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 twenty-six weeks ended June 28, 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 July 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 June 28, 1997 and June 30, 1996 ..... 4
Consolidated Statements of Operations for the
twenty-six weeks ended June 28, 1997 and June 30, 1996 ... 5
Consolidated Balance Sheets, June 28, 1997 and
December 31, 1996 ........................................ 6
Consolidated Statement of Stockholders' Deficiency for
the twenty-six weeks ended June 28, 1997 ................. 7
Consolidated Statements of Cash Flows for the twenty-six
weeks ended June 28, 1997 and June 30, 1996 .............. 8
Notes to Consolidated Financial Statements ................. 9 - 17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 18 - 23
Part II
Item 1. Legal Proceedings. 24
Item 3. Defaults Upon Senior Securities. 24
3
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENTS OF OPERATIONS for the thirteen
weeks ended June 28, 1997 and June 30, 1996
(unaudited, in thousands, except per share amounts)
June 28, June 30,
1997 1996
(see Note 1)
-------- ----------
Revenues:
Construction services ............................ $ 11,380 $ 12,498
Energy sales ..................................... 1,498 5,429
Maintenance, management fees and other ........... 40 7,238
Windplant sales .................................. -- 3,560
Interest on partnership notes and funds
in escrow ....................................... -- 457
Energy management services ....................... -- 309
-------- ----------
Total revenues ................................. 12,918 29,491
Costs of revenues:
Construction services ............................ 11,418 10,839
Energy plant operations .......................... 1,541 9,797
Windplant sales .................................. -- 628
Energy management services ....................... -- 64
-------- ----------
Total costs of revenues ........................ 12,959 21,328
Gross margin (Excess of expenses over revenues)..... (41) 8,163
Project development and marketing expenses ......... 5 2,520
Engineering expenses ............................... -- 1,603
General and administrative expenses ................ 2,589 8,491
-------- ----------
Loss from operations ............................... (2,635) (4,451)
Interest income .................................... 367 299
Interest expense ................................... (3,011) (5,053)
Equity loss of unconsolidated affiliates ........... (6) (90)
Gain on disposition of subsidiaries and assets ..... 411 253
-------- ----------
Loss before taxes .................................. (4,874) (9,042)
Income tax provision................................ -- 23,393
-------- ----------
Net loss ..................................... $ (4,874) $ (32,435)
======== ==========
Net loss per common share - Primary and Fully diluted $ (0.19) $ (0.94)
Weighted average number of common shares used in
computing per share amounts - Primary and Fully diluted 36,830 36,826
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENTS OF OPERATIONS for the twenty-six
weeks ended June 28, 1997 and June 30, 1996
(unaudited, in thousands, except per share amounts)
June 28, June 30,
1997 1996
(See Note 1)
-------- ----------
Revenues:
Construction services ............................ $ 21,531 $ 23,393
Energy sales ..................................... 2,840 10,184
Maintenance, management fees and other ........... 527 14,507
Windplant sales .................................. -- 6,942
Interest on partnership notes and funds
in escrow ....................................... -- 1,125
Energy management services ....................... -- 1,047
-------- --------
Total revenues ................................. 24,898 57,198
Costs of revenues:
Construction services ............................ 21,388 20,148
Energy plant operations .......................... 3,256 24,270
Windplant sales .................................. -- 3,972
Energy management services ....................... -- 250
-------- --------
Total costs of revenues ........................ 24,644 48,640
Gross margin ....................................... 254 8,558
Project development and marketing expenses ......... 26 4,522
Engineering expenses ............................... -- 4,205
General and administrative expenses ................ 8,275 15,587
-------- --------
Loss from operations ............................... (8,047) (15,756)
Interest income .................................... 575 774
Interest expense ................................... (7,760) (10,787)
Equity loss of unconsolidated affiliates ........... (11) (90)
Gain on disposition of subsidiaries and assets ..... 463 66
-------- --------
Loss before taxes .................................. (14,780) (25,793)
Income tax provision................................ -- 23,393
-------- --------
Net loss ..................................... $(14,780) $(49,186)
======== ========
Net loss per common share - Primary and Fully diluted $ (0.52) $ (1.46)
Weighted average number of common shares used in
computing per share amounts - Primary and Fully diluted 36,830 36,732
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED BALANCE SHEETS
June 28, 1997 and December 31, 1996
(unaudited, in thousands, except share amounts)
ASSETS
June 28, December 31,
1997 1996
--------- ------------
Current assets:
Cash and cash equivalents ....................... $ 11,553 $ 17,208
Funds in escrow, net ............................ 3,377 5,221
Accounts receivable ............................. 8,976 17,940
Inventories ..................................... 135 135
Investment in power plant held for sale ......... 18,971 19,209
Deferred tax assets, net ........................ 4,300 4,300
Other ........................................... 2,728 3,986
--------- ------------
Total current assets ............................... 50,040 67,999
Property, plant and equipment, net ................. 23,296 24,735
Power plants under development ..................... 18,624 11,507
Investments in affiliates .......................... 22 32
Deferred tax assets, net ........................... 13,613 13,613
Other assets ....................................... 3,485 5,425
--------- ------------
Total assets ................................. $ 109,080 $ 123,311
========= ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable ................................ $ 19,826 $ 18,841
Bank loan payable ............................... 20,196 18,860
Accrued interest ................................ 20,003 13,462
Accrued liabilities ............................. 14,303 21,010
Debt associated with power plant
held for sale .................................. 16,360 16,578
Other notes payable ............................. 19,398 20,165
Senior secured notes payable .................... 99,072 99,005
Accrued losses on contracts ..................... 1,699 1,699
--------- ------------
Total current liabilities ..................... 210,857 209,620
Accrued losses on contracts ........................ 245 897
Accrued dividends on preferred stock ............... 13,915 9,633
Other long-term obligations ........................ 1,025 1,061
--------- ------------
Total liabilities .............................. 226,042 221,211
Commitments and contingencies
Stockholders' deficiency:
Convertible preferred stock - 10,000,000 shares
authorized, $.01 par value; issued and outstanding
102,492, $117,688 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 ...................... 131,939 136,221
Cumulative foreign exchange ..................... 35 35
Accumulated deficit ............................. (348,501) (333,721)
--------- ------------
Total stockholders' deficiency ................. $(116,962) (97,900)
--------- ------------
Total liabilities and
stockholders' deficiency .................... $ 109,080 $ 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 twenty-six weeks ended June 28, 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 -- -- -- - (4,282) -- -- (4,282)
Net loss -- -- -- - -- -- (14,780) (14,780)
------- ------- ---------- -- -------- --- --------- ---------
Balance, June 28, 1997 102,492 $99,561 36,829,618 $4 $131,939 $35 $(348,501) $(116,962)
======= ======= ========== == ======== === ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS for the twenty-six
weeks ended June 28, 1997 and June 30, 1996
(unaudited, in thousands)
June 28, June 30,
1997 1996
(See Note 1)
-------- ----------
Cash flows from operating activities:
Net loss .......................................$ (14,780) $ (49,186)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred income taxes ....................... - 23,393
Depreciation, amortization and other ........ 6,699 (2,050)
Changes in assets and liabilities:
Funds in escrow, net ....................... 1,844 2,870
Accounts receivable ........................ 8,859 25,024
Partnership notes and interest
receivable, net ........................... - 290
Inventories ................................ - 1,496
Other assets ............................... 2,317 (935)
Accounts payable, accrued liabilities
and accrued interest ...................... (4,386) (6,851)
Accrued loss on contracts .................. (652) (2,157)
Estimated warranty costs ................... - (1,491)
--------- ---------
Net cash used in operating activities ..... (99) (9,597)
Cash flows from investing activities:
Marketable securities:
Purchases .................................... - (3,536)
Additions to property, plant and equipment .... - (390)
Proceeds from sales of subsidiaries and assets 1,268 8,115
Investments in affiliates:
Contributions ................................ - (1,814)
Distributions ................................ 14 522
Power plants under development ................ (7,117) (4,765)
--------- ---------
Net cash used in investing activities ..... (5,835) (1,868)
Cash flows from financing activities:
Proceeds from other notes payable ............. 1,376 -
Payments on other notes payable ............... (1,097) (3,700)
Proceeds from bank loan ....................... - 11,516
Payments on bank loan borrowings .............. - (5,000)
Proceeds from issuance of common stock, net ... - 234
--------- ---------
Net cash provided by financing activities . 279 3,050
--------- ---------
Decrease in cash and cash equivalents (5,655) (8,415)
Cash and cash equivalents at
beginning of period ........................ 17,208 16,842
---------- ---------
Cash and cash equivalents at
end of period .............................. $ 11,553 $ 8,427
========== =========
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 second quarters of 1997 and 1996 ended June 28,
1997 and June 30, 1996, respectively.
The consolidated financial statements of KENETECH Corporation and certain
subsidiaries as of June 28, 1997 and December 31, 1996 and for the periods
ending June 28, 1997 and June 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 June 28, 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 9).
Power Plant Held for Sale: Power plant held for sale represents the
Company's share of a completed power plant (see Note 10).
Power Plants Under Development: Power plants under development include
project development costs, representing preconstruction costs incurred to
complete the design of windpower plants, independent power plants and
cogeneration facilities, 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. At June 28, 1997 and December
31, 1996 the Company's only project under active development is the Puerto
Rico project.
Other Assets: Other assets include debt issuance costs of $2,769,000 at
June 28, 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 $1,050,000 and $623,000 respectively for the first twenty-six
weeks of 1997 and 1996.
3. Liquidity and Going Concern
The consolidated financial statements as of and for the periods ending June
28, 1997, June 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 twenty-six weeks of 1997 and for the years
ending December 31, 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.
10
<PAGE>
3. Liquidity and Going Concern (continued)
Management's plan to address its liquidity involves sales by subsidiaries
of their respective interests in the Puerto Rico construction contract and
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 Puerto Rico
construction contract and/or 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"). 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. At June 28, 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
twenty-six weeks ended June 28, 1997 and consolidated balance sheet as of
June 28, 1997 include the following amounts relating to CNF:
Twenty-six weeks ended June 28, 1997
(in thousands)
Revenues .......................... $ 21,531
Costs of revenues ................. 21,388
--------
Gross margin ..... ................ 143
General and administrative expenses 3,978
--------
Loss from operations .............. (3,835)
Other .......................... (195)
--------
Loss before income taxes ......... $ (4,030)
========
As of
June 28, 1997
(in thousands)
Assets: Liabilities and owner's deficiency:
Current assets $ 9,862 Current liabilities $28,254
Property plant and Long term liabilities 1,025
equipment 3,654 Owner's deficiency (14,810)
Other long term assets 953
------- -------
Total assets $14,469 Total liabilities and equity $14,469
======= =======
CNF has a joint venture interest in the engineering, procurement and
construction ("EPC") contract for the Puerto Rico project described above.
The Company has signed a letter of intent to sell this interest in the EPC
contract and intends to dispose of its construction subsidiary in 1997.
There can be no assurance that the Company will be successful in selling
CNF's interest in the EPC contract or disposing of CNF's remaining assets.
11
<PAGE>
5. Net Loss Per Share
Net loss per share amounts for the periods ending June 28, 1997 and June
30, 1996 were calculated as follows:
<TABLE>
Primary and Fully Diluted
(in thousands, except per share amounts)
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
June 28, June 30, June 28, June 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss $ (4,874) $ (32,435) $ (14,780) $ (49,186)
Less preferred stock dividends (2,141) (2,141) (4,282) (4,282)
--------- --------- --------- ---------
Net loss used in per share calculations $ (7,015) $ (34,576) (19,062) (53,468)
========= ========= ========= =========
Weighted average shares used in per share
calculations 36,830 36,826 36,830 36,732
========= ========= ========= =========
Net loss per share $ (0.19) $ (0.94) $ (0.52) $ (1.46)
========= ========= ========= =========
</TABLE>
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.
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:
June 28, June 30,
1997 1996
--------- ---------
(in thousands)
Supplemental cash flow information:
Cash paid (received) for:
Income taxes paid ...................... $ 134 $ 17
Income taxes refunded .................. (38) (420)
--------- ---------
Net cash flow from income taxes .......... $ 96 $ (403)
========= =========
Interest activity:
Interest paid ........................... $ 863 $ 3,403
Capitalized interest ..................... (1,962) (587)
Interest accrued but not paid, net ....... 7,883 9,246
Interest paid but accrued in prior periods (74) (1,554)
Amortization of deferred financing costs . 1,050 279
--------- ---------
Interest expense ........................ $ 7,760 $ 10,787
========= =========
Capitalized interest charged to costs of revenues was $1,962,00 for the
twenty-six weeks ended June 28, 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 June 28, 1997 and December 31,
1996 were as follows:
June 28, December 31,
1997 1996
-------- ------------
(in thousands)
Other notes payable $ 1,653 $ 1,581
Letters of credit collateral 150 1,086
Project collateral 1,574 2,554
-------- ------------
$ 3,377 $ 5,221
======== ============
As of June 28, 1997, funds in escrow were invested in short-term cash
investments with interest rates ranging from zero to 5.5%. As previously
discussed, KWI's funds in escrow are not reflected in either the June 28,
1997 or the December 31, 1996 balance sheet.
8. Accounts Receivable
Accounts Receivable: Accounts receivable at June 28, 1997 and December 31,
1996 consisted of:
June 28, December 31,
1997 1996
-------- ------------
(in thousands)
Contracts - Billed:
Completed contracts .............. $ -- $ 1,981
Contracts in progress ............ 1,945 9,106
Retained ......................... 1,942 2,216
Contracts - Unbilled .............. 3,932 2,782
Operations and other .............. 1,157 1,855
-------- ------------
$ 8,976 $ 17,940
======== ============
At June 28, 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 June 28, 1997 and
December 31, 1996. As previously discussed, receivables of KWI are not
reflected in the accompanying June 28, 1997 and December 31, 1996 balance
sheets.
A summary of costs incurred and estimated earnings on uncompleted contracts
at June 28, 1997 and December 31, 1996 is as follows:
June 28, December 31,
1997 1996
--------- ------------
(in thousands)
Costs incurred and estimated earnings
on uncompleted contracts ............ $ 179,167 $ 151,850
Billings to date ................... 176,481 157,346
--------- ------------
$ 2,686 $ (5,496)
========= ============
Such amounts were included in the consolidated balance sheets at June 28,
1997 and December 31, 1996 as follows:
June 28, December 31,
1997 1996
--------- ------------
(in thousands)
Costs incurred and estimated earnings
in excess of billings on uncompleted
contracts (accounts receivable) ...... $ 3,932 $ 2,782
Billings in excess of costs and
estimated earnings on uncompleted
contracts (accrued liabilities) .... (1,246) (8,278)
--------- ------------
$ 2,686 $ (5,496)
========= ============
13
<PAGE>
9. Inventories
Inventories (in thousands) at June 28, 1997 and December 31, 1996 consisted
of:
June 28, 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.
10. Investment in Power Plant Held for Sale and Debt Associated With Power
Plant Held for Sale
Investment in power plant held for sale at June 28, 1997 and December 31,
1996 consisted of:
June 28, December 31,
1997 1996
--------- ------------
(in thousands)
Chateaugay power plant $ 18,971 $ 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 June 28, 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 debt
payments, the Company reduces its pro rata 50% share of the debt.
Accordingly, $16,360,000 was outstanding at June 28, 1997. Additionally,
the Company has borrowed $1,200,000 against its equity in this project.
11. 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 13.28% at June 28, 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 $20,196,000 at June 28,
1997.
14
<PAGE>
12. Other Notes Payable
Other notes payable at June 28, 1997 and December 31, 1996 consisted of
the following:
June 28, December 31,
1997 1996
--------- ------------
(in thousands)
Note bearing interest at 11.3%, due in equal
annual installments of principal and interest
through 2002, collateralized by a cogeneration
facility owned by the Company and requiring an
escrow account. $ 8,268 $ 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 $2,142,860
due on March 31, 2001.(1) 6,132 6,351
Borrowings under a $4,400,000 revolving loan
agreement, interest rate selected by the Company
from specified alternatives (7.6% and 7.4% at
June 28, 1997 and December 31, 1996, respectively),
convertible to a 15-year term, loan payable
semi-annually, collateralized by land, building
and equipment.(1) 3,565 3,645
Borrowings under a $1,200,000 loan agreement,
due in 1999 bearing interest at prime plus 3%
(11.25% at June 28, 1997 and December 31, 1996). 1,139 641
Notes bearing interest at 7.0% due through 1999.(2) 74 504
Other obligations bearing interest at 9.9%
due through 1999, collateralized by equipment. 54 191
--------- ------------
$ 19,398 $ 20,165
========= ============
(1) Facility associated with the Company's construction subsidiary. See
discussion below regarding defaults.
(2) 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.
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 June 28, 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 $1,614,000 at June 28, 1997.
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 June 28,
1997 and December 31, 1996 balance sheets.
15
<PAGE>
13. 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 $928,000 at June 28, 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 $19,125,000 as of June 28, 1997.
14. Contingencies
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 alleges claims under sections 11 and
15 of the Securities Act of 1933, and sections 10(b) and 20(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, based on alleged
misrepresentations and omissions in the Company's public statements, on
behalf of a class consisting of persons who purchased the Company's common
stock during the period from September 21, 1993 (the date of the Company's
initial public offering) through August 8, 1995 and persons who purchased
the Company's preferred stock during the period from April 28, 1994 (the
public offering date of the preferred stock) through August 8, 1995. The
amended complaint alleges that the defendants misrepresented the Company's
progress on the development of its latest generation of wind turbines and
the Company's future prospects. The amended complaint seeks unspecified
damages and other relief. On December 4, 1996, with underwriters and their
counsel and the insurance carriers' counsel in attendance, a mediation
occurred in San Francisco in an attempt to settle the action; however, the
parties were unsuccessful. Plaintiffs' motion for class certification was
heard and taken under submission by the Court on January 31, 1997. By order
dated March 24, 1997, the Court granted the underwriter defendants' motion
to dismiss any claim based on section 11 of the Securities Act of 1933 that
would require tracing back to the initial public offering of KENETECH
securities. In addition, 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 Company
intends to continue to contest the action vigorously.
16
<PAGE>
14. Contingencies (continued)
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 due to Tennessee's delay. On July
16, 1997, the Federal Energy Regulatory Commission ordered Tennesse to
refund in excess of $2,500,000 to Flagg involving the gas transportation
services described above. Tennessee has now filed a motion seeking an
emergency order to compel KES and its subsidiaries to effect the tentative
settlement. KES has opposed such motion.
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.
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.
17
<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 507 MW (net)
natural gas cogeneration facility and associated liquified 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.
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 in 1997.
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 recently has constructed all
of the Windplants it developed. Substantially all construction work
performed by the Company for third parties is competitively bid and most is
performed under turnkey contracts. This construction subsidiary has a joint
venture interest in the EPC contract for the Puerto Rico project described
above. The Company has signed a letter of intent to sell its interest in
this EPC contract and intends to dispose of its construction subsidiary in
1997. 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.
18
<PAGE>
Results of Operations
---------------------
The consolidated financial statements of KENETECH Corporation and certain
subsidiaries as of and for the quarterly periods ending June 28, 1997 and
June 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 June
28, 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 twenty-six weeks of 1997 of
$14.8 million as compared to a net loss for the first twenty-six weeks of
of 1996 of $49.2 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 JUNE 28, 1997 AND JUNE 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 quarterly periods.
<TABLE>
<CAPTION>
Thirteen Weeks Ended
June 28, 1997 June 30, 1996
------------------------ ------------------------
(in millions)
Gross Gross
Revenues Costs Margins Revenues Costs Margins
-------- ----- ------- -------- ----- -------
<S> ............................ <C> <C> <C> <C> <C> <C>
Construction services ........... $ 11.4 $11.4 $ 0.0 $ 12.5 $10.8 $ 1.7
Energy sales (1) ................ 1.5 N/A 1.5 5.4 N/A 5.4
Maintenance, management
fees and other (1).............. 0.0 N/A 0.0 7.2 N/A 7.2
Energy plant operations (1)...... N/A 1.5 (1.5) N/A 9.8 (9.8)
-------- ----- ------- -------- ----- -------
Total energy plant operations 1.5 1.5 0.0 12.6 9.8 2.8
Windplant sales ................. -- -- -- 3.6 0.6 3.0
Interest on partnership notes
and funds in escrow ........... -- -- -- 0.5 N/A 0.5
Energy management services ...... -- -- -- 0.3 0.1 0.2
-------- ----- ------- -------- ----- -------
Total ............................ $ 12.9 $12.9 $ 0.0 $ 29.5 $21.3 $ 8.2
======== ===== ======= ======== ===== =======
(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>
19
<PAGE>
Construction services revenues (recorded under the percentage-of-completion
method) decreased to $11.4 million for the thirteen weeks ended June 28,
1997 from $12.5 million for the comparable period in 1996; accompanied by a
decline in the gross margin to zero for the thirteen weeks ended June 28,
1997 from 14% for the comparable period in 1996. The gross margin for the
second thirteen weeks of 1996 was favorably impacted by the resolution of
change orders on another cogeneration project. The Company intends to
dispose of its construction business in 1997.
Energy plant operations, Windplant sales, Interest on partnership notes and
funds in escrow and Engineering expenses all declined significantly because
of the deconsolidation of KWI. Subsequent to June 28, 1997, the Company's
Hartford Hospital co-generation facility incurred mechanical problems and
is currently not generating any energy sales. Management is seeking a
resolution to these mechanical problems.
Energy management services revenues decreased to zero for the thirteen
weeks ended June 28, 1997 from $0.3 million for the comparable period in
1996 because this operation was sold in the second quarter of 1996.
Project development and marketing expenses decreased to $5 thousand for the
thirteen weeks ended June 28, 1997 from $2.5 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 $2.6 million for the
thirteen weeks ended June 28, 1997 from $8.5 million for the comparable
period in 1996 due to downsizing of the Company's operations.
Interest income increased to $367 thousand for the thirteen weeks ended
June 28, 1997 from $299 thousand for the comparable period in 1996 due to
higher balances earning interest during 1997's second quarter compared to
1996's second quarter.
Interest expense decreased to $3.0 million for the thirteen weeks ended
June 28, 1997 from $5.1 million for the comparable period in 1996 due to
the deconsolidation of KWI and capitalization of interest expense to the
Puerto Rico project.
Equity loss of unconsolidated affiliates. Equity investments in affiliates
resulted in a net loss of $6 thousand for the thirteen weeks ended June 28,
1997, compared to a net loss of $90 thousand for the comparable period in
1996 due to the sale of the Company's interests in entities accounted for
on an equity basis and the deconsolidation of KWI.
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 June 28, 1997 and June 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.
20
<PAGE>
TWENTY-SIX WEEKS ENDED JUNE 28, 1997 AND JUNE 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 twenty-six weeks ended June 28, 1997 and June 30, 1996.
<TABLE>
Twenty-six weeks Ended
June 28, 1997 June 30, 1996
<CAPTION>
Gross Gross
Revenues Costs Margins Revenues Costs Margins
<S> <C> <C> <C> <C> <C> <C>
Construction services $ 21.5 $ 21.4 $ 0.1 $ 23.4 $ 20.1 $ 3.3
Maintenance, management
fees and other (1) 0.5 n/a 0.5 14.5 n/a 14.5
Energy sales (1) 2.9 n/a 2.9 10.2 n/a 10.2
Energy plant
operations (1) n/a 3.3 (3.3) n/a 24.3 (24.3)
-------- ------ ------- -------- ------ -------
Total energy plant
operations 3.4 3.3 0.1 24.7 24.3 0.4
Windplant sales - - - 6.9 4.0 2.9
Interest on partnership
notes and funds in escrow - n/a - 1.1 n/a 1.1
Energy management services - - - 1.1 0.2 0.9
-------- ------ ------- -------- ------ -------
Total $ 24.9 $ 24.7 $ 0.2 $ 57.2 $ 48.6 $ 8.6
======== ====== ======= ======== ====== =======
</TABLE>
(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 $21.5 million for the twenty-six weeks ended June 28,
1997 from $23.4 million for the comparable period in 1996; however the
gross margin decreased to 1% for the twenty-six weeks ended June 28, 1997
from 14% for the comparable period in 1996. The Company intends to sell its
construction subsidiary.
Energy plant operations, Windplant sales, Interest on partnership notes and
funds in escrow and Engineering expenses all declined significantly because
of the deconsolidation of KWI. Subsequent to June 28, 1997, the Company's
Hartford Hospital co-generation facility incurred mechanical problems and
is currently not generating any energy sales. Management is seeking a
resolution to these mechanical problems.
Energy management services revenues decreased to zero for the first
twenty-six weeks of 1997 from $1.1 million for the comparable period in
1996. This operation was sold in the second quarter of 1996.
Project development and marketing expenses decreased to $26 thousand for
the twenty-six weeks ended June 28, 1997 from $4.5 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.
21
<PAGE>
General and administrative expenses decreased to $8.3 million for the first
twenty-six weeks of 1997 from $15.6 million for the comparable period in
1996 due to the deconsolidation of KWI and downsizing of the Company.
Interest income decreased to $0.6 million for the first twenty-six weeks of
1997 from $0.8 million for the comparable period in 1996 due to lower
interest earned as a result of declining cash and investment balances.
Interest expense decreased to $7.8 million for the first twenty-six weeks
of 1997 from $10.8 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 ($2.0 million in 1997
versus $0.6 million in 1996).
Equity income (loss) of unconsolidated affiliates: Equity investments in
affiliates resulted in net loss of $11 thousand for the first twenty-six
weeks of 1997, compared to $90 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 twenty-six 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 $463 thousand. During the first
twenty-six weeks of 1996 the Company sold its demand side management
business, its wood-fuel business, a manufacturing facility, and various
fixed assets. On an aggregated basis these transactions generated cash of
$3.6 million and a net gain of $66 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 twenty-six weeks ended June 28, 1997 and June 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 twenty-six weeks of 1997 operations activities used cash
of $99 thousand. 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.
Investing activities
During the first twenty-six weeks of 1997 the Company capitalized $7.1
million of its development activities for the continued work on the Puerto
Rico power project.
Financing activities
During the first quarter of 1997 the Company paid $1.1 million of principal
on other notes payable.
Status
------
At June 28, 1997 the Company's working capital deficit is $160.8 million,
which is $19.2 million greater than at December 31, 1996.
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. 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 June 28,
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.
22
<PAGE>
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. The development subsidiary's cash of $7.4 million at June 28,
1997 will be consumed by the continued development of the project. Of the
Company's $11.6 million cash at June 28, 1997 $1.6 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 has signed a
letter of intent to sell its interest in the EPC construction contract
related to the Puerto Rico project and intends to dispose of its
construction subsidiary in 1997. There can be no assurance that the
construction subsidiary will be successful in selling its interest in the
EPC contract or disposing of its remaining assets.
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.
Risks and Uncertainties
-----------------------
The consolidated financial statements as of and for the periods ended June
28, 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 of the
Company's development subsidiary's interest in the Puerto Rico project and
its construction subsidiary's interest in the Puerto Rico construction
contract for which it 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 Puerto Rico construction contract and/or
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.
23
<PAGE>
Part II
Item 1. Legal Proceedings.
------------------
(a) See discussion under Note 14 of Item 1, Part I incorporated herein
by reference.
Item 3. Defaults Upon Senior Securities.
--------------------------------
(a) See discussion under Notes 12 and 13 of Item 1, Part I and
discussion under the heading "status" of Item 2, Part I incorporated
herein by reference.
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
By:
Date: August 8, 1997 Mark D. Lerdal
President, Chief Executive Officer,
and Director
By:
Date: August 8, 1997 Nicholas H. Politan
Chief Financial Officer, Vice
President, and Assistant Secretary
By:
Date: August 8, 1997 Mervin E. Werth
Corporate Controller, Chief
Accounting Officer, and Assistant
Treasurer
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
By: /s/ Mark D. Lerdal
Date: August 8, 1997 Mark D. Lerdal
President, Chief Executive Officer,
and Director
By: /s/ Nicholas H. Politan
Date: August 8, 1997 Nicholas H. Politan
Chief Financial Officer, Vice
President, and Assistant Secretary
By: /s/ Mervin E. Werth
Date: August 8, 1997 Mervin E. Werth
Corporate Controller, Chief
Accounting Officer, and Assistant
Treasurer
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE KEN10-Q 2ND
QUARTER AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<NAME> KENETECH CORPORATION
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