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, 2000
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 9, 2000, there were 31,970,164 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
quarterly periods ended June 30, 2000 and 1999 4
Consolidated Statements of Operations for the
six months ended June 30, 2000 and 1999 5
Consolidated Balance Sheets, as of June 30, 2000 and
December 31, 1999 6
Consolidated Statement of Stockholders' Equity for the
six months ended June 30, 2000 7
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 8
Notes to Consolidated Financial Statements 9-17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 18-22
Item 3. Quantitative and Qualitative Disclosure about Market Risk 23
Part II - OTHER INFORMATION
Item 1. Legal Proceedings. 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 6. Exhibits and Reports on Form 8-K. 24
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
for the quarterly periods ended June 30, 2000 and 1999
(unaudited, in thousands, except per share amounts)
June 30, June 30,
2000 1999
--------- ---------
Revenues:
Construction services ............................ $ -- $ --
Other revenues ................................... 623 577
--------- ---------
Total revenues ................................. 623 577
Selling, general and administrative expenses ....... 607 698
--------- ---------
Income (Loss) from operations ...................... 16 (121)
Gain on disposition of subsidiaries and assets ..... -- 311
Gain on accounts payable settlement and other income 617 998
--------- ---------
Income before taxes ................................ 633 1,188
Income tax expense ................................. -- --
--------- ---------
Net income ................................... $ 633 $ 1,188
========= =========
Net income per common share: Basic and Diluted $ 0.02 $ 0.03
Weighted average number of common shares used in
computing per share amounts: Basic and Diluted 36,852 41,954
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
for the six months ended June 30, 2000 and 1999
(unaudited, in thousands, except per share amounts)
June 30, June 30,
2000 1999
--------- ---------
Revenues:
Construction services ............................ $ -- $ 410
Other revenues ................................... 1,201 1,401
--------- --------
Total revenues ................................. 1,201 1,811
Selling, general and administrative expenses ....... 1,399 2,975
--------- --------
Loss from operations ............................... (198) (1,164)
Equity gain of unconsolidated affiliates ........... -- 27
Gain on disposition of subsidiaries and assets ..... -- 4,908
Gain on accounts payable settlements and other income 899 1,060
-------- --------
Income before taxes ................................ 701 4,831
Income tax ......................................... -- --
-------- ---------
Net income ................................... $ 701 $ 4,831
======== =========
Net income per common share - Basic and Diluted $ 0.02 $ 0.12
Weighted average number of common shares used in
computing per share amounts - Basic and Diluted 39,386 41,954
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
KENETECH CORPORATION
--------------------
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
(unaudited, in thousands, except share amounts)
ASSETS
June 30, December 31,
2000 1999
--------- -----------
Current assets:
Cash and cash equivalents ......................... $ 4,344 $ 15,291
Funds in escrow ................................... 278 314
Accounts receivable ............................... 10 110
Trading debt securities ........................... 25,726 31,388
Interest receivable ............................... 443 464
--------- -----------
Total current assets ................................. 30,801 47,567
Project development advances ......................... 6,051 2,451
Investments:
Held-to-maturity debt securities .................. 3,500 --
Other investments ................................. 1,550 --
--------- -----------
Total investments ................................ 5,050 --
Property, plant and equipment, net ................... 42 58
Other assets ......................................... 61 21
--------- -----------
Total assets ................................... $ 42,005 $ 50,097
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 249 $ 937
Accrued liabilities ............................... 3,367 4,580
Current taxes payable ............................. 122 130
Other notes payable ............................... -- 6
Accrued stock repurchase obligation .............. 817 26
--------- ----------
Total current liabilities ....................... 4,555 5,679
Accrued liabilities .................................. 924 1,168
Deferred benefit for deconsolidated subsidiary losses. 10,305 10,305
--------- ----------
Total liabilities ................................ 15,784 17,152
Commitments and contingencies
Stockholders' equity:
Common stock - 110,000,000 shares authorized,
$.0001 par value; 32,960,664 and 41,919,218
issued and outstanding at June 30, 2000, and
December 31, 1999, respectively. Repurchased
for retirement still outstanding 990,500 at
June 30, 2000, 401,200 at December 31, 1999 -
960,600 and 29,900 shares subsequently retired
on July 13 and August 3, 2000, respectively ....... 3 4
Additional paid-in capital ........................ 216,318 223,742
Accumulated deficit ............................... (190,100) (190,801)
--------- ----------
Total stockholders' equity ....................... 26,221 32,945
--------- ----------
Total liabilities and stockholders' equity...... $ 42,005 $ 50,097
========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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KENETECH CORPORATION
--------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the six months ended June 30, 2000
(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, 1999 41,919,218 $4 $223,742 $(190,801) $ 32,945
Common stock repurchased
for retirement (8,958,554) (1) (7,437) -- (7,438)
Compensatory element of
warrant issued -- - 13 -- 13
Net income -- - -- 701 701
---------- -- -------- --------- ---------
Balance, June 30, 2000 32,960,664 $3 $216,318 $(190,100) $ 26,221
========== == ======== ========= =========
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, 2000 and 1999
(unaudited, in thousands)
June 30, June 30,
2000 1999
--------- ---------
Cash flows from operating activities:
Net income ..................................... $ 701 $ 4,831
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation, amortization and other ........ 16 20
Gain on disposition of subsidiaries
and assets ................................. -- (4,908)
Gain on settlement of accounts payable ...... -- (945)
Gain on trading debt securities ............. 22 --
Compensatory element of warrant issued ...... 13 --
Proceeds from sales of trading
debt securities ............................ 14,667 --
Purchase of trading debt securities ......... (9,027) --
Changes in assets and liabilities:
Accounts and interest receivable ........... 121 858
Other assets ............................... (40) --
Accounts payable ........................... (688) (856)
Accrued liabilities ........................ (1,457) (1,451)
Current taxes payable ...................... (8) (1,971)
Other notes payable ........................ (6) --
Deferred benefit for deconsolidated
subsidiary losses ......................... -- 1,977
--------- ---------
Net cash provided by (used in) operating
activities ............................. 4,314 (2,445)
Cash flows from investing activities:
Capital expenditures ........................ -- (64)
Decrease in funds in escrow restricted
for line of credit ......................... 36 --
Purchase of held-to-maturity debt securities (3,500) --
Other investments ........................... (1,550) --
Project development advances ................ (3,600) --
Net proceeds on disposition of subsidiaries
and assets ................................. -- 3,220
--------- ---------
Net cash provided by (used in) investing
activities ............................. (8,614) 3,156
Cash flows from financing activities:
Payment on other notes payable .............. (1,065)
Payment of preferred dividend ............... -- (21,408)
Increase in stock repurchase payable ........ 791 --
Stock repurchased for retirement ............ (7,438) --
--------- ---------
Net cash used in financing activities .... (6,647) (22,473)
--------- ---------
Decrease in cash and cash equivalents............ (10,947) (21,762)
Cash and cash equivalents at
beginning of period ........................ 15,291 67,424
--------- ---------
Cash and cash equivalents at end of period ... $ 4,344 $ 45,662
========= =========
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, 1999. 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.
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. 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.
Other revenues: Other revenues are recognized as they are earned.
Investments: The Company accounts for investments in marketable equity
securities and debt securities in accordance with FAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Under FAS No. 115,
the Company's publicly traded securities are classified as trading
securities. Publicly-traded trading securities are stated at their fair
value, with any unrealized gains and losses, net of taxes, reported in
results of operations.
Certain of the Company's investments in debt securities are classified as
held-to-maturity under FAS No. 115. Accordingly, these investments are
carried at cost.
Other of the Company's investments in non-marketable equity securities are
not subject to FAS No. 115. The Company employs the cost method of
accounting for these investments. The investments are not subject to equity
accounting under APB18, the Equity Method of Accounting for Investments in
Common Stock.
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 projects (net of 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.
Cash equivalents: Short-term investments purchased with original maturities
of three months or less and other instruments which are readily tradeable
and without significant interest rate risk are considered cash equivalents.
9
<PAGE>
Project development advances: The Company capitalizes amounts funded under
various project participation agreements, as described in Note 3, until
such time as the funding is repaid. Project development costs incurred by
the Company are capitalized as other assets.
Comprehensive Income: The Company has adopted Financial Accounting
Standards Board SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. SFAS No. 130 requires that all items required to be
recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company currently has no
reportable comprehensive income items.
Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Boards issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 is effective for the Company's quarter ending
March 31, 2001. The Company is in the process of determining the impact of
SFAS No. 133 on its financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101.
The SAB summarized certain of the SEC Staff's views in applying generally
accepted accounting principles to revenue recognition in financial
statements. The Company believes it currently conforms to the guidance
contained in the bulletin.
3. Business Activities
The Company continues its involvement in project development activities.
The Company is currently participating with other parties in developing two
electric generating facilities and one oriented strand-board facility.
OSB Chateaugay
In July 1999, the Company entered into a funding and participation
agreement with OSB Chateaugay, LLC ("OSB"). The funding will be used by OSB
to pursue the development of an oriented strand-board project in
Chateaugay, New York (the "OSB Project"). In addition to development
services, the Company agreed to fund up to $1.25 million. The OSB Project
is expected to produce up to 475 million square feet of strand board per
year. Construction is anticipated to commence in the second half of 2000,
but may be delayed. In exchange for the services and funding, the Company
will receive participation distributions. The funding is to be repaid upon
the completion of certain development milestones as specified in the
funding and participation agreement. Repayment of the funding is to occur
before any participation distributions. Repayment of the funding and
participation distributions are both dependent upon the ultimate success of
the OSB Project.
The Company had advanced $727,000 as of June 30, 2000. As of August 9,
2000, the Company had funded an additional $44,000 on the OSB Project,
bringing the total amount funded to $771,000.
Astoria
In October 1999, the Company entered into funding and participation
agreements with Astoria Energy, LLC ("Astoria") to provide funding under a
note agreement of up to $3 million for the development of a 1,000 megawatt
independent power plant (the "Astoria Project") to be located in Astoria,
Queens, New York. The Astoria Project is currently under development and is
expected to commence construction in the second half of 2001. In exchange
for the services and funding, the Company will receive, in addition to
repayment of the note evidencing the funding, certain participation
distributions. The note is secured by all property and assets of Astoria.
10
<PAGE>
On March 14, 2000, the note was amended to change the due date of the
original note to December 15, 2000, and provide for interest at 20% on the
balance outstanding beginning on April 15, 2000. On March 14, 2000, the
Company also committed to fund an additional $2 million toward the
development of the Astoria Project in the form of a second note. The second
note is due and payable on December 15, 2000, and carries interest at 20%
on the balance outstanding.
Recovery of the notes, interest on the notes, and participation
distributions are all dependent upon the ultimate success of the Astoria
Project. Accordingly, interest income and participation distributions will
be recognized upon the completion of certain project milestones.
As of June 30, 2000, the Company had advanced $4,974,000 on the Astoria
Project, consisting of $3,000,000 on the original note and $1,974,000 on
the second note.
Subsequent to June 30, 2000, the Company has agreed to invest $6 million
for a twenty-percent interest in Steinway Creek Electric Generating Company
LLC ("Steinway"), a Delaware limited liability company. Steinway directly
owns 100% of Astoria Project Partners LLC, which in turn owns 100% of
Astoria. The Company will fund the $6 million initial obligation on August
15, 2000. The Company has the obligation to fund a further $2 million in
exchange for an additional ten-percent interest in Steinway, depending upon
the status of the project's funding as of December 1, 2000. Upon
acquisition of the twenty-percent interest in Steinway, the Company may
need to account for the interest using APB Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock.
Whinash
In February 2000, the Company agreed to fund up to $600,000 for the
development of a wind-powered electrical generating facility to be located
in Whinash, Cumbria, England. The project is a 50 megawatt facility. In
exchange for the funding, the Company will receive certain participation
distributions upon the sale or financial closing of the Whinash project. As
of June 30, 2000, the Company had funded $350,000.
Other Information
The Company currently has substantial cash balances and net operating
income tax losses and other tax attributes to carry forward to future
years. While pursuing development projects, management continues to
evaluate different businesses that the Company might pursue, through
acquisition or otherwise. In addition, the Company is evaluating all
strategic alternatives available to it. The Company has retained
professionals to assist it in such evaluations.
4. Net Income Per Share
Net income per share amounts for the periods ended June 30, 2000 and 1999
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,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 633 $ 1,188 $ 701 $ 4,831
--------- --------- --------- ---------
Net income used in per
share calculations $ 633 $ 1,188 $ 701 $ 4,831
========= ========= ========= =========
Weighted average shares used in per share
calculations 36,852 41,954 $ 39,386 41,954
========= ========== ========= =========
Net income per share $ 0.02 $ 0.03 $ 0.02 $ 0.12
========= ========== ========= =========
</TABLE>
11
<PAGE>
Common stock equivalents are not included in weighted average shares used
in the per share calculations because they would be anti-dilutive.
Currently, all of the Company's outstanding stock options are
anti-dilutive.
5. Other Income
The Company recorded other income of $899 thousand for the six months ended
June 30, 2000, primarily due to the reduction in accrued liabilities
related to the favorable resolution of various legal matters, the reversal
of construction-related accounts payable upon which the statute of
limitations had expired, and gain realized on the sale of demutualized
insurance company stock.
6. Investments
A. Held-to-maturity debt securities
Indosuez Capital Funding VI, Ltd: In April 2000, the Company agreed to
purchase $2,500,000 of Income Notes of Indosuez Capital Funding VI, Ltd.
("Indosuez"). The Income Notes are non-recourse, junior and subordinated,
with a stated term of twelve years. Indosuez is a newly formed company
organized under the laws of the Cayman Islands to acquire and manage a
diversified portfolio of corporate and other debt obligations. The
portfolio will consist primarily of U.S. dollar denominated senior secured
term loans and high-yield bonds generally rated below investment grade
which, at the time of purchase of Indosuez, represent obligations of
obligors located in the United States or other non-emerging market
countries. The notes are non-marketable and highly illiquid. On June 15,
2000, the Company advanced the $2,500,000 to Indosuez in anticipation of
the financial closing for the Income Notes.
ServiSense.com: On April 18, 2000, the Company entered into a Bridge Loan
and Warrant Agreement with ServiSense.com, Inc. ("ServiSense"), a Delaware
corporation, whereby the Company loaned ServiSense $1 million in exchange
for a note receivable and a warrant to purchase ServiSense preferred stock.
ServiSense is a bundler of core energy and telecommunications products sold
to small businesses and residential customers. Its services include local
and long distance telephone, natural gas and home heating oil supplied at
rates lower than the incumbent's rate. The note, which earns interest at
10% per annum, matures upon the earlier of April 18, 2001, or the date that
ServiSense closes an equity financing that yields at least $5 million in
gross proceeds. The note is non-marketable and highly illiquid.
The Company recognizes revenue on the above held-to-maturity debt
securities when received.
B. Other Investments
Francisco Partners: In April 2000, the Company agreed to invest $5 million
over the next six years in Francisco Partners, L.P. ("Francisco Partners"),
a partnership formed to make private information technology buy-out
investments. The Company received limited partnership interests for its
investment which aggregate to a less than 0.5% ownership interest in the
partnership. The limited partnership interests are highly illiquid and
Francisco Partners has a term of at least ten years. The Company uses the
cost method of accounting to account for its investment in Francisco
Partners. The Company had invested $325,000 as of June 30, 2000. As of
August 9, 2000, the Company had invested an additional $515,000, bringing
the total amount invested to $840,000.
Draper Atlantic Venture Fund II, L.P.: In April 2000, the Company agreed to
invest $2,500,000 over the next two years in Draper Atlantic Venture Fund
II, L.P. ("Draper Atlantic"), a partnership formed to invest primarily in
early-stage information technology companies. The Company received limited
partnership interests for its investment which approximate a one percent
ownership interest in the partnership. The Company uses the cost method to
account for its investment in Draper Atlantic. The limited partnership
interests are highly illiquid and Draper Atlantic has a term of at least
ten years. The Company had invested $125,000 as of June 30, 2000. The
Company expects to fund an additional $125,000 by August 15, 2000.
Sage Systems, Inc.: On April 14, 2000, the Company invested $500,000 in
Sage Systems, Inc. ("Sage"), in exchange for 390,625 shares of Sage's
Series A Preferred Stock. Sage is an early stage technology company that
possesses networking technology which offers web-based control over
everyday devices with a proprietary operating system which operates over
existing power lines. The Company's ownership percentage of Sage is
approximately seven percent. The Company uses the cost method of accounting
with respect to its investment in Sage. There is no public market for the
capital stock of Sage.
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Odin Millennium Partnership, Ltd.: On April 14, 2000, the Company invested
$250,000 in Odin Millenium Partnership, Ltd., a Texas limited partnership
formed to purchase the FPS Laffit Pincay, a semi-submersible offshore
drilling rig. The Company received limited partnership interests for its
investment and approximately owns a one and a half percentage interest in
the partnership. The Company uses the cost method to account for its
investment in the partnership. The limited partnership interests are highly
illiquid. The partnership may operate the drilling rig, lease it to a third
party, or sell it.
GenPhar, Inc.: On June 22, 2000, the Company invested $250,000 in GenPhar,
Inc. ("GenPhar") in exchange for 62,500 shares of Series C Preferred Stock.
GenPhar is a development stage biopharmaceutical company focusing on viral
and oncological diseases with products derived from advanced DNA
technology. The Company's ownership percentage of GenPhar is approximately
0.7%. The Company uses the cost method of accounting with respect to its
investment in GenPhar. There is no public market for the stock of GenPhar.
International Interactive Commerce, Ltd.: On June 29, 2000, the Company
invested $100,000 in International Interactive Commerce, Ltd. ("IIC"), in
exchange for 33,333 shares of Series B Preferred Stock. IIC is an internet
commerce enabling technology company in the development stage. The
Company's ownership percentage in IIC is approximately 0.3%. The Company
uses the cost method of accounting which respect to its investment in IIC.
There is no public market for the stock of IIC.
ServiSense warrants: In connection with the Bridge Loan and Warrant
Agreement, dated April 18, 2000, the Company received a warrant with a term
of five years which provides for the purchase of newly issued preferred
stock of ServiSense. The number of shares subject to the warrant is
variable depending on the date ServiSense closes a qualifying equity
financing. There is no market for the warrant.
The above investments involve significant investment risk. They are
long-term in duration and highly illiquid. There is no assurance that the
investments will realize net profits or achieve returns commensurate with
the risks associated with such investments, or that the investments will
not experience losses, which may be substantial.
7. Income Taxes
At June 30, 2000 and December 31, 1999, the Company had substantial net
deferred tax assets for which a valuation allowance of an equal amount has
been established. The balance of the deferred benefit for deconsolidated
subsidiary losses remains unchanged from December 31, 1999, to June 30,
2000, with a balance of $10,305,000 at both periods.
8. Trading Securities
Cumulative unrealized losses on trading securities equaled approximately
$241,000 at June 30, 2000 and $249,000 at December 31, 1999. The decrease
of $8,000 in unrealized losses from December 31, 1999, to June 30, 2000,
has been included in earnings during the six months ended June 30, 2000.
The Company recorded a $22,000 gain on trading securities for the six
months ended June 30, 2000, consisting of the above $8,000 unrealized gain
plus $14,000 in realized gains.
The Company first held trading securities during the year ended December
31, 1999.
The Company uses specific identification to determine the basis used in the
computation of gain or loss on the sale of trading securities.
9. Stockholder's Equity
Stock Repurchase: In November 1999, the Company's Board of Directors
authorized the repurchase of up to 2,000,000 shares of the Company's Common
Stock. The repurchase program was to continue until the Company acquired
the 2,000,000 shares or until September 30, 2000. The Company, on March 22,
2000, authorized the repurchase of an additional 2,000,000 shares and
extended the repurchase period to December 31, 2000.
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<PAGE>
In May 2000, the Company's Board of Directors authorized the repurchase of
an additional 5,000,000 shares, bringing the total number of shares
authorized for repurchase to 9,000,000. As of June 30, 2000, the Company
had reacquired under the program 8,975,734 shares out of the 9,000,000
shares authorized at a cost of $6,878,000 resulting in a decrease of
Additional Paid in Capital of $6,877,000 from inception of the program and
$6,612,000 during the six months ended June 30, 2000. As of June 30, 2000,
the Company had retired 8,945,834 of the shares repurchased. On August 3,
2000, the Company retired an additional 29,900 shares of the shares
repurchased under the program, bring the total number of shares repurchased
and retired under the program to 8,975,734.
In May and June 2000, the Company repurchased 973,320 shares directly from
stockholders at a cost of $825,000, resulting in a decrease of Additional
Paid in Capital of $825,000 for the six months ended June 30, 2000. As of
July 14, 2000, all 973,320 of the shares purchased directly had been
retired.
Warrants: In connection with the consulting agreement with Terrasearch,
Inc., the Company issued warrants to purchase up to 500,000 shares of
Common Stock of the Company at an exercise price of $1.00 per share. The
warrants become excercisable on January 1, 2002 and expire on December 31,
2005.
10. 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.
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, or (b) an amount equal to 1,000 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), or (b) an amount
equal to 1,000 times the payment made per share of Common Stock. Each share
of Preferred Stock will have 1,000 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 1,000
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.
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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.
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.
11. Commitments and Contingencies
As described in Note 3, the Company has committed to fund approximately
$12.9 million to various development projects, of which approximately $6.1
million had been funded by August 9, 2000.
As described in Note 6, the Company has committed to several long-term
investments, which require $12.1 million in cash to be invested. As of
August 9, 2000, approximately $5.6 million has been invested.
Litigation
Delaware Stockholders' Class Action and Derivative Litigation: On February
2, 2000, plaintiffs Robert L. Kohls and Louise A. Kohls filed two actions
in the Court of Chancery of the State of Delaware In and For New Castle
County, against the Company, Angus M. Duthie, Mark D. Lerdal, Gerald R.
Alderson and Charles Christenson. Plaintiffs filed amended complaints on
February 23, 2000.
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.
The first action was purportedly brought as a class action on behalf of the
named plaintiffs and all other persons who owned the PRIDES as of May 13,
1998. Plaintiffs alleged, among other things, that defendants breached the
terms of the Company's Certificate of Designations, Preferences, Rights and
Limitations (the "Certificate of Designations") under which the PRIDES were
issued and breached their fiduciary duty to protect the interests of the
holders of the PRIDES prior to the PRIDES mandatory conversion. Plaintiffs
sought, among other things, (i) certification of the action as a class
action, (ii) a declaration that the holders of PRIDES were entitled to be
paid a liquidation preference of up to $1,012.50 per share of PRIDES, and
(iii) a judgment that the defendants were liable to the PRIDES holders in
an amount up to $1,012.50 per share.
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The Delaware Court of Chancery dismissed the class action by opinion dated
July 26, 2000, and order dated August 4, 2000.
The second action is purportedly brought as a derivative action on behalf
of the Company. Plaintiffs generally allege that the purchase of the
Company's Common Stock by defendant Mark D. Lerdal in December 1997 was a
corporate opportunity and that such Common Stock should have been instead
purchased by the Company. Plaintiffs are seeking, among other things, (i) a
declaration that the purchase of the Common Stock by defendant Lerdal
constituted the taking of a corporate opportunity and is null and void,
(ii) an order requiring defendant Lerdal to transfer the Common Stock to
the Company for the consideration he paid, and (iii) to the extent the
Common Stock may not be transferred to the Company, damages for the fair
value of the Common Stock.
On July 26, 2000, the Delaware Court of Chancery denied defendants' motion
to dismiss the derivative action. On August 7, 2000, defendants filed an
application seeking certification of an interlocutory appeal to the
Delaware Supreme Court of the Court's opinion denying their motion to
dismiss. In addition, defendants filed a motion to stay the proceedings
pending the potential appeal. The Company intends to continue to defend
this action vigorously.
PRIDES 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 PRIDES.
Plaintiffs filed an amended complaint on July 7, 1998. Generally, the
amended complaint alleged that the Company was currently in liquidation and
was in liquidation prior to May 14, 1998, that the plaintiffs were entitled
to receive the liquidation preference of $1,012.50 per share set forth in
the Certificate of Designations in any distribution of assets the Company
might 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 sought, among other things, (i) a declaration that
they were entitled to receive the liquidation preference in any
distribution of assets before any distribution was made to holders of
Common Stock and that the mandatory conversion of the PRIDES did not
operate to eliminate their right to receive the liquidation preference,
(ii) related injunctive relief, and (iii) other unspecified damages.
A bench trial in the action was held February 16-19, 1999, before the Court
of Chancery and on October 13, 1999, the Court entered judgment in favor of
the Company on all counts and denied the relief requested by plaintiffs. On
October 26, 1999, plaintiffs filed a Notice of Appeal with the Delaware
Supreme Court.
On April 6, 2000, the Supreme Court of the State of Delaware affirmed on
all counts the judgment of the Court of Chancery in favor of the
Company.
Federal Stockholders' 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 alleged claims under
sections 11 and 15 of the Securities Act of 1933, and sections 10(b) and
20(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder,
based on alleged misrepresentations and omissions in the Company's public
statements, on behalf of a class consisting of persons who purchased the
Company's Common Stock during the period from September 21, 1993 (the date
of the Company's initial public offering) through August 8, 1995 and
persons who purchased the Company's PRIDES (depository shares) during the
period from April 28, 1994 (the public offering date of the PRIDES) through
August 8, 1995. The amended complaint alleged 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 sought unspecified damages and other relief.
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The Court 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
judgment and ordered that plaintiffs take nothing and that the action be
dismissed on the merits. The plaintiffs have appealed the Court's order.
The Company intends to defend the appeal vigorously.
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
$1,121,305. On April 13, 1999, the Company filed a Motion to Dismiss for
lack of personal jurisdiction and also filed a Request to Revise. A hearing
on the Motion and Request is pending. The Company intends to defend this
action vigorously.
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 which took place on 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 litigation has been stayed
by agreement of the parties. In the event that the litigation resumes, 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.
The Company does not believe that the ultimate outcome of the
above-described matters will have a material adverse effect on the
Company's financial position.
Lease Commitments: The Company leases approximately 2,400 square feet of
office space in San Francisco, CA. The associated lease commitment is
approximately $75,000 annually, expiring on September 30, 2001.
12. Subsequent events
As described in Note 3, the Company, subsequent to June 30, 2000, has
agreed to invest $6 million for an indirect twenty percent interest in the
Astoria Project.
On July 14 and August 3, 2000, the Company retired 960,600 and 29,900
shares of common stock it had repurchased directly from shareholders,
respectively.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
KENETECH Corporation ("KENETECH") is a Delaware corporation that has
historically been involved in the development, construction, and management
of independent power projects. The Company continues in project development
activities at this time; however, it has ceased its construction and
management activities. The Company is currently participating with other
parties in developing two electric generating facilities and one oriented
strand-board facility. As used in this document, "Company" refers to
KENETECH and its wholly-owned subsidiaries (including KENETECH Windpower,
Inc. ("KWI") only through May 29, 1996).
The Company currently has substantial cash balances and net operating
income tax losses and other tax attributes to carry forward to future
years. While pursuing development projects, management continues to
evaluate different businesses that the Company might pursue, through
acquisition or otherwise. In addition, the Company is evaluating all
strategic alternatives available to it. The Company has retained
professionals to assist it in such evaluations.
OSB Chateaugay
In July 1999, the Company entered into a funding and participation
agreement with OSB Chateaugay, LLC ("OSB"). The funding will be used by OSB
to pursue the development of an oriented strand-board project in
Chateaugay, New York (the "OSB Project"). In addition to development
services, the Company agreed to fund up to $1.25 million. The OSB Project
is expected to produce up to 475 million square feet of strand board per
year. Construction is anticipated to commence in the second half of 2000,
but may be delayed. In exchange for the services and funding, the Company
will receive participation distributions. The funding is to be repaid upon
the completion of certain development milestones as specified in the
funding and participation agreement. Repayment of the funding is to occur
before any participation distributions. Repayment of the funding and
participation distributions are both dependent upon the ultimate success of
the OSB Project.
The Company had advanced $727,000 as of June 30, 2000. As of August 9,
2000, the Company had funded an additional $44,000 on the OSB Project,
bringing the total amount funded to $771,000.
Astoria
In October 1999, the Company entered into funding and participation
agreements with Astoria Energy, LLC ("Astoria") to provide funding under a
note agreement of up to $3 million for the development of a 1,000 megawatt
independent power plant (the "Astoria Project") to be located in Astoria,
Queens, New York. The Astoria Project is currently under development and is
expected to commence construction in the second half of 2001. In exchange
for the services and funding, the Company will receive, in addition to
repayment of the note evidencing the funding, certain participation
distributions. The note is secured by all property and assets of Astoria.
On March 14, 2000, the note was amended to change the due date of the
original note to December 15, 2000, and provide for interest at 20% on the
balance outstanding beginning on April 15, 2000. On March 14, 2000, the
Company also committed to fund an additional $2 million toward the
development of the Astoria Project in the form of a second note. The second
note is due and payable on December 15, 2000, and carries interest at 20%
on the balance outstanding.
Recovery of the notes, interest on the notes, and participation
distributions are all dependent upon the ultimate success of the Astoria
Project. Accordingly, interest income and participation distributions will
be recognized upon the completion of certain project milestones.
As of June 30, 2000, the Company had advanced $4,974,000 on the Astoria
Project, consisting of $3,000,000 on the original note and $1,974,000 on
the second note.
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Subsequent to June 30, 2000, the Company has agreed to invest $6 million
for a twenty-percent interest in Steinway Creek Electric Generating Company
LLC ("Steinway"), a Delaware limited liability company. Steinway directly
owns 100% of Astoria Project Partners LLC, which in turn owns 100% of
Astoria. The Company will fund the $6 million initial obligation on August
15, 2000. The Company has the obligation to fund a further $2 million in
exchange for an additional ten-percent interest in Steinway, depending upon
the status of the project's funding as of December 1, 2000. Upon
acquisition of the twenty-percent interest in Steinway, the Company may
need to account for the interest using APB Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock.
Whinash
In February 2000, the Company agreed to fund up to $600,000 for the
development of a wind-powered electrical generating facility to be located
in Whinash, Cumbria, England. The project is a 50 megawatt facility. In
exchange for the funding, the Company will receive certain participation
distributions upon the sale or financial closing of the Whinash project. As
of June 20, 2000, the Company had fund $350,000.
Other Investments
A. Held-to-maturity debt securities
Indosuez Capital Funding VI, Ltd: In April 2000, the Company agreed to
purchase $2,500,000 of Income Notes of Indosuez Capital Funding VI, Ltd.
("Indosuez"). The Income Notes are non-recourse, junior and subordinated,
with a stated term of twelve years. Indosuez is a newly formed company
organized under the laws of the Cayman Islands to acquire and manage a
diversified portfolio of corporate and other debt obligations. The
portfolio will consist primarily of U.S. dollar denominated senior secured
term loans and high-yield bonds generally rated below investment grade
which, at the time of purchase of Indosuez, represent obligations of
obligors located in the United States or other non-emerging market
countries. The notes are non-marketable and highly illiquid. On June 15,
2000, the Company advanced the $2,500,000 to Indosuez in anticipation of
the financial closing for the Income Notes.
ServiSense.com: On April 18, 2000, the Company entered into a Bridge Loan
and Warrant Agreement with ServiSense.com, Inc. ("ServiSense"), a Delaware
corporation, whereby the Company loaned ServiSense $1 million in exchange
for a note receivable and a warrant to purchase ServiSense preferred stock.
ServiSense is a bundler of core energy and telecommunications products sold
to small businesses and residential customers. Its services include local
and long distance telephone, natural gas and home heating oil supplied at
rates lower than the incumbent's rate. The note, which earns interest at
10% per annum, matures upon the earlier of April 18, 2001, or the date that
ServiSense closes an equity financing that yields at least $5 million in
gross proceeds. The note is non-marketable and highly illiquid.
The Company recognizes revenue on the above held-to-maturity debt
securities when received.
B. Other Investments
Francisco Partners: In April 2000, the Company agreed to invest $5 million
over the next six years in Francisco Partners, L.P. ("Francisco Partners"),
a partnership formed to make private information technology buy-out
investments. The Company received limited partnership interests for its
investment which aggregate to a less than 0.5% ownership interest in the
partnership. The limited partnership interests are highly illiquid and
Francisco Partners has a term of at least ten years. The Company uses the
cost method of accounting to account for its investment in Francisco
Partners. The Company had invested $325,000 as of June 30, 2000. As of
August 9, 2000, the Company had invested an additional $515,000, bringing
the total amount invested to $840,000.
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Draper Atlantic Venture Fund II, L.P.: In April 2000, the Company agreed to
invest $2,500,000 over the next two years in Draper Atlantic Venture Fund
II, L.P. ("Draper Atlantic"), a partnership formed to invest primarily in
early-stage information technology companies. The Company received limited
partnership interests for its investment which approximate a one percent
ownership interest in the partnership. The Company uses the cost method to
account for its investment in Draper Atlantic. The limited partnership
interests are highly illiquid and Draper Atlantic has a term of at least
ten years. The Company had invested $125,000 as of June 30, 2000. The
Company expects to fund an additional $125,000 by August 15, 2000.
Sage Systems, Inc.: On April 14, 2000, the Company invested $500,000 in
Sage Systems, Inc. ("Sage"), in exchange for 390,625 shares of Sage's
Series A Preferred Stock. Sage is an early stage technology company that
possesses networking technology which offers web-based control over
everyday devices with a proprietary operating system which operates over
existing power lines. The Company's ownership percentage of Sage is
approximately seven percent. The Company uses the cost method of accounting
with respect to its investment in Sage. There is no public market for the
capital stock of Sage.
Odin Millennium Partnership, Ltd.: On April 14, 2000, the Company invested
$250,000 in Odin Millenium Partnership, Ltd., a Texas limited partnership
formed to purchase the FPS Laffit Pincay, a semi-submersible offshore
drilling rig. The Company received limited partnership interests for its
investment and approximately owns a one and a half percentage interest in
the partnership. The Company uses the cost method to account for its
investment in the partnership. The limited partnership interests are highly
illiquid. The partnership may operate the drilling rig, lease it to a third
party, or sell it.
GenPhar, Inc.: On June 22, 2000, the Company invested $250,000 in GenPhar,
Inc. ("GenPhar") in exchange for 62,500 shares of Series C Preferred Stock.
GenPhar is a development stage biopharmaceutical company focusing on viral
and oncological diseases with products derived from advanced DNA
technology. The Company's ownership percentage of GenPhar is approximately
0.7%. The Company uses the cost method of accounting with respect to its
investment in GenPhar. There is no public market for the stock of GenPhar.
International Interactive Commerce, Ltd.: On June 29, 2000, the Company
invested $100,000 in International Interactive Commerce, Ltd. ("IIC"), in
exchange for 33,333 shares of Series B Preferred Stock. IIC is an internet
commerce enabling technology company in the development stage. The
Company's ownership percentage in IIC is approximately 0.3%. The Company
uses the cost method of accounting which respect to its investment in IIC.
There is no public market for the stock of IIC.
ServiSense warrants: In connection with the Bridge Loan and Warrant
Agreement, dated April 18, 2000, the Company received a warrant with a term
of five years which provides for the purchase of newly issued preferred
stock of ServiSense. The number of shares subject to the warrant is
variable depending on the date ServiSense closes a qualifying equity
financing. There is no market for the warrant.
The above investments involve significant investment risk. They are
long-term in duration and highly illiquid. There is no assurance that the
investments will realize net profits or achieve returns commensurate with
the risks associated with such investments, or that the investments will
not experience losses, which may be substantial.
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 Exchange 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.
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Results of Operations
---------------------
The Company recognized net income for the second quarter of 2000 of $633
thousand as compared to $1,188 thousand in the second quarter of 1999.
The Company recorded other revenue of $623 thousand for the quarter ended
June 30, 2000, compared to $577 thousand for the comparable quarter in
1999. Other revenue consists primarily of interest income earned on trading
debt securities and realized and unrealized gains and losses on trading
debt securities. Interest income decreased to $547 thousand for the quarter
ended June 30, 2000 from $577 thousand for the comparable period in 1999
due to the reduction in funds invested. During the quarter ended June 30,
2000, the Company recorded a $76 thousand gain on trading debt securities,
comprised of a $6 thousand realized gain on sale, and a $70 thousand
unrealized gain in fair value. No such securities were owned during the
comparable quarter in 1999.
Selling, general and administrative expenses decreased to $607 thousand for
the quarter ended June 30, 2000 from $698 thousand for the comparable
period in 1999. Current period general and administrative expense consists
primarily of salary and wages, legal costs associated with litigation, and
consulting expenses.
The Company recorded no gain or loss on the disposition of subsidiaries and
assets for the quarter ended June 30, 2000, compared to a $311 thousand
gain for the comparable quarter in 1999. The $311 thousand gain in 1999
related primarily to the sales of partnership interests.
The Company recorded other income of $617 thousand for the quarter ended
June 30, 2000 compared to $41 thousand in this period in 1999. Other income
in 2000 relates primarily to the reversal of construction-related accounts
payable upon which the statute of limitations had expired and gain realized
on the sale of demutualized insurance company stock. The Company recorded
no gain on settlement of accounts payable in the current quarter compared
to $957 thousand in 1999.
Income taxes: The Company uses 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, 2000 and
1999, due to the expected utilization of deferred tax benefits offset by
reduction in valuation reserve.
The Company recognized net income for the six months ended June 30, 2000,
of $701 thousand, compared to net income of $4,831 thousand for the
comparable period in 1999.
The Company recorded other revenue of $1,201 thousand for the six months
ended June 30, 2000, compared to $1,401 thousand for the comparable period
in 1999. Other revenue consists primarily of interest income earned on
trading debt securities and realized and unrealized gains and losses on
trading debt securities. Interest income decreased to $1,179 thousand for
the six months ended June 30, 2000 from $1,380 thousand for the comparable
period in 1999 due to the reduction in funds invested. During the six
months ended June 30, 2000, the Company recorded a $22 thousand gain on
trading debt securities, comprised of a $8 thousand realized gain on sale,
and a $14 thousand unrealized gain in fair value. No such securities were
owned during the comparable period in 1999.
Selling, general and administrative expenses decreased to $1,399 thousand
for the six months ended June 30, 2000 from $2,975 thousand for the
comparable period in 1999 due principally to reduced personnel expenses
related to the payment of severance to several senior level executives in
1999. Current period general and administrative expense consists primarily
of salary and wages, legal costs associated with litigation, and consulting
expenses.
The Company recorded no gain or loss on the disposition of subsidiaries and
assets for the six months ended June 30, 2000, compared to a $5 million
gain for the comparable period in 1999. The $5.0 million gain in 1999
represents primarily the gain on the disposition of the Chateaugay Project
and a Dutch limited partnership.
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The Company recorded other income of $899 thousand for the six months ended
June 30, 2000, compared to $103 thousand in this period in 1999. Other
income in 2000 relates primarily to the reduction in accrued liabilities
related to the favorable resolution of various legal matters, the reversal
of construction-related accounts payable upon which the statute of
limitations had expired, and gain realized on the sale of the demutualized
insurance company stock.
The Company recognized no gain on settlement of accounts payable in the
six-month period ended June 30, 2000, compared to $957 thousand in 1999.
Income taxes: The Company uses 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, 2000 and
1999 due to the expected utilization of deferred tax benefits offset by
reduction in valuation reserve.
Liquidity and Capital Resources
-------------------------------
Operating activities
During the first six months of 2000, operating activities provided cash of
approximately $4,314,000 principally due to the proceeds from the sale of
trading debt securities, offset by the payment of general and
administrative expenses and the purchase of trading debt securities.
Investing activities
During the first six months of 2000, investment activities used cash of
approximately $8,614,000, consisting primarily of the purchase of
nonmarketable investments of $5,050,000 and the funding of $3,600,000 in
project development costs.
Financing activities
During the first six months of 2000, the Company used cash of approximately
$6,647,000 in repurchasing its common stock.
Status
Given the current operations and strategy of the Company, its cash balances
are adequate for the foreseeable future. As of August 9, 2000, the Company
had approximately $6.8 million remaining to be funded under its project
development funding commitments and approximately $6.5 million remaining
under its investment funding commitments.
Effect of Recent Accounting Pronouncements
Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Boards issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 is effective for the Company's quarter ending
March 31, 2001. The Company is in the process of determining the impact of
SFAS No. 133 on its financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101.
The SAB summarized certain of the SEC Staff's views in applying generally
accepted accounting principles to revenue recognition in financial
statements. The Company believes it currently conforms to the guidance
contained in the bulletin.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101.
The SAB summarized certain of the SEC Staff's views in applying generally
accepted accounting principles to revenue recognition in financial
statements. The Company currently conforms to the guidance contained in the
bulletin.
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Item 3. Quantitative and Qualitative Disclosure about Market Risk
Market Risk - Trading Securities
As of June 30, 2000, the Company's exposure to market risk associated with
instruments entered into for trading purposes is principally confined to
its investment in trading debt securities, which are subject primarily to
interest rate risk. The Company's investment in trading debt securities is
a material component of the Company's total assets; therefore, market risk
exposure should be considered to be material.
The Company manages its interest rate risk through specific investment
criteria designed to minimize such risk. The Company also employs
discretionary selling practices aimed at minimizing realized market losses.
The Company could foreseeably hold its investment in trading debt
securities until the investments' maturity, thereby effectively eliminating
associated interest rate risk. The majority of the Company's investment in
trading debt securities that is subject to interest rate risk matures
within three years.
The potential gain or loss in fair value to the Company's investment in
trading debt securities resulting from selected hypothetical increases in
interest rates is expressed in the following sensitivity analysis.
Change in market interest rates
-------------------------------
Current 10% 20%
-------------------------------------
(in thousands)
Fair value of trading debt
securities $ 25,726 $ 25,492 $ 25,492
Decrease from current fair value -- $ (104) $ (234)
The sensitivity analysis above, known as a stress test in the banking
industry, models the change in fair value based upon specific changes in
the prime interest rate.
The Company has no material market risk relating to foreign exchange rate
risk or commodity price risk.
Market Risk - Non-Trading Securities
As of June 30, 2000, market risk associated with instruments entered into
for other than trading purposes, namely the Company's investments in
held-to-maturity debt securities and other investments, is not material.
The Company's held-to-maturity debt securities and other investments are
non-marketable and non-tradeable.
Many of the Company's held-to-maturity debt securities and other
investments represent investments in development-stage entities. The fair
value of such investments may suffer adverse consequences should the
investee entities fail to develop successfully.
With respect to both investments entered into for trading purposes and
instruments entered into for purposes other than trading, the Company is
exposed to risk of classification as an investment company under the
Investment Company Act of 1940. Some of the Company's investments may
constitute investment securities under the 1940 Act. A company may be
deemed to be an investment company if it owns investment securities with a
value exceeding forty percent of its total assets, subject to certain
exclusions. Investment companies are subject, in general, to registration
under, and compliance with, the 1940 Act. If the Company was deemed to be
an investment company under the 1940 Act, the Company would be prohibited
from engaging in business or issuing securities as it has in the past, and
might be subject to civil and criminal penalties for noncompliance.
Additionally, certain of the Company's contracts might be voidable, and a
court-appointed receiver could take control of the Company and liquidate
its business.
Although the Company's investments currently comprise less than forty
percent of its total assets, fluctuations in the value of these securities
or in other of the Company's assets may cause the limitation to be
exceeded. To avoid exceeding the limitation, the Company may dispose of
assets, realizing losses as a consequence, or may purchase additional
non-investment assets. If the Company sells investment securities, it may
sell them sooner than it otherwise would, perhaps at depressed prices or on
unfavorable terms. Some investments may not be sold due to restrictions on
transfer or non-marketability. Moreover, the Company may incur substantial
tax liabilities upon any sale.
23
<PAGE>
Part II OTHER INFORMATION
Item 1. Legal Proceedings.
See discussion under Note 11 of Item 1 incorporated herein by
reference.
Item 2. Changes in Securities and Use of Proceeds.
(a) On May 4, 2000, the Company amended its Restated Certificate of
Incorporation to eliminate the class of preferred stock known as
Preferred Redeemable Increased Dividend Equity Securities SM, 8-1/4%
PRIDES SM, Convertible Preferred Stock ("PRIDES"). No shares of PRIDES
have been outstanding since their mandatory conversion on May 14, 1998
into Common Stock of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3 Restated Certificate of Incorporation.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K, on May 4, 2000, reporting
under Item 5, the approval of the repurchase of an additional
5,000,000 shares under the Company's stock repurchase program. The
Company also reported that it had completed the repurchase of
2,000,000 shares under the repurchase program approved in March 2000.
The Company filed a Report on Form 8-K, on April 7, 2000, reporting,
under Item 5, the affirmance by the Delaware Supreme Court of the
ruling in favor of the Company on all counts in the PRIDES Litigation
(see Item 1, Note 11).
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 thereunto duly authorized.
KENETECH Corporation
By:
Date: August 14, 2000 Mark D. Lerdal
President, Chief Executive Officer
and Principal Accounting Officer
Date: August 14, 2000 By:
Andrew M. Langtry
Corporate Controller and
Chief Accounting Officer
25
<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 14, 2000 Mark D. Lerdal
President, Chief Executive Officer
and Principal Accounting Officer
Date: August 14, 2000 By: /s/ Andrew M. Langtry
Andrew M. Langtry
Corporate Controller and
Chief Accounting Officer
26