UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 August 10, 1999, there were 41,954,218 shares of the issuer's Common
Stock, $.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 June 30, 1999 and 1998 4
Consolidated Statements of Operations for the
six months ended June 30, 1999 and 1998 5
Consolidated Balance Sheets, as of June 30, 1999 and
December 31, 1998 6
Consolidated Statement of Stockholders' Equity (Deficiency) for
the six months ended June 30, 1999 7
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 8
Notes to Consolidated Financial Statements 9-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 16-20
Part II - OTHER INFORMATION
Item 1. Legal Proceedings. 21
Item 2. Changes in Securities and Use of Proceeds. 21
Item 5. Other Information. 21
Item 6. Exhibits and Reports on Form 8-K 21
3
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
for the quarterly periods ended June 30, 1999 and 1998
(unaudited, in thousands, except per share amounts)
June 30, June 30,
1999 1998
--------- ---------
Revenues:
Construction services ............................ $ -- $ 487
Maintenance, management fees and other ........... -- 570
Energy sales ..................................... -- 295
--------- --------
Total revenues ................................. -- 1,352
Costs of revenues:
Construction services ............................ -- 373
Energy plant operations .......................... -- 954
--------- --------
Total costs of revenues ........................ -- 1,327
Gross margin ....................................... -- 25
Project development and marketing expenses ......... 20 26
General and administrative expenses ................ 678 755
--------- --------
Loss from operations ............................... (698) (756)
Interest income .................................... 577 284
Interest expense ................................... -- (4,704)
Equity loss of unconsolidated affiliates ........... -- (22)
Gain on disposition of subsidiaries and assets ..... 311 25
Gain on accounts payable settlements and other income 998 --
-------- --------
Income (Loss) before taxes ......................... 1,188 (5,173)
Income tax ......................................... -- --
-------- ---------
Net income (loss) ............................ $ 1,188 $ (5,173)
======== =========
Net income (loss) per common share - Basic and Diluted $ .03 $ (0.16)
Weighted average number of common shares used in
computing per share amounts - Basic and Diluted 41,954 39,506
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
for the six months ended June 30, 1999 and 1998
(unaudited, in thousands, except per share amounts)
June 30, June 30,
1999 1998
--------- ---------
Revenues:
Construction services ............................ $ 410 $ 3,382
Maintenance, management fees and other ........... 21 985
Energy sales ..................................... -- 472
--------- --------
Total revenues ................................. 431 4,839
Costs of revenues:
Construction services ............................ 56 2,543
Energy plant operations .......................... -- 2,218
--------- --------
Total costs of revenues ........................ 56 4,761
Gross margin ....................................... 375 78
Project development and marketing expenses ......... 80 383
General and administrative expenses ................ 2,839 1,600
--------- --------
Loss from operations ............................... (2,544) (1,905)
Interest income .................................... 1,380 385
Interest expense ................................... -- (8,318)
Equity gain (loss) of unconsolidated affiliates .... 27 (57)
Gain (Loss) on disposition of subsidiaries and assets 4,908 (43)
Gain on accounts payable settlements and other income 1,060 --
-------- --------
Income (Loss) before taxes ......................... 4,831 (9,938)
Income tax ......................................... -- --
-------- ---------
Net income (loss) ............................ $ 4,831 $ (9,938)
======== =========
Net income (loss) per common share - Basic and Diluted $ 0.12 $ (0.34)
Weighted average number of common shares used in
computing per share amounts - Basic and Diluted 41,954 36,168
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED BALANCE SHEETS
as of June 30, 1999 and December 31, 1998
(unaudited, in thousands, except share amounts)
ASSETS
June 30, December 31,
1999 1998
--------- ------------
Current assets:
Cash and cash equivalents ......................... $ 45,662 $ 67,424
Funds in escrow, net .............................. 478 478
Accounts receivable ............................... 221 1,079
Investment in Chateaugay Project .................. -- 15,480
--------- ------------
Total current assets ............................. 46,361 84,461
Property, plant and equipment, net ................... 67 24
--------- ------------
Total assets ................................... $ 46,428 $ 84,485
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable .................................. $ 653 $ 4,002
Accrued liabilities ............................... 7,107 8,871
Current taxes payable ............................. 128 2,100
Chateaugay Project debt ........................... -- 15,620
Other notes payable ............................... 6 1,071
Accrued dividends on preferred stock .............. -- 21,408
--------- ------------
Total current liabilities ....................... 7,894 53,072
Accrued liabilities .................................. 1,205 893
Deferred benefit for deconsolidated
subsidiary losses ................................... 35,878 33,900
--------- ------------
Total liabilities ................................ 44,977 87,865
Commitments and contingencies
Stockholders' deficiency:
Common stock - 110,000,000 shares authorized,
$.0001 par value; 41,954,218 issued and
outstanding in 1999 and at December 31, 1998 ...... 4 4
Additional paid-in capital ........................ 224,007 224,007
Accumulated deficit ............................... (222,560) (227,391)
--------- ------------
Total stockholders' equity (deficiency) .......... 1,451 (3,380)
--------- ------------
Total liabilities and stockholders'
equity (deficiency) .......................... $ 46,428 $ 84,485
========= ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
for the six months ended June 30, 1999
(unaudited, in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional
Paid-In Accumulated
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 41,954,218 $4 $224,007 $(227,391) $ (3,380)
Net income -- - -- 4,831 4,831
---------- -- -------- --------- ---------
Balance, June 30, 1999 41,954,218 $4 $224,007 $ (222,560) $ 1,451
========== == ======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
7
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1999 and 1998
(unaudited, in thousands)
June 30, June 30,
1999 1998
--------- ---------
Cash flows from operating activities:
Net income (loss) .............................. $ 4,831 $ (9,938)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation, amortization and other ........ 20 12,679
(Gain) Loss on disposition of subsidiaries
and assets ................................. (4,908) 43
(Gain) Loss on settlement of accounts payable (1,060) --
Changes in assets and liabilities:
Funds in escrow ............................ -- 1,519
Accounts receivable ........................ 858 2,894
Accounts payable, accrued liabilities,
accrued interest and deferred benefit ..... (2,186) (12,090)
--------- ---------
Net cash used in operating activities ... (2,445) (4,893)
Cash flows from investing activities:
Capital expenditures ........................ (64) --
Net proceeds on disposition of subsidiaries
and assets ................................. 3,220 7,701
Expenditures on EcoElectrica Project ........ -- (1,128)
--------- ---------
Net cash provided by investing activities 3,156 6,573
Cash flows from financing activities:
Borrowings on Hartford Hospital Project debt. -- 3,011
Payments on other notes payable ............. (1,065) (78)
Payment of preferred dividends .............. (21,408) --
--------- ---------
Net cash provided by (used in) financing
activities ............................ (22,473) 2,933
--------- ---------
Increase (Decrease) in cash and cash equivalents (21,762) 4,613
Cash and cash equivalents at
beginning of period ....................... 67,424 7,294
--------- ---------
Cash and cash equivalents at
end of period ............................. $ 45,662 $ 11,907
========= =========
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 (the "Company"), but exclude KENETECH Windpower, Inc. ("KWI").
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, 1998. 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.
KWI filed for protection under Chapter 11 of the Federal Bankruptcy Code on
May 29, 1996, reporting an excess of liabilities over its assets. As of May
29, 1996, KWI ceased to be accounted for as a consolidated subsidiary of
the Company and the Company's financial statements exclude all KWI activity
after that date. KWI's Plan of Reorganization was confirmed by the
Bankruptcy Court on January 27, 1999 and became effective, as later
amended, on April 8, 1999. Although the Company continues to own the common
stock of KWI, the Company believes it will not realize any value from its
remaining interests in KWI other than certain tax attributes. KWI will
continue to be a member of the Company's consolidated group for income tax
purposes.
The deferred benefit of $35.9 million as of June 30, 1999 and $33.9 million
as of December 31, 1998 consists of various tax benefits from the Company's
deconsolidated subsidiary (KWI). These benefits have been deferred for
financial statement purposes until the availability of such benefits have
been confirmed under various provisions of the Internal Revenue and
Bankruptcy codes.
2. Significant Accounting Policies
Revenues: Revenues from 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 manage or operate and maintain certain energy
production facilities. Other revenues include development fees earned in
connection with various independent power plant development activities.
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 life of the asset.
Gains or losses on disposition of subsidiaries and project costs are
recognized at closing, when proceeds from the sale are received.
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.
9
<PAGE>
3. Liquidity
As of June 30, 1999, the Company had completed its activities to raise
funds for working capital purposes, had disposed of substantially all its
operating assets and had repaid substantially all of its indebtedness. The
Company currently has substantial cash balances, may have substantial net
operating income tax losses to carry forward to future years and is
managing significant litigation (see Note 10). During the second quarter,
management continued to evaluate different businesses that the Company
might pursue, through acquisition or otherwise. The Company retained
professionals to assist it in the identification and evaluation of
different business alternatives. The Company has made a commitment to fund
the development of a building products manufacturing facility.
4. Net Income (Loss) Per Share
Net income (loss) per share amounts for the periods ended June 30, 1999 and
1998 were calculated as follows:
<TABLE>
Basic and Diluted
(in thousands, except per share amounts)
<CAPTION>
Quarters Ended Six months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,188 $ (5,173) $ 4,831 $ (9,938)
Less preferred stock dividends -- (1,047) -- (3,188)
--------- --------- --------- ---------
Net income (loss) used in per
share calculations $ 1,188 $ (6,220) 4,831 (13,126)
========= ========= ========= =========
Weighted average shares used in per share
calculations 41,954 39,506 41,954 38,168
========= ========= ========= =========
Net income (loss) per share $ 0.03 $ (0.16) $ 0.12 $ (0.34)
========= ========= ========= =========
</TABLE>
PRIDES (as defined in Note 10) dividends are added to the June 1998 net
loss. The Company incurred net losses after PRIDES dividends for the second
quarter of 1998 therefore common stock equivalents are not included in
weighted average shares used in the loss per share calculation because they
would be anti-dilutive (reduce the loss per share). On May 14, 1998, the
PRIDES were mandatorily converted into 5,124,600 shares of common stock,
$.0001 par value, and dividends on the PRIDES ceased to accrue.
5. Preferred Stock Rights
On May 4, 1999, the Board of Directors of the Company declared a dividend
of one preferred share purchase right (a "Right") for each outstanding
share of common stock, par value $.0001 per share, of the Company (the
"Common Stock"). The dividend was paid on May 13, 1999 to the stockholders
of record on May 5, 1999 (the "Record Date"). Each Right entitles the
registered holder to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Preferred Stock, par value $.01 per
share, of the Company (the "Preferred Stock") at a price of $10 per one
one-thousandth of a share of Preferred Stock (the "Purchase Price"),
subject to adjustment.
10
<PAGE>
The Rights are not exercisable until the earlier to occur of (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons (with certain exceptions, an "Acquiring Person") has
acquired beneficial ownership of 15% or more of the outstanding shares of
Common Stock or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any
person or group of affiliated persons becomes an Acquiring Person)
following the commencement of, or announcement of an intention to make, a
tender offer or exchange offer the consummation of which would result in
the beneficial ownership by a person or group of 15% or more of the
outstanding shares of Common Stock (the earlier of such dates being called
the "Distribution Date"). The Rights will expire on May 4, 2009 (the "Final
Expiration Date"), unless the Final Expiration Date is advanced or extended
or unless the Rights are earlier redeemed or exchanged by the Company, in
each case as described below.
Shares of Preferred Stock purchasable upon exercise of the Rights will not
be redeemable. Each share of Preferred Stock will be entitled, when, as and
if declared, to a minimum preferential quarterly dividend payment of the
greater of (a) $10 per share, and (b) an amount equal to 1000 times the
dividend declared per share of Common Stock. In the event of liquidation,
dissolution or winding up of the Company, the holders of the Preferred
Stock will be entitled to a minimum preferential payment of the greater of
(a) $10 per share (plus any accrued but unpaid dividends), (b) an amount
equal to 1000 times the payment made per share of Common Stock. Each share
of Preferred Stock will have 1000 votes, voting together with the Common
Stock. Finally, in the event of any merger, consolidation or other
transaction in which outstanding shares of Common Stock are converted or
exchanged, each share of Preferred Stock will be entitled to receive 1000
times the amount received per share of Common Stock. These rights are
protected by customary antidilution provisions.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will thereupon become
void), will thereafter have the right to receive upon exercise of a Right
that number of shares of Common Stock having a market value of two times
the exercise price of the Right.
In the event that, after a person or group has become an Acquiring Person,
the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are
sold, proper provisions will be made so that each holder of a Right (other
than Rights beneficially owned by an Acquiring Person which will have
become void) will thereafter have the right to receive upon the exercise of
a Right that number of shares of common stock of the person with whom the
Company has engaged in the foregoing transaction (or its parent) that at
the time of such transaction have a market value of two times the exercise
price of the Right.
At any time after any person or group becomes an Acquiring Person and prior
to the earlier of one of the events described in the previous paragraph or
the acquisition by such Acquiring Person of 50% or more of the outstanding
shares of Common Stock, the Board of Directors of the Company may exchange
the Rights (other than Rights owned by such Acquiring Person which will
have become void), in whole or in part, for shares of Common Stock or
Preferred Stock (or a series of the Company's preferred stock having
equivalent rights, preferences and privileges), at an exchange ratio of one
share of Common Stock, or a fractional share of Preferred Stock (or other
preferred stock) equivalent in value thereto, per Right.
At any time prior to the time an Acquiring Person becomes such, the Board
of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $.01 per Right (the "Redemption Price") payable, at the
option of the Company, in cash, shares of Common Stock or such other form
of consideration as the Board of Directors of the Company shall determine.
The redemption of the Rights may be made effective at such time, on such
basis and with such conditions as the Board of Directors in its sole
discretion may establish. Immediately upon any redemption of the Rights,
the right to exercise the Rights will terminate and the only right of the
holders of Rights will be to receive the Redemption Price.
11
<PAGE>
Until a Right is exercised or exchanged, the holder thereof, as such, will
have no rights as a stockholder of the Company, including, without
limitation, the right to vote or to receive dividends.
6. Investment In Chateaugay Project and Chateaugay Project Debt
The Company, through KENETECH Energy Systems, Inc., owned a 50% indirect
interest in a partnership (the "Chateaugay Partnership"), which owned a
17.8 MW wood-fired electric generating station developed and constructed by
the Company in Chateaugay, New York (the "Chateaugay Project"). The
remaining 50% equity interest was owned by affiliates of CMS Generation
Company. The Chateaugay Project delivered electric energy to New York State
Electric & Gas Corporation under a long-term power purchase agreement. Debt
associated with the Chateaugay Project consisted primarily of tax-exempt
bonds. In July 1991, the Chateaugay Partnership entered into an agreement
with the County of Franklin (New York) Industrial Development Authority
(the "Authority") whereby the Authority loaned the Chateaugay Partnership
the proceeds of the Authority's Series 1991A Bonds issued in the principal
amount of $34,800,000 to finance the construction of the Chateaugay
Project. In October 1998, the Chateaugay Partnership and the Authority
signed a Cooperation and Termination Agreement with respect to the proposed
termination of the power purchase agreement, the payment or defeasance of
the Series 1991A Bonds, and the disposition of the Chateaugay Project.
On March 24, 1999, the Chateaugay Partnership entered into and consummated
a number of agreements under which the Chateaugay Partnership (i)
terminated the power purchase agreement, (ii) received a payment from an
affiliate of Citizens Power LLC, a Delaware limited liability company, in
connection with such termination, (iii) sold substantially all its rights
in the Chateaugay Project to an affiliate of Boralex, Inc., a Quebec
corporation, (iv) terminated its relationship with the Authority pursuant
to the Termination Agreement, (v) satisfied in full all of its obligations
with respect to the Series 1991A Bonds, and (vi) terminated certain
agreements entered into in connection with the Chateaugay Project relating,
among other matters, to the operation and administration of the project.
The Company has been released from the Chateaugay Project debt, and the
liabilities relating to the Chateaugay Project included in other notes
payable of $1,060,000 at December 31, 1998 have been paid in full. The
Company received net cash of approximately $2,391,000, included in Gain on
disposition of subsidiaries and assets. Of that gain, $311,000 was received
in the second quarter of 1999.
7. Investment in Partnership and Settlement of Accounts Payable
The Company owned a 50% interest in the general partner of a Dutch limited
partnership that owned a windplant in the Netherlands. In addition, a
subsidiary of the Company had a payable to the co-general partner of the
partnership of approximately $1,549,000. On January 14, 1999, the Company
transferred its 50% general partner interest to its partner, paid $200,000
to the partner and was released from the remainder of the payable. The
transaction accounted for approximately $1,349,000 of the Gain on
disposition of subsidiaries and assets.
The Company also reported a $957 thousand Gain on accounts payable
settlements. One transaction resulted in a gain of $924,000 on settlement
of a $1,074,000 payable to a German vendor related to the Dutch windplant.
12
<PAGE>
8. Other Notes Payable
Other notes payable at June 30, 1999 and December 31, 1998 consisted of the
following:
June 30, December 31,
1999 1998
--------- ------------
(in thousands)
Borrowings under a $1,200,000 loan agreement,
due in 1999 bearing interest at prime plus 3%
(10.75% at December 31, 1998).................... $ -- $ 1,060
Note bearing interest at 7.0% due in 1999........ 6 6
Other obligations bearing interest at 9.9%
due through 1999, collateralized by equipment.... -- 5
--------- ----------
$ 6 $ 1,071
========= ==========
9. Income Taxes
At June 30, 1999 and December 31, 1998, the Company had net deferred tax
assets for which a valuation allowance of an equal amount has been
recognized.
10. 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 "PRIDES") of the Company,
that mandatorily converted, on May 14, 1998, into Common Stock, par value
$0.0001 per share ("Common Stock") of the Company.
13
<PAGE>
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 PRIDES (the "Certificate of Designations") in any
distribution of assets the Company may make notwithstanding that the PRIDES
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 PRIDES does not operate to eliminate their right to
receive the liquidation preference, (ii) related injunctive relief, and
(iii) other unspecified damages.
The Court of Chancery entered a Temporary Restraining Order in the action
on December 28, 1998 that restrains the Company from making payments from
the proceeds of the sale of the EcoElectrica Project interest in
satisfaction of any obligations not previously disclosed in the Company's
10-K or 10-Q or their attached exhibits (except to the extent necessary for
ordinary, customary and reasonable expenses) without first providing five
business days advance notice to Plaintiffs.
A bench trial in the action was held February 16-19, 1999 before the Court
of Chancery and a ruling on the merits is expected in either the third or
fourth quarter of 1999.
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 PRIDES (depository shares) during the
period from April 28, 1994 (the public offering date of the PRIDES) 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.
The Court has certified a plaintiff class consisting of all persons or
entities who purchased Common Stock between September 21, 1993 and August
8, 1995 or depositary 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.
On August 9, 1999, the Court granted Defendants' motion for summary
judgement and ordered that Plaintiffs take nothing and that the action be
dismissed on the merits.
14
<PAGE>
Insurance Litigation: On January 29, 1999, Travelers Insurance Company
filed a complaint against KENETECH and CNF Industries, Inc. ("CNF") in the
Superior Court, Judicial District of Hartford, Connecticut. The complaint
alleges that the defendants failed to pay premiums and other charges for
insurance coverage and services. Damages are alleged to be in excess of
$1,118,246. On April 13, 1999, the Company filed a Motion to Dismiss
challenging the exercise of personal jurisdiction and a Request to Revise.
A hearing on the Motion and Request is pending.
Annual Meeting Litigation: On July 30, 1999, Campus, LLC and Joseph A.
Wagda filed a complaint against the Company and its directors (namely,
Angus M. Duthie, Mark D. Lerdal, Gerald R. Alderson and Charles
Christenson) in the Court of Chancery of the State of Delaware in and for
New Castle County. The plaintiffs in this action purport to be stockholders
of the Company. The complaint alleges, among other things, that plaintiffs
were deprived of the opportunity to nominate directors for election at the
Company's annual meeting scheduled for August 18, 1999. Plaintiffs are
seeking, among other things, (i) a declaration that the annual meeting was
illegally and inequitably scheduled and that any actions taken at the
annual meeting are null and void and (ii) an order requiring the defendants
to schedule a meeting, allowing stockholders an opportunity to nominate
directors, file solicitation materials with the Securities and Exchange
Commission and conduct a proxy solicitation. The Company intends to defend
this action vigorously.
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.
11. PRIDES Dividend
On March 23, 1999, the Board of Directors of the Company determined,
pursuant to the terms of the Certificate of Incorporation of the Company,
to pay cash in an amount equal to all accrued and unpaid dividends on each
share of PRIDES, to and including May 14, 1998 (the "Mandatory Conversion
Date"), which resulted in a payment of $4.1775 per depositary share. The
payment was made on April 14, 1999, to the persons in whose names
depositary receipts evidencing the depositary shares were registered on the
books of the Depositary, ChaseMellon Shareholder Services, L.L.C., on the
Mandatory Conversion Date. The total payment by the Company was
$21,408,016.
12. Subsequent Event
In December 1998, the Company sold its EcoElectrica Project interest for
$247,000,000. An additional payment of $5 million in cash, contingent on
the successful conversion of the local tax status of EcoElectrica, L.P.,
was received July 27, 1999. This amount has not been recognized in the
accompanying financial statements.
15
<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). Historically, the Company developed, constructed,
financed, operated, managed and sold independent power projects and
manufactured wind turbines.
The Company experienced severe constraints on its liquidity beginning in
late 1995. In an effort to relieve such constraints, KWI filed for
protection under Chapter 11 of the Federal Bankruptcy Code on May 29, 1996,
reporting an excess of liabilities over its assets. The Chapter 11 filing
of KWI materially adversely affected the Company's ability to procure new
business. As a result of liquidity constraints, the Company limited its new
development activities and focused all of its activities on raising funds
for working capital and to repay debt. As of May 29, 1996, KWI ceased to be
accounted for as a consolidated subsidiary of the Company and the Company's
financial statements exclude all KWI activity after that date. KWI's Plan
of Reorganization was confirmed by the Bankruptcy Court on January 27, 1999
and became effective, as later amended, April 8, 1999. Although the Company
continues to own the common stock of KWI, the Company believes it will not
realize any value from its remaining interests in KWI other than certain
tax attributes.
In December 1998, the Company sold its EcoElectrica Project interest for
$247,000,000. An additional payment of $5 million in cash, contingent on
the successful conversion of the local tax status of EcoElectrica, L.P.,
was received July 27, 1999. This amount has not been recognized in the
accompanying financial statements.
The Company, through KENETECH Energy Systems, Inc. ("KES"), owned a 50%
indirect interest in a partnership (the "Chateaugay Partnership"), which
owned a 17.8 MW wood-fired electric generating station developed and
constructed by the Company in Chateaugay, New York (the "Chateaugay
Project"). The remaining 50% equity interest was owned by affiliates of CMS
Generation Company. The Chateaugay Project delivered electric energy to New
York State Electric & Gas Corporation under a long-term power purchase
agreement. Debt associated with the Chateaugay Project consisted primarily
of tax-exempt bonds. In July 1991, the Chateaugay Partnership entered into
an agreement with the County of Franklin (New York) Industrial Development
Authority (the "Authority") whereby the Authority loaned the Chateaugay
Partnership the proceeds of the Authority's Series 1991A Bonds issued in
the principal amount of $34,800,000 to finance the construction of the
Chateaugay Project. In October 1998, the Chateaugay Partnership and the
Authority signed a Cooperation and Termination Agreement with respect to
the proposed termination of the power purchase agreement, the payment or
defeasance of the Series 1991A Bonds, and the disposition of the Chateaugay
Project.
On March 24, 1999, the Chateaugay Partnership entered into and consummated
a number of agreements under which the Chateaugay Partnership (i)
terminated the power purchase agreement, (ii) received a payment from an
affiliate of Citizens Power LLC, a Delaware limited liability company, in
connection with such termination, (iii) sold substantially all its rights
in the Chateaugay Project to an affiliate of Boralex, Inc., a Quebec
corporation, (iv) terminated its relationship with the Authority pursuant
to the Termination Agreement, (v) satisfied in full all of its obligations
with respect to the Series 1991A Bonds, and (vi) terminated certain
agreements entered into in connection with the Chateaugay Project relating,
among other matters, to the operation and administration of the project.
The Company has been released from the Chateaugay Project debt. The
liabilities relating to the Chateaugay Project included in other notes
payable of $1,060,000 at December 31, 1998 have been paid in full. The
Company received net cash of approximately $2,391,000. Of that gain,
$311,000 was received in the second quarter of 1999.
16
<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 Company recognized net income for the second quarter of 1999 of $1.2
million as compared to a net loss incurred for the second quarter of 1998
of $5.2 million.
Quarters ended June 30, 1999 and June 30, 1998
<TABLE>
<CAPTION>
Quarter Ended
June 30, 1999 June 30, 1998
------------------------ ------------------------
(in millions)
Gross Gross
Revenues Costs Margins Revenues Costs Margins
-------- ----- ------- -------- ----- -------
<S> ............................ <C> <C> <C> <C> <C> <C>
Construction services ..............$ -- $ -- $ -- $ 0.5 $ 0.4 $ 0.1
Maintenance, management
fees and other <F1>.............. -- -- -- 0.6 -- 0.6
Energy sales <F1> ................ -- -- -- 0.3 1.0 (0.7)
-------- ----- ------- -------- ----- -------
Total ...............................$ -- $ -- $ -- $ 1.4 $ 1.4 $ --
======== ===== ======= ======== ===== =======
<FN>
<F1>
</FN> </TABLE>
There were no revenues from active construction projects for the quarter
ended June 30, 1999, a decrease from approximately $500 thousand for the
comparable period in 1998. 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.
There were no maintenance, management fees and other revenues in the second
quarter of 1999, a decrease from approximately $600 thousand during the
second quarter of 1998. 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.
17
<PAGE>
Energy sales in the second quarter of 1999 declined to zero from
approximately $300 thousand during the comparable quarter in 1998 because
the Company sold the Hartford Hospital Project in June 1998. Energy sales
experienced an excess of expenses over revenues of approximately $700
thousand for the second quarter of 1998 due to the sporadic operation of
the Hartford Hospital Project turbines.
Project development and marketing expenses decreased to $20 thousand for
the quarter ended June 30, 1999 from $26 thousand for the comparable period
in 1998. Project development and marketing expenses incurred in the second
quarter of 1999 related to the development of a building products
manufacturing facility.
General and administrative expenses decreased to $678 thousand for the
quarter ended June 30, 1999 from $755 thousand for the comparable period in
1998 due principally to reduced personnel and premises expenses, partly
off-set by added costs related to archiving the accounting and tax records
of the Company from files from a non-Y2K compliant system.
Interest expense decreased to zero for the quarter ended June 30, 1999 from
$4.7 million for the comparable period in 1998 primarily due to the
repayment in December 1998 of the Company's Senior Secured Notes (including
accrued interest) and the EcoElectrica Project development loan payable in
conjunction with the Company's sale of its interest in the EcoElectrica
Project.
The Company recorded $311 thousand for the quarter ended June 30, 1999
related to the sale of the Chateaugay Project (see Note 6 of Item 1).
The Company recorded a $957 thousand gain on settlement of disputed
accounts payable plus $41 thousand of other income in the quarter ended
June 30, 1999, compared to zero in the comparable quarter in 1998.
The Company accounts for income taxes using the asset and liability
approach for financial accounting and reporting for income taxes. The
Company reported no income tax expense or benefit for the periods ended
June 30, 1999 and 1998. Further, in the quarter ended June 30, 1999, the
Company was refunded substantially all of its $1.2 million federal 1998
extension payment.
Six months ended June 30, 1999 and June 30, 1998
<TABLE>
<CAPTION>
Six months ended
June 30, 1999 June 30, 1998
------------------------ ------------------------
(in millions)
Gross Gross
Revenues Costs Margins Revenues Costs Margins
-------- ----- ------- -------- ----- -------
<S> ............................ <C> <C> <C> <C> <C> <C>
Construction services ..............$ 0.4 $ -- $ 0.4 $ 3.4 $ 2.6 $ 0.8
Maintenance, management
fees and other <F1>.............. -- -- -- 1.0 -- 1.0
Energy sales <F1> ................ -- -- -- 0.5 2.2 (1.7)
-------- ----- ------- -------- ----- -------
Total ...............................$ 0.4 $ -- $ 0.4 $ 4.9 $ 4.8 $ 0.1
======== ===== ======= ======== ===== =======
<FN>
<F1>
</FN> </TABLE>
18
<PAGE>
The revenues and costs of revenues recorded during the twenty-six weeks
ended June 30, 1999, represent revenue realized and expenses incurred upon
the settlement of certain disputes involving construction projects. There
were no revenues from active construction projects for the twenty-six weeks
ended June 30, 1999, a decrease from approximately $3.4 million for the
comparable period in 1998. 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.
There were no maintenance, management fees and other revenues in the first
six months of 1999, a decrease from approximately $1.0 million during the
first six months of 1998. 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.
There were no energy sales in 1999 because the Company sold the Hartford
Hospital Project in June 1998. Energy sales experienced an excess of
expenses over revenues of approximately $1.7 million for the first six
months of 1998 due to the sporadic operation of the Hartford Hospital
Project turbines.
Project development and marketing expenses decreased to $80 thousand for
the six months ended June 30, 1999 from $383 thousand for the comparable
period in 1998. Project development and marketing expenses incurred in the
first six months of 1999 related principally to the Chateaugay Project.
General and administrative expenses increased to $2.8 million for the
twenty-six weeks ended June 30, 1999 from $1.6 million for the comparable
period in 1998 due principally to (i) an increase in legal expenses
associated with the Preferred Stock Litigation, (ii) severance of several
senior personnel, (iii) additional expense due to preparation of the
federal income tax return earlier in the year than is customary, and (iv) a
change of accounting system and costs related to archiving files from a
non-Y2K compliant system.
In addition to the $4.6 million Gain on disposition of subsidiaries and
assets recorded for the first quarter of 1999, the Company recorded $311
thousand in the quarter ended June 30, 1999 related to the Chateaugay
Project (see Note 6 of Item 1).
The Company recorded a $945 thousand net gain on settlement of accounts
payable plus $115 thousand of other income in the six month period ended
June 30, 1999, compared to zero in the comparable period in 1998.
Interest expense decreased to zero for the six months ended June 30, 1999
from $8.3 million for the comparable period in 1998 primarily due to the
repayment in December 1998 of the Company's Senior Secured Notes (including
accrued interest) and the EcoElectrica Project development loan payable in
conjunction with the Company's sale of its interest in the EcoElectrica
Project.
The Company accounts for income taxes using the asset and liability
approach for financial accounting and reporting for income taxes. The
Company reported no income tax expense or benefit for the six months ended
June 30, 1999 and 1998. Further, in the six months ended June 30, 1999, the
Company was refunded substantially all of its $1.2 million federal 1998
extension payment.
19
<PAGE>
Liquidity and Capital Resources
-------------------------------
Operating activities
During the first six months of 1999, operating activities used cash of $2.4
million, principally for the items mentioned in the discussion of General
and administrative expenses above, offset by favorable settlement of
accounts payable associated with disputed contracts.
Investing activities
During the first six months of 1999, investment activities provided cash of
$3.2 million, principally from the sale of the Chateaugay Project.
Financing activities
During the first six months of 1999 the Company repaid $1.1 million of
notes payable, related to the Chateaugay Project (see Note 6 of Item 1) and
paid $21.4 million of PRIDES dividends (see Note 11 of Item 1).
Future Activities
As of June 30, 1999, the Company had completed its activities to raise
funds for working capital purposes, had disposed of substantially all its
operating assets and had repaid substantially all of its indebtedness. The
Company currently has substantial cash balances, may have substantial net
operating income tax losses to carry forward to future years and is
managing significant litigation (see Item 1, Note 10, Contingencies).
During the second quarter, management continued to evaluate different
businesses that the Company might pursue, through acquisition or otherwise.
The Company retained professionals to assist it in the identification and
evaluation of different business alternatives. The Company has made a
commitment to fund the development of a building products manufacturing
facility.
Effect of Year 2000
The Company recently upgraded its accounting system and other systems to be
Year 2000 compliant. The Company's historical tax and accounting systems
were not Year 2000 compliant and the Company undertook a project in the
second quarter to archive the historical tax and accounting records on a
Year 2000 compliant system. That work is complete at a cost of
approximately $600 thousand. The Company has not assessed and cannot
predict to what extent its results of operations, financial condition or
business may be adversely affected if third parties with whom the Company
has a material relationship are not compliant.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring
that an entity recognize those items as assets or liabilities in the
statement of financial position and measure them at a fair value.
FASB Statement No. 137, "Accounting for Derivatives, Instruments, and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133, and amendment of FASB Statement No. 133," issued in June 1999, defers
the effective date of Statement No. 133. Statement No. 133, as amended, is
now effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. As of June 30, 1999, the Company is reviewing the effect
SFAS No. 133 will have on the Company's consolidated financial statements.
20
<PAGE>
Part II OTHER INFORMATION
Item 1. Legal Proceedings.
See discussion under Note 10 of Item 1 incorporated herein by reference.
Item 2. Changes in Securities and Use of Proceeds.
See discussion under Note 5 of Item 1 incorporated herein by reference.
Item 5. Other Information.
On or about April 29, 1999, Campus, LLC ("Campus"), initiated a tender
offer for up to two million shares of common stock ("Common Stock") of the
Company, together with certain legal rights for thirty cents ($.30) per
share (the "Offer"). Campus is interested in purchasing only shares of
Common Stock that were received by holders of the Company's PRIDES when the
PRIDES were mandatorily converted into Common Stock on May 14, 1998. On
June 25, 1999, Campus terminated the Offer, but stated that it would
negotiate with former PRIDES holders to purchase their Common Stock.
The Board of Directors of the Company (the "Board") recommended to the
targeted stockholders that they reject the offer of Campus for their Common
Stock. The Board believed then, and continues to believe that the fair
market value of the Common Stock is greater than thirty cents ($.30) per
share, the amount of Campus's Offer.
Item 6. Exhibits and Reports on Form 8-k.
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-k
None
21
<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 thereunto duly authorized.
KENETECH Corporation
By:
Date: August 16, 1999 Mark D. Lerdal
President, Chief Executive Officer
and Principal Accounting Officer
22
<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 thereunto duly authorized.
KENETECH Corporation
By: /s/ Mark D. Lerdal
Date: August 16, 1999 Mark D. Lerdal
President, Chief Executive Officer
and Principal Accounting Officer
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM KENETECH CORPORATION'S JUNE 30, 1999 CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000807708
<NAME> KENETECH CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 45,662
<SECURITIES> 0
<RECEIVABLES> 221
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46,361
<PP&E> 122
<DEPRECIATION> (55)
<TOTAL-ASSETS> 46,428
<CURRENT-LIABILITIES> 7,894
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 46,428
<SALES> 431
<TOTAL-REVENUES> 431
<CGS> 56
<TOTAL-COSTS> 56
<OTHER-EXPENSES> (2,919)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,831
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,831
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.12
</TABLE>
