from the customer who bought out its obligation in 1996, which had no corresponding costs, and declines in high margin alternate source coal sales were offset by improved mining efficiencies at the Black Butte mine and a decline in costs as the 1996 costs include certain equipment write-offs. Information Services. The Group's information services business provides computer operations outsourcing and systems integration services to firms that desire to focus resources on their core business. Systems integration services include converting mainframe based systems to client/server architecture, Year 2000 compliance, code restructuring and software re-engineering. Revenue attributable to computer outsourcing and systems integration increased 146% to $27 million for the three months ended September 30, 1997 compared to the same period in 1996. The increase in revenue is attributable to signing several new outsourcing contracts in late 1996 and the increased focus of customers on Year 2000 compatibility, code restructuring and software re-engineering. The operating costs of the information services business doubled to $16 million in 1997 primarily due to its continued growth. Hardware, communications and personnel costs for the systems integration business all increased significantly compared to the prior year. Operational efficiencies were recognized in 1997 through increased utilization of existing computer hardware. General and Administrative Expenses. General and administrative expenses decreased 28% in the third quarter of 1997 compared to the same period in 1996. The primary reason for the reduction is the exclusion of $21 million of C-TEC's expenses in 1997. C-TEC is no longer consolidated due to a reduction in the Group's controlling interest. This was partially offset by increases in the additional overhead of the expanding information services business and professional services required for the sale of assets to CalEnergy and the separation of the Diversified and Construction groups. Equity Losses, net. The telecommunications segment of the Group is now comprised of the three entities created in the C-TEC restructuring. As a result of the restructuring, the Group owns less than 50% of the outstanding shares and voting rights of each entity and accounts for them utilizing the equity method. Equity losses increased by $8 million in comparing the third quarter of 1997 to 1996. Contributing to this increase was the inclusion of ($9) million of equity losses for the three companies that previously comprised C-TEC. The losses of RCN continue to grow due to the continued expansion of its Boston, New York, and Washington D.C. markets. Investment Income, net. Excluding the $2 million attributable to C-TEC in 1996, investment income remained the same for the third quarter. The average portfolio balance and the average yield were relatively consistent between the quarters. Interest Expense, net. Interest expense increased $2 million in 1997, excluding C-TEC's $8 million of interest expense in 1996. CPTC incurred $3 million of interest costs in the third quarter of 1996 of which $1 million was capitalized due to the construction of the toll road. In 1997, CPTC also incurred $3 million of interest expense all of which was charged against earnings. The interest on the debt incurred by KDG to purchase the real estate in Colorado also contributed to the increase in interest expense. Other, net. With the exclusion of $1 million of expense for C-TEC in 1996, other income decreased 67% for the third quarter of 1997. In 1996, other income included a gain from the liquidation of a captive insurance company which insured against black lung disease. Provision for Income Taxes. The effective income tax rates in 1997 of 37% and in 1996 of 38% differ from the expected statutory rate of 35% primarily due to state income taxes. Minority Interest in Net Loss (Income) of Subsidiaries. The losses associated with the SR91 toll road comprise minority interest in 1997. In 1996, losses of ($2) million at CPTC are offset by the income of the C-TEC companies. Discontinued Operations. Equity earnings, net of tax, increased 160% in the third quarter of 1997. The Group's proportionate share of CalEnergy's earnings, net of tax, increased $4 million in the third quarter of 1997 to $8 million. The conversion of CalEnergy debentures to common stock and the exercise of options increased the Group's ownership interest in CalEnergy from 23% at July 1, 1996 to 30% at September 30, 1997. CalEnergy's earnings also increased primarily due to the completion and commencement of operations at the Salton Sea Unit IV geothermal facility, the purchase of three cogeneration facilities and the acquisition of Northern Electric all of which occurred in the last half of 1996 and the commencement of operations at the Mahanagdong geothermal facility in July of 1997. In addition to contributing to CalEnergy's earnings, the Group's proportionate share of Mahanagdong and Northern Electric, net of tax, also provided $2 million and $1 million of income. Partially offsetting these gains were losses attributable to the Casecnan project. The Casecnan loss during construction results from the variance in borrowing and investing interest rates on the funds generated by the project's debt offering in 1995. Also contained in discontinued operations is the extraordinary loss of $63 million, net of tax, from the Windfall tax imposed by the British government in 1997. Results of Operations - Nine Months 1997 vs. Nine Months 1996 Revenue from each of the Group's business segments for the nine months ended September 30 comprised the following (in millions): 1997 1996 Coal Mining $ 165 $ 172 Telecommunications - 273 Information Services 67 30 Other 9 7 ------ ------ $ 241 $ 482 ====== ====== Coal Mining. Coal sales declined 4% during the first nine months of 1997. Alternate source coal sales decreased $6 million primarily due to the reduced contractual obligations of customers. Contracted coal sales also declined slightly in 1997. Reduced coal sales to Detroit Edison Company, which is temporarily behind in purchasing its 1997 contracted coal, were partially offset by additional sales to Mississippi Power. Operating costs as a percentage of revenue were virtually unchanged from the same period in 1996. A decline in higher margin alternate source coal sales and proceeds from a customer who had bought out its obligations in 1996, were offset by improved mining efficiencies at the Black Butte mine and a decline in costs as the 1996 costs include certain equipment write-offs. Information Services. Revenue for information services business increased 123% to $67 million for the nine months ended September 30, 1997. The increase in revenue is attributable to signing several new outsourcing contracts in late 1996 and the increased focus of customers on Year 2000 compatibility, code restructuring and software re-engineering. The operating costs of the information services business increased 86% to $41 million in 1997 primarily due to its continued growth. Hardware, communications and personnel costs for the systems integration business all increased significantly compared to the prior year. Operational efficiencies were recognized in 1997 through increased utilization of existing computer hardware. General and Administrative Expenses. General and administrative expenses in 1997 and 1996 would have been $67 million and $52 million had C-TEC been accounted for using the equity method in both years. Increases in the expenses associated with the information services business, compensation expenses and professional fees incurred for the proposed restructuring and CalEnergy transaction led to the increase in general and administrative expenses. Equity Losses, net. Losses attributable to equity investees increased to ($18) in 1997 from ($7) in 1996 assuming C-TEC was accounted for using the equity method in both periods. The costs of RCN's continued expansion into Boston, New York City and Washington D.C. and $10 million of costs incurred in connection with the buyout of a marketing contract with minority shareholders are responsible for the increase in equity losses. Investment Income, net. Excluding C-TEC's $9 million in 1996, investment income decreased 17% in 1997. A reduction in the average portfolio balance due to significant investments in CE Electric and international energy projects, and a decline in gains recognized on the sales of securities, all contributed to the reduction in investment income. Interest Expense, net. Without the effect of C-TEC's $20 million in 1996, interest expense increased $8 million. Primarily contributing to the increase was CPTC's SR91 toll road. Through September 1996 and 1997, CPTC incurred $8 million and $8 million of interest on its long-term debt. In 1996, $6 million of the interest was capitalized due to the construction of the toll road. In August 1996, the road was opened, therefore, interest incurred after opening was charged against earnings. Other, net. Other income is primarily comprised of gains and losses on the sale and disposition of property, plant and equipment and other assets. Without C-TEC's $5 million of expenses recognized in 1996, other income decreased 62%. In 1996, gains were realized from the sale of certain nonoperating assets. Also in 1996, other income included a gain from the liquidation of a captive insurance company which insured against black lung disease. Provision for Income Taxes. The effective income tax rate in 1996 of 38% differs from the expected statutory rate of 35% primarily due to the state income taxes. The effective rate in 1997 is approximately 35%. Minority Interest in Net Loss (Income) of Subsidiaries. Minority interest in 1997 is now comprised of the earnings attributable to the minority shareholders of CPTC. The losses that were allocated to CPTC's minority shareholders were ($3) and ($1) million in 1997 and 1996. In 1996, C-TEC's minority shareholders earned $2 million. Discontinued Operations. Equity earnings, net of tax, increased significantly in 1997. The Group's proportionate share of CalEnergy's earnings, net of tax, increased $10 million in 1997 to $19 million. An increase in the Group's share of CalEnergy's earnings and improvement in those earnings, primarily due to the commencement of operations at a geothermal facility, and the acquisitions of three congeneration facilities and Northern Electric, contributed to the increase. The Group's proportionate share of Northern Electric, which was acquired in December 1996, provided $7 million of income after taxes. Also contained in discontinued operations is the extraordinary loss of $63 million, net of tax, from the Windfall tax imposed by the British government in 1997. Financial Condition - September 30, 1997 vs. December 28, 1996 Excluding C-TEC, the Group's working capital increased $234 million or 63% during 1997. An increase in cash flows from operations, primarily due to $146 million of federal tax and interest refunds, and financing activities. The increase was partially offset by cash used to fund investing activities and discontinued operations. Investing activities primarily consist of $22 million of real estate investments, $20 million of capital expenditures, including $11 million for equipment of the information services business, and the net purchase of marketable securities of $8 million. Financing sources include $72 million from the exchange of Class B&C Stock for Class D Stock, $49 million from the issuance of common stock and $17 million long-term debt borrowings, primarily to purchase the Aurora property. These sources were partially offset by $12 million for the payment of dividends. Prior to the agreement with CalEnergy, the Group invested $34 million in the Dieng, Patuha and Bali power projects in Indonesia during 1997. In October 1996, the PKS Board of Directors ("Board") 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 and the Diversified Group through a split-off of the Construction and Mining Group. 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 would be 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. As a result, the restructuring will probably not occur until mid- year 1998. The Diversified Group probably will not seek to list its stock for public trading on a national securities exchange until it raises capital through a public equity offering or desires to have a listed equity security available for acquisitions. The Board will retain the right, even if the stockholders ratify the proposal and favorable tax treatment is satisfied, to abandon, defer or modify the Transaction if it believes that it would be in the best intersts of all stockholders. The Group has recently decided to substantially increase its emphasis on and resources to its information services business, with a view to becoming a facilities-based provider of a broad range of integrated 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 services, 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 anticipates that these costs may be in excess of $1 billion per year within approximately two years after the separation of the Construction and Diversified businesses. Long-term liquidity uses of the Group include payment of income taxes and repurchasing the Group's stock. The Group's current financial condition, borrowing capacity and proceeds from the CalEnergy transaction should be sufficient for immediate operating and investing activities. Subsequent to September 30, 1997, the Group sold $67 million of Class D Stock to employees. 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 on the Philippine island of Luzon. The Group and CalEnergy have 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 transactions contemplated with CalEnergy. 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 will consist of RCN Telecom Services; C-TEC's existing cable systems in the Boston-Washington, D.C. corridor; and the investment in Megacable S.A. de C.V., a cable operator in Mexico. RCN Telecom Services is a provider of packaged local and long distance telephone, video, and internet access services provided over fiber optic networks to residential customers in Boston, New York City and Washington, D.C. The restructuring is expected to permit investors and the financial markets to better understand and evaluate C-TEC's various businesses. In addition, the restructuring has allowed C-TEC to raise capital on more efficient terms. In July 1997, C-TEC closed four separate credit facilities with a syndicate of banks aggregating $410 million and in October 1997, RCN issued $575 million of debt. These proceeds were used to refinance the cable group's existing Senior Secured Notes and to fund RCN's continued development. -----END PRIVACY-ENHANCED MESSAGE-----