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 September 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 November 13, 1996, there were 36,829,618 shares of the issuer's Common
Stock, $.0001 par value outstanding.
1
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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 September 30, 1996 and 1995 3
Consolidated Statements of Operations for the thirty-nine
weeks ended September 30, 1996 and 1995 4
Consolidated Balance Sheets, September 30, 1996 and
December 31, 1995 5
Consolidated Statement of Stockholders' Equity for
the thirty-nine weeks ended September 30, 1996 6
Consolidated Statements of Cash Flows for the
thirty-nine weeks ended September 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 8 - 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 16 - 23
Part II
Item 3. Defaults Upon Senior Secured Notes Payable and
Other Notes Payable 24
Item 4. Submission of Matters to a Vote of Security Holders. 24
2
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KENETECH CORPORATION
----------------
CONSOLIDATED STATEMENTS OF OPERATIONS
for the quarterly periods ended September 30, 1996 and 1995
(unaudited, in thousands, except per share amounts)
September 30, September 30,
1996 1995
(See Note 1)
Revenues:
Construction services $ 12,681 $ 15,792
Maintenance, management fees and other 1,555 16,003
Energy sales 2,004 15,697
Windplant sales 215 53,884
Interest on partnership notes and funds in escrow - 1,927
Energy management services - 1,594
-------- --------
Total revenues 16,455 104,897
Costs of revenues:
Construction services 13,133 12,319
Energy plant operations 2,905 14,382
Windplant sales 175 53,522
Energy management services - 944
-------- --------
Total costs of revenues 16,213 81,167
Gross margin 242 23,730
Engineering expenses - 3,160
Project development and marketing expenses 104 2,992
General and administrative expenses 6,404 8,673
-------- --------
(Loss) Income from operations (6,266) 8,905
Interest income 159 501
Interest expense (4,096) (5,276)
Equity loss of unconsolidated affiliates (46) (300)
Gain on sales of subsidiaries and fixed assets 94 -
-------- --------
(Loss) Income before taxes (10,155) 3,830
Income tax provision - 1,498
-------- --------
Net (loss) income $(10,155) $ 2,332
========= ========
Net (loss) income per common share $ (0.33) $ 0.01
Weighted average number of common shares used in
computing per share amounts 36,827 36,591
The accompanying notes are an integral part of
these consolidated financial statements.
3
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KENETECH CORPORATION
----------------
CONSOLIDATED STATEMENTS OF OPERATIONS
for the thirty-nine weeks ended September 30, 1996 and 1995
(unaudited, in thousands, except per share amounts)
September 30, September 30,
1996 1995
(See Note 1)
Revenues:
Construction services $ 36,074 $ 44,910
Maintenance, management fees and other 16,062 33,599
Energy sales 12,188 33,024
Windplant sales 7,157 158,490
Interest on partnership notes and funds in escrow 1,125 4,639
Energy management services 1,047 5,889
-------- --------
Total revenues 73,653 280,551
Costs of revenues:
Construction services 33,281 40,475
Energy plant operations 27,175 47,123
Windplant sales 4,147 132,603
Energy management services 250 2,781
-------- --------
Total costs of revenues 64,853 222,982
Gross margin 8,800 57,569
Engineering expenses 4,205 9,354
Project development and marketing expenses 4,626 7,529
General and administrative expenses 21,991 24,853
-------- --------
(Loss) Income from operations (22,022) 15,833
Interest income 933 1,968
Interest expense (14,883) (15,619)
Equity loss of unconsolidated affiliates (136) (886)
Gain on sales of subsidiaries and fixed assets 160 -
-------- --------
(Loss) Income before taxes (35,948) 1,296
Income tax provision 23,393 523
-------- --------
Net (loss) income $(59,341) $ 773
======== ========
Net loss per common share $ (1.79) $ (0.16)
Weighted average number of common shares used in
computing per share amounts 36,764 36,276
The accompanying notes are an integral part of
these consolidated financial statements.
4
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KENETECH CORPORATION
----------------
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
(unaudited, in thousands, except share amounts)
ASSETS
September 30, December 31,
1996 1995
(See Note 1)
Current assets:
Cash and cash equivalents $ 16,722 $ 16,842
Funds in escrow, net 354 12,531
Accounts receivable 16,315 52,593
Partnership notes and interest receivable, net 777 1,477
Inventories 909 38,684
Investment in power plant held for sale 19,972 19,951
Deferred tax assets, net - 2,764
Other assets 4,372 5,980
-------- --------
Total current assets 59,421 150,822
Accounts receivable and funds in escrow, net 4,878 21,031
Partnership notes and interest receivable, net 6,731 22,566
Inventories, net - 18,431
Property, plant and equipment, net 27,796 118,214
Power plants under development 13,084 14,956
Investments in affiliates 60 9,686
Deferred tax assets, net 17,912 38,235
Other assets 6,740 7,308
-------- --------
Total assets $136,622 $401,249
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 20,494 $ 38,663
Accrued liabilities 21,403 56,950
Accrued interest 10,445 2,115
Bank loan payable 8,387 13,200
Debt associated with power plant held for sale 16,958 16,958
Other notes payable 21,386 18,794
Estimated warranty costs - 7,374
Senior secured notes payable 98,976 -
-------- --------
Total current liabilities 198,049 154,054
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 965 62,643
Accrued dividends on preferred stock 7,492 1,071
-------- --------
Total liabilities 207,637 406,808
Commitments and contingencies
Stockholders' deficiency:
Convertible preferred stock - 10,000,000 shares
authorized, $.01 par value; issued and outstanding
102,492, $111,266 liquidation preference 99,561 99,561
Common stock - 110,000,000 shares authorized, $.0001
par value; issued and outstanding 36,829,618 in 1996
and 36,533,836 in 1995 4 4
Additional paid-in capital 138,362 144,551
Unearned compensation - (281)
Cumulative foreign exchange (121) 86
Accumulated deficit (308,821) (249,480)
-------- --------
Total stockholders' deficiency (71,015) (5,559)
Total liabilities and stockholders' deficiency $136,622 $401,249
The accompanying notes are an integral part of
these consolidated financial statements.
5
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KENETECH CORPORATION
----------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
for the thirty-nine weeks ended September 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 - - 295,782 - 234 - - - 234
Recognition of unearned
compensation - - - - - 281 - - 281
Preferred stock dividends - - - - (6,423) - - - (6,423)
Foreign exchange - - - - - - (207) - (207)
Net loss - - - - - - - (59,341) (59,341)
-------- -------- --------- ------ -------- --------- -------- ---------- ---------
Balance, September 30, 1996 102,492 $ 99,561 36,829,618 $ 4 $ 138,362 $ - $ (121) $ (308,821) $ (71,015)
======= ======== ========== ====== ========= ========= ======== ========== =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
6
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KENETECH CORPORATION
----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS for
the thirty-nine weeks ended September 30, 1996 and 1995
(unaudited, in thousands)
September 30, September 30,
1996 1995
(See Note 1)
Cash flows from operating activities:
Net (loss) income $(59,341) $ 773
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred income taxes 23,393 (223)
Depreciation, amortization and other 2,303 12,493
Changes in assets and liabilities:
Funds in escrow, net 3,127 (128)
Accounts receivable 23,749 (14,370)
Partnership notes and interest receivable, net 290 (203)
Inventories 1,694 (14,758)
Power plants under development (5,613) (2,806)
Other assets (1,469) (2,251)
Accounts payable and accrued liabilities (244) 2,857
Estimated warranty costs (1,491) -
Accrued loss on contracts (2,157) -
-------- --------
Net cash used in operating activities (15,759) (18,616)
Cash flows from investing activities:
Marketable securities:
Sales 3,536 19,949
Purchases (3,536) (481)
Acquisition of Century Contractors West Inc. - (1,360)
Property plant and equipment:
Additions (486) (27,093)
Proceeds from sales - 2,690
Proceeds from sales of subsidiaries and assets 8,115 -
Proceeds from sale of partnership interest in
cogeneration facility 200 4,069
Investments in affiliates:
Contributions (1,814) (8,435)
Distributions 530 739
-------- --------
Net cash provided by (used in)
investing activities 6,545 (9,922)
Cash flows from financing activities: Other notes payable:
Proceeds 166 1,678
Payments (5,122) (12,781)
Proceeds on bank loan borrowings 18,816 79,000
Payments on bank loan borrowings (5,000) (52,000)
Proceeds from issuance of common stock, net 234 2,771
Payment of preferred stock dividends - (6,423)
-------- --------
Net cash provided by financing activities 9,094 12,245
-------- --------
Decrease in cash and cash equivalents (120) (16,293)
Cash and cash equivalents at beginning of period 16,842 42,618
-------- --------
Cash and cash equivalents at end of period $ 16,722 $ 26,325
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
7
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KENETECH CORPORATION
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
for the quarterly period and thirty-nine weeks
ended September 30, 1996 and 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 consolidated financial statements of KENETECH Corporation and certain
subsidiaries as of and for the periods ending September 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 September
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 September 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 thirty-nine week
period ended September 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 problems 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. (See Notes 7 and 12).
2) Discussions and negotiations of corporate obligations and commitments
with lenders, suppliers and other creditors.
8
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KENETECH CORPORATION
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
for the quarterly period and thirty-nine weeks
ended September 30, 1996 and 1995
There are numerous risks and uncertainties which may prevent the Company from
successfully implementing its plans and continuing as a going concern. 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. In addition, management believes such sales will not generate
sufficient proceeds to ultimately provide any return of invested capital to
the holders of the Company's stock. At this time the Company has not
finalized plans for future operations. There can be no assurance that the
Company will be successful in implementing its plans to improve its
liquidity and that the Company will continue as a going concern.
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 September 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
September 30, 1996
(unaudited, in thousands)
Assets: Liabilities and Stockholder's
Deficiency:
Cash $ 16,199 Accounts Payable $ 35,634
Funds in Escrow 12,458 Accrued Liabilities 28,382
Accounts Receivable 14,505 Accrued Warranty Liabilities 64,462
Partnership Notes and Accrued Loss on Contracts 33,704
Interest Receivable 16,786 Other Notes Payable 36,728
Due From Affiliates 718 ---------
Inventories 20,759 Total Liabilities 198,910
Projects Held for Sale 3,568
Net Property, Plant
and Equipment 77,095
Development Costs 6,012 Stockholder's Deficiency (25,960)
Investment in Affiliates 2,460 ---------
Other Assets 2,390
--------- Total Liabilities
Total Assets $ 172,950 and Equity $ 172,950
========= =========
KWI's 1996 operations through May 29, 1996 are reflected in the accompanying
consolidated financial statements. KWI's operating results for the period May
30 through September 30, 1996 generated a net loss of $13,302 which is not
included in the consolidated income statement of the Company. The decrease in
inventories from the June 30, 1996 balance of $32,264 primarily represents an
adjustment to fair market value. The Company's investment in KWI is recorded
as zero in "Investments in Affiliates" in the accompanying September 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 (See Note 7).
9
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KENETECH CORPORATION
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
for the quarterly period and thirty-nine weeks
ended September 30, 1996 and 1995
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
required 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 at that time). Subsequently, KWI sold a
project held for sale. The proceeds from this sale repaid the amount due and
the revolving credit agreement was terminated.
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 Thirty-nine weeks Ended
September 30, September 30,
1996 1995 1996 1995
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net (loss) income $ (10,155) $ 2,332 $ (59,341) $ 773
Less preferred stock dividends (2,141) (2,141) (6,423) (6,423)
--------- --------- --------- -------
Net (loss) income used in
per share calculations $ (12,296) $ 191 $ (65,764) $(5,650)
========= ========= ========= =======
Weighted average shares
outstanding 36,827 36,421 36,764 36,276
Common stock equivalents - 170 - -
--------- --------- --------- -------
Weighted average shares used in
per share calculations 36,827 36,591 36,764 36,276
========= ========= ========= =======
Net (loss) income per share $ (0.33) $ 0.01 $ (1.79) $ (0.16)
========= ========= ========= =======
</TABLE>
Preferred stock dividends are added to the net loss for the calculation of
net loss per share or deducted from net income for the calculation of net
income per share. If 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).
10
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KENETECH CORPORATION
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
for the quarterly period and thirty-nine weeks
ended September 30, 1996 and 1995
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 thirty-nine week periods ended September 30, 1996 and
1995 is presented below:
September 30, September 30,
1996 1995
Non cash investing activity:
Capital leases for equipment $ - $ 381
------- -------
Supplemental cash flow information:
Cash paid (received) for:
Income taxes paid $ 45 $ 348
Income taxes refunded (420) (178)
------- -------
Net cash flow from income taxes $ (375) $ 170
======= =======
Interest paid $ 4,156 $13,909
Capitalized interest (587) (4,560)
Interest accrued but not paid 12,477 3,893
Interest paid but accrued in prior periods (1,555) -
Amortization of deferred financing costs 392 2,377
------- -------
Interest expense $14,883 $15,619
======= =======
Capitalized interest charged to costs of revenues totaled $587 for the
thirty-nine weeks ended September 30, 1996 and $3,236 for the comparable 1995
period.
6. INVENTORIES
Inventories (in thousands) at September 30, 1996 and December 31, 1995
consisted of:
September 30, December 31,
1996 1995
Current inventories:
Work-in-process $ - $ 5,616
Unassembled parts and supplies 909 15,114
Projects held for sale:
Texas Windplant - 3,568
Projects in construction:
Costa Rica Windplant - 14,386
-------- --------
Total current inventories $ 909 $ 38,684
======== ========
Long-term inventories:
Long-term inventory $ - $ 33,177
Reserve - $(14,746)
-------- --------
Total long-term inventories $ - $ 18,431
======== ========
As of September 30, 1996 KWI has $20,759 of inventory including projects held
for sale (see Note 3).
11
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KENETECH CORPORATION
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
for the quarterly period and thirty-nine weeks
ended September 30, 1996 and 1995
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 during 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.
8. BANK LOAN PAYABLE
On August 30, 1996, the Company entered into a $30,000,000 loan agreement to
be used for the one large thermal power plant being developed by the Company.
Amounts borrowed under this agreement bear interest at the 90 day LIBOR plus
7.5%. This rate can change when the project reaches certain milestones. The
90 day LIBOR rate was 5.625% at September 30, 1996. As of September 30, 1996,
there was $8,387,282 outstanding. The loan is collateralized by the stock of
a special purpose entity formed to hold through affiliates the Company's
interest in this thermal power plant.
12
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KENETECH CORPORATION
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
for the quarterly period and thirty-nine weeks
ended September 30, 1996 and 1995
9. OTHER NOTES PAYABLE
Other notes payable at September 30, 1996 and December 31, 1995 consisted of
the following (in thousands):
September 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 monthly
installments of principal and interest through 2002,
collateralized by a cogeneration facility owned by
the Company and requires an escrow account 8,917 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 7,232 -
Borrowings under a $4,400,000 revolving loan
agreement, interest rate selected by the Company
from specified alternatives (7.4% and 7.6% at
September 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 3,645 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 826 3,074
-------- --------
Total other notes payable 21,386 71,955
Less current portion 21,386 18,794
-------- --------
Long term portion $ - $ 53,161
======== ========
13
<PAGE>
KENETECH CORPORATION
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
for the quarterly period and thirty-nine weeks
ended September 30, 1996 and 1995
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 outstanding at March 30, 1996 and to
provide 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 September 30, 1996 CNF was not in compliance with
these covenants. The bank has issued a notice of default letter because of
the bankruptcy filing and because of certain other covenant violations. 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 cash equivalents totaled $9,376,000 at September 30, 1996.
As of September 30, 1996 KWI has $36,728,000 of Other Notes Payable (see
Note 3).
10. 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 $1,024,000 at September 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 a current liability on the September
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.
11. 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. On March 29,
1996 a second amended complaint was filed. The complaint, as amended, 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 there-
under, 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 misrepre-
sented 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.
14
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KENETECH CORPORATION
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
for the quarterly period and thirty-nine weeks
ended September 30, 1996 and 1995
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.
12. SALES OF SUBSIDIARIES AND FIXED ASSETS
In conjunction with management's plans to address its liquidity the following
transactions were entered into during 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. Currently,
the Company and buyer are in arbitration over the final purchase price.
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.
2) In the second quarter of 1996 the Company sold its demand side management
business for approximately $400,000 in cash and the 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.
5) In September 1996 the Company sold a subsidiary that held a 25% equity
interest in a district steam heating facility located in New Haven,
Connecticut for $200,000 cash and realized a small gain on this
transaction.
15
<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, operating its
construction subsidiary 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.
FORWARD LOOKING INFORMATION
Certain information included in this report contains forward looking
statements within the meaning of the Securities Act of 1933, as amended,
and the Securities Act of 1934, as amended. Such forward looking
information is based on information available when such statements are
made and is subject to risks and uncertainties that could cause actual
results to differ materially from those expressed in the statements.
RESULTS OF OPERATIONS
The consolidated financial statements of KENETECH Corporation and certain
subsidiaries as of and for the periods ending September 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 September 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 $10.2 million and $59.3 million during the
third quarter and the thirty-nine week period ending September 30, 1996
compared to income of $2.3 million and $0.8 million for the comparable
1995 periods. 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.
16
<PAGE>
QUARTERS ENDED SEPTEMBER 30, 1996 AND 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
September 30, 1996 September 30, 1995
Gross Gross
Revenues Costs Margins Revenues Costs Margins
Construction services $ 12.7 $ 13.1 $ (0.4) $ 15.8 $ 12.3 $ 3.5
Maintenance, management
fees and other (1) 1.6 n/a 1.6 16.0 n/a 16.0
Energy sales (1) 2.0 n/a 2.0 15.7 n/a 15.7
Energy plant
operations (1) n/a 2.9 (2.9) n/a 14.4 (14.4)
------ ------ ------ ------- ------ ------
Total energy plant
operations 3.6 2.9 0.7 31.7 14.4 17.3
Windplant sales 0.2 0.2 - 53.9 53.5 0.4
Interest on partnership
notes and funds in escrow - n/a - 1.9 n/a 1.9
Energy management services - - - 1.6 1.0 0.6
------ ------ ------ ------- ------ ------
Total $ 16.5 $ 16.2 $ 0.3 $ 104.9 $ 81.2 $ 23.7
====== ====== ====== ======= ====== ======
(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 $12.7 million for the
quarter ended September 30, 1996 from $15.8 million for the comparable
period in 1995. However, costs of construction services exceeded revenues
for the quarter ended September 30, 1996 due to the additional costs
incurred on a 250 MW cogeneration plant construction project and the
reduction of the total estimated revenue on the project. The Company is
currently pursuing reimbursement for the costs incurred. The gross margin
was 22% 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 Company's
financial condition and the bankruptcy filing of KWI increases the
difficulty of establishing backlog. 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 $1.6
million for the quarter ended September 30, 1996 compared to $16.0
million for the comparable period in 1995 due to:
i. the exclusion of KWI's operations in the consolidated income
statement for the third quarter of 1996.
ii. A decline of wood revenues because the Company sold, during the
second quarter of 1996, the subsidiary that performed those
operations.
17
<PAGE>
Energy sales decreased to $2.0 million for the quarter ended September
30, 1996 from $15.7 million due to the exclusion of KWI's operations in
the consolidated income statement for the third quarter of 1996.
Energy plant operations: The expenses related to energy sales,
maintenance and management fees, and wood fuel sales decreased to $2.9
million for the quarter ended September 30, 1996 from $14.4 million for
the comparable period in 1995 for the same reasons discussed above
about the decline in maintenance management fees and other revenues.
Windplant sales decreased to $0.2 million for the quarter ended September
30, 1996 from $53.9 million for the comparable period in 1995 due to
decreased activity in 1996. During the third quarter of 1996 the Company
sold some wind turbine parts. By comparison 1995's third quarter
activities included the sale of Windplants under construction in Spain and
The Netherlands and the sale of Windplant equipment to a third party
developer in India.
Interest on partnership notes and funds in escrow decreased to zero for
the quarter ended September 30, 1996 from $1.5 million for the comparable
period in 1995, as a result of the exclusion of KWI's operations in the
consolidated income statement during the third quarter of 1996.
Energy management services revenues decreased to zero for the quarter
ended September 30, 1996 from $1.6 million for the comparable period in
1995 since this operation was sold in the second quarter of 1996 (see
Note 12 to the consolidated financial statements and the discussion on
sales of subsidiaries and fixed assets).
Engineering expenses decreased to zero for the quarter ended September 30,
1996 compared to $3.2 million for the comparable period in 1995 due to the
exclusion of KWI in the consolidated income statement during the third
quarter of 1996.
Project development and marketing expenses decreased for the quarter ended
September 30, 1996 to $0.1 million from $3.0 million for the comparable
period in 1995 due to the exclusion of the operations of KWI in the
consolidated income statement during the third quarter of 1996.
General and administrative expenses decreased to $6.4 million for the
quarter ended September 30, 1996 compared to $8.7 million for the
comparable 1995 period. The major components of 1996's expenses were
employee compensation and legal costs of which a significant
portion is related to management's activity in conjunction with the sale
of assets and subsidiaries. The Company is capitalizing significantly
lower amounts during 1996 compared to 1995 since only one large thermal
power project is being developed. Certain general and administrative
expenses incurred by the Company's development subsidiary are allocated
to projects (capitalized to an asset or allocated to costs of sales).
Interest income decreased to $0.2 million for the quarter ended September
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 $4.1 million for the quarter ended
September 30, 1996 from $5.3 million for the comparable period in 1995
due to:
i. during the third quarter of 1995, $1.7 million of interest
expense was capitalized compared to no capitalization of interest
in the third quarter of 1996.
ii. the exclusion of KWI's operations in the consolidated income
statement during the third quarter of 1996.
Equity (loss) income of unconsolidated affiliates: Equity investments in
affiliates resulted in a net loss of $46 thousand for the quarter ended
September 30, 1996, compared to a net loss of $0.3 million for the
comparable period in 1995 due to the differing performance of investments
accounted for on the equity method and the sale by the Company of
subsidiaries that held investments accounted for on the equity basis.
18
<PAGE>
Sales of subsidiaries and fixed assets: During the third quarter of 1996
the Company sold a subsidiary that held a 25% equity interest in a
district steam heating facility located in New Haven, Connecticut for
$200 thousand cash and realized a small gain on this transaction.
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 September 30, 1996 as compared to a
provision of $1.5 million for the comparable period in 1995. Although a
loss was incurred in the third quarter of 1996, no tax benefit was
recorded because of the uncertainty about the Company's ability to utilize
such a benefit.
THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 1996 AND 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 thirty-nine weeks ended September 30, 1996 and 1995.
Thirty-nine weeks Ended
September 30, 1996 September 30, 1995
Gross Gross
Revenues Costs Margins Revenues Costs Margins
Construction services $ 36.1 $ 33.3 $ 2.8 $ 44.9 $ 40.5 $ 4.4
Maintenance, management
fees and other (1) 16.1 n/a 16.1 33.6 n/a 33.6
Energy sales (1) 12.2 n/a 12.2 33.0 n/a 33.0
Energy plant
operations (1) n/a 27.2 (27.2) n/a 47.1 (47.1)
------ ------ ------ ------ ------ ------
Total energy plant
operations 28.3 27.2 1.1 66.6 47.1 19.5
Windplant sales 7.2 4.1 3.1 158.5 132.6 25.9
Interest on partnership notes
and funds in escrow 1.1 n/a 1.1 4.6 n/a 4.6
Energy management services 1.0 0.3 0.7 6.0 2.8 3.2
------ ------ ------ ------ ------ ------
Total $ 73.7 $ 64.9 $ 8.8 $280.6 $223.0 $ 57.6
====== ====== ====== ====== ====== ======
(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 $36.1 million for the
thirty-nine weeks ended September 30, 1996 from $44.9 million for the
comparable period in 1995. The gross margin decreased to 8% for the
thirty-nine weeks ended September 30, 1996 from 10% for the comparable
period in 1995. A portion of the revenue fluctuation is attributable to
126 MW and 95 MW cogeneration plant construction jobs which were
completed during 1995. The low gross margin during 1996 was due to the
additional costs incurred on a 250 MW cogeneration plant construction
project. The Company is currently pursuing reimbursement for the costs
incurred. The Company's financial condition and the bankruptcy filing
of KWI increased the difficulty of establishing backlog. 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.
19
<PAGE>
Maintenance, management fees and other revenues decreased to $16.1
million for the thirty-nine weeks ended September 30, 1996 compared to
$33.6 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
thirty-nine weeks of 1996.
ii. a decrease in deferred revenue recognized. This deferred revenue
relates to Windplants sold prior to 1990 which was being
recognized as the principal on the related partnership notes
was received.
iii. a decline in wood revenues because the Company sold, during the
second quarter, the subsidiary that performed those operations.
Energy sales decreased to $12.2 million for the thirty-nine weeks ended
September 30, 1996 from $33.0 million due to:
i. the inclusion of only five months of operations of the Windplant
subsidiary in the consolidated income statement during 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
thirty-nine 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,
maintenance and management fees, and wood fuel sales) decreased to
$27.2 million for the first thirty-nine weeks ended September 30, 1996
from $47.1 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 1996.
ii. a decrease in lease expenses because the Company acquired a
Windplant it had previously leased.
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 $7.2 million for the thirty-nine weeks ended
September 30, 1996 from $158.5 million for the comparable period in 1995
due to decreased activity in 1996. During the first thirty-nine 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. By comparison, activities in 1995's
comparable period 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 thirty-nine weeks ended September
30, 1996 to 43% of Windplant sales from 16% for the comparable period in
1995.
Interest on partnership notes and funds in escrow decreased to $1.1
million for the first thirty-nine weeks of 1996 from $4.6 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
thirty-nine 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.
20
<PAGE>
Energy management services revenues decreased to $1.0 million for the
first thirty-nine weeks of 1996 from $6.0 million for the comparable
period in 1995. This operation was sold in the second quarter of 1996 (see
Note 12 to the consolidated financial statements).
Engineering expenses decreased to $4.2 million for the first thirty-nine
weeks of 1996 compared to $9.4 million for the comparable period in 1995
due to the inclusion of only five months of operations of the windpower
subsidiary in the consolidated income statement during 1996.
Project development and marketing expenses for the first thirty-nine weeks
of 1996 were $4.6 million compared to $7.5 million for the comparable 1995
period. However, during the first thirty-nine weeks of 1995 the Company
incurred $14.7 million of expenditures related to project development
and marketing of which $7.2 million was capitalized or allocated to
cost of sales. By comparison the Company incurred $4.8 million during
the first thirty-nine weeks of 1996 of which $0.2 million was capitalized.
General and administrative expenses decreased to $22.0 million for the
first thirty-nine weeks of 1996 from $24.9 million for the comparable
period in 1995. However, during the first thirty-nine weeks of 1995 the
Company incurred $37.1 million of general and administrative expenditures
of which $12.2 million was allocated to projects (allocated to cost of
sales or capitalized). By comparison, the Company is capitalizing
significantly lower amounts during 1996 since only one large thermal power
project is being developed. Certain general and administrative expenses
incurred by the Company's development subsidiary are allocated to projects
(capitalized to an asset or allocated to cost of sales). The major
components of 1996's expenses were an allowance for doubtful accounts by
the Company's construction subsidiary for a receivable from KWI which
filed for protection under chapter 11 of the Federal Bankruptcy Code,
employee compensation, and legal expenses.
Interest income decreased to $0.9 million for the first thirty-nine weeks
of 1996 from $2.0 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 $14.9 million for the first thirty-nine
weeks of 1996 from $15.6 million for the comparable period in 1995. During
the first thirty-nine weeks of 1995 $4.3 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 $0.2 million for the first thirty-nine
weeks of 1996, compared to $0.9 million for the comparable period in 1995
due to the differing performance of investments accounted for on the
equity method and the sale by the Company of subsidiaries that held
investments accounted for on the equity basis.
Sale of subsidiaries and fixed assets: During the first thirty-nine 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 $8.3 million and
a net gain of $160 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 thirty-nine weeks ended September 30, 1996 as
compared to a provision of $0.5 million for the comparable period in 1995.
Although a loss was incurred in the first thirty-nine 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 thiry-nine weeks ended
September 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.
21
<PAGE>
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 thirty-nine weeks of 1996 operating
activities used cash of $15.8 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;
expenditures for the one large thermal power plant; and the uncertainty
regarding the Company's ability to use its deferred tax assets. The
Company expects a loss from operations in 1996 even excluding KWI.
Investing activities: During the first thirty-nine weeks of 1996 investing
activities provided cash of $6.5 million primarily through the sales of
subsidiaries and assets.
Financing activities: During the first thirty-nine weeks of 1996 financing
activities provided $9.1 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 constructed
in Costa Rica under an agreement with a third-party developer. The balance
outstanding of $12,050,000 was repaid in the third quarter when this
Windplant was sold and the revolving credit agreement was terminated.
Also, in August 1996, the Company through a special purpose entity entered
into a $30,000,000 loan agreement related to the aforementioned
thermal project. As of September 30, 1996, $8,387,282 had been drawn under
this agreement. At the time of the filing of this report the Company had
requested approximately $10,000,000 of additional advances. No further
advances will be available under this agreement since the remaining
funding capacity must accommodate accrued and unpaid interest for the
remaining term of the loan.
Liquidity
Status: At September 30, 1996 the Company's working capital deficit is
$138.6 million, which is $135.4 million greater than at December 31, 1995.
This increase is the result of long term debt being classified as a
current liability due to the Company's default on the interest payments
on the senior secured notes and resulting covenant violations.
During the first thirty-nine weeks of 1996 the Company's liquidity became
severely constrained. The Company projects negative operating cash flows
in 1996. On August 30, 1996 the Company entered into a $30.0 million loan
agreement related to the aforementioned thermal power plant. The loan
is collateralized by the stock of a special purpose entity formed to hold
through affiliates the Company's interest in this thermal power plant.
This source of funding provides short-term liquidity primarily for the
continued development of this specific project but will not enable the
Company to pursue other significant development opportunities.
Of the Company's $16.7 million cash, $9.4 is related to the construction
subsidiary which is prohibited by financial covenants from upstreaming
cash. The development subsidiary's cash will largely be consumed by the
continued development of the one large thermal power project. And as
discussed above under financing activities after the next draw, there is
no additional funding available under the $30.0 million loan agreement.
This leaves little additional cash available for the development of other
projects or general corporate uses.
22
<PAGE>
The Company is unable to borrow other money and is delaying all payments
except for essential services while it attempts to raise cash through
asset sales, financing or other means. The ability of the construction
subsidiary to reestablish its backlog is hampered by the Company's
financial condition and KWI's bankruptcy filing. 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.
Management Plans: The consolidated financial statements as of and for the
periods ending September 30, 1996 and December 31, 1995 have been prepared
assuming the Company will continue as a going concern. The Company
incurred significant losses in the first thirty-nine weeks of 1996 and in
1995, has negative working capital and its liquidity is 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 problems 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
commitments with lenders, suppliers and other creditors.
Risks and Uncertainties: There are numerous risks and uncertainties which
may prevent the Company from successfully implementing its plans and
continuing as a going concern. 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. In addition, management believes that such sales will not generate
sufficient proceeds to ultimately provide any return of invested
capital to the holders of the Company's stock. At this time the Company
has not finalized plans for future operations. There can be no assurance
that the Company will be successful in implementing its plans to improve
its liquidity or that the Company will continue as going concern. The
Company continues to evaluate other strategies and opportunities which
include merger, sale or bankruptcy.
23
<PAGE>
PART II
Item 3. Defaults Upon Senior Secured Notes Payable and Other Notes Payable
(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.
Other Notes Payable - The borrowings under the $5,000,000 revolving
credit agreement, the $7,500,000 term loan agreement and the
$4,400,000 revolving loan agreement are in default due to KENETECH
Windpower, Inc. bankruptcy filing, cross default provisions, and
failure to meet financial covenants.
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The 1996 Annual Meeting of Stockholders was held August 7, 1996.
(b) The meeting involved the election of three Class III Directors for a
term of three years. The following individuals were elected as Class
III Directors.
Term Expires on the Date of the
Director Annual Stockholder Meeting in:
Charles Christenson 1999
Angus M. Duthie 1999
Mark D. Lerdal 1999
The term of office as a director continued after the meeting for
Gerald R. Alderson (term expiring in 1997) and Howard W. Pifer III
(term expiring in 1998).
c) The matters voted upon at the meeting, and vote tabulations for each
matter, were as follows:
(1) Election of Directors:
Charles Christenson
In Favor 33,454,603
Against 0
Withheld 441,671
Abstentions 0
Broker Non-Voters 0
Angus M. Duthie
In Favor 33,454,603
Against 0
Withheld 441,671
Abstentions 0
Broker Non-Voters 0
Mark D. Lerdal
In Favor 33,470,959
Against 0
Withheld 425,315
Abstentions 0
Broker Non-Voters 0
(2) Ratification of the selection of KPMG as the independent
auditors of the Company for its fiscal year ending December 31,
1996.
In Favor 33,619,943
Against 137,276
Abstentions 139,055
Broker Non-Voters 0
(d) There were no settlements between the Company and any other
participant terminating any solicitation subject to Rule 14a-11.
24
<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
November 14, 1996 By:
Date Mark D. Lerdal
President and
Chief Executive Officer
November 14, 1996 By:
Date Nicholas H. Politan
Chief Financial Officer
November 14, 1996 By:
Date Mervin E. Werth
Corporate Controller
25
<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
November 14, 1996 By: /s/ Mark D. Lerdal
Date Mark D. Lerdal
President and
Chief Executive Officer
November 14, 1996 By: /s/ Nicholas H. Politan
Date Nicholas H. Politan
Chief Financial Officer
November 14, 1996 By: /s/ Mervin E. Werth
Date Mervin E. Werth
Corporate Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the KEN10-Q3rd
Quarter and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000807708
<NAME> KENETECH CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 16,722
<SECURITIES> 0
<RECEIVABLES> 701
<ALLOWANCES> 0
<INVENTORY> 909
<CURRENT-ASSETS> 59,421
<PP&E> 41,925
<DEPRECIATION> 14,129
<TOTAL-ASSETS> 136,622
<CURRENT-LIABILITIES> 198,049
<BONDS> 98,976
99,561
0
<COMMON> 4
<OTHER-SE> (170,580)
<TOTAL-LIABILITY-AND-EQUITY> 136,622
<SALES> 55,419
<TOTAL-REVENUES> 73,653
<CGS> 64,603
<TOTAL-COSTS> 95,675
<OTHER-EXPENSES> 136
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,883
<INCOME-PRETAX> (35,948)
<INCOME-TAX> (23,393)
<INCOME-CONTINUING> (59,341)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (59,341)
<EPS-PRIMARY> (1.79)
<EPS-DILUTED> (1.79)
</TABLE>
