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 thirty-nine weeks ended September 27, 1997
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 October 31, 1997, there were 36,829,618 shares of the issuer's Common Stock,
$.0001 par value outstanding.
2
<PAGE>
PART I - FINANCIAL INFORMATION
Part I
Item 1. Financial Statements.
KENETECH Corporation Consolidated Financial Statements Page
Consolidated Statements of Operations for the
thirteen weeks ended September 27, 1997 and
September 30, 1996 .......................................... 4
Consolidated Statements of Operations for the
thirty-nine weeks ended September 27, 1997
and September 30, 1996 ...................................... 5
Consolidated Balance Sheets, September 27, 1997 and
December 31, 1996 ........................................... 6
Consolidated Statement of Stockholders' Deficiency for
the thirty-nine weeks ended September 27, 1997 .............. 7
Consolidated Statements of Cash Flows for the thirty-nine
weeks ended September 27, 1997 and September 30, 1996 ....... 8
Notes to Consolidated Financial Statements ................. 9 - 19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 20 - 26
Part II
Item 1. Legal Proceedings. 27
Item 3. Defaults Upon Senior Securities. 27
3
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
for the thirteen weeks ended September 27, 1997 and September 30, 1996
(unaudited, in thousands, except per share amounts)
September 27, September 30,
1997 1996
(see Note 1) (see Note 1)
------------- -------------
Revenues:
Construction services .........................$ 7,349 $ 12,681
Energy sales .................................. 330 2,004
Maintenance, management fees and other ........ 945 1,555
Windplant sales ............................... -- 215
------------- -------------
Total revenues .............................. 8,624 16,455
Costs of revenues:
Construction services ......................... 8,108 13,133
Energy plant operations ....................... 4,470 2,905
Windplant sales ............................... -- 175
------------- --------------
Total costs of revenues ..................... 12,578 16,213
Gross margin (Excess of expenses over revenues).. (3,954) 242
Project development and marketing expenses ...... 8 104
General and administrative expenses ............. 2,239 6,404
------------- --------------
Loss from operations ............................ (6,201) (6,266)
Interest income ................................. 235 159
Interest expense ................................ (4,721) (4,096)
Equity income (loss) of unconsolidated affiliates 144 (46)
Gain on disposition of subsidiaries and assets .. 293 94
------------- --------------
Loss before taxes ............................... (10,250) (10,155)
Income tax provision............................. -- --
------------- --------------
Net loss ..................................$ (10,250) $ (10,155)
============= ==============
Net loss per common share -
Primary and Fully diluted $ (0.34) $ (0.33)
Weighted average number of common shares
used in computing per share amounts -
Primary and Fully diluted 36,830 36,827
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
for the thirty-nine weeks ended September 27, 1997 and September 30, 1996
(unaudited, in thousands, except per share amounts)
September 27, September 30,
1997 1996
(see Note 1) (see Note 1)
------------- -------------
Revenues:
Construction services .........................$ 28,880 $ 36,074
Energy sales .................................. 3,170 12,188
Maintenance, management fees and other ........ 1,472 16,062
Windplant sales ............................... -- 7,157
Interest on partnership notes and funds in
escrow....................................... -- 1,125
Energy management services .................... -- 1,047
------------- -------------
Total revenues .............................. 33,522 73,653
Costs of revenues:
Construction services ......................... 29,496 33,281
Energy plant operations ....................... 7,726 27,175
Windplant sales ............................... -- 4,147
Energy management services .................... -- 250
------------- --------------
Total costs of revenues ..................... 37,222 64,853
Gross margin (Excess of expenses over revenues).. (3,700) 8,800
Project development and marketing expenses ...... 34 4,626
Engineering expenses ............................ -- 4,205
General and administrative expenses ............. 10,514 21,991
------------- --------------
Loss from operations ............................ (14,248) (22,022)
Interest income ................................. 810 933
Interest expense ................................ (12,481) (14,883)
Equity income (loss) of unconsolidated affiliates 133 (136)
Gain on disposition of subsidiaries and assets .. 756 160
------------- --------------
Loss before taxes ............................... (25,030) (35,948)
Income tax provision............................. -- 23,393
------------- --------------
Net loss ..................................$ (25,030) $ (59,341)
============= ==============
Net loss per common share -
Primary and Fully diluted $ (0.85) $ (1.79)
Weighted average number of common shares
used in computing per share amounts -
Primary and Fully diluted 36,830 36,764
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED BALANCE SHEETS
September 27, 1997 and December 31, 1996
(unaudited, in thousands, except share amounts)
ASSETS
September 27, December 31,
1997 1996
------------ ------------
Current assets:
Cash and cash equivalents .....................$ 10,167 $ 17,208
Funds in escrow, net .......................... 2,896 5,221
Accounts receivable ........................... 8,619 17,940
Inventories ................................... 135 135
Investment in power plant held for sale ....... 18,975 19,209
Deferred tax assets, net ...................... 4,300 4,300
Other ......................................... 2,189 3,986
------------ ------------
Total current assets ............................. 47,281 67,999
Property, plant and equipment, net ............... 19,239 24,735
Power plants under development ................... 19,546 11,507
Investments in affiliates ........................ -- 32
Deferred tax assets, net ......................... 13,613 13,613
Other assets ..................................... 2,930 5,425
------------ ------------
Total assets ...............................$ 102,609 $ 123,311
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable ..............................$ 19,704 $ 18,841
Bank loan payable ............................. 20,900 18,860
Accrued interest .............................. 23,232 13,462
Accrued liabilities ........................... 15,088 21,010
Debt associated with power plant held for sale. 16,248 16,578
Other notes payable ........................... 18,677 20,165
Senior secured notes payable .................. 99,105 99,005
Accrued losses on contracts ................... 1,944 1,699
Accrued dividends on preferred stock .......... 16,056 9,633
------------ ------------
Total current liabilities ................... 230,954 219,253
Accrued losses on contracts ...................... -- 897
Other long-term obligations ...................... 1,008 1,061
------------ ------------
Total liabilities ............................ 231,962 221,211
Commitments and contingencies
Stockholders' deficiency: Convertible preferred
stock - 10,000,000 shares authorized, $.01 par
value; issued and outstanding 102,492, $119,829
liquidation preference .......................... 99,561 99,561
Common stock - 110,000,000 shares authorized,
$.0001 par value; 36,829,618 issued and
outstanding in 1997 and at December 31, 1996 .... 4 4
Additional paid-in capital .................... 129,798 136,221
Cumulative foreign exchange ................... 35 35
Accumulated deficit ........................... (358,751) (333,721)
------------ ------------
Total stockholders' deficiency ............... (129,353) (97,900)
------------ ------------
Total liabilities and
stockholders' deficiency ..................$ 102,609 $ 123,311
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
6
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
for the thirty-nine weeks ended September 27, 1997
(unaudited, in thousands, except share amounts)
<TABLE>
<CAPTION>
Effect of
Convertible Common Stock Additional Cumulative
Preferred Stock Series A Paid-In Foreign Accumulated
Shares Amount Shares Amount Capital Exchange Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 102,492 $99,561 36,829,618 $ 4 $136,221 $35 $(333,721) $ (97,900)
Preferred stock dividends --- --- --- --- (6,423) -- --- (6,423)
Net loss --- --- --- --- --- -- (25,030) (25,030)
------- ------- ---------- --- -------- --- --------- ---------
Balance, September 27, 1997 102,492 $99,561 36,829,618 $ 4 $129,798 $35 $(358,751) $(129,353)
======= ======= ========== === ======== === ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
7
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the thirty-nine weeks ended September 27, 1997 and September 30, 1996
(unaudited, in thousands)
September 27, September 30,
1997 1996
(see Note 1) (see Note 1)
------------- -------------
Cash flows from operating activities:
Net loss ........................................$ (25,030) $ (59,341)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred income taxes .......................... -- 23,393
Depreciation, amortization and other ........... 772 2,303
Write off of fixed assets....................... 3,685 --
Accrued, but not paid, interest................. 11,828 12,477
Changes in assets and liabilities:
Funds in escrow, net ........................ 2,325 3,127
Accounts receivable ......................... 9,216 23,749
Partnership notes and interest
receivable, net ............................ -- 290
Inventories ................................. -- 1,694
Power plants under development .............. (8,039) (5,613)
Other assets ................................ 3,016 (1,469)
Accounts payable and accrued liabilities .... (5,059) (12,721)
Estimated warranty costs .................... -- (1,491)
Accrued loss on contracts ................... (652) (2,157)
------------ -------------
Net cash used in operating activities ...... (7,938) (15,759)
Cash flows from investing activities:
Marketable securities:
Sales ......................................... -- 3,536
Purchases ..................................... -- (3,536)
Additions to property, plant and equipment ..... -- (486)
Proceeds from sales of subsidiaries and assets.. 1,304 8,115
Proceeds from sale of partnership interest in
cogeneration facility ......................... -- 200
Investments in affiliates:
Contributions ................................. -- (1,814)
Distributions ................................. 14 530
Sale of affiliate............................... 16 --
------------- ------------
Net cash provided by investing activities .. 1,334 6,545
Cash flows from financing activities:
Proceeds from other notes payable .............. 1,430 166
Payments on other notes payable ................ (1,867) (5,122)
Proceeds from bank loan ........................ -- 18,816
Payments on bank loan borrowings ............... -- (5,000)
Proceeds from issuance of common stock, net .... -- 234
------------- -------------
Net cash (used in) provided by
financing activities ..................... (437) 9,094
------------- -------------
Decrease in cash and cash equivalents............ (7,041) (120)
Cash and cash equivalents at
beginning of period ......................... 17,208 16,842
------------- -------------
Cash and cash equivalents at
end of period ...............................$ 10,167 $ 16,722
============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
8
<PAGE>
1. General
The interim consolidated financial statements presented herein include the
accounts of KENETECH Corporation and its consolidated subsidiaries (the
"Company"). 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, 1996. These interim
consolidated financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary (consisting of items of a
normal recurring nature) 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 for
a full year. The Company's thirteen weeks represent thirteen weeks of
operations; accordingly the third quarters of 1997 and 1996 ended September
27, 1997 and September 30, 1996, respectively.
The consolidated financial statements of KENETECH Corporation and certain
subsidiaries as of September 27, 1997 and December 31, 1996 and for the
periods ending September 27, 1997 and September 30, 1996, have been
prepared assuming the Company will continue as a going concern (see Note
3). Intercompany balances and transactions for consolidated subsidiaries
are eliminated in consolidation. 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 its assets. Although the Company continues to own the
common stock of KWI and provides certain services under the jurisdiction of
the Bankruptcy Court, the Company believes it is probable that such
ownership 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 and no activities of KWI have been
reflected in the consolidated financial statements of the Company since
that date. The Company's investment in KWI is recorded as zero in
"Investments in Affiliates" in the accompanying September 27, 1997 and
December 31, 1996 consolidated balance sheets. Revenues and expenses of KWI
from January 1, 1996 through May 29, 1996 are reflected in consolidated
statements of operations and cash flows. KWI 1996 operations through May
29, 1996 reflect an excess of expenses over revenues of $164,000.
2. Significant Accounting Policies
Foreign Currency Translation: Assets and liabilities of certain non-U.S.
subsidiaries are translated at current exchange rates, and related revenues
and expenses are translated at average exchange rates in effect during the
period. Resulting translation adjustments are recorded as a component of
stockholders' deficiency.
Revenues: Revenues from Windplant sales and construction services are
recognized on the percentage-of-completion, cost-to-cost method. Costs of
such revenues include all direct material and labor costs and those
indirect costs related to contract performance such as indirect labor,
supplies and tool costs that can be attributed to specific contracts.
Estimated future warranty costs are recognized as units are sold and
adjusted as circumstances require. Indirect costs not specifically
allocable to contracts and general and administrative expenses are charged
to operations as incurred. Revisions to contract revenue and cost estimates
are recognized in the accounting period in which they are determined.
Provision for estimated losses on uncompleted contracts is made in the
period in which such losses are determined.
Maintenance and management fees are recognized as earned under various
long-term agreements to operate and maintain the energy plants which the
Company has developed. Many of these fees are a percentage of owners'
energy sales which fluctuate based on production and price. Other revenues
include development fees earned under various independent power plant
development activities.
9
<PAGE>
2. Significant Accounting Policies (continued)
Energy sales revenue is recognized when electrical power or steam is
supplied to a purchaser, generally the local utility company or site host,
at the contract rate in place at the time of delivery. Certain contracts
have fixed prices for the first few years after which the prices are based
on the "avoided costs" price of utility purchasers.
Depreciation: Depreciation is recorded on a straight-line basis over the
estimated useful lives as shown below:
Buildings and improvements 30 years
Windplants 20 to 30 years
Cogeneration and substation facilities 30 years
Machinery and equipment 2 to 10 years
Furniture and fixtures 3 to 5 years
Leasehold improvements Shorter of estimated life or
term of lease
Income Taxes: The Company accounts for income taxes using the liability
method under which deferred income taxes arise from temporary differences
between the tax basis of assets and liabilities and their reported amounts
in the consolidated financial statements. Changes in deferred tax assets
and liabilities include the impact of any tax rate changes enacted during
the year and changes in the valuation allowance.
Accounts Receivable/Accrued Liabilities: Costs incurred and estimated
earnings in excess of billings on uncompleted contracts are included in
accounts receivable. Billings in excess of costs and estimated earnings on
uncompleted contracts are included in accrued liabilities (See Note 8).
Inventories: Inventories are stated at the lower of cost or market,
principally using the average-cost method (See Note 10).
Power Plant Held for Sale: Power plant held for sale represents the
Company's share of a completed power plant (see Note 11).
Power Plants Under Development: Power plants under development include
project development costs, representing preconstruction costs incurred to
complete the design of an independent power plant in late stage development
in Puerto Rico, to secure the necessary permits, to negotiate the contracts
to construct and operate the project, to obtain construction financing and
for other development services. Project development costs are capitalized
once a project has reached the design and permitting stage and the Company
has obtained a power purchase agreement or other enforceable right to sell
power. Such capitalized development costs are transferred to construction
in progress after construction begins. When it is probable that future
projects will not be completed or costs may not be recovered, such costs
are written off or reserved for. As of September 27, 1997 and December 31,
1996 the Company's only project under active development was the Puerto
Rico project.
Other Assets: Other assets include debt issuance costs of $2,365,000 at
September 27, 1997 and $3,860,000 at December 31, 1996 which are amortized
on a straight-line basis over the term of the related debt. Such
amortization expense was $817,000 and $1,469,000 respectively for the first
thirty-nine weeks of 1997 and 1996.
3. Liquidity and Going Concern
The consolidated financial statements as of and for the periods ending
September 27, 1997, September 30, 1996 and December 31, 1996 have been
prepared assuming the Company will continue as a going concern. The Company
incurred significant losses in the first thirty-nine weeks of 1997 and for
the year ending December 31, 1996, has negative working capital and its
liquidity is severely constrained. Certain lenders and creditors are
seeking repayment and/or restructuring of the amounts due them. In 1997 the
Company expects to generate operating losses before the sale of assets due
to administrative expenses in excess of gross margin and interest expense
on debt. These factors raise substantial doubt about the Company's ability
to continue as a going concern in its current form.
10
<PAGE>
3. Liquidity and Going Concern (continued)
The Company's construction subsidiary has agreed to sell its interests in
the Puerto Rico project construction contracts for approximately
$18,000,000. The Company received an initial payment of $1,000,000 in the
third quarter and will receive the balance when (1) the authorization to
begin construction is given ("Notice to Proceed"), (2) the project has
binding financing commitments, and (3) the project has made the first
milestone payment. The buyer may cancel this agreement between December 15,
and December 19, 1997 if the "Notice to Proceed" has not been issued by
December 15, 1997 or if the project is canceled before the "Notice to
Proceed" is issued.
Management's plan to address its liquidity involves the sale by
subsidiaries of their remaining respective interests in the Puerto Rico
project for which the Company expects to receive substantial cash proceeds.
There can be no assurance that the Company will be successful in
implementing its plan, that the sales of the interests in the Puerto Rico
project will be consummated, that substantial proceeds will be received, or
that the Company will continue as a going concern. Management believes that
such sales even if consummated will not generate sufficient proceeds to
ultimately provide any return of invested capital to the holders of the
Company's stock. The Company believes that any proceeds received from asset
sales will be used in operations or paid to creditors. In addition, the
Company believes KWI will assert certain claims in bankruptcy against the
Company. Consequently, after, or as a part of a sale of the Company's
subsidiaries' interests in the Puerto Rico project (the Company's only
active development project), the Company believes that it is likely that it
will seek protection under the Federal Bankruptcy Code.
4. Construction Subsidiary
The Company has announced its intention to dispose of its construction
subsidiary, CNF Industries, Inc. ("CNF") and, in fact, has sold
substantially all of its assets.(see Note 3) The Company continues to own
the common stock of CNF and controls its operations; therefore, the
consolidated financial statements continue to reflect the consolidation of
the assets, liabilities, revenues and expenses of CNF. At September 27,
1997 the Company had not completed the disposition of CNF, therefore the
Company's financial statements do not include any adjustment or reserves
that might result from the disposition. The Company's consolidated
statement of operations for the thirty-nine weeks ended September 27, 1997
and consolidated balance sheet as of September 27, 1997 include the
following amounts relating to CNF:
Thirty-nine weeks ended September 27, 1997
(in thousands)
Revenues ...........................$ 28,880
Costs of revenues ................. (29,496)
--------
Excess of expenses over revenues.. (616)
General and administrative expenses 5,230
--------
Loss from operations ............... (5,846)
Other .......................... (373)
--------
Loss before income taxes ......... $ (6,219)
========
As of
September 27, 1997
(in thousands)
Assets: Liabilities and owner's deficiency:
Current assets $10,045 Current liabilities $28,684
Property plant and Long term liabilities 1,008
equipment 2,882 Owner's deficiency (16,255)
Other long term assets 510
------- -------
Total assets $13,437 Total liabilities and equity $13,437
======= =======
11
<PAGE>
4. Construction Subsidiary (continued)
As mentioned above in Note 3, CNF has agreed to sell its interests in the
Puerto Rico project construction contracts and the Company received an
initial payment of $1,000,000 in the third quarter. The $1,000,000 is
refundable if the sale is canceled. The Company has recognized no income on
this transaction.
As previously mentioned, the Company intends to dispose of its construction
subsidiary following the completion of the above-described transactions;
however, there can be no assurance that the Company will be successful in
disposing of CNF's remaining assets.
5. Net Loss Per Share
Net loss per share amounts for the periods ending September 27, 1997 and
September 30, 1996 were calculated as follows:
<TABLE>
Primary and Fully Diluted
(in thousands, except per share amounts)
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
September 27, September 30, September 27, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss $ (10,250) $ (10,155) $ (25,030) $ (59,341)
Less preferred stock dividends (2,141) (2,141) (6,423) (6,423)
------------- ------------- ------------- -------------
Net loss used in per share calculations $ (12,391) $ (12,296) $ (31,453) $ (65,764)
============= ============= ============= =============
Weighted average shares used in per share
calculations 36,830 36,827 36,830 36,764
============= ============= ============= =============
Net loss per share $ (0.34) $ (0.33) $ (0.85) $ (1.79)
============= ============= ============= =============
Preferred stock dividends increase the net loss for the calculation of net loss per share. Common stock
equivalents are not included in weighted average shares used in the calculations of net loss per share
because they would be anti-dilutive (reducing the amount of net loss per share) due to the fact that the
Company incurred net losses during the periods.
</TABLE>
6. Cash Flow Information
Short term investments purchased with original maturities of three months
or less are considered cash equivalents. Additional cash flow information
is presented below:
September 27, September 30,
1997 1996
------------- -------------
(in thousands)
Supplemental cash flow information:
Cash paid (received) for:
Income taxes paid ......................$ 145 $ 45
Income taxes refunded .................. (38) (420)
------------- -------------
Net cash flow from income taxes ..........$ 107 $ (375)
============= =============
Interest activity:
Interest paid ...........................$ 1,146 $ 4,156
Capitalized interest .................... (1,962) (587)
Interest accrued but not paid, net ...... 11,911 12,477
Interest paid but accrued in prior
periods ................................ (83) (1,555)
Amortization of deferred financing costs. 1,469 392
------------- -------------
Interest expense .......................$ 12,481 $ 14,883
============= =============
Capitalized interest charged to costs of revenues was $1,962,000 for the
thirty-nine weeks ended September 27, 1997 and $587,000 for the comparable
1996 period.
12
<PAGE>
7. Funds in Escrow
The Company has various debt and other agreements which have escrow fund
requirements and certain debt service payments are made from these escrow
accounts. The escrow account balances at September 27, 1997 and December
31, 1996 were as follows:
September 27, December 31,
1997 1996
------------- ------------
(in thousands)
Other notes payable $ 1,094 $ 1,581
Letters of credit collateral 150 1,086
Project collateral 1,652 2,554
------------- ------------
$ 2,896 $ 5,221
============= ============
As of September 27, 1997, funds in escrow were invested in short-term cash
investments with interest rates ranging from zero to 5.1%. As previously
discussed, KWI's funds in escrow are not reflected in either the September
27, 1997 or the December 31, 1996 balance sheet.
8. Accounts Receivable
Accounts Receivable: Accounts receivable at September 27, 1997 and December
31, 1996 consisted of:
September 27, December 31,
1997 1996
------------- ------------
(in thousands)
Contracts - Billed:
Completed contracts .................$ 366 $ 1,981
Contracts in progress ............... 3,146 9,106
Retained ............................ 1,887 2,216
Contracts - Unbilled ................. 2,873 2,782
Operations and other ................. 347 1,855
------------- ------------
$ 8,619 $ 17,940
============= ============
At September 27, 1997 and December 31, 1996 billed and unbilled receivables
did not include any amounts from related parties. Operations and other
receivables include $33,000 from related parties at December 31, 1996. As
previously discussed, receivables of KWI are not reflected in the
accompanying September 27, 1997 and December 31, 1996 balance sheets.
A summary of costs incurred and estimated earnings on uncompleted contracts
at September 27, 1997 and December 31, 1996 is as follows:
September 27, December 31,
1997 1996
------------- ------------
(in thousands)
Costs incurred and estimated earnings
on uncompleted contracts ............ $ 183,371 $ 151,850
Billings to date ................... 182,322 157,346
------------- ------------
$ 1,049 $ (5,496)
============= ============
13
<PAGE>
8. Accounts Receivable (continued)
Such amounts were included in the consolidated balance sheets at September
27, 1997 and December 31, 1996 as follows:
September 27, December 31,
1997 1996
------------- ------------
(in thousands)
Costs incurred and estimated earnings
in excess of billings on uncompleted
contracts (accounts receivable) ...... $ 2,873 $ 2,782
Billings in excess of costs and
estimated earnings on uncompleted
contracts (accrued liabilities) ...... (1,824) (8,278)
------------- ------------
$ 1,049 $ (5,496)
============= ============
9. Property, plant and equipment
Property, plant and equipment at September 27, 1997 and December 31, 1996
consisted of:
September 27, December 31,
1997 1996
------------- ------------
(in thousands)
Land...................................$ 580 $ 580
Buildings and improvements............. 2,217 2,966
Cogeneration facility.................. 22,282 26,467
Machinery, equipment and other......... 3,751 6,122
------------- ------------
28,830 36,135
Less accumulated depreciation.......... 9,591 11,400
------------- ------------
$ 19,239 $ 24,735
============= ============
On June 13, 1997, the Company's cogeneration facility in Hartford,
Connecticut experienced the failure of a combustion turbine. On July 28,
1997 the second turbine failed leaving the plant inoperable. Both failures
were force majeure events and catastrophic in nature. The cost of repairing
the individual units is prohibitive. Additionally, there are no lease
engines available for short term installation. An expense of approximately
$3.0 million was recorded to write-off these two turbines. The Company is
assembling one operational turbine from the serviceable parts of the two
failed turbines. Currently, no energy sales are being generated by the
facility. Upon installation of the repaired unit, the facility is expected
to produce approximately half of its rated capacity. The Company has
requested additional funding from the lender to the facility to purchase
two new units. If financing does not become available for the two new
turbines and management cannot develop any other solutions, the estimated
future cash flows would indicate that the facility (net book value of
$15,827,000) was an impaired asset indicating the need for a write-down.
10. Inventories
Inventories (in thousands) at September 27, 1997 and December 31, 1996
consisted of:
September 27, December 31,
1997 1996
------------- ------------
(in thousands)
Unassembled parts and supplies $ 135 $ 135
============= ============
Unassembled parts and supplies consists of fuel and maintenance parts for
the Company's wholly-owned cogeneration facility in Hartford, Connecticut.
14
<PAGE>
11. Investment in Power Plant Held for Sale and Debt Associated With Power
Plant Held for Sale
Investment in power plant held for sale at September 27, 1997 and December
31, 1996 consisted of:
September 27, December 31,
1997 1996
------------- -----------
(in thousands)
Chateaugay power plant $ 18,975 $ 19,209
============== ============
The Company owns a 50% ownership interest in a 17.0 megawatt wood-fired
electric power plant it constructed in Chateaugay, New York in September
1993. Debt associated with this project held for sale at September 27, 1997
and December 31, 1996 consisted primarily of tax-exempt bonds. In July
1991, the Company entered into an agreement with the County of Franklin
(New York) Industrial Development Authority (the "Authority") whereby the
Authority loaned the Company the proceeds of the Authority's Series 1991A
Bonds issued of $34,800,000 to finance the construction of the Chateaugay
project. The bonds are due July 1, 2021. As the Partnership makes sinking
fund payments, the Company reduces its pro rata 50% share of the debt.
Accordingly, $16,248,000 was outstanding at September 27, 1997.
Additionally, the Company has borrowed $1,113,000 against its equity in
this project as of September 27, 1997. Another of the Company's
subsidiaries which supplied waste wood to the power plant has received a
notice of default under a contract with a waste wood supplier. The Company
has guaranteed the subsidiary's performance under such contract.
12. Bank Loan Payable
On August 30, 1996, the Company entered into a $30,000,000 loan agreement
to be used for the Puerto Rico project being developed by the Company's
development subsidiary and affiliates of Enron Corporation. 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 5.7% at September 27, 1997. 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. No further funds are
available under this agreement because the remaining funding capacity
accommodates accrued and unpaid interest for the remaining term of the
loan. The outstanding balance on this bank loan was $20,900,000 at
September 27, 1997.
15
<PAGE>
13. Other Notes Payable
Other notes payable at September 27, 1997 and December 31, 1996 consisted
of the following:
<TABLE>
<CAPTION>
September 27, December 31,
1997 1996
------------- ------------
(in thousands)
<S> <C> <C>
Note bearing interest at 11.3%, due in equal annual installments of principal and
interest through 2002, collateralized by the cogeneration facility in Hartford,
Connecticut owned by the Company and requiring an escrow account. $ 8,000 $ 8,667
Borrowings under a $5,000,000 revolving credit agreement bearing interest at 1% above
the bank's prime rate through April 30, 1997.(1) 166 166
Borrowings under a $7,500,000 term loan agreement bearing interest at 2% above the
bank's prime rate due in quarterly installments of $267,857 plus interest through
December 31, 2000 and $1,578,860 due on March 31, 2001.(1) 5,864 6,351
Borrowings under a $4,400,000 revolving loan agreement, interest rate selected by the
Company from specified alternatives (7.5% and 7.4% at September 27, 1997 and December
31, 1996, respectively), payable semi-annually, collateralized by land, building and
equipment.(1) 3,481 3,645
Borrowings under a $1,200,000 loan agreement, due in 1999 bearing interest at prime
plus 3% (11.25% at September 27, 1997 and December 31, 1996). (2) 1,113 641
Notes bearing interest at 7.0% due through 1999.(3) 7 504
Other obligations bearing interest at 9.9% due through 1999, collateralized by equipment. 46 191
------------ -------------
$ 18,677 $ 20,165
============ =============
(1) Facility associated with the Company's construction subsidiary. See discussion below regarding defaults.
(2) Related to the Company's 'Investment in Power Plant Held for Sale'.
(3) The Company did not make the required principal and interest payment on December 1, 1996 and certain holders of the
notes notified the Company of their intention to accelerate the obligation to pay the unpaid balance of the notes
plus accrued interest. On February 21, 1997, the Company paid $322,000 in full settlement of $460,000 of unpaid
principal and interest. In September 1997, the Company paid $36,000 in full settlement of $67,000 of unpaid principal
and the notes' related unpaid interest.
</TABLE>
The Company maintained a 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 upon the disposition of CNF.
The agreement requires CNF to meet certain net worth, financial ratio and
debt service coverage tests. At September 27, 1997 and December 31, 1996
CNF was not in compliance with these covenants. The bank has issued a
notice of default letter which states that due to KWI's bankruptcy filing
and certain covenant violations it would not make any further advances
under the revolving credit agreement. CNF is prohibited from transferring
cash to KENETECH Corporation by provisions of this line of credit. CNF's
cash and cash equivalents totaled $1,255,000 at September 27, 1997. As of
May 27, 1997, the Company and its bank entered into a forbearance agreement
which defers some repayments until certain events transpire and which
requires repayment in full once CNF has received payment from the sale of
its interests in the construction contracts for the Puerto Rico project.
Certain of the debt agreements provide events of default including
provisions which allow the lenders to accelerate repayment of the debt
should other debt of the Company experience an event of default which would
cause such other debt to be accelerated. Because of these provisions all
other notes payable are classified as current in the accompanying September
27, 1997 and December 31, 1996 balance sheets.
16
<PAGE>
14. 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 $895,000 at September 27, 1997. Interest on these
notes is due June 15 and December 15 of each year. The Notes are
redeemable, at the option of the Company, beginning December 15, 1997 at
106% of par, 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
covenants, 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.
The indenture provides for an event of default (including the acceleration
of the repayment of the Notes) should other debt of the Company be
accelerated because the other debt was in default. The Company has not paid
an interest payment since December 15, 1995 and is in default. The debt is
classified as a current liability. The Company has accrued unpaid interest
on these notes of $23,015,000 as of September 27, 1997.
15. Convertible Preferred Stock
In May and June 1994, the Company sold 102,494 shares of a 8 1/4%
convertible preferred stock with a stated value of $1,012.50 per share
resulting in net proceeds of approximately $99,561,000 after unwriting
discount and expenses. Dividends are cumulative from the date or original
issuance and are payable quarterly in arrears, when and as declared by the
Company's board of directors. The voluntary and involuntary liquidation
value of each preferred share is equal to the stated value plus unpaid
dividends. Preferred stockholders have the same voting rights as common
stocjholders at the rate of 40 votes per preferred share.
The holders of the preferred stock may convert their shares into common
stock at any time at the rate of 41.665 common shares for each preferred
share. The preferred stock is not convertible by the Company prior to May
15, 1997. However, after that date and prior to May 15, 1998, the Company
may convert the preferred stock and should be expected to do so if the then
current market value exceeds the call price as defined. At such time the
preferred shareholder would receive the number of common shares equal to
the call price (initially $1,033.40, declining ratably to $1,012.50)
divided by the market price of the common stock, but in no event fewer than
41.665 common shares for each share of preferred stock. If not previously
converted, on May 14, 1998, each preferred share will mandatorily convert
into 50 shares of common stock and the right to receive cash in an amount
equal to all accrued and unpaid dividends.
The preferred stock is held by a depositary and 5,124,600 depositary shares
have been issued. Each depositary share represents one-fiftieth of a
preferred share, with the holder entitled, proportionately, to all the
rights and preference of the underlying preferred stock.
17
<PAGE>
16. Contingencies
Shareholders' Litigation: On September 28, 1995, a class action complaint
was filed against the Company and certain of its officers and directors
(namely, Stanley Charren, Maurice E. Miller, Joel M. Canino and Gerald R.
Alderson) in the United States District Court for the Northern District of
California alleging federal securities laws violations. On November 2,
1995, a First Amended Complaint was filed naming additional defendants,
including underwriters of the Company's securities and certain other
officers and directors of the Company (namely, Charles Christenson, Angus
M. Duthie, Steven N. Hutchinson, Howard W. Pifer III and Mervin E. Werth).
Subsequent to the Court's partial grant of the Company's and the
underwriter defendants' motions to dismiss, a Second Amended Complaint was
filed on March 29, 1996. The amended complaint alleged 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 latest
generation of wind turbines and the Company's future prospects. The amended
complaint seeks unspecified damages and other relief.
In separate orders dated March 24, 1997 and April 16, 1997, the Court
granted plaintiffs' motion for certification of a plaintiff class
consisting of all persons or entities who purchased KENETECH common stock
between September 21, 1993 and August 8, 1995 or KENETECH depository shares
between April 28, 1994 and August 8, 1995, appointed representatives of the
certified plaintiff class, appointed counsel for the certified class and
denied without prejudice plaintiffs' motion for certification of an
underwriter defendant class. The plaintiffs recently filed a Third Amended
Complaint adding additional plaintiffs alleged to have claims based on
Section 11 of the Securities Act of 1933. On October 15, 1997, the Court
issued an order certifying a plaintiff and defendant underwriter class as
to the Section 11 claim. There have been two unsuccessful attempts at
mediation to settle the action. The Company intends to continue to contest
the action vigorously.
Tennessee Pipeline Litigation: On January 6, 1996, a breach of contract
action was filed in the Superior Court for Middlesex County, Massachusetts,
by Tennessee Gas Pipeline Company ("Tennessee") against Pepperell Power
Associates Limited Partnership (the "Pepperell Partnership"), its general
partner, KES Pepperell, Inc. (each in whole or in part directly or
indirectly owned by KENETECH Energy Systems, Inc. ("KES"), a wholly-owned
subsidiary of the Company), and its other general partner, in connection
with the termination of a natural gas transportation agreement, seeking to
recover alleged unpaid charges of approximately $1,800,000. KES Pepperell,
Inc. has filed a counterclaim in the action. On December 2, 1996, Tennessee
filed another action in the Superior Court for Middlesex County,
Massachusetts, against KES Pepperell, Inc. and KES, among others, seeking
to recover an $810,000 payment made to the Pepperell Partnership plus
treble damages and attorneys' fees. In June 1997 a tentative settlement was
reached with Tennessee which included resolution of claims involving Flagg
Energy Development Corporation ("Flagg"), a wholly-owned subsidiary of KES,
which obtains gas transportation services from Tennessee for the Hartford
Hospital co-generation plant. The settlement was to be finalized and
executed by July 15, 1997, but was not finalized or executed by that date
due to Tennessee's delay. On July 16, 1997, in a pending appeal involving
the gas transportion service described above for the Hartford cogeneration
facility, the Federal Energy Regulatory Commission ordered Tennessee to
refund in excess of $2,500,000 to Flagg. After a request for a re-hearing
by Tennessee, FERC ordered payment of the refund by Tennessee within 30
days. Tennessee filed a motion seeking an emergency order to compel KES and
its subsidiaries to effect the tentative settlement. On October 31, 1997,
the parties entered into a new tentative settlement. The Company has not
recorded any amounts related to the refund.
On September 30, 1997 Tennessee filed a complaint in the district court of
Harris County, Texas, against KES and FEDCO, alleging essentially the same
causes of action as in the above-described litigation and seeking to
enforce the tentative settlement. This action was also part of the
aforementioned tentative settlement entered into on October 31, 1997.
18
<PAGE>
16. Contingencies (continued)
Puerto Rico Litigation: On March 13, 1997, Mision Industrial de Puerto
Rico, Inc., the Union de Trabajadores de la Industria Electrica y Riego
(UTIER), Guayamenses Pro-Salud y Buen Ambiente, Bartolome Diana, SURCCO,
Inc. and Jose E. Olivieri Antonmarchi (the Appellants) timely filed an
appeal before the Circuit Court of Appeal of Puerto Rico (No. KLAN
97-00236), appealing the judgment entered against them on January 21, 1997,
in the Ponce Superior Division of the Court of First Instance of Puerto
Rico (the trial court) (No. JPE 96-0345) dismissing Appellants' complaint
against the Puerto Rico Electric Power Authority ("PREPA") requesting
injunctive and declaratory relief. Appellants are environmental groups,
citizens and the union which represents PREPA's electrical workers; they
had brought their civil action challenging the procedure used by PREPA to
select two independent power producers (one of which is the Company's
wholly-owned development subsidiary) to design, finance, construct, own and
operate the Puerto Rico project. The trial court held that PREPA's
selection of the independent power producers need not have been done
through public bidding pursuant to section 205 of PREPA's Organic Act. The
partnership which holds the power purchase agreement for the Puerto Rico
project intervened in the action before the trial court and intends to
contest the action vigorously.
Enercon Litigation: In 1996, Enercon GmbH ("Enercon") filed suit against
the Company, individual officers of the Company and/or KENETECH Windpower,
Inc. ("KWI"), and KWI's expert witness in proceedings before the U.S.
International Trade Commission, for alleged misconduct related to patent
infringement proceedings instituted by KWI against Enercon. In its suit,
Enercon alleges malicious prosecution, patent misuse and anti-trust
violations. Upon motion of the defendants, this suit has been stayed by the
Federal District Court pending the outcome of related litigation.
Westinghouse Litigation: C. N. Flagg Incorporated, a wholly-owned
subsidiary of CNF Industries, Inc., has instituted legal proceedings
against Westinghouse Electric Corporation ("Westinghouse") in the U.S.
Federal District Court in Minnesota to recover $6.0 million as compensation
for a termination of convenience of a project C. N. Flagg was building on
behalf of Westinghouse. Westinghouse has filed a counter-claim for $2.6
million alleging overpayment. C. N. Flagg has filed a motion for summary
judgment that has not yet been decided. The Company has not recorded any
amounts related to this litigation.
Other: The Company is also a party to various other legal proceedings
normally incident to its business activities. The Company intends to defend
itself vigorously against these actions.
It is not feasible to predict or determine whether the ultimate outcome of
the above-described matters will have a material adverse effect on the
Company's financial position.
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
--------
KENETECH Corporation ("KENETECH"), a Delaware corporation, is a holding
company which participated through its subsidiaries in the electric utility
market. As used in this document "Company" refers to KENETECH and its
wholly-owned subsidiaries (including KENETECH Windpower, Inc. (KWI) only
through May 29, 1996).
The Company develops, constructs, finances, sells and operates and manages
independent power projects. A wholly-owned development subsidiary is a
joint venture partner with an affiliate of Enron Corporation in a project
in late stage development in Puerto Rico. The project is a natural gas
cogeneration facility of approximately 500 MW and associated liquefied
natural gas facility which will produce electricity to be sold to Puerto
Rico Electric Power Authority pursuant to a 22 year Power Purchase
Agreement dated March 10, 1995 as amended.
The power plant will be a combined cycle cogeneration facility consisting
of two combustion turbines capable of operating on LNG, LPG, or fuel oil to
generate electricity, and is expected to produce approximately 4 million
Mwh of electricity annually under baseload conditions. Steam generated will
also be used to convert sea water into fresh water in a desalination plant,
which is expected to produce approximately 4 million gallons of potable
water per day, of which approximately 1 million gallons per day will be
required by the project, with the remainder being available for sale to
local entities. This is the only project the Company (through its
wholly-owned development subsidiary) has in active development. The
Company's wholly-owned development subsidiary intends to sell its interest
in this project.
One of the Company's subsidiaries is a general contractor which has
constructed independent power projects since 1988. This subsidiary competes
for contracts for engineering, procurement and construction (EPC) and for
construction only. Historically, the Company has constructed all of the
thermal energy power projects it developed and more recently constructed
all of the Windplants it developed. Substantially all construction work
performed by the Company for third parties was competitively bid and most
was performed under turnkey contracts. This construction subsidiary had a
joint venture interests in the construction contracts for the Puerto Rico
project described above. The Company has signed an agreement to sell its
interests in these construction contracts and intends to dispose of its
construction subsidiary. The chapter 11 filing of KWI discussed below has
materially adversely affected the Company's construction subsidiary and its
ability to procure contracts.
KWI manufactured wind turbines and designed and operated utility-scale wind
powered electric powerplants which incorporated large arrays of such
turbines. 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 services under the jurisdiction of the
Bankruptcy Court, the Company believes it is probable that such ownership
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 financial statements exclude all
KWI activities after that date.
Cautionary Statement
--------------------
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.
20
<PAGE>
Results of Operations
---------------------
The consolidated financial statements of KENETECH Corporation and certain
subsidiaries as of and for the thirteen weeks ending September 27, 1997 and
September 30, 1996 have been prepared assuming the Company will continue as
a going concern (see Note 3). As mentioned previously, as of May 29, 1996
KWI ceased to be accounted for as a consolidated subsidiary of KENETECH and
no activities of KWI have been reflected in the consolidated financial
statements of the Company since that date. The Company's investment in KWI
is recorded at zero in "Investments in Affiliates" in the accompanying
September 27, 1997 and December 31, 1996 consolidated balance sheets.
Revenues and expenses of KWI from January 1, 1996 through May 29, 1996 are
reflected in the 1996 consolidated statement of operations and cash flows.
The Company incurred a net loss for the first thirty-nine weeks of 1997 of
$25.0 million as compared to a net loss for the first thirty-nine weeks of
1996 of $59.3 million. This does not indicate an improvement in the
Company's prospects. Instead this loss reflects the elimination of
activities associated with divested subsidiaries and divisions and KWI. In
1997 the Company expects to generate operating losses before the sale of
assets described above in "Overview" due to administrative expenses and
interest expense on debt in excess of gross margin.
THIRTEEN WEEKS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 30, 1996
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 periods.
<TABLE>
<CAPTION>
Thirteen Weeks Ended
September 27, 1997 September 30, 1996
-------------------------- --------------------------
(in millions)
Gross Gross
Revenues Costs Margins Revenues Costs Margins
-------- ------- ------- -------- ------- -------
<S> ............................ <C> <C> <C> <C> <C> <C>
Construction services ........... $ 7.3 $ 8.1 $ (0.8) $ 12.7 $ 13.1 $ (0.4)
Energy sales (1) ................ 0.3 N/A 0.3 2.0 N/A 2.0
Maintenance, management
fees and other (1).............. 1.0 N/A 1.0 1.6 N/A 1.6
Energy plant operations (1)...... N/A 4.5 (4.5) N/A 2.9 (2.9)
-------- ------- ------- -------- ------- -------
Total energy plant operations 1.3 4.5 (3.2) 3.6 2.9 0.7
Windplant sales ................. -- -- -- 0.2 0.2 ---
-------- ------- ------- -------- ------- -------
Total ............................ $ 8.6 $ 12.6 $ (4.0) $ 16.5 $ 16.2 $ 0.3
======== ======= ======= ======== ======= =======
(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.
</TABLE>
21
<PAGE>
Construction services revenues (recorded under the percentage-of-completion
method) decreased to $7.3 million for the thirteen weeks ended September
27, 1997 from $12.7 million for the comparable period in 1996 due to the
continued work-off of existing back-log. The Company is currently only
actively working on two remaining projects. The Company incurred expenses
in excess of revenues of $800 thousand for the thirteen weeks ended
September 27, 1997 compared to $400 thousand for the comparable period in
1996 due to increases in total estimated costs on one of its construction
projects. The Company intends to dispose of its construction business.
Energy plant operations experienced an excess of expenses over revenues of
$3.2 million in the thirteen weeks ended September 27, 1997 compared to a
gross margin of $700 thousand in the comparable 1996 period because in June
and July of 1997 the Company's cogeneration facility experienced, through
force majeure events, catastrophic failures of both its turbines. The cost
of repairing the individual units is prohibitive. Additionally, there are
no lease engines available for short term installation. An expense of
approximately $3.0 million was recorded in energy plant operations to
write-off these two turbines. The Company is assembling one operational
turbine from the serviceable parts of the two failed turbines. Currently,
no energy sales are being generated by the facility. Upon installation of
the repaired unit, the facility is expected to produce approximately half
of its rated capacity. The Company has requested additional funding from
the lender to the facility to purchase two new units. If financing does not
become available for the two new turbines and management cannot develop any
other solutions, the estimated future cash flows would indicate that the
facility was an impaired asset indicating the need for a write-down.
Project development and marketing expenses decreased to $8 thousand for the
thirteen weeks ended September 27, 1997 from $104 thousand for the
comparable period in 1996. Project development expenses declined
significantly since the only project the Company has in active development
is the Puerto Rico project and expenditures for that project are being
capitalized. The costs expensed here represent expenditures to market
assets and/or to keep various assets marketable.
General and administrative expenses decreased to $2.2 million for the
thirteen weeks ended September 27, 1997 from $6.4 million for the
comparable period in 1996 due to downsizing of the Company's operations.
Income taxes. The Company uses the asset and liability approach for
financial accounting and reporting for income taxes was recorded for the
thirteen weeks ended September 27, 1997 and September 30, 1996. Although a
loss was incurred, no tax benefit was recorded because of the uncertainty
about the Company's ability to utilize such a benefit.
22
<PAGE>
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 30, 1996
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 27, 1997 and September 30, 1996.
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
September 27, 1997 September 30, 1996
-------------------------- --------------------------
(in millions)
Gross Gross
Revenues Costs Margins Revenues Costs Margins
-------- ------- ------- -------- ------- -------
<S> ............................ <C> <C> <C> <C> <C> <C>
Construction services ........... $ 28.9 $ 29.5 $ (0.6) $ 36.1 $ 33.3 $ 2.8
Energy sales (1) ................ 3.1 N/A 3.1 12.2 N/A 12.2
Maintenance, management
fees and other (1).............. 1.5 N/A 1.5 16.1 N/A 16.1
Energy plant operations (1)...... N/A 7.7 (7.7) N/A 27.2 (27.2)
-------- ------- ------- -------- ------- -------
Total energy plant operations 4.6 7.7 (3.1) 28.3 27.2 1.1
Windplant sales ................. -- -- -- 7.2 4.1 3.1
Interest on partnership notes
and funds in escrow ........... -- -- -- 1.1 N/A 1.1
Energy management services ...... -- -- -- 1.0 0.3 0.7
-------- ------- ------- -------- ------- -------
Total ............................ $ 33.5 $ 37.2 $ (3.7) $ 73.7 $ 64.9 $ 8.8
======== ======= ======= ======== ======= =======
(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 and
a thermal power plant owned by the Company. Energy plant operations expenses are incurred to
generate these revenues.
</TABLE>
Construction services revenues (recorded under the percentage-of-completion
method) decreased to $28.9 million for the thirty-nine weeks ended
September 27, 1997 from $36.1 million for the comparable period in 1996 due
to the continued work-off of existing back-log. The Company incurred
expenses in excess of revenues of $600 thousand for the thirty-nine weeks
ended September 27, 1997 compared to a gross margin of $2.8 million for the
comparable period in 1996 due to increases in total estimated costs on one
of its construction projects. The Company intends to dispose of its
construction subsidiary.
Energy plant operations experienced an excess of expenses over revenues of
$3.1 million in the thirty-nine weeks ended September 27, 1997 compared to
a gross margin of $1.1 million in the comparable 1996 period because in
June and July of 1997 the Company's cogeneration facility experienced,
through force majeure events, catastrophic failures of both its turbines.
The cost of repairing the individual units is prohibitive. Additionally,
there are no lease engines available for short term installation. An
expense of approximately $3.0 million was recorded in energy plant
operations to write-off these two turbines. The Company is assembling one
operational turbine from the serviceable parts of the two failed turbines.
Currently, no energy sales are being generated by the facility. Upon
installation of the repaired unit, the facility is expected to produce
approximately half of its rated capacity. The Company has requested
additional funding from the lender to the facility to purchase two new
units. If financing does not become available for the two new turbines and
management cannot develop any other solutions, the estimated future cash
flows would indicate that the facility was an impaired asset indicating the
need for a write-down.
Windplant sales, interest on partnership notes and funds in escrow and
engineering expenses all declined significantly because of the
deconsolidation of KWI.
23
<PAGE>
Energy management services revenues decreased to zero for the first
thirty-nine weeks of 1997 from $1.0 million for the comparable period in
1996. This operation was sold in the second quarter of 1996.
Project development and marketing expenses decreased to $34.0 thousand for
the thirty-nine weeks ended September 27, 1997 from $4.6 million for the
comparable period in 1996. Project development expenses declined
significantly since the only project the Company has in active development
is the Puerto Rico project and expenditures for that project are being
capitalized. The costs expensed here represent expenditures to market
assets and/or to keep various assets marketable.
General and administrative expenses decreased to $10.5 million for the
first thirty-nine weeks of 1997 from $21.9 million for the comparable
period in 1996 due to the deconsolidation of KWI and downsizing of the
Company.
Interest expense decreased to $12.5 million for the first thirty-nine weeks
of 1997 from $14.9 million for the comparable period in 1996 due to the
deconsolidation of KWI, the sale of subsidiaries and increased
capitalization of interest to the Puerto Rico project.
Equity income (loss) of unconsolidated affiliates: Equity investments in
affiliates resulted in net income of $133 thousand for the first
thirty-nine weeks of 1997, compared to a loss of $136 thousand for the
comparable period in 1996 due to the deconsolidation of KWI and sale of
equity investments.
Sale of subsidiaries and fixed assets: During the first thirty-nine weeks
of 1997 the Company sold fixed assets and some projects in the initial
stages of development. On an aggregated basis, these transactions generated
cash of $1.3 million and a net gain of $756 thousand. 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
$8.1 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 thirty-nine weeks ended September 27, 1997 and
September 30, 1996 because of the uncertainty about the Company's ability
to utilize such a benefit.
Liquidity and Capital Resources
-------------------------------
Operating activities
During the first thirty-nine weeks of 1997 operations activities used cash
of $7.9 million which includes $8.0 million invested into development of
the Puerto Rico project which was capitalized. As previously stated, the
Company expects a loss from operations in 1997 before the sale of the
assets described above in "Overview" due to administrative expenses and
interest on debt in excess of gross margin. Additionally, the Company .
Investing activities
During the first thirty-nine weeks of 1997 investing activities provided
$1.3 million generated by the sale of subsidiaries and assets.
Financing activities
During the first thirty-nine weeks of 1997 the Company paid $1.9 million of
principal on other notes payable and borrowed an additional $1.4 million.
24
<PAGE>
Status
------
At September 27, 1997 the Company's working capital deficit is $183.7
million. During 1996 the Company's liquidity became severely constrained as
it consumed its cash. On February 2, 1996 the Company announced that it
would not pay the dividend scheduled for February 15, 1996 on its preferred
stock. The Company paid no dividends on the preferred stock in 1996, has
not paid any dividends in 1997 and does not expect to be able to for the
foreseeable future. Under the terms of the preferred stock, dividends
accrue until paid or until the preferred stock is converted. In December
1992 the Company sold $100.0 million 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 1996 interest payments, has not made the June
15, 1997 interest payment and is in default. Also, the borrowings under the
$5.0 million revolving credit agreement, the $7.5 million term loan
agreement and the $4.4 million revolving loan agreement (included in Other
Notes Payable on the September 27, 1997 and December 31, 1996 balance
sheets) are in default due to KWI's bankruptcy filing, cross default
provisions, failure to meet financial covenants and the Company's default
on the interest payment on the senior secured notes. The Company does not
expect to cure these defaults in the foreseeable future.
The Company was able to continue its activities because it generated $13.5
million in 1996 by selling assets and drew $18.9 million from the $30.0
million Puerto Rico project loan obtained by a wholly-owned subsidiary.
This loan is collateralized by the stock of a special purpose entity formed
to hold the Company's interest in the Puerto Rico power project. No further
funds are available under this agreement because the remaining funding
capacity accommodates accrued and unpaid interest for the remaining term of
the loan. Of the Company's $10.2 million cash at September 27, 1997 $1.3
million is related to the construction subsidiary which is prohibited by
financial covenants from transferring cash to KENETECH. The ability of the
construction subsidiary to reestablish its backlog has been severely
hampered by the Company's financial condition and KWI's bankruptcy filing.
The Company's construction subsidiary has agreed to sell its interests in
the Puerto Rico project construction contracts for approximately
$18,000,000. The Company received an initial payment of $1,000,000 in the
third quarter and will receive the balance when (1) the authorization to
begin construction is given ("Notice to Proceed"), (2) the project has
binding financing commitments, and (3) the project has made the first
milestone payment. The buyer may cancel this agreement between December 15,
and December 19, 1997 if the "Notice to Proceed" has not been issued by
December 15, 1997 or if the project is canceled before the "Notice to
Proceed" is issued. As mentioned previously, the Company intends to dispose
of its construction subsidiary; however, there can be no assurance that the
Company will be successful in selling its construction business.
Certain lenders and other creditors are seeking repayment and/or
restructuring of the amounts due them. The Company is unable to borrow
money and is delaying all payments except for essential services while it
attempts to raise cash through additional asset sales.
There can be no assurances that asset sales will be consummated or that
substantial proceeds will be received. If the Company is unable to sell
assets its liquidity will be further constrained. Management believes that
such sales even if consummated will not generate sufficient proceeds to
ultimately provide any return of invested capital to the holders of the
Company's stock. It is expected that all proceeds received from asset sales
will be used in operations or paid to creditors. Consequently, after, or as
a part of a sale of the Company's subsidiaries' interests in its only
active development project, the Company believes that it is likely that it
will seek protection under the Federal Bankruptcy Code.
25
<PAGE>
Risks and Uncertainties
-----------------------
The consolidated financial statements as of and for the periods ended
September 27, 1997 have been prepared assuming the Company will continue as
a going concern. The Company incurred significant losses in 1996 and 1995,
has negative working capital and its liquidity is severely constrained.
Certain lenders and creditors are seeking repayment and/or restructuring of
the amounts due them. In 1997 the Company expects to generate operating
losses before the sale of assets due to administrative expenses in excess
of gross margin and interest expense on debt. These factors raise
substantial doubt about the Company's ability to continue as a going
concern in its current form.
Management's plan to address its liquidity involves the sale by
subsidiaries of their remaining respective interests in the Puerto Rico
project for which the Company expects to receive substantial cash proceeds.
There can be no assurance that the Company will be successful in
implementing its plans, that the sales of the interests in the Puerto Rico
project will be consummated, that substantial proceeds will be received, or
that the Company will continue as a going concern. Management believes that
such sales even if consummated will not generate sufficient proceeds to
ultimately provide any return of invested capital to the holders of the
Company's stock. The Company believes that any proceeds received from asset
sales will be used in operations or paid to creditors. In addition, the
Company believes KWI will assert certain claims in bankruptcy against the
Company. Consequently, after, or as a part of a sale of the Company's
subsidiaries' interests in its only active development project, the Company
believes that it is likely that it will seek protection under the Federal
Bankruptcy Code.
26
<PAGE>
Part II
Item 1. Legal Proceedings.
------------------
(a) See discussion under Note 16 of Item 1, Part I incorporated herein
by reference.
Item 3. Defaults Upon Senior Securities.
--------------------------------
(a) See discussion under Notes 13 and 14 of Item 1, Part I and
discussion under the heading "status" of Item 2, Part I incorporated
herein by reference.
27
<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
By:
Date: November 7, 1997 Mark D. Lerdal
President, Chief Executive Officer, and
Director
By:
Date: November 7, 1997 Nicholas H. Politan
Chief Financial Officer, Vice President,
and Assistant Secretary
By:
Date: November 7, 1997 Mervin E. Werth
Corporate Controller, Chief Accounting
Officer, and Assistant Treasurer
28
<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
By:/s/ Mark D. Lerdal
Date: November 7, 1997 Mark D. Lerdal
President, Chief Executive Officer, and
Director
By:/s/ Nicholas H. Politan
Date: November 7, 1997 Nicholas H. Politan
Chief Financial Officer, Vice President,
and Assistant Secretary
By:/s/ Mervin E. Werth
Date: November 7, 1997 Mervin E. Werth
Corporate Controller, Chief Accounting
Officer, and Assistant Treasurer
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS COMPANY INFORMATION EXTRACTED FROM THE KEN10-Q 3RD
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>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-27-1997
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<BONDS> 99,105
99,561
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<TOTAL-LIABILITY-AND-EQUITY> 102,609
<SALES> 32,050
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