EXHIBIT 99.B
KIEWIT DIVERSIFIED GROUP
Index to Financial Statements
and Financial Statement Schedule and
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Report of Independent Accountants
Financial Statements as of December 30, 1995 and
December 31, 1994 and for the three years
ended December 30, 1995:
Statements of Earnings
Balance Sheets
Statements of Cash Flows
Statements of Changes in Stockholders' Equity
Notes to Financial Statements
Financial Statement Schedule for the three years ended December
30, 1995:
II--Valuation and Qualifying Accounts and Reserves
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Schedules not indicated above have been omitted because of the
absence of the conditions under which they are required or
because the information called for is shown in the financial
statements or in the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Peter Kiewit Sons', Inc.
We have audited the financial statements and the financial
statement schedule of Kiewit Diversified Group, a business group
of Peter Kiewit Sons', Inc. (as defined in Note 1 to these
financial statements) as listed in the index on the preceding
page of this exhibit to Form 10-K. These financial statements
and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, when
read in conjunction with the consolidated financial statements of
Peter Kiewit Sons', Inc. and Subsidiaries, present fairly, in all
material respects, the financial position of Kiewit Diversified
Group as of December 30, 1995 and December 31, 1994 and the
results of its operations and its cash flows for each of the
three years in the period ended December 30, 1995 in conformity
with generally accepted accounting principles. In addition, in
our opinion the financial statement schedule referred to above,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
March 19, 1996, March 19, 1996,
except for Note 18, as to
which the date is March 27, 1996.
KIEWIT DIVERSIFIED GROUP
Statements of Earnings
For the three years ended December 30, 1995
(dollars in millions, except per share data) 1995 1994 1993
Revenue $ 580 $ 537 $ 267
Cost of Revenue (358) (327) (154)
------ ------ ------
222 210 113
General and Administrative Expenses (180) (133) (70)
------ ------ ------
Operating Earnings 42 77 43
Other Income (Expense):
Gain on Subsidiary's Stock Transactions, net 3 54 211
Investment Income, net 62 30 18
Interest Expense, net (23) (36) (11)
Other, net 128 (1) 13
----- ----- -----
170 47 231
Equity Loss in MFS (131) (102) (13)
------ ----- -----
Earnings Before Income Taxes and
Minority Interest 81 22 261
Income Tax Benefit (Provision) 71 10 (80)
Minority Interest in Net (Income)
Loss of Subsidiaries (12) 1 -
------ ----- -----
Net Earnings $ 140 $ 33 $ 181
====== ===== =====
Net Earnings Per Common and
Common Equivalent Share $ 6.45 $1.63 $9.08
====== ===== =====
See accompanying notes to financial statements.
KIEWIT DIVERSIFIED GROUP
Balance Sheets
December 30, 1995 and December 31, 1994
(dollars in millions) 1995 1994
Assets
Current Assets:
Cash and cash equivalents $ 363 $ 330
Marketable securities 484 754
Receivables, less allowance of $2 and $2 81 157
Note receivable from sale of
discontinued operations - 29
Deferred income taxes 5 15
Other 36 83
------- -----
Total Current Assets 969 1,368
Property, Plant and Equipment, at cost:
Land 17 15
Buildings 61 171
Equipment 717 1,254
------ ------
795 1,440
Less accumulated depreciation
and amortization (289) (336)
------ ------
Net Property, Plant and Equipment 506 1,104
Investments 459 258
Intangible Assets, net 499 733
Other Assets 57 74
------- ------
$ 2,490 $ 3,537
======= =======
See accompanying notes to financial statements.
KIEWIT DIVERSIFIED GROUP
Balance Sheets
December 30, 1995 and December 31, 1994
(dollars in millions) 1995 1994
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 61 $ 165
Current portion of long-term debt:
Telecommunications 36 26
Other 4 4
Accrued costs and billings in excess of
revenue on uncompleted contracts 10 37
Accrued reclamation and other mining costs 18 20
Other 88 147
------ ------
Total Current Liabilities 217 399
Long-Term Debt, less current portion:
Telecommunications 264 827
Other 97 72
Deferred Income Taxes 235 306
Retirement Benefits 54 67
Accrued Reclamation Costs 99 102
Other Liabilities 170 85
Minority Interest 214 448
Stockholders' Equity (Redeemable Common Stock,
$1,151 million aggregate redemption value)
Common equity 1,125 1,238
Foreign currency adjustment (1) -
Net unrealized holding gain (loss) 16 (7)
----- ------
Total Stockholders' Equity 1,140 1,231
------ --------
$2,490 $ 3,537
====== ========
See accompanying notes to financial statements.
KIEWIT DIVERSIFIED GROUP
Statements of Cash Flows
For the three years ended December 30, 1995
(dollars in millions) 1995 1994 1993
Cash flows from continuing operations:
Net earnings $ 140 $ 33 $ 181
Adjustments to reconcile net earnings
to net cash provided by continuing
operations:
Depreciation, depletion and amortization 96 165 51
(Gain) loss on sale of property, plant
and equipment, and other investments (7) 16 8
Gain on subsidiary's stock transactions,
net (3) (54) (211)
Equity (earnings) loss 119 (7) (13)
Non-cash interest expense - 40 -
Minority interest in subsidiaries 12 (50) (3)
Decline in market value of investments - - 25
Retirement benefits paid (2) (6) (17)
Deferred income taxes (147) (37) 53
Change in working capital items:
Receivables 11 (28) 8
Other current assets - (48) -
Payables (3) 23 51
Other liabilities 69 (2) 36
Other (4) 24 27
------ ------ ------
Net cash provided by continuing
operations 281 69 196
Cash flows from investing activities:
Proceeds from sales and maturities
of marketable securities 408 1,610 4,155
Purchases of marketable securities (455) (1,473) (4,490)
Acquisitions, excluding cash acquired (229) (207) (146)
Proceeds from sale of cellular properties - 182 -
Proceeds from sale of property, plant
and equipment, and other investments 14 7 25
Capital expenditures (82) (450) (139)
Investments in affiliates (29) (33) (3)
Acquisition of minority interest - (6) -
Deferred development costs and other (38) (49) (36)
------- ------- ------
Net cash used in investing activities $ (411) $ (419) $ (634)
See accompanying notes to financial statements
KIEWIT DIVERSIFIED GROUP
Statements of Cash Flows
For the three years ended December 30, 1995
(dollars in millions) 1995 1994 1993
Cash flows from financing activities:
Long-term debt borrowings $ 49 $ 691 $ 19
Payments on long-term debt, including
current portion (49) (305) (7)
Net change in short-term borrowings - - (80)
Issuances of common stock 2 1 8
Issuances of subsidiaries' stock - 70 458
Repurchases of common stock (3) (20) (40)
Dividends paid - - (17)
Exchange of Class B&C Stock for Class D
Stock, net 155 42 26
Other - (1) 3
----- ----- ----
Net cash provided by financing activities 154 478 370
Cash flows from discontinued
packaging operations:
Proceeds from sales of discontinued
packaging operations 29 5 110
Other cash provided by discontinued
packaging operations - - 20
----- ----- ----
Net cash provided by discontinued
packaging operations 29 5 130
Cash and cash equivalents of MFS at
beginning of year (22) - -
Effect of exchange rates on cash 2 - -
----- ----- ----
Net increase in cash and cash equivalents 33 133 62
Cash and cash equivalents at
beginning of year 330 197 135
----- ----- ----
Cash and cash equivalents at end of year $ 363 $ 330 $ 197
===== ===== =====
Supplemental disclosure of cash
flow information:
Taxes $ 132 $ 66 $ 29
Interest 33 39 4
Noncash investing and financing activities:
Dividend of investment in MFS $ 399 $ - $ -
Issuance of C-TEC redeemable preferred stock
for acquisition 39 - -
Issuances of MFS stock for acquisitions - 71 -
MFS stock transactions to settle contingent
purchase price adjustment - 25 -
See accompanying notes to financial statements.
KIEWIT DIVERSIFIED GROUP
Statements of Changes in Stockholders' Equity
For the three years ended December 30, 1995
(dollars in millions, except per share data) 1995 1994 1993
Common equity:
Balance at beginning of year $ 1,238 $ 1,182 $ 1,017
Issuances of stock 5 1 8
Repurchases of stock (3) (20) (40)
Exchange of Class B&C Stock for Class
D Stock, net 155 42 26
Net earnings 140 33 181
Dividend of investment in MFS (399) - -
Dividends (per share: $.50 in 1995(a),
$.50 in 1993) (11) - (10)
--------- ------ ------
Balance at end of year 1,125 1,238 1,182
Other equity adjustments:
Balance at beginning of year (7) 9 4
Foreign currency adjustment (1) - (4)
Net unrealized holding gain (loss) 23 (16) 9
-------- ------ -----
Balance at end of year 15 (7) 9
-------- ------ -----
Total stockholders' equity $ 1,140 $ 1,231 $ 1,191
======== ======== ========
(a) Dividend declared in 1995 but paid in January 1996.
See accompanying notes to financial statements.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
(1) Basis of Presentation
The Class B&C Stock and the Class D Stock are designed to
provide stockholders with separate securities reflecting the
performance of Peter Kiewit Sons', Inc.'s ("PKS")
construction business and certain mining services
("Construction & Mining Group") and its other businesses
("Diversified Group").
The financial statements of the Diversified Group include the
financial position, results of operations and cash flows for
PKS' businesses other than its Construction & Mining Group
businesses, held by a wholly-owned subsidiary, Kiewit
Diversified Group Inc. ("KDG") and a portion of the PKS
corporate assets and liabilities and related transactions
which are not separately identified with the ongoing
operations of the Diversified Group or the Construction &
Mining Group. These financial statements have been prepared
using the historical amounts included in the PKS consolidated
financial statements.
Although the financial statements of PKS' Diversified Group
and Construction & Mining Group separately report the assets,
liabilities and stockholders' equity of PKS attributed to
each such group, legal title to such assets and
responsibility for such liabilities will not be affected by
such attribution. Holders of Class D Stock and Class B&C
Stock are stockholders of PKS. Accordingly, the PKS
consolidated financial statements and related notes should be
read in conjunction with these financial statements.
(2) Summary of Significant Accounting Policies
Principles of Group Presentation
These financial statements include the accounts of the
Diversified Group ("the Group"). The Group's and Construction
& Mining Group's financial statements, taken together,
comprise all of the accounts included in the PKS consolidated
financial statements. The Group's enterprises include coal
mining, telecommunications, data management services, energy
production and timberland sales. The Group's only reportable
segments are coal mining and telecommunications.
Fifty-percent-owned mining joint ventures are consolidated on
a pro rata basis. Investments in other companies in which
the Group exercises significant influence over operating and
financial policies are accounted for by the equity method. In
addition, the Group accounts for its investments in
international energy projects using the equity method. All
significant intercompany accounts and transactions, except
those directly between the Group and the Construction &
Mining Group, have been eliminated.
Coal Sales Contracts
The Group's coal is sold primarily under long-term contracts
with electric utilities, which burn coal in order to generate
steam to produce electricity. A substantial portion of the
Group's sales were made under long-term contracts during 1995,
1994 and 1993. The remainder of the Group's sales are made on the
spot market where prices are substantially lower than those in
the long-term contracts. As the long-term contracts expire, a
higher proportion of the Group's sales will occur on the spot market.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
The coal industry is highly competitive. The Group competes
not only with other domestic and foreign coal suppliers, some
of whom are larger and have greater capital resources than
the Group, but also with alternative methods of generating
electricity and alternative energy sources. Many of the
Group's competitors are served by two railroads and, due to
the competition, often benefit from lower transportation
costs than the Group which is served by a single railroad.
Additionally, many competitors have lower stripping ratios
than the Group, often resulting in lower comparative costs of
production.
The Group is also required to comply with various
federal, state and local laws concerning protection of the
environment. The Group believes its compliance with
environmental protection and land restoration laws will not
affect its competitive position since its competitors are
similarly affected by such laws.
The Group and its mining ventures have entered into
various agreements with its customers which stipulate
delivery and payment terms for the sale of coal. Prior to
1993, one of the primary customers deferred receipt of
certain commitments by purchasing undivided fractional
interests in coal reserves of the Group and the mining
ventures. Under these arrangements revenue was recognized
when cash was received. The agreements with this
customer were renegotiated in 1992. In accordance with
the renegotiated agreements, there were no sales of
interests in coal reserves subsequent to January 1, 1993.
The Group has the obligation to deliver the coal reserves to
the customer in the future if the customer exercises its
option. If the option is exercised, the Group
presently intends to deliver coal from unaffiliated mines
and a mine in which the Group has a 50% interest. In the
opinion of management, the Group has sufficient coal reserves
to cover the above sales commitments.
The Group's coal sales contracts are with several electric
utility and industrial companies. In the event that these
customers do not fulfill contractual responsibilities, the
Group would pursue the available legal remedies.
Telecommunications Revenues
C-TEC Corporation's, ("C-TEC"), most significant operating
groups are its local telephone service and cable system
operations. C-TEC's telephone network access revenues are
derived from net access charges, toll rates and settlement
arrangements for traffic that originates or terminates within
C-TEC's local telephone company. Revenues from telephone
services and basic and premium cable programming services are
recorded in the month service is provided.
The telecommunications industry is subject to local, state
and federal regulation. Consequently, the ability of the
telephone and cable groups to generate increased volume and
profits is largely dependent upon regulatory approval to
expand customer bases, increase prices and limit expenses.
Competition for the cable group's services traditionally
has come from broadcast television, video rentals and direct
broadcast satellite received on home dishes. Future
competition is expected from telephone companies.
Concentration of credit risk with respect to accounts
receivable are limited due to the dispersion of customer base
among geographic areas and remedies provided by the terms of
contracts and statutes.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
Depreciation and Amortization
Property, plant and equipment are recorded at cost.
Depreciation and amortization for the majority of the Group's
property, plant and equipment are computed on accelerated and
straight-line methods. Depletion of mineral properties is
provided primarily on an units-of-extraction basis determined
in relation to estimated reserves.
In accordance with industry practice, certain telephone plant
owned by C-TEC valued at $233 million is depreciated based on
the estimated remaining lives of the various classes of
depreciable property and straight-line composite rates. When
property is retired, the original cost, plus cost of removal,
less salvage, is charged to accumulated depreciation.
Intangible Assets
Intangible assets primarily consist of amounts allocated upon
purchase of existing operations, franchise and subscriber
lists and development costs. These assets are amortized on a
straight-line basis over the expected period of benefit,
which does not exceed 40 years.
The Group reviews the carrying amount of intangible assets
for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be
recoverable. Measurement of any impairment would include a
comparison of estimated future operating cash flows
anticipated to be generated during the remaining life of the
asset to the net carrying value of the asset.
Pension Plans
The Group maintains defined benefit plans primarily for
packaging employees who retired prior to the disposition of
the packaging operations. Benefits paid under the plans are
based on years of service for hourly employees and years of
service and rates of pay for salaried employees.
Substantially all of C-TEC's employees are included in a
trusteed noncontributory defined benefit plan. Upon
retirement, employees are provided a monthly pension based on
length of service and compensation.
The plans are funded in accordance with the requirements of
the Employee Retirement Income Security Act of 1974.
Reserves for Reclamation
The Group follows the policy of providing an accrual for
reclamation of mined properties, based on the estimated cost
of restoration of such properties, in compliance with laws
governing strip mining. It is at least reasonably possible
that the estimated cost of restoration will be revised in the
near term.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
Foreign Currencies
The local currencies of foreign subsidiaries are the
functional currencies for financial reporting purposes.
Assets and liabilities are translated into U.S. dollars at
year-end exchange rates. Revenue and expenses are
translated using average exchange rates prevailing during the
year. Gains or losses resulting from currency translation are
recorded as adjustments to stockholders' equity.
Subsidiary Stock Sales and Issuances
The Group recognizes gains and losses from the sales and
issuances of stock by its subsidiaries.
Earnings Per Share
Primary earnings per share of Class D Stock have been
computed using the weighted average number of shares
outstanding during each year. The number of shares used in
computing primary earnings per share were 21,718,792,
20,438,806 and 19,941,885 in 1995, 1994 and 1993. Fully
diluted earnings per share have not been presented because it
is not significantly different from primary earnings per
share.
Income Taxes
Deferred income taxes are provided on the temporary
differences between the financial reporting basis and the tax
basis of the Group's assets and liabilities using enacted tax
rates in effect for the year in which the differences are
expected to reverse.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
Reclassifications
Where appropriate, items within the financial statements and
notes thereto have been reclassified from previous years to
conform to current year presentation.
Fiscal Year
The Group's fiscal year ends on the last Saturday in December.
There were 52 weeks in fiscal years 1995 and 1993 and 53 weeks
in the 1994 fiscal year.
C-TEC has a calendar fiscal year.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
(3) MFS Spin-off
The PKS Board of Directors approved a plan to make a tax-free
distribution of its entire ownership interest in MFS
Communications Company, Inc. ("MFS"), effective September 30,
1995, to the Class D stockholders (the "Spin-off") at a
special meeting on September 25, 1995.
The Spin-off was completed after PKS and KDG agreed with MFS
to effect a recapitalization of MFS pursuant to which KDG
exchanged a portion of the MFS Common Stock held by KDG for
certain high-vote convertible preferred stock. In addition,
prior to completing the Spin-off, PKS purchased additional
shares of MFS Common Stock which were subsequently
distributed to the Class D stockholders.
PKS completed an exchange offer prior to the Spin-off whereby
4,000,000 shares of Class B and Class C Stock ("Class B&C
Stock) were exchanged for 1,666,384 shares of Class D Stock
on terms similar to those upon which Class B&C Stock can be
converted into Class D Stock during the annual conversion
period provided for in the Company's Certificate of
Incorporation. The conversion ratio used in the exchange was
calculated using final 1994 stock prices adjusted for 1995
dividends.
After the recapitalization of MFS and the exchange offer
discussed above, shares were distributed on the basis of
approximately 1.741 shares of MFS Common Stock and
approximately .651 shares of MFS Preferred Stock for each
share of outstanding Class D Stock.
The net investment in MFS distributed on September 30, 1995
was approximately $399 million.
The results of operations of MFS have been classified as a
single line item on the statements of earnings for the three
years ended December 30, 1995. MFS is consolidated in the
1994 balance sheet and the 1994 and 1993 statements of cash
flows.
Operating results of MFS through September 30, 1995 and for
fiscal years 1994 and 1993 are summarized as follows:
(dollars in millions) 1995 1994 1993
Revenue $ 412 $ 287 $ 141
Loss from operations (176) (136) (31)
Net loss (196) (151) (16)
Group's share of loss in MFS (131) (102) (13)
Included in the income tax benefit on the statement of
earnings for the year ended December 30, 1995, is $93 million
of tax benefits from the reversal of certain deferred tax
liabilities, recognized on gains from previous MFS stock
transactions, that will not be taxed due to the Spin-off.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
(4) Corporate Activities
Financial Structure
Cash, cash equivalents and marketable securities were
allocated between the Groups based upon the desired capital
structure of the two Groups at December 28, 1991. Financial
statement impacts of dividends paid to holders of Class D
Stock and repurchases and issuances of Class D Stock in
1995, 1994 and 1993 were reflected in their entirety in the
Diversified Group's financial statements.
PKS, in addition to specifically attributable items, has
corporate assets, liabilities and related income and expense
which are not separately identified with the ongoing
operations of the Group or the Construction & Mining Group.
The items attributable to the Group and the Group's 50%
portion of PKS is as follows:
(dollars in millions) 1995 1994
Cash and cash equivalents $ - $ 86
Marketable securities 10 15
Property, plant and equipment, net 5 5
Other assets 3 14
------ ------
Total Assets $ 18 $ 120
====== ======
Accounts payable $ 23 $ 67
Long-term debt, including current portion 3 7
Other liabilities - 2
------ ------
Total Liabilities $ 26 $ 76
====== ======
1995 1994 1993
Net investment income (expense) $ - $ 7 $ 6
Other income (expense) - (4) (1)
Corporate General and Administrative Costs
A portion of corporate general and administrative costs has
been allocated to the Group based upon certain measures of
business activities, such as employment, investments and
sales, which method management believes to be reasonable.
These allocations were $5 million, $8 million and $10
million in 1995, 1994 and 1993. Due to a realignment of the
corporate overhead departments, a portion of the
administrative functions and personnel previously allocated
to the Group are now located at the Group.
Income Taxes
All domestic members of the PKS affiliated group are
included in the consolidated U.S. income tax return filed by
PKS as allowed by the Internal Revenue Code. Accordingly,
the provision for income taxes and the related payments or
refunds of tax are determined on a consolidated basis.
The financial statement provision and actual cash tax
payments have been reflected in the Group's and Construction
& Mining Group's financial statements in accordance with
PKS' tax allocation policy for such groups. In general,
such policy provides that the consolidated tax provision and
related cash flows and balance sheet amounts are allocated
between the Group and the Construction & Mining Group,
for group financial statement purposes, based principally
upon the financial income, taxable income, credits,
preferences and other amounts directly related to the
respective groups. The provision for estimated United States
income taxes for the Group does not differ materially from that
which would have been determined on a separate return basis.
(5) Acquisitions
During 1995, the Group and its subsidiaries acquired the
entities described below. The Group has accounted for the
transactions as purchases and consolidated the operating
results since the acquisition dates. Purchase prices in
excess of the fair market values of net assets acquired have
been recorded as goodwill, in intangible assets.
C-TEC completed the first step of an acquisition of Twin
County Trans Video, Inc. ("Twin County") in May 1995. Twin
County provides cable television service to 74,000
subscribers in eastern Pennsylvania. In consideration for
40% of the capital stock of Twin County, C-TEC paid $26
million in cash and issued a $4 million note of its
subsidiary, C-TEC Cable Systems, Inc. In addition, C-TEC
paid $11 million in consideration of a noncompete agreement.
The remaining outstanding common stock of Twin County was
acquired in September 1995 in exchange for $52 million stated
value redeemable preferred stock of C-TEC. The preferred
stock has a stated dividend rate of 5%, beginning January 1,
1996. The fair value of the preferred stock, as determined
by an independent appraiser, is $39 million and is recorded
in other liabilities. Goodwill of $18 million is being
amortized over 10 years.
Pursuant to a stock rights offering in August 1995, C-TEC
acquired majority voting control of Mercom, Inc. ("Mercom")
through the exercise of stock rights and over subscription
privileges. Immediately prior to the rights offering, C-TEC
owned 43% of the outstanding common stock of Mercom and
accounted for it under the equity method. For the aggregate
consideration of approximately $7 million, C-TEC increased
its ownership interest to 62% and accordingly consolidated
Mercom in its financial statements. C-TEC's total investment
exceeded the underlying equity of Mercom by $11 million,
which is being amortized over 15 years.
The following unaudited pro forma information shows the
results of the Group as though the C-TEC acquisitions
occurred at the beginning of 1995 and 1994. These results
include certain adjustments, primarily increased
amortization, and do not necessarily indicate future results,
nor the results of historical operations had the acquisitions
actually occurred on the assumed dates.
(in millions, except per share data) 1995 1994
Revenue $ 598 $ 574
Net earnings 135 25
Earnings per share of Class D stock 6.23 1.26
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
(6) Gain on Subsidiary's Stock Transactions, net
In May 1993, MFS sold 12.7 million shares of common stock to
the public at an initial offering price of $20 per share for
$233 million, net of certain transaction costs. An
additional 4.6 million shares were sold to the public in
September 1993, at a price of $50 per share for $218
million, net of certain transaction costs. Substantially
all of the net proceeds from the offerings funded MFS'
growth.
In 1994, the Group settled a contingent purchase price
adjustment resulting from MFS' 1990 purchase of Chicago
Fiber Optic Corporation ("CFO"). The former shareholders of
CFO accepted MFS stock previously held by the Group, valued
at current market prices, as payment of the obligation.
The above transactions, along with the stock issuances by
MFS for acquisitions and employee stock options, reduced the
Group's ownership in MFS prior to the Spin-off in 1995 to
66% and to 67% and 71% at the end of 1994 and 1993. As a
result, the Group recognized gains of $3 million, $54
million and $211 million in 1995, 1994 and 1993 representing
the increase in the Group's proportionate share of MFS
equity. Deferred income taxes had been established on these
gains prior to the Spin-off.
(7) Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to determine
classification and fair values of financial instruments:
Cash and Cash Equivalents
Cash equivalents generally consist of highly liquid
instruments purchased with an original maturity of three
months or less. The securities are stated at cost, which
approximates fair value.
Marketable Securities and Non-current Investments
The Group has classified all marketable securities and non-
current investments not accounted for under the equity method
as available-for-sale. The amortized cost of the securities
used in computing unrealized and realized gains and losses is
determined by specific identification. Fair values are
estimated based on quoted market prices for the securities on
hand or for similar investments. Net unrealized holding
gains and losses are reported as a separate component of
stockholders' equity, net of tax.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
At December 30, 1995 and December 31, 1994 the cost,
unrealized holding gains and losses and estimated fair values
of marketable securities and noncurrent investments were as
follows:
Unrealized Unrealized
Amortized Holding Holding Fair
(dollars in millions) Cost Gains Losses Value
1995:
Kiewit Mutual Fund:
Short-term government $ 99 $ 1 $ - $ 100
Intermediate term bond 76 4 - 80
Tax exempt 130 4 - 134
Equity 10 2 - 12
Equity securities 8 3 - 11
U.S. debt securities 2 - - 2
Federal agency securities 8 - - 8
Municipal debt securities 1 - - 1
Corporate debt securities 134 - - 134
Collateralized mortgage
obligations - 2 - 2
----- ----- ----- -----
$ 468 $ 16 $ - $ 484
===== ===== ===== =====
Non-current Investments:
Equity securities $ 38 $ 10 $ - $ 48
===== ===== ===== =====
1994:
Kiewit Mutual Fund:
Short-term government $ 42 $ - $ 1 $ 41
Intermediate term bond 202 - 4 198
Tax exempt 5 - - 5
Equity securities 4 - 1 3
U.S. debt securities 275 - 3 272
Federal agency securities 77 - - 77
Municipal debt securities 5 - - 5
Corporate debt securities 145 - 2 143
Collateralized mortgage
obligations 12 1 3 10
---- ----- ---- -----
$ 767 $ 1 $ 14 $ 754
===== ===== ==== =====
Non-current investments:
Equity securities $ 59 $ 5 $ 2 $ 62
===== ===== ==== =====
For debt securities, amortized costs do not vary
significantly from principal amounts. Realized gains and
losses on sales of marketable securities were $1 million and
$2 million in 1995, $2 million and $16 million in 1994, and
$29 million and $39 million in 1993.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
At December 30, 1995, the contractual maturities of the debt
securities are as follows:
(dollars in millions) Amortized Cost Fair Value
U.S. debt securities:
Less than 1 year $ 2 $ 2
====== =====
Federal agency securities:
Less than 1 year $ 8 $ 8
====== =====
Municipal debt securities:
1-5 years $ - $ -
5-10 years - -
Over 10 years 1 1
------ -----
$ 1 $ 1
====== =====
Corporate debt securities:
Less than 1 year $ 33 $ 33
1-5 years 81 81
5-10 years 20 20
------ -----
$ 134 $ 134
====== =====
Maturities for the mutual fund, equity securities and
collateralized mortgage obligations have not been presented
as they do not have a single maturity date.
Long-term Debt
The fair value of debt was estimated using the incremental
borrowing rates of the Group for debt of the same remaining
maturities. With the exception of C-TEC, the fair value of
debt approximates the carrying amount. C-TEC's Senior
Secured Notes and the Credit Agreement with National Bank of
Cooperatives have an aggregate fair value of $253 million.
(8) Investments
In February 1995, CalEnergy Company, Inc. ("CE"), formerly
named California Energy Company, Inc., an equity method
investee, completed the purchase of Magma Power Company. The
cash transaction, valued at $950 million, was partially
financed by the sale of 17 million shares of CE common stock
at $17 per share. As part of this offering, the Group
purchased 1.5 million shares. In addition, during the second
quarter of 1995, the Group purchased an additional 200,000
common shares of CE. At December 30, 1995, the Group owned
21% of CE's outstanding common stock and had a cumulative
investment in CE common stock of $153 million, $37 million in
excess of the Group's proportionate share of CE's equity.
The excess investment is being amortized over 20 years.
Equity earnings, net of goodwill amortization, were $10
million, $5 million and $7 million in 1995, 1994 and 1993.
CE common stock is traded on the New York Stock Exchange. On
December 30, 1995, the market value of the Group's investment
in CE common stock was $211 million.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
In 1995, 1994 and 1993, the Group also recorded dividends in
kind, of $1 million, $5 million and $5 million declared by CE
consisting of voting convertible preferred stock. The stock
dividends brought the Group's total investment in convertible
preferred stock to $65 million. In March 1995, CE exchanged
the preferred stock for 9.5% Convertible Subordinated
Debentures (the "Debentures") that pay interest semi-
annually. The Debentures mature in December 2003 and are
convertible into CE common stock at a conversion price of
$18.375 per share any time prior to maturity. CE may prepay
the Debentures if the share price of CE stock is at least
150% of the conversion price for any 20 trading days out of
any 30 consecutive trading days.
On February 20, 1996 the Group exercised 1.5 million CE
options at a price of $9 per share. The transaction
increased the Group's ownership interest in CE to 24%. In
addition, the Group has 4.3 million options to purchase
additional CE stock at prices of $11.625-$12 per share.
The following is summarized financial information of
CalEnergy Company Inc.:
Financial Position (dollars in millions) 1995 1994
Current assets $ 418 $ 518
Other assets 2,236 613
------ -----
Total assets 2,654 1,131
Current liabilities 564 309
Other liabilities 1,546 578
Redeemable preferred stock - 64
------ -----
Total liabilities 2,110 951
------ -----
Net assets $ 544 $ 180
======= =====
Operations (dollars in millions) 1995 1994 1993
Revenue $ 399 $ 186 $ 132
===== ===== ======
Net income available to
common stockholders $ 62 $ 32 $ 43
===== ===== ======
In January 1995, C-TEC purchased, for $84 million in
cash, a 40% equity position in Megacable S.A. De C.V.
("Megacable"), Mexico's second largest cable television
operator with 174,000 subscribers in twelve cities. C-TEC
accounts for its investment using the equity method. The
excess cost over the underlying assets of Megacable,
approximately $94 million, is being amortized on a straight
line basis over 15 years. C-TEC's share of Megacable's
earnings, net of goodwill amortization was approximately a $3
million loss in 1995.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
Pursuant to a joint venture agreement with CE, the Group is
an equity investor with CE in the Mahanagdong geothermal
power project and the Casecnan power/irrigation project in
the Philippines. Both projects are under construction. To
date the Group has invested $89 million in the Philippine
projects. The Group also expects to be an equity investor
with CE in additional geothermal projects in Indonesia. To
date investments in these projects total $9 million.
Investments also include equity securities classified as non-
current and carried at the fair value of $48 million.
(9) Intangible Assets
Intangible assets consist of the following at December 30,
1995 and December 31, 1994:
(dollars in millions) 1995 1994
Goodwill $ 199 $ 466
Franchise and subscriber lists 224 145
Noncompete agreements 86 15
Licenses and rights-of-ways - 15
Deferred development costs 47 65
Toll road franchise costs 109 75
Other 4 19
------ -----
669 800
Less accumulated amortization (170) (67)
------ -----
$ 499 $ 733
====== =====
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
(10) Long-Term Debt
At December 30, 1995 and December 31, 1994, long-term debt
was as follows::
(dollars in millions) 1995 1994
Telecommunications:
C-TEC Long-term Debt (with recourse only
to C-TEC):
Credit Agreement - National Bank for
Cooperatives (7.51% due 2009) $ 119 $ 128
Senior Secured Notes -
(9.65%, due 1999)
(includes unamortized premium of $5 and
$6 based on imputed rate of 6.12%) 150 156
Term Credit Agreement - Morgan Guaranty
Trust Company
(7% due 2002) 19 -
Promissory Note - Twin County Acquisition
(5% due 2003) 4 -
Revolving Credit Agreements and Other 8 4
MFS Long-term Debt (with recourse only to MFS):
9.375% Senior Discount Notes, Due 2004,
with semi-annual interest payments 1999-2004 - 549
Notes Payable, Due 1995, (Prime plus 1.5%) - 16
----- -----
300 853
Other Long-term Debt:
9.5% to 11.1% Notes to former stockholders
due 1996-2001 3 6
6.25% to 8.75% Convertible debentures - 2
Construction loans and other 98 68
----- -----
401 929
Less current portion (40) (30)
----- -----
$ 361 $ 899
===== =====
In March 1994, C-TEC's telephone group entered into a $135
million Credit Agreement with the National Bank for
Cooperatives ("National"). The funds were used to prepay
outstanding borrowings with the United States of America.
Substantially all the assets of C-TEC's telephone group are
subject to liens under this Credit Agreement. In addition,
the telephone group is restricted from paying dividends in
excess of the prior year net income.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
The Senior Secured notes are collateralized by pledges of the
stock of C-TEC's cable group. The notes contain restrictive
covenants which require, among other things, specific debt to
cash flow ratios.
Mercom, a consolidated subsidiary of C-TEC, has pledged the
common stock of its operating subsidiaries as collateral for
the Term Credit Agreement ("Agreement") with Morgan Guaranty
Trust Company ("Morgan"). In addition, a first lien on
certain material assets of Mercom and its subsidiaries has
been granted to Morgan. The Agreement contains a restrictive
covenant which requires Mercom to maintain a specified debt
to cash flow ratio.
In connection with the acquisition of Twin County Trans
Video, Inc., C-TEC Cable Systems, Inc., a wholly owned
subsidiary of C-TEC, issued a $4 million 5% promissory note.
The note is unsecured.
C-TEC's cable group has Revolving Credit agreements which are
collateralized by a pledge of the stock of the cable group
subsidiaries. At December 30, 1995, the borrowings available
under the agreement total $12 million. The commitments are
reduced on a quarterly basis through maturity in September
1996. The cable group had borrowings of $7 million (6.7%
weighted average interest rate) as of December 1995.
The convertible debentures are convertible during October of
the fifth year preceding their maturity date. Each annual
series may be redeemed in its entirety prior to the due date
except during the conversion period. Debentures were
converted into 69,022, 12,594 and 14,322 shares of Class D
common stock in 1995, 1994, and 1993. As a part of the
exchange offer completed prior to the MFS Spin-off, all
holders of 1990 and 1991 debentures and 1993 D debentures
converted their debentures into Class C and Class D common
stock.
Other long-term debt consists primarily of construction
financing of a privately owned toll road which will be
converted to term debt upon completion of the project.
Variable interest rates on this debt ranged from 7% to 10% at
December 30, 1995. The Group capitalized $7 million of
interest in 1995.
Scheduled maturities of long-term debt through 2000 are as
follows (in millions): 1996 - $40; 1997 - $56; 1998 - $62;
1999 - $61 and $13 in 2000.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
(11) Income Taxes
An analysis of the income tax benefit (provision) before
minority interest for the three years ended December 30, 1995
follows:
(dollars in millions) 1995 1994 1993
Current:
U.S. federal $ (69) $ ( 21) $ (24)
Foreign (4) (2) -
State (3) (4) (3)
------ ------- -------
(76) (27) (27)
Deferred:
U.S. federal 140 27 (53)
Foreign 3 4 -
State 4 6 -
------ ------ ------
147 37 (53)
------ ------ ------
$ 71 $ 10 $ (80)
====== ====== ======
The United States and foreign components of earnings for tax
reporting purposes, before equity loss in MFS, (recorded net
of tax), minority interest and income taxes follow:
(dollars in millions) 1995 1994 1993
United States $ 211 $ 123 $ 274
Foreign 1 1 -
------ ----- -----
$ 212 $ 124 $ 274
====== ===== =====
A reconciliation of the actual income tax benefit (provision)
and the tax computed by applying the U.S. federal rate (35%)
to the earnings before equity loss in MFS, (recorded net of
tax), minority interest and income taxes for the three years
ended December 30, 1995 follows:
(dollars in millions) 1995 1994 1993
Computed tax at statutory rate $ (74) $ (43) $ (96)
State income taxes - - (3)
Depletion 2 3 3
Dividend exclusion - 2 3
Goodwill amortization (3) (2) 1
Tax exempt interest 2 3 -
Prior year tax adjustments 51 51 12
MFS deferred tax 93 - -
Other - (4) -
----- ------ -----
$ 71 $ 10 $ (80)
====== ======= =======
Possible taxes beyond those provided on remittances of
undistributed earnings of foreign subsidiaries are not expected
to be material.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
The components of the net deferred tax liabilities for the
years ended December 30, 1995 and December 31, 1994 were as
follows:
(dollars in millions) 1995 1994
Deferred tax liabilities:
Investments in securities $ 7 $ -
Investments in joint ventures 37 83
Investments in subsidiaries 9 101
Asset bases - accumulated depreciation 191 196
Deferred coal sales 39 11
Other 23 24
---- -----
Total deferred tax liabilities 306 415
Deferred tax assets:
Insurance claims 5 10
Compensation - retirement benefits 24 16
Provision for estimated expenses 22 10
Net operating losses of subsidiaries 5 84
Alternative minimum tax credits of subsidiary 5 13
Other 19 43
Valuation allowances (4) (52)
---- ----
Total deferred tax assets 76 124
---- ----
Net deferred tax liabilities $ 230 $ 291
====== ======
(12) Employee Benefit Plans
The Group's defined benefit pension plans cover primarily
packaging employees who retired prior to the disposition of
the packaging operations. The expense related to these plans
was approximately $7 million, $1 million and $7 million in
1995, 1994 and 1993.
C-TEC maintains a separate defined benefit plan for
substantially all of its employees. The prepaid cost and
expense related to this plan is not significant at December
30, 1995 and December 31, 1994, and for the three years ended
December 30, 1995.
The Group also had a long-term incentive plan, consisting of
stock appreciation rights, for certain employees. This plan
concluded in 1994. The expense related to this plan was $1
million in 1994 and 1993.
Substantially all employees of the Group, with the exception
of C-TEC employees, are covered under the Group's profit
sharing plans. The expense related to these plans was less
than $ 1 million in 1995 and $1 million in 1994 and 1993.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
(13) Postretirement Benefits
In addition to providing pension and other supplemental
benefits, the Group provides certain health care and life
insurance benefits primarily for packaging employees who
retired prior to the disposition of certain packaging
operations and C-TEC employees who retired prior to 1993.
Employees become eligible for these benefits if they meet
minimum age and service requirements or if they agree to
contribute a portion of the cost. These benefits have not
been funded.
In March 1995, the Group settled its liability with respect
to certain postretirement life insurance benefits. The Group
purchased insurance coverage from a third party insurance
company for approximately $14 million to be paid over seven
years. The settlement did not have a material impact on the
Group's financial position, or results of operations or cash
flows.
The net periodic costs for health care benefits were less
than $1 million in 1995, $1 million in 1994 and $4 million in
1993. In all years, the costs related primarily to interest
on accumulated benefits.
The accrued postretirement benefit liability as of December
30, 1995 was as follows:
Health
(dollars in millions) Insurance
Retirees $ 31
Fully eligible active plan participants -
Other active plan participants -
------
Total accumulated postretirement benefit obligation 31
Unrecognized prior service cost 19
Unrecognized net loss (7)
-----
Accrued postretirement benefit liability $ 43
======
The unrecognized prior service cost resulted from certain
modifications to the postretirement benefit plan for
packaging employees which reduced the accumulated
postretirement benefit obligation. The Group may make
additional modifications in the future.
A 7.7% increase in the cost of covered health care benefits
was assumed for fiscal 1995. This rate is assumed to
gradually decline to 6.2% in the year 2020 and remain at that
level thereafter. A 1% increase in the health care trend
rate would increase the accumulated postretirement benefit
obligation ("APB") by less than $1 million at year-end 1995.
The weighted average discount rate used in determining the
APB was 6.75%.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
(14) Stockholders' Equity
PKS is generally committed to purchase all Class D Stock in
accordance with the Restated Certificate of Incorporation.
Issuances and repurchases of common shares, including
conversions, for the three years ended December 30, 1995 were
as follows:
D Stock
Shares issued in 1993 748,026
Shares repurchased in 1993 841,808
Shares issued in 1994 777,556
Shares repurchased in 1994 396,684
Shares issued in 1995 2,675,553
Shares repurchased in 1995 42,147
(15) Industry and Geographic Data
The Group's operations are conducted domestically in two
reportable business segments: mining and telecommunications.
In 1995, 1994 and 1993 Commonwealth Edison Company accounted
for 23%, 22% and 44% of the Group's revenues
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
The information below summarizes the Group's operations in
different industries:
Industry Data (dollars in millions) 1995 1994 1993
Revenue:
Mining $ 216 $ 225 $ 210
Telecommunications 325 291 48
Other 39 21 9
------- -------- --------
$ 580 $ 537 $ 267
======= ======== ========
Operating earnings (loss):
Mining $ 77 $ 76 $ 75
Telecommunications 37 27 6
Other (72) (26) (38)
------ -------- --------
$ 42 $ 77 $ 43
====== ======== ========
Identifiable assets:
Mining $ 374 $ 370 $ 420
Telecommunications 1,142 2,551 1,682
Other 259 118 68
Corporate (1) 715 498 589
------ ------- -------
$2,490 $ 3,537 $ 2,759
====== ======= =======
Capital Expenditures:
Mining $ 4 $ 3 $ 5
Telecommunications 72 426 127
Other 6 16 3
Corporate - 5 4
------ ------- -------
$ 82 $ 450 $ 139
====== ======= =======
Depreciation, depletion and amortization:
Mining $ 7 $ 11 $ 12
Telecommunications 81 149 35
Other 5 4 3
Corporate 3 1 1
------ ------ ------
$ 96 $ 165 $ 51
====== ====== =======
(1) Principally cash, cash equivalents, marketable
securities, notes receivable from sales of discontinued
operations and investments in all years.
(16) Related Party Transaction
The Group receives certain mine management services from the
Construction & Mining Group. The expense for these services
was $30 million for 1995 and $29 million for 1994 and 1993.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
(17) Other Matters
In May 1995, the lawsuit titled Whitney Benefits, Inc. and
Peter Kiewit Sons' Co. v. The United States was settled. In
1983, plaintiffs alleged that the enactment of the Surface
Mining Control and Reclamation Act of 1977 had prevented the
mining of their Wyoming coal deposits and constituted a
government taking without just compensation. In settlement
of all claims, plaintiffs agreed to deed the coal deposits to
the government and the government agreed to pay plaintiffs
$200 million, of which Peter Kiewit Sons' Co., a KDG
subsidiary, received approximately $135 million in June 1995
and recorded it in other income on the statement of earnings.
In 1994, several former stockholders of an MFS subsidiary
filed a lawsuit against MFS, KDG and the chief executive
officer of MFS, in the United States District Court for the
Northern District of Illinois, Case No. 94C-1381. These
shareholders sold shares of the subsidiary to MFS in
September 1992. MFS completed an initial public offering in
May 1993. Plaintiffs allege that MFS fraudulently concealed
material information about its plans from them, causing them
to sell their shares at an inadequate price. Plaintiffs have
alleged damages of at least $100 million. Defendants have
meritorious defenses and intend to vigorously contest this
lawsuit. Defendants expect that a trial will be held in
1996. Prior to the initial public offering, KDG agreed to
indemnify MFS against any liabilities arising from the
September 1992 sale; if MFS is deemed to be liable to
plaintiffs, KDG will be required to satisfy MFS' liabilities
pursuant to the indemnity agreement.
The Group is involved in various other lawsuits, claims and
regulatory proceedings incidental to its business. Management
believes that any resulting liability, beyond that provided,
should not materially affect the Group's financial position,
future results of operations or future cash flows.
In many pending proceedings, the Group is one of numerous
defendants who may be "potentially responsible parties"
liable for the cleanup of hazardous substances deposited in
landfills or other sites. The Group has established
reserves to cover its probable liabilities for environmental
cases and believes that any additional liabilities will not
materially affect the Group's financial position, future
results of operations or future cash flows.
A subsidiary of the Group, Continental Holdings Inc., remains
contingently liable as a guarantor of $53 million of debt
relating to various businesses which have been sold.
The Group leases various buildings and equipment under both
operating and capital leases. Minimum rental payments on
buildings and equipment subject to noncancelable operating
leases during the next 8 years aggregate $76 million.
It is customary in the Group's industries to use various
financial instruments in the normal course of business.
These instruments include items such as letters of credit.
Letters of credit are conditional commitments issued on
behalf of the Group in accordance with specified terms and
conditions. As of December 30, 1995, the Group had
outstanding letters of credit of approximately $35 million.
In November 1995, C-TEC announced that it had engaged an investment
banker to assist with evaluating strategic alternatives for its
various business units with a view toward enhancing shareholder
value. C-TEC is now planning to distribute to its shareholders in
a tax-free spin-off the telephone group, the communications services
group, and certain other assets. Following the spin-off, C-TEC plans
to combine its remaining businesses, which will consiste of its
domestic cable group, with a third party pursuant to a tax-free, stock-
for-stock transaction. C-TEc has received a number of inquiries
regarding its domestic cable group and is holding discussions with
interested parties.
KIEWIT DIVERSIFIED GROUP
Notes to Financial Statements
(18) Subsequent Event
In 1996, RCN Corporation ("RCN"), a majority owned subsidiary,
entered into an asset purchase agreement, along with other
ancillary agreements, with Liberty Cable Company, Inc. ("Liberty")
to purchase an 80 percent interest in certain private cable
systems in New York City and selected areas of New Jersey.
The transaction closed on March 6, 1996. These cable
systems provide subscription television services using microwave
frequencies. RCN deposited $27 million in an escrow account which
was released on the closing date. In addition, RCN issued a
$15 million promissory note that is expected to be paid during
1996.
Under the terms of an agreement dated March 27, 1996, RCN will pay
C-TEC approximately $123 million for certain of C-TEC's assets,
including the long distance group, C-TEC International, which holds
the 40% interest in Megacable, S.A. de C.V., and Residential
Communications Network, a start-up joint effort with RCN which plans
to provide telecommunications services to the residential market. RCN
will purchase Residential Communications Network for cash in a
transaction expected to close in April 1996. RCN's purchase of the
other businesses for cash or C-TEC stock, at RCN's option, is expected to
close in the second half of 1996. The transactions are subject to
certain conditions including the receipt of all necessary regulatory
approvals. The agreement with RCN contains a repurchase option under
which C-TEC can reacquire the businesses if a restructuring of C-TEC's
main businesses does not occur. Additionally, C-TEC retains a warrant
to reacquire a six percent stake in Residential Communications Network.
The agreement with RCN was approved by a special committee of the board
of directors of C-TEC, composed of directors unaffiliated with either
RCN or the Group.
SCHEDULE II
KIEWIT DIVERSIFIED GROUP
Valuation and Qualifying Accounts and Reserves
Additions
Balance Charged to Amounts Balance
Beginning Costs and Charged to End of
(dollars in millions) of Period Expenses Reserves Other Period
Year ended December 30, 1995
Allowance for doubtful
trade accounts $ 2 $ - $ - $ - $ 2
Reserves:
Retirement benefits 67 3 (2) (14)(a) 54
Year ended December 31, 1994
Allowance for doubtful
trade accounts $ 2 $ 1 $ (1) $ - $ 2
Reserves:
Retirement benefits 71 2 (6) - 67
Year ended December 25, 1993
Allowance for doubtful
trade accounts $ 5 $ 1 $ (4) $ - $ 2
Reserves:
Retirement benefits 74 12 (17) 2 71
(a)The Group settled its liability with respect to certain
postretirement life insurance benefits by purchasing insurance
coverage from a third party insurance company.
KIEWIT DIVERSIFIED GROUP
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The financial statements of the Diversified Group ("the Group")
include the financial position, results of operations and cash
flows for the businesses of PKS other than its construction
business and certain mining service businesses, and include a
portion of the corporate assets and liabilities and related
transactions which are not separately identified with ongoing
operations of the Group or the Construction & Mining Group. The
Group's share of corporate assets and liabilities and related
transactions includes amounts to reflect certain financial
activities, corporate general and administrative costs, common
stock transactions and income taxes. See Notes 1 and 3 to the
Group's financial statements.
Results of Operations 1995 vs. 1994
Mining. Mining revenue decreased 4% in 1995 primarily due to a
decrease in spot sales. Spot sales were lower due to reduced
demand in the Group's spot market area because of a mild winter
and high hydro-electricity generation in the Western United
States. The decrease in spot sales was partially offset by an
increase in alternate source coal sales due to the acceleration
of coal shipments to the current year from future years and the
shift of certain coal shipments from mined coal to alternate
source coal.
Direct costs, as a percentage of revenue, decreased 4% as a
result of the additional alternate source coal sales.
Telecommunications. With the Spin-off of MFS, the
Telecommunications segment is now solely comprised of C-TEC. C-
TEC's primary operations are telephone and cable. In 1995,
telecommunication revenue increased 12% over 1994. Sales of the
telephone group increased $7 million to $129 million, a 6%
increase over 1994. Increases in access lines for the local
network service and rate increases for intrastate access traffic
were primarily responsible for the improvement. Sales for the
cable group increased 34% to $127 million in 1995. The
acquisition of Twin County Trans Video, Inc. and the
consolidation of Mercom, Inc.'s results since August contributed
$18 million and $6 million to C-TEC's revenue in 1995. In
addition, subscriber increases of approximately 16,000 over 1994
and rate increases effective in April 1995 account for an $8
million increase in cable revenue. Revenues from other operating
groups increased $17 million, a 32% increase over 1994 primarily
due to the resale of long distance telephone services to another
long distance reseller, improvements in switched business, 800
service sales and third party revenues from C-TEC's communication
services business. The arrangement with the third party reseller
terminated in the second quarter of 1995. Partially offsetting C-
TEC's increase in revenue was the sale of the mobile services
group in 1994 which contributed $23 million in revenue that year.
C-TEC's direct costs increased $30 million or 15% in 1995. The
telephone group's cost of revenue increased primarily because of
higher payroll expenses and higher depreciation expense. The
acquisitions of Mercom and Twin County led to a 37% increase in
direct costs for the cable group. In addition, higher basic
programming costs resulting from increased subscribers, channel
additions and rate increases contributed to the increase.
Direct expenses for C-TEC's other operating groups increased
because of costs associated with the resale of long distance
services and communication services work performed for third
parties.
KIEWIT DIVERSIFIED GROUP
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Partially offsetting these increases was the elimination of
direct costs associated with the mobile services group.
General and Administrative Expenses. General and administrative
expenses increased 35% in 1995. An increase in expenses for
environmental and other legal matters was partially offset by
an overall decline in C-TEC's general and administrative costs.
Gain on Subsidiary's Stock Transactions, net. The issuance of
MFS stock for acquisitions by MFS and the exercise of MFS
employee stock options resulted in a $3 million net gain to the
Group in 1995. In 1994 the Group settled a contingent purchase
price obligation resulting from MFS' 1990 purchase of Chicago
Fiber Optic Corporation ("CFO"). The former shareholders of CFO
accepted MFS stock previously held by the Group, valued at market
prices, as payment of the obligation. This transaction, along
with the issuances of stock for acquisitions and employee stock
options, resulted in a $28 million net gain before taxes. The
Group has recognized gains and losses from sales and issuances of
stock by MFS on the statement of earnings. With the Spin-off of
MFS, these types of gains will no longer be recognized for MFS
transactions.
Investment Income, net. Investment income increased 107% to $62
million in 1995. Improvements in interest and dividend income,
equity earnings, primarily from CE and declines in losses on the
sales of securities and international energy project development
expenses all contributed to the increase in investment income.
Proceeds from the C-TEC rights offering and the sale of its
mobile services group along with the Whitney Settlement proceeds
all contributed to a higher average portfolio balance and
increased interest income. The Group also recognized equity
earnings, net of goodwill amortization from CE of $10 million in
1995 compared to $5 million in 1994. This increase is primarily
attributable to the successful merger of Magma Energy operations
into CE in 1995. In 1995, losses on the sale of securities
declined 92% from 1994 primarily due to the reallocation of its
portfolio from fixed rate securities to mutual fund portfolios
with differing investment objectives. Developmental expenses
declined 75% in 1995 primarily due to the reimbursement of prior
year expenses and the capitalization of current year amounts.
Interest Expense, net. Interest expense in 1995 decreased 36% as
compared to 1994. The decline is primarily due to C-TEC's
prepayment of the senior secured notes in December 1994.
Other, net. In 1995, other income primarily includes settlement
proceeds of $135 million from the Whitney Benefits litigation.
Other income also includes gains and losses from the disposition
of property, plant and equipment and other assets in 1995 and
1994.
KIEWIT DIVERSIFIED GROUP
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Equity Loss in MFS. MFS is a leading provider of communication
services to business. Through its operating subsidiaries, MFS
provides a wide range of high quality voice, data, network system
integration and other enhanced services. The Group's losses
associated with MFS continued to increase, primarily because of
the accelerated expansion activities announced in 1993 and 1995.
These expansion activities require significant initial
development and roll out expenses in advance of anticipated
revenues and continue to negatively effect the operating results
of MFS. After September 30, 1995, the date of the Spin-off, the
Group will no longer include MFS' results in its financial
statements.
Income Tax Benefit (Provision). The effective income tax rate
for 1995 differs from the statutory rate of 35% due primarily to
$93 million of income tax benefits from the reversal of certain
deferred tax liabilities originally recognized on gains from
previous MFS stock transactions that are no longer required due
to the tax-free spin-off of MFS and adjustments of prior year tax
provisions. In 1994, the rate is lower than 35% primarily due to
adjustments to prior year tax provisions.
Results of Operations 1994 vs. 1993
Mining. Mining revenue increased 7% in 1994. This increase was
primarily due to an increase in spot sales. Mining gross profits
were 47% in 1994 and 50% in 1993.
Alternate source coal sales by Black Butte and Decker in 1994
were consistent with 1993. Alternate source coal consists of
coal purchased from unaffiliated mines located in the Powder
River Basin area of Wyoming and from a mine in which the Company
has a 50% interest. In 1994, alternate source coal sales
accounted for 33% of revenues and 50% of gross profits compared
to 34% and 54% in 1993.
Telecommunications. C-TEC generated telecommunications revenue
for the Group of $291 million and $48 million in 1994 and 1993.
The 1993 figures represent activity from the acquisition date. C-
TEC's telephone group and cable group had revenue of $122 million
and $95 million. The mobile services group, sold in 1994, the
long distance group and communications services group
generated the balance. Overall C-TEC's revenues increased 5% in
1994. Increases in interstate access revenues for the telephone
group, 9,300 additional subscribers for the cable group and
increased business and residential market penetration for the
long distance group all contributed to the increase in revenue.
The cost of revenue for C-TEC included in the Group's results was
$189 million and $42 million in 1994 and 1993. The costs in 1994
are primarily attributable to the telephone group - $57 million
and the cable group - $71 million. C-TEC's cost of revenue
increased at a higher rate than revenue in 1994. The costs
associated with developing the long distance business, primarily
the opening of four new sales offices in late 1993, advertising
expenses and promotional and discount campaigns designed to
obtain a greater market share were the reasons for the increase.
General and Administrative Expenses. General and administrative
expenses in 1994 exceeded those of 1993 by 90%. The inclusion of
a full year of C-TEC's operations is responsible for the majority
of the increase. Overall, C-TEC's general and administrative
expenses remained fairly consistent in 1994. The remaining
increase in general and administrative expenses was attributable
to an increase in payroll expenses partially offset by lower
professional fees.
KIEWIT DIVERSIFIED GROUP
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Gain on Subsidiary's Stock Issuances, net. In 1994, the Group
settled a contingent purchase price adjustment resulting from
MFS' 1990 purchase of CFO. The former shareholders of CFO
accepted MFS stock previously held by the Group, valued at market
prices, as payment of the obligation. This transaction, along
with the MFS issuance of stock for the Cylix and Realcom
acquisitions and MFS employee stock options, resulted in a $54
million pre-tax gain to the Group. Deferred taxes were provided
on these gains.
Investment Income, net. The improvement in investment income was
directly attributable to a decline of $22 million in losses from
the sale and writedown of derivative and other securities.
Partially offsetting these items was a $3 million decrease in
interest and dividend income and the recognition of $4 million of
developmental expenses associated with the international energy
projects being jointly developed by the Group and CE.
Interest Expense, net. Interest expense increased significantly
in 1994. The interest on the debt assumed in the C-TEC
acquisition, $33 million, was primarily responsible for the
increase.
Other, net. Debt prepayment penalties incurred by C-TEC were
primarily responsible for the decline.
Income Tax Benefit (Provision). The effective income tax rate
for 1994 and 1993 differed from the statutory rate of 35% due to
adjustments of prior year tax provisions. Dividend exclusions
and mineral depletion deductions also contributed to the lower
effective rate in 1993.
KIEWIT DIVERSIFIED GROUP
Financial Condition - December 30, 1995
The Group's working capital, exclusive of MFS, increased $66
million or 9% during 1995. The increase was mainly due to cash
flows from operations, including the receipt of the Whitney
settlement of $135 million and the net proceeds from stock
conversions. The increase was partially offset by the use of
cash for investing activities.
Investing activities include $82 million of capital expenditures,
$258 million of investments, $36 million of deferred development
costs and net purchases of marketable securities of $47 million.
The investments primarily include C-TEC's $84 million outlay for
40% of Megacable and $37 million outlay for Twin County, KDG's
$85 million investment in two Philippine power projects, $29
million purchase of CE's stock, $8 million investment in
geothermal power plants in Indonesia and $6 million for a 19%
interest in a healthcare software development company. The
capital outlays were partially offset by $14 million of proceeds
from the sale of property, plant and equipment and other
investments.
Financing sources include $157 million of stock conversions and
sales and $30 million for the construction financing of a
privately owned toll road. Financing uses consisted of C-TEC's
$27 million outlay for the net payment of long-term debt, $3
million of payments on stockholders' notes and $3 million for
stock repurchases.
In 1995, the Group received the final payment ($29 million) for
the sale of certain discontinued packaging operations.
In addition to the C-TEC activities described below, the Group
anticipates making significant investments in its infrastructure,
telecommunications and energy businesses - including its joint
venture agreement with CE covering international power project
development activities and searching for opportunities to acquire
capital intensive businesses which provide for long-term growth.
Other long-term liquidity uses include payment of income taxes
and repurchasing the Group's stock. The Group's current
financial condition and borrowing capacity should be sufficient
for future operating and investing activities.
In October 1995, the PKS Board of Directors declared a special
$.50 per share dividend payable to Class D shareholders in
January 1996.
In November 1995, C-TEC announced that it had engaged an investment
banker to assist with evaluating strategic alternatives for its
various business units with a view toward enhancing shareholder
value. C-TEC is now planning to distribute to its shareholders
in a tax-free spin-off the telephone group, the communications
services group, and certain other assets. Following the spin-off
C-TEC plans to combine its remaining businesses, which will consist
of its domestic cable group,with a third party pursuant to a tax-free,
stock-for-stock transaction. C-TEC has received a number of inquiries
regarding its domestic cable group and is holding discussions with
interested parties.
In March 1996, under the terms of an agreement, RCN will pay C-TEC
approximately $123 million for certain of C-TEC's assets, including
the long distance group, C-TEC International, which holds the 40%
interest in Megacable, S.A. de C.V., and Residential Communications
Network, a start-up joint effort with RCN which plans to provide
telecommunications services to the residential market. RCN will
purchase Residential Communications Network for cash in a transaction
expected to close in April 1996. RCN's purchase of the other asset
for cash or C-TEC stock, at RCN's option, is expected to close in the
second half of 1996. The transactions are subject to certain
conditions including the receipt of all necessary regulatory
approvals. The agreement with RCN contains a repurchase option under
which C-TEC can reacquire the businesses if a restructuring of C-TEC's
main businesses does not occur. Additionally, C-TEC retains a warrant to
reacquire a six percent stake in Residential Communications Network. The
agreement with RCN was approved by a special committee of the board of
directors of C-TEC, composed of directors unaffiliated with either RCN
or the Group.
Also in March 1996, RCN entered into an asset purchase
agreement, along with other ancillary agreements, with Liberty
Cable Company, Inc. ("Liberty") to purchase an 80 percent
interest in certain private cable systems in New York City and
selected areas of New Jersey. The transaction closed on March 6,
1996. These cable systems provide subscription television
services using microwave frequencies. RCN deposited $27
million in an escrow account which was released on the closing
date. In addition, RCN issued a $15 million promissory note that
is expected to be paid during 1996.