UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 410
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 30, 1998, there were 41,954,218 shares of the issuer's Common
Stock, $0.0001 par value, outstanding.
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
KENETECH Corporation Consolidated Financial Statements Page
Consolidated Statements of Operations for the
Quarters ended September 30, 1998 and September 27, 1997 4
Consolidated Statements of Operations for the
nine months ended September 30, 1998 and September 27, 1997 5
Consolidated Balance Sheets, September 30, 1998 and
December 31, 1997 6
Consolidated Statement of Stockholders' Deficiency for
the nine months ended September 30, 1998 7
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and September 27, 1997 8
Notes to Consolidated Financial Statements 9-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 16-22
Part II - OTHER INFORMATION
Item 1. Legal Proceedings. 23
Item 3. Defaults Upon Senior Securities. 23
3
<PAGE>
PART I - FINANCIAL INFORMATION
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
for the quarterly periods ended September 30, 1998 and September 27, 1997
(unaudited, in thousands, except per share amounts)
September 30, September 27,
1998 1997
--------- --------
Revenues:
Construction services ............................ $ -- $ 7,349
Maintenance, management fees and other ........... 16 330
Energy sales ..................................... -- 945
--------- --------
Total revenues ................................. 16 8,624
Costs of revenues:
Construction services ............................ -- 8,108
Energy plant operations .......................... -- 4,470
--------- --------
Total costs of revenues ........................ -- 12,578
Gross Margin (Excess of expenses over revenues) .... 16 (3,954)
Project development and marketing expenses ......... 318 8
General and administrative expenses ................ 1,293 2,239
--------- --------
Loss from operations ............................. (1,595) (6,201)
Interest income .................................... 130 235
Interest expense ................................... (4,606) (4,721)
Equity income of unconsolidated affiliates ......... 71 144
Gain on disposition of subsidiaries and assets ..... 213 293
-------- --------
Loss before taxes .................................. (5,787) (10,250)
Income tax benefit ................................. -- --
-------- --------
Net loss ..................................... $ (5,787) $(10,250)
======== ========
Net loss per common share - Basic and Diluted $ (0.14) $ (0.34)
Weighted average number of common shares used in
computing per share amounts - Basic and Diluted 41,954 36,830
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
for the nine months ended September 30, 1998 and September 27, 1997
(unaudited, in thousands, except per share amounts)
September 30, September 27,
1998 1997
--------- --------
Revenues:
Construction services ............................ $ 3,382 $ 28,880
Maintenance, management fees and other ........... 1,000 3,170
Energy sales ..................................... 472 1,472
--------- --------
Total revenues ................................. 4,854 33,522
Costs of revenues:
Construction services ............................ 2,543 29,496
Energy plant operations .......................... 2,218 7,726
--------- --------
Total costs of revenues ........................ 4,761 37,222
Gross Margin (Excess of expenses over revenues) .... 93 (3,700)
Project development and marketing expenses ......... 700 34
General and administrative expenses ................ 2,893 10,514
--------- --------
Loss from operations ............................... (3,500) (14,248)
Interest income .................................... 514 810
Interest expense ................................... (12,924) (12,481)
Equity income of unconsolidated affiliates ......... 15 133
Gain on disposition of subsidiaries and assets ..... 170 756
--------- ---------
Loss before taxes .................................. (15,725) (25,030)
Income tax benefit ................................. -- --
--------- ---------
Net loss ..................................... $ (15,725) $ (25,030)
========= =========
Net loss per common share - Basic and Diluted $ (0.48) $ (0.85)
Weighted average number of common shares used in
computing per share amounts - Basic and Diluted 39,430 36,830
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
(unaudited, in thousands, except share amounts)
ASSETS
September 30, December 31,
1998 1997
--------- ------------
Current assets:
Cash and cash equivalents ......................... $ 10,535 $ 7,294
Funds in escrow, net .............................. 478 1,997
Accounts receivable ............................... 1,396 4,669
Inventories ....................................... -- 135
Hartford Hospital Project ......................... -- 15,642
Investment in EcoElectrica Project, net............ 21,314 19,830
Investment in Chateaugay Project .................. 15,713 16,128
Deferred tax assets, net .......................... 17,913 17,913
Other assets ...................................... 1,797 3,026
--------- ------------
Total current assets ............................. 69,146 86,634
Property, plant and equipment, net ................... 47 3,252
Other assets ......................................... -- 700
--------- ------------
Total assets ................................... $ 69,193 $ 90,586
========= ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable .................................. $ 4,436 $ 12,579
Accrued liabilities ............................... 8,184 13,147
Hartford Hospital Project debt .................... -- 7,689
EcoElectrica Project development loan payable ..... 26,606 24,236
Chateaugay Project debt ........................... 15,756 16,128
Other notes payable ............................... 1,081 1,189
Senior secured notes payable ...................... 99,239 99,139
Accrued interest on senior secured notes payable .. 41,216 28,044
Accrued losses on contracts ....................... 1,944 1,944
--------- ------------
Total current liabilities ...................... 198,462 204,095
Accrued dividends on preferred stock ................. 21,384 18,196
--------- ------------
Total liabilities ................................ 219,846 222,291
Commitments and contingencies
Stockholders' deficiency:
Convertible preferred stock - 10,000,000 shares
authorized, $.01 par value; issued and outstanding
102,492 until May 14, 1998 ........................ -- 99,561
Common stock - 110,000,000 shares authorized,
$.0001 par value; 36,829,618 issued and outstanding
December 31, 1997 and until May 14, 1998; after
May 14, 1998, 41,954,218 issued and outstanding ... 4 4
Additional paid-in capital ....................... 224,031 127,658
Cumulative foreign exchange ....................... -- 35
Accumulated deficit ............................... (374,688) (358,963)
--------- ------------
Total stockholders' deficiency ................... (150,653) (131,705)
--------- ------------
Total liabilities and
stockholders' deficiency ...................... $ 69,193 $ 90,586
========= ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
for the nine months ended September 30, 1998
(unaudited, in thousands, except share amounts)
<TABLE>
<CAPTION>
Effect of
Convertible Common Stock Additional Cumulative
Preferred Stock Paid-In Foreign Accumulated
Shares Amount Shares Amount Capital Exchange Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 102,492 $99,561 36,829,618 $4 $127,658 $35 $(358,963) $(131,705)
Mandatory preferred stock
conversion (102,492) ($99,561) 5,124,600 - $99,561 -- -- --
Preferred stock dividends -- -- -- - (3,188) -- -- (3,188)
Net loss -- -- -- - -- -- (15,725) (15,725)
Write off of cumulative
foreign exchange -- -- -- - -- (35) -- (35)
------- ------- ---------- -- -------- --- --------- ---------
Balance, September 30, 1998 -- $ -- 41,954,218 $4 $224,031 $-- $(374,688) $(150,653)
======= ======= ========== == ======== === ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
7
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1998 and September 27, 1997
(unaudited, in thousands)
September 30, September 27,
1998 1997
--------- ---------
Cash flows from operating activities:
Net loss ....................................... $ (15,725) $ (25,030)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, amortization and other ........ 2,446 1,528
Write off of assets ......................... -- 3,685
Gain on disposition of subsidiaries
and assets ................................. (170) (756)
Accrued, but not paid, interest ............. 15,711 11,828
Changes in assets and liabilities:
Funds in escrow, net ....................... 1,519 2,325
Accounts receivable ........................ 2,896 9,216
Other assets ............................... -- 3,016
Accounts payable and accrued liabilities ... (12,756) (5,059)
Accrued loss on contracts .................. -- (652)
--------- ---------
Net cash (used in) provided by operating
activities ............................... (6,079) 101
Cash flows from investing activities:
Proceeds from sales of subsidiaries
and assets ................................. 7,901 1,304
Expenditures on EcoElectrica Project ........ (1,484) (8,039)
Investments in affiliates:
Distributions .............................. -- 14
Sale of affiliate ........................... -- 16
--------- ---------
Net cash provided by (used in) investing
activities .............................. 6,417 (6,705)
Cash flows from financing activities:
Proceeds from other notes payable ........... 3,011 1,430
Payments on other notes payable ............. (108) (1,867)
--------- ---------
Net cash provided by (used in) financing
activities ............................... 2,903 (437)
--------- ---------
Increase (Decrease) in cash and cash equivalents 3,241 (7,041)
Cash and cash equivalents at
beginning of period ....................... 7,294 17,208
--------- ---------
Cash and cash equivalents at
end of period ............................. $ 10,535 $ 10,167
========= =========
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 ("KENETECH") and its consolidated
subsidiaries (collectively, 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, 1997. 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. 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 the fair value
of its assets. A Settlement Agreement and Release ("Release") was entered
into as of May 13, 1998, by and among KWI, the Official Committee of
Unsecured Creditors appointed in KWI's chapter 11 case (the "Official
Committee"), KENETECH, KENETECH Energy Systems, Inc., a wholly-owned
subsidiary of KENETECH ("KES"), CNF Industries, Inc., a wholly-owned
subsidiary of KENETECH, CNF Constructors, Inc., a wholly-owned subsidiary
of CNF Industries, Inc. (collectively with CNF Industries, Inc. ("CNF")),
and The Bank of New York, in its capacity as successor Indenture Trustee
for the Senior Secured Notes (the "Trustee"). In the Release, CNF, KENETECH
and the Trustee released the claims filed against KWI in the KWI bankruptcy
proceedings. KWI released KENETECH, KES and the Trustee from all claims
against those entities including those for preferential payments prior to
the filing of the bankruptcy petition, alter ego claims, and any claim for
substantive consolidation. KES and KENETECH agreed to pay KWI $6.5 million
upon the occurrence of certain circumstances. While the obligation to KWI
is joint and several between KES and KENETECH, no amounts are due or
payable to KWI until the Company receives proceeds from the sale of its
Investment in EcoElectrica Project ("EcoElectrica Interest") (see Notes 3
and 7). Additionally, KWI will continue to be a member of the Company's
consolidated group for income tax purposes. The Release was approved by the
Bankruptcy Court on May 26, 1998. On October 22, 1998, KWI and the Official
Committee jointly filed a first Amended Plan of Reorganization with the
Bankruptcy Court which will hold a hearing to consider confirmation of the
Amended Plan on January 6, 1999. Although KENETECH continues to own the
common stock of KWI and provides certain services under the jurisdiction of
the Bankruptcy Court, KENETECH believes 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 for financial reporting purposes 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 30, 1998 and
December 31, 1997 consolidated balance sheets.
2. Significant Accounting Policies
Construction Service Revenue: Revenue from construction services is
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.
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: Maintenance and management fees are
recognized as earned under various long-term agreements to manage or
operate and maintain certain energy production facilities.
9
<PAGE>
2. Significant Accounting Policies (continued)
Energy sales revenue: 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.
Depreciation: Depreciation is recorded on a straight-line basis over the
estimated useful lives as shown below:
Buildings and improvements 30 years
Hartford Hospital Project 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. The Company believes it
will realize a substantial gain (which will be taxable) upon the sale of
the EcoElectrica Interest (see Notes 3 and 7) and may be able to realize
tax basis and loss carry forwards against which a substantial valuation
allowance has been recorded. There are various contingencies that relate to
the timing and amount of the sale and realization of the tax basis and
losses such that the Company is not able to conclude that it is more likely
than not to realize more than the $17 million of net deferred tax assets
recorded at September 30, 1998.
Inventories: Inventories are stated at the lower of cost or market.
Reclassified Amounts: Based upon management's plan to dispose of assets
during 1998, certain assets have been classified as current. Related 1997
amounts have been reclassified for comparative purposes.
3. Liquidity and Going Concern
The consolidated financial statements of the Company as of September 30,
1998 and December 31, 1997 and for the nine months ending September 30,
1998 and September 27, 1997, have been prepared assuming the Company will
continue as a going concern. The Company incurred significant losses in
1997, 1996 and 1995, has incurred a significant loss for the first nine
months of 1998, has negative working capital and its liquidity is severely
constrained. In 1998 the Company expects to generate losses before the sale
of assets due to administrative expenses 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 plans to improve the Company's liquidity and to facilitate the
continuation of its energy project development business by selling its
EcoElectrica Interest (see Note 7) for substantial cash proceeds. In June
1998 the Company sold the Hartford Hospital Project (see Note 6). In
October 1998 the Company entered into an agreement which may lead to the
disposition of the Chateaugay Project (see Note 8).
There can be no assurance that the Company will successfully complete its
sale of the EcoElectrica Interest, or that, even if the planned sale of the
EcoElectrica Interest is completed, the Company will realize sufficient
cash proceeds to discharge current liabilities and to provide additional
working capital to enable the Company to continue as a going concern.
Consequently, the Company may be required to seek protection from its
creditors under the Federal Bankruptcy Code.
10
<PAGE>
4. Construction Subsidiary
The Company's construction subsidiary is not working on any construction
projects, has no employees and is in the process of disposing of its
remaining assets and liabilities. The Company's consolidated statement of
operations for the nine months ended September 30, 1998 and consolidated
balance sheet as of September 30, 1998 include the following amounts
relating to its construction subsidiary:
Nine months ended September 30, 1998
(in thousands)
Revenues $ 3,382
Costs of revenues 2,543
-------
Gross margin 839
General and administrative expenses 572
-------
Income from operations 267
Gain on sale of assets 13
Interest income 117
-------
Income before income taxes $ 397
=======
As of
September 30, 1998
(in thousands)
Assets: Liabilities and owner's deficiency:
Current assets $ 3,747 Current liabilities $ 6,857
Owner's deficiency (3,110)
------- --------
Total assets $ 3,747 Total liabilities & deficiency $ 3,747
======= ========
5. Net Loss Per Share
Net loss per share amounts for the periods ended September 30, 1998 and
September 27, 1997 were calculated as follows:
<TABLE>
Basic and Diluted
(in thousands, except per share amounts)
<CAPTION>
Quarters Ended Nine months Ended
September 30, September 27, September 30, September 27,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss $ (5,787) $ (10,250) $ (15,725) $ (25,030)
Less preferred stock dividends -- (2,141) (3,188) (6,423)
--------- --------- --------- ---------
Net loss used in per share calculations $ (5,787) $ (12,391) $ (18,913) $ (31,453)
========= ========= ========= =========
Weighted average shares used in per share
calculations 41,954 36,830 39,430 36,830
========= ========= ========= =========
Net loss per share $ (0.14) $ (0.34) $ (0.48) $ (0.85)
========= ========= ========= =========
</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 because they would be anti-dilutive
(reduce the loss per share). On May 14, 1998, the Preferred Stock was
mandatorily converted into 5,124,600 shares of Common Stock, $0.0001 par
value, and dividends on the Preferred Stock ceased to accrue.
11
<PAGE>
6. Hartford Hospital Project and Associated Debt
The Company indirectly owned a cogeneration plant located in Hartford,
Connecticut (the "Hartford Hospital Project"). In May 1998 the Company and
the utility with which the Company had an Electricity Purchase Agreement
(the "EPA") completed a Termination Agreement providing for the termination
of the EPA in exchange for a stream of monthly payments payable with
respect to the Hartford Hospital Project through December 1, 2000. In June
1998 the Company sold the Hartford Hospital Project, including the rights
to the aforementioned monthly stream of payments, for $4,891,000 in cash
(net) and assumption of the $10,700,000 note payable collateralized by the
Hartford Hospital Project and approximately $350,000 of other liabilities.
The Company realized no gain or loss on this transaction.
7. Investment in EcoElectrica Project and Associated Development Loan Payable
The Company indirectly owns a 50% interest (the "EcoElectrica Interest") in
a partnership owning an industrial complex currently under construction
that will consist of a liquefied natural gas import terminal and storage
facility, a gas-fired cogeneration facility of approximately 540 MW, a
desalination plant and assorted ancillary facilities located in Penuelas,
Puerto Rico (collectively, the "EcoElectrica Project"). On August 30, 1996,
the Company entered into a $30,000,000 loan agreement with loan proceeds
principally applied to the development of the EcoElectrica Project.
Throughout 1996 and most of 1997, amounts borrowed under this agreement
bore interest at the 90 day LIBOR plus 7.5%. This rate was reduced to the
90 day LIBOR plus 5.9% upon the Project receiving construction financing in
December 1997. The loan is collateralized by the stock of a special purpose
entity formed to hold through affiliates the EcoElectrica Interest. No
further cash is available under this agreement since the remaining funding
capacity is structured to finance accrued and unpaid interest for the
remaining term of the loan. This loan matures in conjunction with
commercial operation of the EcoElectrica Project which is scheduled to
occur in the fourth quarter of 1999.
In February 1998 KENETECH and KES retained Fieldstone Private Capital Group
("Fieldstone") as their financial advisor with respect to the proposed sale
by the Company of the EcoElectrica Interest. In April 1998, Fieldstone
commenced a confidential solicitation of proposals from a limited number of
qualified potential purchasers of the EcoElectrica Interest. The Company is
currently negotiating the sale of the EcoElectrica Interest based on bids
received from potential purchasers. Although the Company currently plans to
sell the EcoElectrica Interest in 1998, there can be no assurance that
current efforts will ultimately result in a disposition of the EcoElectrica
Interest on terms acceptable to the Company or as of any specified date.
8. Investment in Chateaugay Project and Associated Debt
The Company indirectly owns a 50% interest in KES Chateaugay, L.P., a
Delaware limited partnership (the "Partnership"), which owns a 17.8
megawatt wood-fired electric power plant it developed and constructed in
Chateaugay, New York (the "Chateaugay Project"). The Chateaugay Project
delivers electric energy to New York State Electric & Gas Corporation under
a long-term Power Purchase Agreement. Debt associated with the Chateaugay
Project consists primarily of tax-exempt bonds. In July 1991, the
Partnership entered into an agreement with the County of Franklin (New
York) Industrial Development Authority (the "Authority") whereby the
Authority loaned the partnership the proceeds of the Authority's Series
1991A Bonds issued of $34,800,000 (supported by a letter of credit from the
Partnership's nonrecourse lender) 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.
12
<PAGE>
In October 1998, the Partnership and the Authority signed a Cooperation and
Termination Agreement and Release (collectively, the "Termination
Agreement") with respect to a proposed termination of the Power Purchase
Agreement, the payment or defeasance of the Series 1991A Bonds, and
disposition of the Chateaugay Project, including obligations related to
closure of the facility. Consummation of the transaction contemplated by
the Termination Agreement is subject to several material conditions
precedent beyond the control of the Partnership. If the transactions are
successfully concluded, as to which there is no assurance, the Company
would be released by the Authority from all liability associated with the
Project but does not expect to receive substantial net cash proceeds from
the disposition of the Chateaugay Project assets. Accordingly, no provision
for the outcome of this matter has been made in the accompanying financial
statements.
9. Other Notes Payable
Other notes payable at September 30, 1998 and December 31, 1997 consisted
of the following:
September 30, December 31,
1998 1997
--------- ------------
(in thousands)
Borrowings under a $1,200,000 loan agreement,
due in 1999 bearing interest at prime plus 3%
(8.25% at September 30, 1998)................... $ 1,060 $ 1,144
Notes bearing interest at 7.0% due through 1999. 6 6
Other obligation bearing interest at 9.9% due
through 1999, collateralized by equipment....... 15 39
--------- ------------
$ 1,081 $ 1,189
========= ============
10. Senior Secured Notes Payable
In December 1992 the Company sold $100,000,000 of 12-3/4% Senior Secured
Notes due 2002. The notes were sold at a discount of $1,389,000. Such
discount is being amortized on the effective yield method through 2002.
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 payment of
such dividends, repurchasing common stock, incurring additional
indebtedness, pledging of assets and advances or loans to affiliates. The
Company has not paid any interest since December 15, 1997 and is in
default. At September 30, 1998 and December 31, 1997 the debt was
classified as a current liability.
13
<PAGE>
11. Contingencies
Preferred Stock Litigation: On May 6, 1998, Quadrangle Offshore (Cayman)
LLC, and Cerberus Partners, L.P. ("Plaintiffs"), filed a Verified Complaint
for Declaratory Judgment and Injunctive Relief, in the Court of Chancery of
the State of Delaware In and For New Castle County (Civil Action No.
16362-NC). Plaintiffs allege that they were beneficial owners of Preferred
Redeemable Increased Dividend Equity Securities, 8-1/4% PRIDES, Convertible
Preferred Stock, par value $0.01 per share (the "Preferred Stock") of the
Company, that mandatorily converted, on May 14, 1998, into common stock,
par value $0.0001 per share ("Common Stock") of the Company.
Plaintiffs filed an amended complaint on July 7, 1998. Generally, the
amended complaint alleges that the Company is currently in liquidation and
was in liquidation prior to May 14, 1998, that the plaintiffs are entitled
to receive the liquidation preference of $1,012.50 per share set forth in
the Company's Certificate of Designations, Preferences, Rights and
Limitations of Preferred Redeemable Increased Dividend Equity Securities,
8-1/4% PRIDES, Convertible Preferred Stock (the "Certificate of
Designations") in any distribution of assets the Company may make
notwithstanding that the Preferred Stock mandatorily converted and ceased
to be outstanding on May 14, 1998, and that the Company breached an implied
covenant of good faith and fair dealing under the Certificate of
Designations. Plaintiffs are seeking, among other things, (i) a declaration
that they are entitled to receive the liquidation preference in any
distribution of assets before any distribution is made to holders of Common
Stock and that the mandatory conversion of the Preferred Stock does not
operate to eliminate their right to receive the liquidation preference,
(ii) related injunctive relief, and (iii) other unspecified damages.
The Company's motion to dismiss the amended complaint was denied by the
Court of Chancery on October 21, 1998. The Company filed (i) with the Court
of Chancery, an Application for Certification of Interlocutory Appeal
seeking the entry of an order certifying an interlocutory appeal to the
Supreme Court of the State of Delaware from the order denying the motion to
dismiss and a motion for a stay of discovery, and (ii) with the Supreme
Court of the State of Delaware, an appeal from the interlocutory order of
the Court of Chancery and a motion to grant a stay of the proceedings
pending the appeal. The Court of Chancery on November 9, 1998 refused to
certify the Interlocutory Appeal and has denied the motion to stay. The
appeal to the Supreme Court is pending and the Supreme Court has denied the
motion to stay.
Trial in the action is tentatively set for January 1999 and the Company
intends to continue to contest the action vigorously.
Shareholders' Class Action: 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.
14
<PAGE>
The Court has certified 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 certified a plaintiff and
defendant underwriter class as to the section 11 claim.
There have been two unsuccessful attempts at mediation to settle the action
and one unsuccessful settlement conference. Defendants' motion for summary
judgement is pending and no trial date has been set.
Enercon Litigation: In 1996, Enercon GmbH ("Enercon") filed suit in Federal
Court against the Company, individual officers of the Company and/or KWI,
and KWI's expert witness in proceedings before the U.S. International Trade
Commission (the "ITC"), for alleged misconduct related to patent
infringement proceedings instituted by KWI against Enercon and The New
World Power Corporation ("New World Power") that resulted in issuance of an
exclusion order by the ITC that barred Enercon and New World Power from
importing infringing wind turbines products into the United States. In its
suit, Enercon alleged malicious prosecution, patent misuse and anti-trust
violations. Enercon has dismissed the action without prejudice after the
ITC's exclusion order was affirmed by the Federal Circuit Court of Appeals.
Lease Litigation: On October 1, 1998, Mellon US Leasing filed suit in San
Francisco County Superior Court against the Company. The complaint alleges
that the Company has breached an equipment lease agreement and seeks
damages of approximately $100,000 and other unspecified costs and relief.
Westinghouse Litigation: C. N. Flagg & Co, Incorporated ("C.N. Flagg"), a
wholly-owned subsidiary of CNF, instituted legal proceedings against, among
others, Westinghouse Electric Corporation ("Westinghouse") in March, 1997,
in the U.S. Federal District Court in Minnesota (No. 97-617 JRT/RLE) 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. Discovery
is proceeding in the action and a trial date in January 1999 has been set.
NTS Litigation: On May 6, 1998, National Technical Services, Inc. filed a
complaint in the Superior Court of California, County of Sacramento,
against CNF, among others, alleging breach of contract related to labor and
materials provided by NTS in connection with a power plant being
constructed by CNF for the Sacramento Power Authority. Plaintiff is seeking
damages of approximately $700,000 and other unspecified relief.
Wrongful Termination Litigation: On December 31, 1987, a former employee of
CN Flagg Power, Inc. ("CN Power") (formerly, a wholly-owned subsidiary of
CNF filed a complaint with the State of Connecticut Commission of Human
Rights and Opportunities (the "Commission") alleging that he was wrongfully
terminated from his position at Millstone Point, a nuclear energy
generation facility owned and operated by Northeast Utilities. CN Flagg's
motion to dismiss the complaint has been denied by the Commission. Damages
are alleged to be in the area of $300,000.
Eemsmond: Certain companies have threatened to bring suit against CNF
alleging CNF's failure to make payments on certain equipment or civil
construction services supplied in connection with the construction of a
windplant in The Netherlands. The amounts alleged to be unpaid are in the
area of $2,000,000.
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.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
KENETECH is a holding company which has participated through its
subsidiaries in the electric utility market. Historically, the Company
developed, constructed, financed, sold, operated and managed independent
power projects with an emphasis on windpower generation.
The Company's windpower subsidiary, KWI, manufactured wind turbines and
designed wind-powered electric power plants 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. A Release was entered into as of May 13,
1998, by and among KWI, the Official Committee, KENETECH, KES, CNF and the
Trustee. In the Release, CNF, KENETECH and the Trustee released the claims
filed against KWI in the KWI bankruptcy proceedings. KWI released KENETECH,
KES and the Trustee from all claims against those entities including those
for preferential payments prior to the filing of the bankruptcy petition,
alter ego claims, and any claim for substantive consolidation. KES and
KENETECH agreed to pay KWI $6.5 million upon the occurrence of certain
circumstances. While the obligation to KWI is joint and several between KES
and KENETECH, no amounts are due or payable from KES until it receives
proceeds from the sale of its EcoElectrica Interest as more fully described
below. Additionally, KWI will continue to be a member of the Company's
consolidated group for income tax purposes. The Release was approved by the
Bankruptcy Court on May 26, 1998. On October 22, 1998, KWI and the Official
Committee jointly filed a first Amended Plan of Reorganization with the
Bankruptcy Court which will hold a hearing to consider confirmation of the
Amended Plan on January 6, 1999. Although KENETECH continues to own the
common stock of KWI and provides certain services under the jurisdiction of
the Bankruptcy Court, KENETECH believes that such ownership will not exist
after the completion of the KWI bankruptcy proceedings. Accordingly, as of
May 29, 1996, KWI ceased to be accounted for as a consolidated subsidiary
of the Company for financial reporting purposes. The Company's financial
statements exclude all activities of KWI after that date.
Through CNF, the Company constructed independent power projects since 1988.
This subsidiary competed for contracts for engineering, procurement and
construction (EPC) and for construction only. Historically, the Company had
constructed all of the thermal energy power projects it developed and many
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. The chapter 11 filing of KWI
discussed above has materially adversely affected CNF and its ability to
procure contracts. CNF had joint venture interests in the EPC contracts for
the EcoElectrica Project described below which were sold in December 1997.
CNF is not working on any of construction projects, has no employees and is
in the process of disposing its remaining assets and liabilities.
Through KES, the Company develops and finances independent power projects.
KES currently indirectly holds interests in the independent power projects
described below:
The EcoElectrica Project
Through KES, the Company owns the EcoElectrica Interest, a 50% interest in
EcoElectrica, L.P., a Bermuda limited partnership ("EcoElectrica"). The
remaining 50% equity interest in EcoElectrica is owned by affiliates of
Enron Corp.
16
<PAGE>
EcoElectrica was formed to pursue the development, construction, operation
and ownership of the EcoElectrica Project, an industrial complex consisting
of a liquefied natural gas import terminal and storage facility, a
gas-fired cogeneration facility of approximately 540MW, a desalination
plant, and assorted ancillary facilities located in Penuelas, Puerto Rico.
The EcoElectrica Project will produce electricity to be sold to the Puerto
Rico Electric Power Authority ("PREPA") pursuant to a 22-year Power
Purchase and Operating Agreement. The desalination plant will produce water
for the EcoElectrica Project and also for sale to the Puerto Rico Aqueduct
and Sewer Authority for further sale to local markets and to PREPA for use
in its generating plants.
In August 1996, a single purpose subsidiary of KES entered into a $30
million non-recourse loan agreement to provide proceeds to continue the
development of the EcoElectrica Project. The loan matures in conjunction
with commercial operations of the EcoElectrica Project, currently scheduled
for the fourth quarter of 1999, and contains adequate remaining capacity to
finance the interest charges on the principal balance through maturity when
the entire $30 million would be utilized.
EcoElectrica closed its construction financing, including up to $603
million of non-recourse debt, in December 1997. Construction, under a
turnkey contract guaranteed as to payment by Enron Corp. and as to payment
and performance by Enron Power Corp., is underway with initial commercial
power deliveries expected in the fourth quarter of 1999. KES has secured
its $33.5 million equity commitment (included in the Investment in
EcoElectrica Project) to EcoElectrica with a cash-collateralized
irrevocable letter of credit. This equity commitment is due when the
EcoElectrica Project begins commercial operations which is currently
scheduled to occur in the fourth quarter of 1999.
In February 1998, KENETECH and KES retained Fieldstone as their financial
advisor with respect to the proposed sale of the EcoElectrica Interest. In
April 1998, Fieldstone commenced a confidential solicitation of proposals
from a limited number of qualified potential purchasers of the EcoElectrica
Interest. The Company is currently negotiating the sale of the EcoElectrica
Interest based on bids received from potential purchasers. Although the
Company currently plans to sell the EcoElectrica Interest in 1998, there
can be no assurance that current efforts will ultimately result in a
disposition of the EcoElectrica Interest on terms acceptable to the Company
or as of any specified date.
The Chateaugay Project
Through KES, the Company owns a 50% indirect interest in the Partnership,
which owns the 17.8 megawatt wood-fired electric generating Chateaugay
Project it developed and constructed in Chateaugay, New York. The remaining
50% equity interest is owned by affiliates of CMS Generation Company. The
Chateaugay Project delivers electric energy to New York State Electric &
Gas Corporation under a long-term Power Purchase Agreement. Debt associated
with the Chateaugay Project consists primarily of tax-exempt bonds. In July
1991, the Partnership entered into an agreement with the County of Franklin
(New York) Industrial Development Authority (the "Authority") whereby the
Authority loaned the partnership the proceeds of the Authority's Series
1991A Bonds issued of $34,800,000 (supported by a letter of credit from the
Partnership's nonrecourse lender) to finance the construction of the
Chateaugay Project. The bonds are due July 1, 2021.
In October 1998, the Partnership and the Authority signed a Termination
Agreement with respect to a proposed termination of the Power Purchase
Agreement, the payment or defeasance of the Series 1991A Bonds, and
disposition of the Chateaugay Project, including obligations related to
closure of the facility. Consummation of the transaction contemplated by
the Termination Agreement is subject to several material conditions
precedent beyond the control of the Partnership. If the transactions are
successfully concluded, as to which there is no assurance, the Company
would be released by the Authority from all liability associated with the
Project but does not expect to receive substantial net cash proceeds from
the disposition of the Chateaugay Project assets. Accordingly, no provision
for the outcome of this matter has been made in the accompanying financial
statements.
17
<PAGE>
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.
Results of Operations
---------------------
The consolidated financial statements of KENETECH Corporation and certain
subsidiaries as of and for the quarterly periods ending September 30, 1998
and September 27, 1997 have been prepared assuming the Company will
continue as a going concern.
Quarters ended September 30, 1998 and September 27, 1997
The Company incurred a net loss for the third quarter of 1998 of $5.8
million as compared to a net loss for the third quarter of 1997 of $10.3
million. In 1998 the Company expects to generate operating losses before
the sale of assets described above in "Overview" due to administrative
expenses and interest expense on debt in excess of gross margin.
<TABLE>
<CAPTION>
Quarter Ended
September 30, 1998 September 27, 1997
------------------------ ------------------------
(in millions)
Gross Gross
Revenues Costs Margins Revenues Costs Margins
-------- ----- ------- -------- ----- -------
<S> ............................ <C> <C> <C> <C> <C> <C>
Construction services ..............$ -- $ -- $ -- $ 7.3 $ 8.1 $ (0.8)
Energy sales <F1> ................ -- -- -- 1.0 4.2 (3.2)
Maintenance, management
fees and other <F1>.............. 0.016 -- 0.016 0.3 0.3 --
-------- ----- ------- -------- ----- -------
Total ...............................$ 0.016 $ -- $ 0.016 $ 8.6 $12.6 $ (4.0)
======== ===== ======= ======== ===== =======
<FN>
<F1>
</FN> </TABLE>
Construction services revenue (recorded under the percentage-of-completion
method) decreased to zero for the quarter ended September 30, 1998 from
$7.3 million for the comparable period in 1997 because the Company's
construction subsidiary is not working on any construction projects, has no
employees and is in the process of disposing of its remaining assets and
liabilities.
Energy sales revenue was zero in the third quarter of 1998 because the
Company sold the Hartford Hospital Project in June 1998 (see discussion at
Note 6 and Gain on disposition of subsidiaries and assets). Comparatively
the Company experienced an excess of expenses over revenues of $3.2 million
in the third quarter of 1997 because in June and July of 1997 the Hartford
Hospital Project experienced, through force majeure events, catastrophic
failures of both its turbines. The cost of repairing the individual units
was prohibitive and there were no lease engines available for short term
installation. The Company assembled one turbine, which operated
sporadically, from the serviceable parts of the two failed turbines.
18
<PAGE>
Maintenance, management fees and other were $16 thousand for the quarter
ended September 30, 1998 compared to $0.3 million for the comparable 1997
period. On June 30, 1998, KENETECH Facilities Management, Inc.'s ("KFM"), a
wholly-owned subsidiary of the Company which performed operations and
maintenance of thermal power plants, sole remaining contract with a third
party expired and was not renewed by the owner of the power plant.
Additionally, in conjunction with the sale of the Hartford Hospital
Project, the operations and maintenance contract held by KFM was
terminated. As a result, KFM has no further business activity or employees
and will be wound up in due course.
Project development and marketing expenses increased to $317 thousand for
the quarter ended September 30, 1998 from $8 thousand for the comparable
period in 1997 due to the Company's marketing of its EcoElectrica Interest.
General and administrative expenses decreased to $1.3 million for the
quarter ended September 30, 1998 from $2.2 million for the comparable
period in 1997 due to downsizing of the Company's operations.
Interest expense decreased slightly to $4.6 million for the third quarter
of 1998 compared to $4.7 million for the third quarter of 1997 due to lower
interest bearing balances outstanding during the quarter.
Gain on disposition of subsidiaries and assets reflects a $213 thousand
gain for the quarter ended September 30, 1998 which was primarily generated
by the receipt of a receivable, previously reserved for, related to the
disposition of various assets.
Income taxes. The Company uses the asset and liability approach for
financial accounting and reporting for income taxes. Although a loss was
incurred, no tax benefit was recorded for the periods ended September 30,
1998 and September 27, 1997 because of the uncertainty about the Company's
ability to utilize such a benefit. The Company believes it will realize a
substantial gain (which will be taxable) upon the sale of the EcoElectrica
Interest and may be able to realize tax basis and loss carry forwards
against which a substantial valuation allowance has been recorded. There
are various contingencies that relate to the timing and amount of the sale
and realization of the tax basis and losses such that the Company is not
able to conclude that it is more likely than not to realize more than the
$17 million of net deferred tax assets recorded at September 30, 1998.
Nine months ended September 30, 1998 and September 27, 1997
The Company incurred a net loss for the first nine months of 1998 of $15.7
million as compared to a net loss for the first nine months of 1997 of
$25.0 million. In 1998 the Company expects to generate operating losses
before the sale of assets described above in "Overview" due to
administrative expenses and interest expense on debt in excess of gross
margin.
<TABLE>
<CAPTION>
Nine months ended
September 30, 1998 September 27, 1997
------------------------ ------------------------
(in millions)
Gross Gross
Revenues Costs Margins Revenues Costs Margins
-------- ----- ------- -------- ----- -------
<S> ............................ <C> <C> <C> <C> <C> <C>
Construction services ..............$ 3.4 $ 2.6 $ 0.8 $ 28.9 $29.5 $ (0.6)
Energy sales <F1> ................ 0.5 1.5 (1.0) 3.1 7.3 (4.2)
Maintenance, management
fees and other <F1>.............. 1.0 0.7 0.3 1.5 0.4 1.1
-------- ----- ------- -------- ----- -------
Total ...............................$ 4.9 $ 4.8 $ 0.1 $ 33.5 $37.2 $ (3.7)
======== ===== ======= ======== ===== =======
<FN>
<F1>
</FN> </TABLE>
19
<PAGE>
Construction services revenues (recorded under the percentage-of-completion
method) decreased to $3.4 million for the nine months ended September 30,
1998 from $28.9 million for the comparable period in 1997 because the
Company's construction subsidiary has completed its projects in process and
is in the process of disposing of its remaining assets and liabilities.
Energy sales experienced an excess of expenses over revenues of $1.0
million for the first nine months of 1998 compared to a $4.2 million in the
first nine months of 1997 because in June and July of 1997 the Hartford
Hospital Project experienced, through force majeure events, catastrophic
failures of both its turbines as described above.
Maintenance, management fees and other were $1.0 million for the nine month
period ended September 30, 1998 compared to $1.5 million for the comparable
1997 period as a result of cessation of business by KFM as described above.
Project development and marketing expenses increased to $382 thousand for
the nine months ended September 30, 1998 from $34 thousand for the
comparable period in 1997 increased due to the Company's marketing of its
EcoElectrica Interest.
General and administrative expenses decreased to $2.9 million for the nine
months ended September 30, 1998 from $10.5 million for the comparable
period in 1997 due to downsizing of the Company's operations.
Interest expense increased to $13.0 million for the nine months ended
September 30, 1998 from $12.5 million for the comparable 1997 period due to
the larger interest bearing balances outstanding during the first nine
months of 1998.
Gain on disposition of assets and subsidiaries. In June 1998 the Company
sold the Hartford Hospital Project, including the rights under the
Termination Agreement (see Note 6) and incurred no gain or loss on this
transaction. The $170 thousand gain reflected in the nine month period was
primarily generated by the receipt of a receivable, previously allowed for,
related to the disposition of various assets.
Income taxes. The Company uses the asset and liability approach for
financial accounting and reporting for income taxes. Although a loss was
incurred, no tax benefit was recorded for the periods ended September 30,
1998 and September 27, 1997 because of the uncertainty about the Company's
ability to utilize such a benefit. The Company believes it will realize a
substantial gain (which will be taxable) upon the sale of the EcoElectrica
Interest and may be able to realize tax basis and loss carry forwards
against which a substantial valuation allowance has been recorded. There
are various contingencies that relate to the timing and amount of the sale
and realization of the tax basis and losses such that the Company is not
able to conclude that it is more likely than not to realize more than the
$17 million of net deferred tax assets recorded at September 30, 1998.
Liquidity and Capital Resources
-------------------------------
Operating activities
During the first nine months of 1998 operations activities used cash of
$6.1 million. As previously stated, the Company expects a loss from
operations in 1998 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 nine months of 1998 the Company sold the building and land
owned by its construction subsidiary for $2.8 million in cash and the
Hartford Hospital Project for $4.9 million (net) in cash and received $0.2
million for a receivable previously allowed for related to the disposition
of various assets.
Financing activities
During the first nine months of 1998 the Company borrowed an additional
$3.0 million from the lender to the Hartford Hospital Project as discussed
under energy plant operations above. The $2.4 million increase on the
EcoElectrica Project development loan during the first nine months of 1998
represents the financing of the interest expense on that loan.
20
<PAGE>
Status
------
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
and has paid no dividends on the Preferred Stock since then. Dividends
ceased to accrue on May 14, 1998 when the Preferred Stock mandatorily
converted to 5,124,600 shares of Common Stock. 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 has
not paid interest since December 15, 1995. The EcoElectrica Project
development loan has no cross default provisions with the Senior Secured
Notes, is current, and the additional capacity is being used to finance the
accrued and unpaid interest for the remaining term of the loan. The
EcoElectrica Interest is the only asset held for sale from which management
expects to receive significant net proceeds. Although the Company currently
plans to sell the EcoElectrica Interest in 1998, there can be no assurance
that current efforts will ultimately result in a disposition of the
EcoElectrica Interest on terms acceptable to the Company or as of any
specified date.
Certain lenders and other creditors are seeking repayment and/or
restructuring of the amounts due them. The Company is unable to borrow
money, except under the EcoElectrica Project development loan to finance
the interest expense on that loan.
Risks and Uncertainties
-----------------------
The consolidated financial statements as of and for the quarter ended
September 30, 1998 have been prepared assuming the Company will continue as
a going concern. The Company incurred significant losses in 1997, 1996, and
1995, has incurred a significant loss for the first nine months of 1998,
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 1998 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 plans to improve the Company's liquidity and to facilitate the
continuation of its energy project development business by selling assets.
There can be no assurance that the Company will successfully complete its
planned asset sales, or that, even if planned asset sales are completed,
the Company will realize sufficient net sales cash proceeds to discharge
current liabilities and provide additional working capital to enable the
Company to continue as a going concern. Consequently, the Company may be
required to seek protection from its creditors under the Federal Bankruptcy
Code.
Effects of Year 2000
It is possible that the Company's currently installed computer systems may
not accept input of, store, or manipulate dates on or after January 1, 2000
without error or interruption (a problem commonly known as the "Year 2000"
problem). Management has evaluated the situation and believes that the cost
to the Company of making its computer systems Year 2000 compliant is not
material and is not expected to have a material adverse effect on the
business, financial position or results of operations. The Company expects
to update its computer systems by the end of 1999. In the Company's project
development business, financial institutions are the critical vendors and
will be evaluated for Year 2000 compliance when appropriate. However, no
assurance can be given that the systems of the Company or its vendors will
be in compliance or corrected on a timely basis. At this time the Company
has no contingency plans in place for such an event. The Company has not
assessed and cannot predict to what extent its results of operations,
financial condition or business may be adversely affected if third parties
with whom the Company has a material relationship are not compliant.
21
<PAGE>
Forward-looking Statements: This discussion of the implications of the Year
2000 for the Company contains numerous forward-looking statements based on
inherently uncertain information. Statements about the cost of the project
and the date on which the Company plans to complete the internal Year 2000
modifications are based on management's best estimates. However, there can
be no guarantee that these estimates will be achieved or that there will
not be a delay in, or increased costs associated with, the implementation
of the Year 2000 program. Although the Company will assess the readiness of
third parties and will prepare contingency plans, there can be no guarantee
that the failure of third parties to modify their systems in advance of
December 31, 1999 will not have a material adverse affect on the Company.
22
<PAGE>
Part II OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
See discussion under Note 11 of Item 1, Part I incorporated herein by
reference.
Item 3. Defaults Upon Senior Securities.
--------------------------------
See discussion under Note 10 of Item 1, Part I and discussion under
the heading "status" of Item 2, Part I incorporated herein by
reference.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned therewith duly authorized.
KENETECH Corporation
By:
Date: November 16, 1998 Mark D. Lerdal
President, Chief Executive Officer,
and Director
Date: November 16, 1998 By:
Michael U. Alvarez
Chief Financial Officer
and Vice-President
By:
Date: November 16, 1998 Mervin E. Werth
Corporate Controller, Chief Accounting
Officer, and Assistant Treasurer
24
<PAGE>
SIGNATURES
Pursuant to the requirements 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 16, 1998 Mark D. Lerdal
President, Chief Executive Officer,
and Director
By: /s/ Michael U. Alvarez
Date: November 16, 1998 Michael U. Alvarez
Chief Financial Officer
and Vice-President
By: /s/ Mervin E. Werth
Date: November 16, 1998 Mervin E. Werth
Corporate Controller, Chief Accounting
Officer, and Assistant Treasurer
25
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<NAME> KENETECH CORPORATION
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<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
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<CASH> 10,535
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0
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<OTHER-EXPENSES> (3,593)
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