UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-53132
KENETECH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3009803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 Sansome Street, Suite 300
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 398-3825
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No
On August 2, 1996, there were 36,826,098 shares of the issuer's Common
Stock, $.0001 par value outstanding.
1
<PAGE>
PART I - FINANCIAL INFORMATION
Part I
Item 1. Financial Statements.
KENETECH Corporation Consolidated Financial Statements Page
Consolidated Statements of Operations for the quarterly
periods ended June 30, 1996 and July 1, 1995 3
Consolidated Statements of Operations for the twenty-six
weeks ended June 30, 1996 and July 1, 1995 4
Consolidated Balance Sheets, June 30, 1996 and
December 31, 1995 5
Consolidated Statement of Stockholders' Equity for
the twenty-six weeks ended June 30, 1996 6
Consolidated Statements of Cash Flows for the
twenty-six weeks ended June 30, 1996 and July 1, 1995 7
Notes to Consolidated Financial Statements 8 - 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 14 - 22
Part II
Item 3. Defaults Upon Senior Securities. 23
Item 6. Exhibits and Reports on Form 8-K. 23
2
<PAGE>
KENETECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the quarterly periods ended June 30, 1996 and July 1, 1995
(unaudited, in thousands, except per share amounts)
June 30, July 1,
1996 1995
(See Note 1)
Revenues:
Construction services $ 12,498 $ 16,170
Maintenance, management fees and other 7,238 10,504
Energy sales 5,429 12,972
Windplant sales 3,560 57,560
Interest on partnership notes and funds in escrow 457 1,475
Energy management services 309 2,167
-------- --------
Total revenues 29,491 100,848
Costs of revenues:
Construction services 10,839 16,017
Energy plant operations 9,797 17,480
Windplant sales 628 44,777
Energy management services 64 770
-------- --------
Total costs of revenues 21,328 79,044
Gross margin 8,163 21,804
Engineering expenses 1,603 3,481
Project development and marketing expenses 2,520 2,911
General and administrative expenses 8,491 8,592
-------- --------
(Loss) Income from operations (4,451) 6,820
Interest income 299 475
Interest expense (5,053) (5,257)
Equity (loss) income of unconsolidated affiliates (90) 530
Gain on sales of subsidiaries and fixed assets 253 -
-------- --------
(Loss) Income before taxes (9,042) 2,568
Income tax provision 23,393 1,076
-------- --------
Net (loss) income $(32,435) $ 1,492
======== ========
Net loss per common share $ (0.94) $ (0.02)
Weighted average number of common shares used in
computing per share amounts 36,826 36,334
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
KENETECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the twenty-six weeks ended June 30, 1996 and July 1, 1995
(unaudited, in thousands, except per share amounts)
June 30, July 1,
1996 1995
(See Note 1)
Revenues:
Construction services $ 23,393 $ 29,118
Maintenance, management fees and other 14,507 17,596
Energy sales 10,184 17,327
Windplant sales 6,942 104,606
Interest on partnership notes and funds in escrow 1,125 2,712
Energy management services 1,047 4,295
-------- --------
Total revenues 57,198 175,654
Costs of revenues:
Construction services 20,148 28,156
Energy plant operations 24,270 32,741
Windplant sales 3,972 79,081
Energy management services 250 1,837
-------- --------
Total costs of revenues 48,640 141,815
Gross margin 8,558 33,839
Engineering expenses 4,205 6,194
Project development and marketing expenses 4,522 4,537
General and administrative expenses 15,587 16,180
-------- --------
(Loss) Income from operations (15,756) 6,928
Interest income 774 1,467
Interest expense (10,787) (10,343)
Equity loss of unconsolidated affiliates (90) (586)
Gain on sales of subsidiaries and fixed assets 66 -
-------- --------
Loss before taxes (25,793) (2,534)
Income tax provision (benefit) 23,393 (975)
-------- --------
Net loss $(49,186) $ (1,559)
======== ========
Net loss per common share $ (1.46) $ (0.16)
Weighted average number of common shares used in computing
per share amounts 36,732 36,203
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
KENETECH CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
(unaudited, in thousands, except share amounts)
ASSETS
June 30, December 31,
1996 1995
(See Note 1)
Current assets:
Cash and cash equivalents $ 8,427 $ 16,842
Marketable securities 3,536 -
Funds in escrow, net 611 12,531
Accounts receivable 15,796 52,593
Partnership notes and interest receivable, net 777 1,477
Inventories 1,107 38,684
Investment in power plant held for sale 19,985 19,951
Deferred tax assets, net - 2,764
Other assets 3,181 5,980
-------- --------
Total current assets 53,420 150,822
Accounts receivable and funds in escrow, net 4,122 21,031
Partnership notes and interest receivable, net 6,731 22,566
Inventories, net - 18,431
Property, plant and equipment, net 28,381 118,214
Power plants under development 12,236 14,956
Investments in affiliates 190 9,686
Deferred tax assets, net 17,912 38,235
Other assets 6,819 7,308
--------- --------
Total assets $129,811 $401,249
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 18,549 $ 38,663
Accrued liabilities 24,212 59,065
Bank loan payable - 13,200
Debt associated with power plant held for sale 16,958 16,958
Other notes payable 22,642 18,794
Estimated warranty costs - 7,374
Senior secured notes payable 98,946 -
-------- --------
Total current liabilities 181,307 154,054
Senior secured notes payable - 98,887
Accrued loss on contracts 1,131 36,992
Other notes payable - 53,161
Estimated warranty costs and other long-term obligations 964 62,643
Accrued dividends on preferred stock 5,352 1,071
-------- --------
Total liabilities 188,754 406,808
Commitments and contingencies
Stockholders' deficiency:
Convertible preferred stock - 10,000,000 shares
authorized, $.01 par value; issued and outstanding
102,492, $109,125 liquidation preference 99,561 99,561
Common stock - 110,000,000 shares authorized, $.0001
par value; issue and outstanding 36,826,098 in 1996
and 36,533,836 in 1995 4 4
Additional paid-in capital 140,503 144,551
Unearned compensation (224) (281)
Cumulative foreign exchange (121) 86
Accumulated deficit (298,666) (249,480)
-------- --------
Total stockholders' deficiency (58,943) (5,559)
-------- --------
Total liabilities and stockholders' deficiency $129,811 $401,249
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE>
KENETECH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
for the twenty-six weeks ended June 30, 1996
(unaudited, in thousands, except share amounts)
<TABLE>
<CAPTION>
Cumulative
Convertible Common Stock Additional Effect of
Preferred Stock Series A Paid-in Unearned Foreign (Accumulated
Shares Amount Shares Amount Capital Compensation Exchange Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 102,492 $ 99,561 36,533,836 $ 4 $ 144,551 $ (281) $ 86 $(249,480) $ (5,559)
Issuance of common stock - - 292,262 - 234 - - - 234
Recognition of unearned
compensation - - - - - 57 - - 57
Preferred stock dividends - - - - (4,282) - - - ( 4,282)
Foreign exchange - - - - - - (207) - (207)
Net loss - - - - - - - (49,186) (49,186)
-------- -------- ---------- ------ --------- --------- --------- ---------- ---------
Balance, June 30, 1996 102,492 $ 99,561 36,826,098 $ 4 $ 140,503 $ (224) $ (121) $(298,666) $(58,943)
======== ======== ========== ====== ========= ========= ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
KENETECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the twenty-six weeks ended June 30, 1996 and July 1, 1995
(unaudited, in thousands)
June 30, July 1,
1996 1995
(See Note 1)
Cash flows from operating activities:
Net loss $(49,186) $ (1,559)
Adjustments to reconcile net loss to net cash
used in operating activities:
Subsidiary bankruptcy filing - -
Deferred income taxes 23,393 (1,164)
Depreciation, amortization and other (2,050) 11,414
Changes in assets and liabilities:
Funds in escrow, net 2,870 4,057
Accounts receivable 25,024 (41,840)
Partnership notes and interest receivable, net 290 5,230
Inventories 1,496 (20,139)
Power plants under development - (1,282)
Other assets (935) (183)
Accounts payable and accrued liabilities (6,851) (12,091)
Estimated warranty costs (1,491) 402
Accrued loss on contracts (2,157) -
-------- --------
Net cash used in operating activities (9,597) (57,155)
Cash flows from investing activities:
Marketable securities:
Sales - 19,949
Purchases (3,536) (481)
Acquisition of Century Contractors West Inc. - (1,360)
Additions to property plant and equipment (390) (19,414)
Proceeds from sales of subsidiaries and assets 8,115 2,413
Investments in affiliates:
Contributions (1,814) (6,197)
Distributions 522 520
Power plants under development (4,765) -
-------- --------
Net cash used in investing activities (1,868) (4,570)
Cash flows from financing activities: Other notes payable:
Proceeds - 1,678
Payments (3,700) (8,493)
Proceeds on bank loan borrowings 11,516 56,000
Payments on bank loan borrowings (5,000) -
Proceeds from issuance of common stock, net 234 1,867
Payment of preferred stock dividends - (4,282)
-------- --------
Net cash provided by financing activities 3,050 46,770
-------- --------
Decrease in cash and cash equivalents (8,415) (14,955)
Cash and cash equivalents at beginning of period 16,842 42,618
Cash and cash equivalents at end of period $ 8,427 $ 27,663
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
7
<PAGE>
KENETECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
for the quarterly period and twenty-six weeks ended
June 30, 1996 and July 1, 1995
1. GENERAL AND BASIS OF PRESENTATION
The interim consolidated financial statements presented herein include the
accounts of KENETECH Corporation ("KENETECH" or the "Company") and certain
subsidiaries. These interim consolidated financial statements should be read
in conjunction with the Company's consolidated financial statements and the
notes thereto for the year ended December 31, 1995, which include information
as to significant accounting policies. Such interim consolidated financial
statements are unaudited but, in the opinion of management, reflect all
adjustments necessary for a fair presentation of the Company's interim
financial position, results of operations, and cash flows. Results of
operations for interim periods are not necessarily indicative of those of a
full year. The Company's quarterly periods represent thirteen weeks of
operations; accordingly, the second quarter of 1996 and 1995 ended June 30,
1996 and July 1, 1995 respectively.
The consolidated financial statements of KENETECH Corporation and certain
subsidiaries as of and for the periods ending June 30, 1996 and December 31,
1995 have been prepared assuming the Company will continue as a going
concern. On May 29, 1996, the Company's windpower subsidiary, KENETECH
Windpower, Inc. ("KWI"), filed for protection under Chapter 11 of the Federal
Bankruptcy Code and reported an excess of liabilities over the fair value of
its assets. Although the Company continues to own the common stock of KWI and
provides certain day-to-day management under the jurisdiction of the
Bankruptcy Court, the Company believes it is probable that such ownership and
control will not exist after completion of the bankruptcy proceedings.
Accordingly, as of May 29, 1996 KWI ceased to be accounted for as a
consolidated subsidiary of the Company. The Company's investment in KWI is
recorded as zero in "Investments in Affiliates" in the accompanying June 30,
1996 consolidated balance sheet. Revenues and expenses of KWI from January 1,
1996 through May 29, 1996 are reflected in consolidated statements of
operations and cash flows (see Note 3 on KWI).
The Company has announced its intention to sell its construction subsidiary,
CNF Industries, Inc. ("CNF"). Since the Company continues to own the common
stock of CNF and controls its operations, the consolidated financial
statements continue to reflect the consolidation of the assets, liabilities,
revenues and expenses of CNF.
2. LIQUIDITY AND GOING CONCERN
As stated above, the consolidated financial statements as of and for the
periods ending June 30, 1996 and December 31, 1995 have been prepared
assuming the Company will continue as a going concern. The Company incurred a
significant loss in 1995, a substantial portion of which was a result of
special charges. The Company also incurred a loss during the twenty-six week
period ended June 30, 1996, has negative working capital and its liquidity is
severely constrained. Also, as mentioned above, KWI filed for protection
under Chapter 11 of the Federal Bankruptcy Code and reported an excess of
liabilities over the fair value of its assets. Even excluding KWI, the
Company projects negative operating cash flows for the remainder of 1996 and
certain lenders and creditors are seeking repayment and/or restructuring of
the amounts due them. These factors raise substantial doubt about the
Company's ability to continue as a going concern in its current form.
Management's plans to address its liquidity and its future operations
excluding KWI include:
1) The sale of certain assets, primarily development projects and subsidi-
aries not engaged in windpower activities, for which it expects to
receive substantial cash proceeds and gains. (see Notes 8 and 12).
2) Discussion and negotiations of corporate obligations and commitments
with lenders, suppliers and other creditors.
There are numerous risks and uncertainties which may prevent the Company from
successfully implementing its strategy. These include the failure to sell
assets or subsidiaries within the necessary time frame or for the estimated
amounts, and the impacts of certain litigation. Although the Company intends
to aggressively market for sale certain of its assets and subsidiaries for
which it anticipates substantial proceeds, there is no assurance as to
whether they will be sold or the price or timing of such sales. There can be
no assurance that the Company will be successful in implementing its plans
and that the Company will continue as a going concern.
8
<PAGE>
KENETECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
for the quarterly period and twenty-six weeks ended
June 30, 199 and July 1, 1995
3. UNCONSOLIDATED SUBSIDIARY
As mentioned previously, KWI filed for protection on May 29, 1996 under
Chapter 11 of the Federal Bankruptcy Code and reported an excess of
liabilities over the fair value of its assets. Although the Company continues
to own the common stock of KWI and provides certain day-to-day management
under the jurisdiction of the Bankruptcy Court, the Company believes it is
probable that such ownership and control will not exist after completion of
the bankruptcy proceedings. Accordingly, as of May 29, 1996 KWI ceased to be
accounted for as a consolidated subsidiary of the Company. The balance sheet
of KWI as of June 30, 1996 was prepared under the guidance of Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" and not on a liquidation basis.
KENETECH WINDPOWER, INC.
CONSOLIDATED BALANCE SHEET
June 30, 1996
(unaudited, in thousands)
Assets: Liabilities and Stockholder's
Cash $ 7,582 Deficiency:
Funds in Escrow 8,108 Bank Loan Payable $ 12,050
Accounts Receivable 18,182 Accounts Payable 31,930
Partnership Notes and Accrued Liabilities 27,752
Interest Receivable 16,380 Accrued Warranty Liabilities 64,462
Due From Affiliates 732 Accrued Loss on Contracts 33,704
Inventories 32,264 Other Notes Payable 36,876
Projects Held for Sale 17,850 --------
Other Assets 3,771 Total Liabilities 206,774
Net Property, Plant
and Equipment 79,065 Stockholder's Deficiency (12,821)
Development Costs 7,541
Investment in Affiliates 2,478
-------- Total Liabilities
Total Assets $193,953 and Equity $ 193,953
======== ========
KWI's 1996 operations through May 29, 1996 are reflected in the accompanying
consolidated financial statements. KWI's operating results for June 1996
generated a net loss of $164,000 which is not included in the consolidated
income statement of the Company. The Company's investment in KWI is recorded
as zero in "Investments in Affiliates" in the accompanying June 30, 1996
consolidated balance sheet.
Deferred Taxes: As of December 31, 1995 KWI had recognized a valuation
allowance equal to the balance of its net deferred tax assets due to the
uncertainty regarding KWI's ability to utilize such assets.
Bank Loan Payable: On September 30, 1994, KWI entered into a $75,000,000 two
year revolving credit agreement (the Windplant construction line) to finance
the construction of Windplants with a group of seven banks. This agreement
requires KWI to meet certain financial ratios and net worth tests. In
February 1996 the Company and KWI entered into a Waiver Agreement with the
banks that did not include waiver of the financial ratios and net worth
requirements. However, under the terms of this Waiver Agreement, the banks
agreed to fund a draw request and waive declaring a default based upon a
"material adverse change" and the Company agreed to suspend payment of
dividends on its preferred stock so long as borrowings remain outstanding. On
May 13, 1996 KWI and the banks agreed to reduce the size of the facility to
$12,050,000 (the amount outstanding). As of June 30, 1996, there was
$12,050,000 in borrowings outstanding and no amounts committed as letters of
credit or bankers' acceptances under this revolving credit agreement. As of
June 30, 1996 KWI was not in compliance with these financial ratios or net
worth requirements; however, no demand for payment of the amounts outstanding
has been made. KWI is negotiating with a third party buyer for the purchase
of a project held for sale. The proceeds from this sale when consummated
would repay the amount due under this revolving credit agreement.
9
<PAGE>
KENETECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
for the quarterly period and twenty-six weeks ended
June 30, 1996 and July 1, 1995
4. NET LOSS PER SHARE
Net loss per share amounts (in thousands, except per share amounts) were
calculated as follows:
<TABLE>
<CAPTION>
Quarterly Period Ended Twenty-Six Weeks Ended
June 30, 1996 July 1, 1995 June 30, 1996 July 1, 1995
<S> <C> <C> <C> <C>
Net (loss) income $ (32,435) $ 1,492 $ (49,186) $ (1,559)
Less preferred stock dividends (2,141) (2,141) (4,282) (4,282)
----------- ----------- ----------- -----------
Net loss used in per share
calculations $ (34,576) $ (649) $ (53,468) $ (5,841)
=========== =========== =========== ===========
Weighted average shares used in
per share calculations 36,826 36,334 36,732 36,203
=========== =========== =========== ===========
Net loss per share $ (0.94) $ (0.02) $ (1.46) $ (0.16)
=========== =========== =========== ===========
</TABLE>
Preferred stock dividends are added to the net loss for the calculation of
net loss per share. Since the Company incurred net losses during the periods,
common stock equivalents are not included in weighted average shares used in
the loss per share calculation since they would be anti-dilutive (reduce the
loss per share).
5. CASH FLOW INFORMATION
Short term investments purchased with original maturities of three months or
less are considered cash equivalents. Additional cash flow information (in
thousands) for the twenty-six week periods ended June 30, 1996 and July 1,
1995 is presented below:
June 30, July 1,
1996 1995
Non cash investing activity:
Capital leases for equipment $ - $ 183
======== ========
Supplemental cash flow information: Cash paid (received) for:
Income taxes paid $ 17 $ 225
Income taxes refunded (420) (125)
-------- --------
Net cash flow from income taxes $ (403) $ 100
======== ========
Interest paid $ 3,403 $ 10,608
Capitalized interest (587) (2,625)
Interest accrued but not paid, net 9,246 3,478
Interest paid but accrued in prior periods (1,554) (1,560)
Amortization of deferred financing costs 279 442
-------- --------
Interest expense $ 10,787 $ 10,343
======== ========
Capitalized interest charged to costs of revenues totaled $587 for the
twenty-six weeks ended June 30, 1996 and $2,297 for the comparable 1995
period.
10
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KENETECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
for the quarterly period and twenty-six weeks ended
June 30, 1996 and July 1, 1995
6. INVENTORIES
Inventories (in thousands) at June 30, 1996 and December 31, 1995 consisted
of:
June 30, December 31,
1996 1995
Current inventories:
Work-in-process $ - $ 5,616
Unassembled parts and supplies 1,107 15,114
Projects held for sale:
Texas Windplant (under construction in 1994) - 3,568
Projects in construction:
Costa Rica Windplant - 14,386
-------- --------
Total current inventories $ 1,107 $ 38,684
======== ========
Long-term inventories:
Long-term inventory $ - $ 33,177
Reserve - (14,746)
-------- --------
Total long-term inventories $ - $ 18,431
======== ========
As of June 30, 1996 KWI has $50,114 of inventory including projects held for
sale (see Note 3).
7. DEFERRED TAXES
Deferred income tax assets and liabilities reflect the tax effects of
temporary differences between the tax basis of assets and liabilities and the
reported amounts of these assets and liabilities for financial reporting
purposes. SFAS No. 109 requires that a valuation allowance be recorded
against deferred tax assets which are more likely than not to not be
realized. The ultimate realization of the Company's net deferred tax asset
will require taxable income in future years which the Company believes is
more likely than not to be realized primarily from the sale of assets with
appreciated values. The reduction of deferred tax assets of $23,393,000
charged to income tax expense in the quarter ended June 30, 1996 is
attributable to the deferred tax assets generated by KWI which the Company
may not be able to utilize due to KWI's bankruptcy filing.
11
<PAGE>
KENETECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENT(UNAUDITED)
for the quarterly period and twenty-six weeks ended
June 30, 1996 and July 1, 1995
8. OTHER NOTES PAYABLE
Other notes payable at June 30, 1996 and December 31, 1995 consisted of the
following (in thousands):
June 30, December 31,
1996 1995
Notes bearing interest at 7.5% to 11.5%, due
in equal semi-annual installments of principal
and interest through 2003, collateralized by
Windplants and $25,862,000 of notes receivable
from the sale of Windplants $ - $ 37,031
Note bearing interest at 11.3%, due in equal annual
installments of principal and interest through 2002,
collateralized by a cogeneration facility owned by
the Company and requires an escrow account 9,159 9,624
Borrowings under a $15,000,000 term loan agreement,
interest at specified rates through 2002 (11% at
December 31, 1995) - 14,512
Notes bearing interest at 10.8%, due through 2001,
collateralized by real property - 3,317
Borrowings under a $5,000,000 revolving credit
agreement bearing interest at 1% above the bank's
prime rate through April 30, 1997 166 -
Borrowings under a $7,500,000 term loan agreement
bearing interest at the bank's prime rate through
August 31, 1996 and at 1% above the bank's prime rate
thereafter, due in quarterly installments of $267,857
plus interest through December 31, 2000 and $2,142,860
due on March 31, 2001 7,500 -
Borrowings under a $4,400,000 revolving loan
agreement, interest rate selected by the Company
from specified alternatives (7.4% and 7.6% at June 30,
1996 and December 31, 1995, respectively), semi-annually
payable under a 15 year amortization schedule with a
balloon payment for the balance outstanding at January 2,
1999, collateralized by land, building and equipment 3,723 3,797
Notes bearing interest at 7.0% due through 1999 600 600
Other obligations bearing interest at 4.9% to 14.3% due
through 1999, collateralized by equipment 1,494 3,074
-------- --------
Total other notes payable 22,642 71,955
Less current portion (22,642) 18,794
-------- --------
Long term portion $ - $ 53,161
======== ========
The Company maintained an additional revolving credit agreement for working
capital purposes which was due to expire on May 30, 1996. This agreement
required the Company to meet certain financial ratios, net worth tests and
indebtedness tests. In April 1996, the Company renegotiated the revolving
credit agreement to provide for up to $5,000,000 for working capital purposes
for the Company's construction subsidiary (CNF) through April 30, 1997. The
renegotiated agreement also provided a term loan of $7,500,000 which was used
to pay the $5,000,000 which was outstanding at March 30, 1996 and which also
provided cash collateral for up to $2,500,000 in outstanding letters of
credit. The loan becomes immediately payable on the sale of CNF. The
agreement requires CNF to meet certain net worth, financial ratio and debt
service coverage tests. At June 30, 1996 CNF was not in compliance with these
covenants. The bank has issued a notice of default letter because of the
KENETECH Windower, Inc. bankruptcy filing and because of certain other
covenant violations.
12
<PAGE>
KENETECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
for the quarterly period and twenty-six weeks ended
June 30, 1996 and July 1, 1995
The bank stated in this letter that due to KWI's bankruptcy filing and
the covenant violations it would not make any further advances under the
revolving credit agreement. The ability of CNF to transfer cash to KENETECH
Corporation is strictly limited by provisions of this line of credit. CNF's
cash and marketable securities totaled $6,343,000 at June 30, 1996.
As of June 30, 1996 KWI has $36,876,000 of other Notes Payable (see Note 3).
9. SENIOR SECURED NOTES PAYABLE
In December 1992 the Company sold $100,000,000 of 12-3/4% Senior Secured
Notes due 2002. The notes were sold at a discount of $1,389,000. Such
discount is being amortized on the effective yield method through 2002. The
unamortized discount was $1,054,000 at June 30, 1996. Interest on these
notes is due June 15 and December 15 of each year. The Company did not make
the June 15, 1996 interest payment and is in default on the notes.
Accordingly the notes are classified as current on the June 30, 1996 balance
sheet. It is uncertain when or if future payments will be made. The Notes
are redeemable, at the option of the Company, beginning December 15, 1998 at
103% of par, and beginning December 15, 1999 at par.
Under the terms of the note indenture, the Company is restricted from paying
cash dividends on its common stock and must comply with certain convenants,
the most restrictive of which place limitations on payments of such
dividends, repurchasing common stock, incurring additional indebtedness,
pledging of assets and advances or loans to affiliates.
10. CONTINGENCIES
On September 28, 1995 a complaint was filed against the Company and certain
of its officers and directors in the United States District Court for the
Northern District of California alleging federal securities laws violations.
On November 2, 1995 an amended complaint was filed naming additional
defendants, including underwriters of the Company's securities. The amended
complaint alleges claims under sections 11 and 15 of the Securities Act of
1933, and sections 10(b) and 20(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 thereunder, based on alleged misrepresentations and omissions in
the Company's public statements, on behalf of a class consisting of persons
who purchased the Company's common stock during the period from September 21,
1993 (the date of the Company's initial public offering) through August 8,
1995 and persons who purchased the Company's preferred stock during the
period from April 28, 1994 (the public offering date of the preferred stock)
through August 8, 1995. The amended complaint alleges that the defendants
misrepresented the Company's progress on the development of its Model KVS-33
wind turbines and the Company's future prospects. The amended complaint seeks
unspecified damages and other relief. The Company intends to contest the
action vigorously. It is not feasible to predict or determine if the ultimate
outcome of these matters will have a material adverse effect on the Company's
financial position.
The Company is a party to various legal proceedings normally incident to its
business activities. The Company intends to defend itself vigorously against
those actions in which the Company is a defendant. After reviewing such
proceedings with counsel, management believes that the ultimate resolution of
these matters will not have a material adverse effect on the Company's
financial position or results of operations.
11. SALES OF SUBSIDIARIES AND FIXED ASSETS
In conjunction with management's plans to address its liquidity the following
transactions were entered into during the second quarter of 1996:
1) In April 1996, the Company signed a purchase and sale agreement for its
subsidiary which holds equity investments in several funds which make
investments in power projects. The Company received $4,500,000 in cash and
the final price is subject to adjustment after due diligence. The
Company's equity investment (shown in "Investments in Affiliates") was
reduced for this $4,500,000 received. These equity investments were
recorded at approximately $9,300,000 prior to a write-down of $4,800,000
in 1995 based upon management's estimate of ultimate recoverability.
13
<PAGE>
KENETECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
for the quarterly period and twenty-six weeks ended
June 30, 1996 and July 1, 1995
2) In the second quarter of 1996 the Company sold its demand side manage-
ment business for approximately $400,000 in cash and assumption of the
debt associated with these operations. The Company incurred no loss on
the sale of these operations.
3) In May 1996 the Company sold its subsidiary which supplies wood fuel to
wood-fired electric power plants for approximately $1,970,000 in cash and
the assumption of debt associated with these operations. The Company
incurred no loss on the sale of these operations.
4) In May 1996 the Company sold a manufacturing facility in Waco, Texas. The
Company received approximately $1,200,000 in cash and incurred a small
loss on the sale of this building.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
OVERVIEW
Historically, the Company through its windpower subsidiary KENETECH
Windpower, Inc. (KWI) was a manufacturer, developer and operator of
utility-scale wind powered electric powerplants. KWI manufactured wind
turbines and designed and constructed Windplants which incorporated large
arrays of such turbines. As discussed below, as of May 29, 1996 KWI is no
longer consolidated in the Company's financial statements. The Company is
currently developing one large thermal power plant and marketing certain
assets, primarily development projects and subsidiaries not engaged in
windpower activities. As the project developer, the Company has incurred
and expects to continue to incur substantial costs prior to the
commencement of construction of this thermal powerplant.
RESULTS OF OPERATIONS
The consolidated financial statements of KENETECH Corporation and certain
subsidiaries as of and for the periods ending June 30, 1996 and December
31, 1995 have been prepared assuming the Company will continue as a going
concern. On May 29, 1996, KWI filed for protection under Chapter 11 of the
Federal Bankruptcy Code and reported an excess of liabilities over the
fair value of its assets. Although the Company continues to own the common
stock of KWI and provides certain day-to-day management under the
jurisdiction of the Bankruptcy Court, the Company believes it is probable
that such ownership and control will not exist after completion of the
bankruptcy proceedings. Accordingly, as of May 29, 1996 KWI ceased to be
accounted for as a consolidated subsidiary of the Company. The Company's
investment in KWI is recorded at zero in "Investments in Affiliates" in
the accompanying June 30, 1996 consolidated balance sheet. Revenues and
expenses of KWI from January 1, 1996 through May 29, 1996 are reflected in
consolidated statements of operations and cash flows (see Note 3 to the
financial statements).
KENETECH incurred a net loss of $32.4 million and $49.2 million during the
second quarter and the twenty-six week period ending June 30, 1996
compared to income of $1.5 million and a loss of $1.6 million for the
comparable 1995 periods. As expected, the same factors which resulted in a
significant change in the Company's short-term prospects during 1995
continue to reflect themselves in 1996's operations
15
<PAGE>
QUARTERS ENDED JUNE 30, 1996 AND JULY 1, 1995
The following table sets forth the Company's revenues, costs, and gross
margin in millions of dollars derived from its products and services for
the quarterly periods.
Quarter Ended
June 30, 1996 July 1, 1995
Gross Gross
Revenues Costs Margins Revenues Costs Margins
Construction services $ 12.5 $ 10.8 $ 1.7 $ 16.2 $ 16.0 $ 0.2
Maintenance, management
fees and other (1) 7.2 n/a 7.2 10.5 n/a 10.5
Energy sales (1) 5.4 n/a 5.4 13.0 n/a 13.0
Energy plant
operations (1) n/a 9.8 (9.8) n/a 17.5 (17.5)
------ ------ ------ ------ ------ ------
Total energy plant
operations 12.6 9.8 2.8 23.5 17.5 6.0
Windplant sales 3.6 0.6 3.0 57.5 44.8 12.7
Interest on partnership
notes and funds in escrow 0.5 n/a 0.5 1.5 n/a 1.5
Energy management services 0.3 0.1 0.2 2.1 0.7 1.4
------ ------ ------ ------ ------ ------
Total $ 29.5 $ 21.3 $ 8.2 $100.8 $ 79.0 $ 21.8
====== ====== ====== ====== ====== ======
(1)Maintenance, management fees and other revenues are earned by the
Company for maintaining and operating Windplants and thermal power
plants owned by third parties and from the sale of fuel to wood-fired
electric power plants. Energy sales are the revenues generated by
Windplants owned or leased by the Company and a thermal power plant
owned by the Company. Energy plant operations represents the expenses
incurred to generate these revenues.
Construction services revenues (recorded under the
percentage-of-completion method) decreased to $12.5 million for the
quarter ended June 30, 1996 from $16.2 million for the comparable period
in 1995; however the gross margin increased to 14% for the quarter ended
June 30, 1996 from 1% for the comparable period in 1995. The fluctuation
in revenues is attributable to a 95 MW cogeneration plant construction job
started in March 1995 and completed prior to year-end. The low gross
margin during the second quarter of 1995 was due to an unfavorable
arbitration ruling which resulted in a $2.1 million expense. The Company
intends to sell its construction subsidiary.
Energy plant operations: The discussion regarding energy plant operations
aggregates revenues earned from maintaining and managing Windplants and
thermal power plants owned by third parties, energy sales from Windplants
and a thermal power plant owned by the Company, and sales of fuel to
wood-fired electric power plants with the expenses incurred to generate
these revenues.
Maintenance, management fees and other revenues decreased to $7.2
million for the quarter ended June 30, 1996 compared to $10.5 million
for the comparable period in 1995 due to:
i. the inclusion of only two months of operations of KWI in the con-
solidated income statement for the second quarter of 1996.
ii. a decrease in deferred revenue recognized. This deferred revenue
relates to Windplants sold prior to 1990 which was being recog-
nized as the principal on the related partnership notes was
received.
iii. A decline of wood revenues because the Company sold, during the
second quarter of 1996, the subsidiary that performed those
operations.
16
<PAGE>
Energy sales decreased to $5.4 million for the quarter ended June 30,
1996 from $13.0 million due to:
i. the inclusion of only two months of operations of KWI in the
consolidated income statement for the second quarter of 1996.
ii. a decrease in the price received for energy. The average price
per kWh earned by Windplants owned or leased by the Company was
significantly lower during the second quarter of 1996 than 1995's
comparable period because of the expirations of the fixed price
periods in the Power Purchase Agreements 73% of the Windplants
owned or leased by KWI operate under.
Energy plant operations: The expenses related to energy sales, mainten-
ance and management fees, and wood fuel sales decreased to $9.8 million
for the quarter ended June 30, 1996 from $17.5 million for the compara-
ble period in 1995. This decrease is the net effect of:
i. the inclusion of only two months of operations of KWI in the
consolidated income statement during the second quarter of 1996.
ii. a decrease in lease expenses since the Company acquired a Wind-
plant it had previously leased, and
iii. a decline in the costs of wood revenues because the Company sold,
during the second quarter of 1996, the subsidiary that performed
those operations.
Windplant sales decreased to $3.6 million for the quarter ended June 30,
1996 from $57.5 million for the comparable period in 1995 due to decreased
activity in 1996. During the second quarter of 1996 the Company sold wind
turbines to an affiliated partnership to replace machines which had been
destroyed by a severe wind storm in West Texas and miscellaneous parts
sales. By comparison 1995's second quarter activities included continued
construction on the Windplant in Texas, the sale of Windplants under
construction in Spain and The Netherlands and the sale of Windplant
equipment to a third party developer in India. Gross margin increased for
the quarter ended June 30, 1996 to 83% of Windplant sales from 22% for the
comparable period in 1995. This significant fluctuation in gross margin
results from the Company recognizing the gain on the sale of the
replacement turbines in Texas when cash related to such gain was received.
During the first quarter of 1996 the Company received cash to cover its
direct costs and deferred any margin until receipt of additional cash,
which occurred in the second quarter.
Interest on partnership notes and funds in escrow decreased to $0.5
million for the quarter ended June 30, 1996 from $1.5 million for the
comparable period in 1995, as a result of:
i. lower outstanding balances of notes and escrowed amounts on which
such interest is earned. The decreases in interest bearing
balances are primarily related to the payments received on
partnership notes in conjunction with the Company's acquisition
of such partnerships.
ii. the inclusion of only two months of operations of KWI in the
consolidated income statement during the second quarter of 1996.
Energy management services revenues decreased to $0.3 million for the
quarter ended June 30, 1996 from $1.5 million for the comparable period in
1995. This operation was sold in the second quarter of 1996 (see Note 11
to the consolidated financial statements and the discussion on sales of
subsidiaries and fixed assets).
Engineering expenses decreased to $1.6 million for the quarter ended June
30, 1996 compared to $3.5 million for the comparable period in 1995 due to
decreased engineering activity and headcount.
Project development and marketing expenses decreased for the quarter ended
June 30, 1996 to $2.5 million from $2.9 million for the comparable period
in 1995. However, during the second quarter of 1995 the Company incurred
$3.9 million of expenditures related to project development and marketing
of which $1.0 million was capitalized or allocated to cost of sales. By
comparison the Company incurred $2.5 million in the second quarter of
1996. The reduction in gross costs was due to decreased prospecting for
new windpower projects and reduced headcount.
17
<PAGE>
General and administrative expenses remained at about $8.5 million for
the quarters ended June 30, 1996 and July 1, 1995. However, during the
second quarter of 1995 the Company incurred $16.2 million of general and
administrative expenditures of which $7.6 million was allocated to
projects (allocated to cost of sales or capitalized) including certain
general and administrative expense incurred by the Company's development
subsidiary. By comparison, the Company incurred $13.0 million in the sec-
ond quarter of 1996 of which only $4.5 million was allocated to projects.
Legal expense was the component of general and administrative expenses
which increased the most for the second quarter of 1996 when compared to
the second quarter of 1995 primarily due to the Chapter 11 filing at KWI.
Furthermore legal expense can be expected to be a significant cost during
1996. Other general and administrative expenditures decreased due to down-
sizing.
Interest income decreased to $0.3 million for the quarter ended June 30,
1996 from $0.5 million for the comparable period in 1995 due to lower
interest earned as a result of declining cash and investment balances.
Interest expense decreased to $5.1 million for the quarter ended June 30,
1996 from $5.3 million for the comparable period in 1995 due to:
i. during the second quarter of 1995, $2.3 million of interest
expense was capitalized compared to $0.3 million in the second
quarter of 1996.
ii. the inclusion of only two months of operations of KWI in the con-
solidated income statement during the second quarter of 1996.
Equity (loss) income of unconsolidated affiliates: Equity investments in
affiliates resulted in a net loss of $0.1 million for the quarter ended
June 30, 1996, compared to a net income of $0.5 million for the comparable
period in 1995 due to the differing performance of investments accounted
for on the equity method.
Sales of subsidiaries and fixed assets: During the second quarter of 1996
the Company sold its demand side management business, its wood-fuel
business, a manufacturing facility, and various fixed assets. On an
aggregated basis these transactions generated cash of $3.6 million and a
net income of $253 thousand.
Income taxes: The Company uses the asset and liability approach for
financial accounting and reporting for income taxes. The Company recorded
no tax benefit for the quarter ended June 30, 1996 as compared to a
provision of $1.1 million for the comparable period in 1995. Although a
loss was incurred in the second quarter of 1996, no tax benefit was
recorded because of the uncertainty about the Company's ability to utilize
such a benefit. The reduction of deferred tax assets of $23.4 million
charged to income tax expense in the quarter ended June 30, 1996 is
attributable to the deferred tax assets generated by KWI which the Company
may not be able to utilize due to KWI's bankruptcy filing.
18
<PAGE>
TWENTY-SIX WEEKS ENDED JUNE 30, 1996 AND JULY 1, 1995
The following table sets forth the Company's revenues, costs, and gross
margin in millions of dollars derived from its products and services for
the twenty-six weeks ended June 30, 1996 and July 1 , 1995.
Twenty-six weeks Ended
June 30, 1996 July 1, 1995
Gross Gross
Revenues Costs Margins Revenues Costs Margins
Construction services $ 23.4 $ 20.1 $ 3.3 $ 29.1 $ 28.2 $ 0.9
Maintenance, management
fees and other (1) 14.5 n/a 14.5 17.6 n/a 17.6
Energy sales (1) 10.2 n/a 10.2 17.3 n/a 17.3
Energy plant
operations (1) n/a 24.3 (24.3) n/a 32.7 (32.7)
------ ------ ------ ------ ------ ------
Total energy plant
operations 24.7 24.3 0.4 34.9 32.7 2.2
Windplant sales 6.9 4.0 2.9 104.6 79.1 25.5
Interest on partnership
notes and funds in escrow 1.1 n/a 1.1 2.8 n/a 2.8
Energy management services 1.1 0.2 0.9 4.3 1.8 2.5
------ ------ ----- ----- ------ ------
Total $ 57.2 $ 48.6 $ 8.6 $175.7 $141.8 $ 33.9
====== ====== ====== ====== ====== ======
(1)Maintenance, management fees and other revenues are earned by the
Company for maintaining and operating Windplants and thermal power
plants owned by third parties and from the sale of fuel to wood-fired
electric power plants. Energy sales are the revenues generated by
Windplants and a thermal power plant owned by the Company. Energy plant
operations expenses are incurred to generate these revenues.
Construction services revenues (recorded under the
percentage-of-completion method) decreased to $23.4 million for the
twenty-six weeks ended June 30, 1996 from $29.1 million for the
comparable period in 1995; however the gross margin increased to 14% for
the twenty-six weeks ended June 30, 1996 from 3% for the comparable
period in 1995. A portion of these fluctuations is attributable to a 126
MW cogeneration plant construction job with a low margin which was
completed during 1995. The size and low margin on this project impacted
the results of construction service activities in the 1995 period.
Additionally, the revenue fluctuation is partially due to a 95 MW
cogeneration plant construction job started in March 1995 and completed
prior to year-end. Also, the low gross margin during 1995 was partially
due to an unfavorable arbitration ruling in the second quarter of 1995
which resulted in a $2.1 million expense. The Company intends to sell its
construction subsidiary.
Energy plant operations: The discussion regarding energy plant operations
aggregates revenues earned from maintaining and managing Windplants and
thermal power plants owned by third parties, energy sales from Windplants
owned or leased by the Company and a thermal power plant owned by the
Company, and sales of fuel to wood-fired electric power plants with the
expenses incurred to generate these revenues.
Maintenance, management fees and other revenues decreased to $14.5
million for the twenty-six weeks ended June 30, 1996 compared to $17.6
million for the comparable period in 1995 due to:
i. the inclusion of only five months of operations of the Windplant
subsidiary in the consolidated income statement for the first
twenty-six weeks of 1996.
ii. a decrease in deferred revenue recognized. This deferred revenue
relates to Windplants sold prior to 1990 which was being recog-
nized as the principal on the related partnership notes was
received.
19
<PAGE>
Energy sales decreased to $10.2 million for the twenty-six weeks ended
June 30, 1996 from $17.3 million due to:
i. the inclusion of only five months of operations of the Windplant
subsidiary in the consolidated income statement for the first
twenty-six weeks of 1996.
ii. a decrease in the price received for energy. The average price
earned per kWh for energy generated by Windplants owned or leased
by the Company was significantly lower during the first
twenty-six weeks of 1996 compared to 1995's comparable period
because of the expirations of the fixed price periods in the
Power Purchase Agreements 73% of the Windplants owned or leased
by KWI operate under.
Energy plant operations, the expenses related to energy sales, maint-
enance and management fees, and wood fuel sales decreased to $24.3
million for the first twenty-six weeks ended June 30, 1996 from $32.7
million for the comparable period in 1995. This decrease is the net
effect of:
i. the inclusion of only five months of operations of the Windplant
subsidiary in the consolidated income statement during the first
twenty-six weeks of 1996.
ii. a decrease in lease expenses because the Company acquired a
Windplant it had previously leased, and
iii. a decline in the costs of wood revenues because the Company sold,
during the second quarter of 1996, the subsidiary that performed
those operations.
Windplant sales decreased to $6.9 million for the twenty-six weeks ended
June 30, 1996 from $104.6 million for the comparable period in 1995 due to
decreased activity in 1996. During the first twenty-six weeks of 1996 the
Company sold wind turbines to an affiliated partnership to replace
machines which had been destroyed by a severe wind storm in West Texas and
miscellaneous parts sales. By comparison, activities in 1995's comparable
periods included continued construction on the Windplant in Texas, the
sale of Windplants under construction in Spain and The Netherlands and the
sale of Windplant equipment to a third party developer in India. Gross
margin increased for the twenty-six weeks ended June 30, 1996 to 42% of
Windplant sales from 24% for the comparable period in 1995.
Interest on partnership notes and funds in escrow decreased to $1.1
million for the first twenty-six weeks of 1996 from $2.7 million for the
comparable period in 1995, as a result of:
i. the inclusion of only five months of operations of the Windplant
subsidiary in the consolidated income statement during the first
twenty-six weeks of 1996.
ii. lower outstanding balances of notes and escrowed amounts on which
such interest is earned. The decreases in interest bearing
balances are primarily related to the payments received on
partnership notes in conjunction with the Company's acquisition
of such partnerships.
Energy management services revenues decreased to $1.1 million for the
first twenty-six weeks of 1996 from $4.3 million for the comparable period
in 1995. This operation was sold in the second quarter of 1996 (see Note 9
to the consolidated financial statements).
Engineering expenses decreased to $4.2 million for the first twenty-six
weeks of 1996 compared to $6.2 million for the comparable period in 1995.
However, during the comparable 1995 period, the Company incurred $7.2
million of engineering expenditures of which $1.0 million was capitalized.
By comparison the Company capitalized no engineering expenditures in the
first twenty-six weeks of 1996.
Project development and marketing expenses for the first twenty-six weeks
of both 1996 and 1995 were $4.5 million. However, during the first
twenty-six weeks of 1995 period the Company incurred $8.1 million of
expenditures related to project development and marketing of which $3.6
million was capitalized or allocated to cost of sales. By comparison the
Company incurred $4.7 million during the first twenty-six weeks of 1996 of
which $0.2 million was capitalized.
20
<PAGE>
General and administrative expenses decreased to $15.7 million for the
first twenty-six weeks of 1996 from $16.2 million for the comparable
period in 1995. However, during the first twenty-six weeks of 1995 the
Company incurred $27.0 million of general and administrative expenditures
of which $10.8 million was allocated to projects (allocated to cost of
sales or capitalized). By comparison, the Company incurred $22.0 million
in the first twenty-six weeks of 1996 of which only $6.3 million was
allocated to projects. Certain general and administrative expenses
incurred by the Company's development subsidiar are allocated to projects
(capitalized to an asset or allocated to cost of sales). Legal expense was
the component of general and administrative expenses which increased the
most for the first twenty-six weeks of 1996 when compared to the first
twenty-six weeks of 1995 primarily due to implementation of the Chapter
11 filing at KWI and management's plan to address its liquidity and future
operations. Furthermore legal expenses can be expected to be a significant
cost during 1996.
Interest income decreased to $0.8 million for the first twenty-six weeks
of 1996 from $1.5 million for the comparable period in 1995 due to lower
interest earned as a result of declining cash and investment balances.
Interest expense increased to $10.9 million for the first twenty-six weeks
of 1996 from $10.3 million for the comparable period in 1995. During the
first twenty-six weeks of 1995 $2.6 million of interest expense was
capitalized compared to only $0.6 million in 1996. Less interest was
incurred in 1996 because of the sale of the demand side management and
wood fuel businesses and the deconsolidation of KWI.
Equity income (loss) of unconsolidated affiliates: Equity investments in
affiliates resulted in net loss of $0.1 million for the first twenty-six
weeks of 1996, compared to $0.6 million for the comparable period in 1995
due to the differing performance of investments accounted for on the
equity method.
Sale of subsidiaries and fixed assets: During the first twenty-six weeks
of 1996 the Company sold its demand side management business, its
wood-fuel business, a manufacturing facility, and various fixed assets. On
an aggregated basis these transactions generated cash of $3.6 million and
a net loss of $43 thousand.
Income taxes: The Company uses the asset and liability approach for
financial accounting and reporting for income taxes. The Company recorded
no tax benefit for the first twenty-six weeks ended June 30, 1996 as
compared to a provision of $1.1 million for the comparable period in 1995.
Although a loss was incurred in the first twenty-six weeks of 1996, no tax
benefit was recorded because of the uncertainty about the Company's
ability to utilize such a benefit. The reduction of deferred tax assets of
$23.4 million charged to income tax expense in the quarter ended June 30,
1996 is attributable to the deferred tax assets generated by KWI which the
Company may not be able to utilize due to KWI's bankruptcy filing.
LIQUIDITY AND CAPITAL RESOURCES
The Company is currently developing one large thermal power plant. As the
project developer, the Company has incurred and expects to continue to
incur substantial costs prior to the commencement of construction of this
thermal powerplant.
Operating activities: During the first twenty-six weeks of 1996 operating
activities used cash of $9.6 million. This primarily results from failure
of the Company's gross margin to cover the engineering, project
development and marketing, and general and administrative expenses. The
Company expects a loss from operations in 1996 even excluding KWI.
Investing activities: During the first twenty-six weeks of 1996 investing
activities used cash of $1.9 million. This usage is the net of capitalized
development costs of $4.8 million for the thermal power project in Puerto
Rico and CNF's purchases of marketable securities offset by cash received
from the sale of subsidiaries and assets.
Financing activities: During the first twenty-six weeks of 1996 financing
activities provided $3.1 million of cash. KWI borrowed $3.9 million on the
revolving credit agreement to finance the construction of Windplants for
work being performed on a 20 megawatt Windplant the Company is
constructing in Costa Rica under an agreement with a third-party
developer. KWI is negotiating with a third party buyer for the sale of
this Windplant. The proceeds from this sale, when consummated, would repay
the amount due ($12.1 million) under the revolving credit agreement.
21
<PAGE>
Liquidity
Status: At June 30, 1996 the Company's working capital deficit is $127.9
million, which is $124.7 million greater than at December 31, 1995. This
increase is the result of long term debt being classified as current due
to the Company's inability to meet various covenants (see Notes 3, 8 and
9).
During the first twenty-six weeks of 1996 the Company's liquidity became
severely constrained. The Company projects negative operating cash flows
in 1996. The Company is unable to borrow money and is delaying all
payments except for essential services while it attempts to raise cash
through asset sales, financing or other means. In that regard, the Company
has targeted certain subsidiaries, development projects and other assets
for sale. The Company believes substantial proceeds (and gains) could
result from these sales; however, there can be no assurances that such
sales can be consummated or that substantial proceeds can be received. If
the Company is unable to sell these or other assets its liquidity will be
further constrained.
Strategy: The consolidated financial statements as of and for the first
twenty-six weeks ended June 30, 1996 and as of and for the year ended
December 31, 1995 have been prepared assuming the Company will continue as
a going concern. The Company incurred significant losses in the first
twenty-six weeks of 1996 and in 1995, has negative working capital and its
liquidity has become severely constrained. Also, as mentioned previously,
KWI filed for protection under Chapter 11 of the Federal Bankruptcy Code
and reported an excess of liabilities over the fair value of its assets.
Even excluding KWI the Company projects negative operating cash flows for
the remainder of 1996 and certain lenders and creditors are seeking
repayment and/or restructuring of the amounts due them. These factors
raise substantial doubt about the Company's ability to continue as a going
concern in its current form.
Management's plans to address its liquidity and its future operations
include:
1) The sale of certain assets, primarily development projects and
subsidiaries not engaged in windpower activities, for which it
expects to receive substantial cash proceeds and gains.
2) Discussions and negotiations of corporate obligations and commit-
ments with lenders, suppliers and other creditors.
There can be no assurance that the Company will be successful in
implementing its plans and that the Company will continue as a going
concern.
Risks and Uncertainties: There are numerous risks and uncertainties which
may prevent the Company from successfully implementing its strategy. These
include the failure to sell assets or subsidiaries within the necessary
time frame or for the estimated amounts. Although the Company intends to
aggressively market for sale certain of its assets and subsidiaries for
which it anticipates substantial proceeds, there is no assurance as to
whether they will be sold or the price or timing of such sales. The
Company continues to evaluate other strategies and opportunities which
include merger, sale or bankruptcy.
22
<PAGE>
PART II
Item 4. Defaults Upon Senior Securities.
(a) Senior Secured Notes Payable - In December 1992 the Company
sold $100,000,000 of 12 3/4% Senior Secured Notes due 2002.
Interest on these notes is due June 15 and December 15 of each
year. The Company did not make the June 15, 1996 payment of
$6,375,000 and is in default.
Item 6. Exhibits and Reports on Form 8-K.
(a) None
(b) Reports filed on Form 8-K during the quarterly period ended
June 30, 1996 and through the date hereof:
1) May 29, 1996
Item 5 Other Information - On May 29, 1996 KENETECH
Windpower, Inc. a wholly-owned subsidiary of the
Registrant, filed a voluntary petition to reorganize
under Chapter 11 of the United States Bankruptcy Code.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned therewith duly authorized.
KENETECH Corporation
August 27, 1996 By: /s/ Mark D. Lerdal
Date Mark D. Lerdal
President and
Chief Executive Officer
August 27, 1996 By: /s/ Nicholas H. Politan
Date Nicholas H. Politan
Chief Financial Officer
August 27, 1995 By: /s/ Mervin E. Werth
Date Mervin E. Werth
Corporate Controller
24
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