-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ml7RVtM1LhIs4cL/Fl+vbADNhCNrHbwPwP6l1qV85Q/M3UGWHMXB9KwxhEYVCmal I0ANUoY6EHU2DVTXpSwdVA== 0000807708-96-000009.txt : 19960921 0000807708-96-000009.hdr.sgml : 19960921 ACCESSION NUMBER: 0000807708-96-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960828 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENETECH CORP CENTRAL INDEX KEY: 0000807708 STANDARD INDUSTRIAL CLASSIFICATION: 4991 IRS NUMBER: 943009803 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22072 FILM NUMBER: 96621692 BUSINESS ADDRESS: STREET 1: 500 SANSOME ST STE 800 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4153983825 MAIL ADDRESS: STREET 1: 500 SANSOME STREET STREET 2: SUITE 300 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 10-Q 1 QUARTERLY PERIOD AND 26 WEEK FINANCIALS 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, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 33-53132 KENETECH CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-3009803 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 500 Sansome Street, Suite 300 San Francisco, California 94111 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 398-3825 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No On August 2, 1996, there were 36,826,098 shares of the issuer's Common Stock, $.0001 par value outstanding. 1 PART I - FINANCIAL INFORMATION Part I Item 1. Financial Statements. KENETECH Corporation Consolidated Financial Statements Page Consolidated Statements of Operations for the quarterly periods ended June 30, 1996 and July 1, 1995 3 Consolidated Statements of Operations for the twenty-six weeks ended June 30, 1996 and July 1, 1995 4 Consolidated Balance Sheets, June 30, 1996 and December 31, 1995 5 Consolidated Statement of Stockholders' Equity for the twenty-six weeks ended June 30, 1996 6 Consolidated Statements of Cash Flows for the twenty-six weeks ended June 30, 1996 and July 1, 1995 7 Notes to Consolidated Financial Statements 8 - 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 14 - 22 Part II Item 3. Defaults Upon Senior Securities. 23 Item 6. Exhibits and Reports on Form 8-K. 23 2 KENETECH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS for the quarterly periods ended June 30, 1996 and July 1, 1995 (unaudited, in thousands, except per share amounts) June 30, July 1, 1996 1995 (See Note 1) Revenues: Construction services $ 12,498 $ 16,170 Maintenance, management fees and other 7,238 10,504 Energy sales 5,429 12,972 Windplant sales 3,560 57,560 Interest on partnership notes and funds in escrow 457 1,475 Energy management services 309 2,167 -------- -------- Total revenues 29,491 100,848 Costs of revenues: Construction services 10,839 16,017 Energy plant operations 9,797 17,480 Windplant sales 628 44,777 Energy management services 64 770 -------- -------- Total costs of revenues 21,328 79,044 Gross margin 8,163 21,804 Engineering expenses 1,603 3,481 Project development and marketing expenses 2,520 2,911 General and administrative expenses 8,491 8,592 -------- -------- (Loss) Income from operations (4,451) 6,820 Interest income 299 475 Interest expense (5,053) (5,257) Equity (loss) income of unconsolidated affiliates (90) 530 Gain on sales of subsidiaries and fixed assets 253 - -------- -------- (Loss) Income before taxes (9,042) 2,568 Income tax provision 23,393 1,076 -------- -------- Net (loss) income $(32,435) $ 1,492 ======== ======== Net loss per common share $ (0.94) $ (0.02) Weighted average number of common shares used in computing per share amounts 36,826 36,334 The accompanying notes are an integral part of these consolidated financial statements. 3 KENETECH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS for the twenty-six weeks ended June 30, 1996 and July 1, 1995 (unaudited, in thousands, except per share amounts) June 30, July 1, 1996 1995 (See Note 1) Revenues: Construction services $ 23,393 $ 29,118 Maintenance, management fees and other 14,507 17,596 Energy sales 10,184 17,327 Windplant sales 6,942 104,606 Interest on partnership notes and funds in escrow 1,125 2,712 Energy management services 1,047 4,295 -------- -------- Total revenues 57,198 175,654 Costs of revenues: Construction services 20,148 28,156 Energy plant operations 24,270 32,741 Windplant sales 3,972 79,081 Energy management services 250 1,837 -------- -------- Total costs of revenues 48,640 141,815 Gross margin 8,558 33,839 Engineering expenses 4,205 6,194 Project development and marketing expenses 4,522 4,537 General and administrative expenses 15,587 16,180 -------- -------- (Loss) Income from operations (15,756) 6,928 Interest income 774 1,467 Interest expense (10,787) (10,343) Equity loss of unconsolidated affiliates (90) (586) Gain on sales of subsidiaries and fixed assets 66 - -------- -------- Loss before taxes (25,793) (2,534) Income tax provision (benefit) 23,393 (975) -------- -------- Net loss $(49,186) $ (1,559) ======== ======== Net loss per common share $ (1.46) $ (0.16) Weighted average number of common shares used in computing per share amounts 36,732 36,203 The accompanying notes are an integral part of these consolidated financial statements. 4 KENETECH CORPORATION CONSOLIDATED BALANCE SHEETS June 30, 1996 and December 31, 1995 (unaudited, in thousands, except share amounts) ASSETS June 30, December 31, 1996 1995 (See Note 1) Current assets: Cash and cash equivalents $ 8,427 $ 16,842 Marketable securities 3,536 - Funds in escrow, net 611 12,531 Accounts receivable 15,796 52,593 Partnership notes and interest receivable, net 777 1,477 Inventories 1,107 38,684 Investment in power plant held for sale 19,985 19,951 Deferred tax assets, net - 2,764 Other assets 3,181 5,980 -------- -------- Total current assets 53,420 150,822 Accounts receivable and funds in escrow, net 4,122 21,031 Partnership notes and interest receivable, net 6,731 22,566 Inventories, net - 18,431 Property, plant and equipment, net 28,381 118,214 Power plants under development 12,236 14,956 Investments in affiliates 190 9,686 Deferred tax assets, net 17,912 38,235 Other assets 6,819 7,308 --------- -------- Total assets $129,811 $401,249 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable $ 18,549 $ 38,663 Accrued liabilities 24,212 59,065 Bank loan payable - 13,200 Debt associated with power plant held for sale 16,958 16,958 Other notes payable 22,642 18,794 Estimated warranty costs - 7,374 Senior secured notes payable 98,946 - -------- -------- Total current liabilities 181,307 154,054 Senior secured notes payable - 98,887 Accrued loss on contracts 1,131 36,992 Other notes payable - 53,161 Estimated warranty costs and other long-term obligations 964 62,643 Accrued dividends on preferred stock 5,352 1,071 -------- -------- Total liabilities 188,754 406,808 Commitments and contingencies Stockholders' deficiency: Convertible preferred stock - 10,000,000 shares authorized, $.01 par value; issued and outstanding 102,492, $109,125 liquidation preference 99,561 99,561 Common stock - 110,000,000 shares authorized, $.0001 par value; issue and outstanding 36,826,098 in 1996 and 36,533,836 in 1995 4 4 Additional paid-in capital 140,503 144,551 Unearned compensation (224) (281) Cumulative foreign exchange (121) 86 Accumulated deficit (298,666) (249,480) -------- -------- Total stockholders' deficiency (58,943) (5,559) -------- -------- Total liabilities and stockholders' deficiency $129,811 $401,249 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 5 KENETECH CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY for the twenty-six weeks ended June 30, 1996 (unaudited, in thousands, except share amounts)
Cumulative Convertible Common Stock Additional Effect of Preferred Stock Series A Paid-in Unearned Foreign (Accumulated Shares Amount Shares Amount Capital Compensation Exchange Deficit) Total Balance, December 31, 1995 102,492 $ 99,561 36,533,836 $ 4 $ 144,551 $ (281) $ 86 $(249,480) $ (5,559) Issuance of common stock - - 292,262 - 234 - - - 234 Recognition of unearned compensation - - - - - 57 - - 57 Preferred stock dividends - - - - (4,282) - - - ( 4,282) Foreign exchange - - - - - - (207) - (207) Net loss - - - - - - - (49,186) (49,186) -------- -------- ---------- ------ --------- --------- --------- ---------- --------- Balance, June 30, 1996 102,492 $ 99,561 36,826,098 $ 4 $ 140,503 $ (224) $ (121) $(298,666) $(58,943) ======== ======== ========== ====== ========= ========= ========= ========== =========
The accompanying notes are an integral part of these consolidated financial statements. 6 KENETECH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS for the twenty-six weeks ended June 30, 1996 and July 1, 1995 (unaudited, in thousands) June 30, July 1, 1996 1995 (See Note 1) Cash flows from operating activities: Net loss $(49,186) $ (1,559) Adjustments to reconcile net loss to net cash used in operating activities: Subsidiary bankruptcy filing - - Deferred income taxes 23,393 (1,164) Depreciation, amortization and other (2,050) 11,414 Changes in assets and liabilities: Funds in escrow, net 2,870 4,057 Accounts receivable 25,024 (41,840) Partnership notes and interest receivable, net 290 5,230 Inventories 1,496 (20,139) Power plants under development - (1,282) Other assets (935) (183) Accounts payable and accrued liabilities (6,851) (12,091) Estimated warranty costs (1,491) 402 Accrued loss on contracts (2,157) - -------- -------- Net cash used in operating activities (9,597) (57,155) Cash flows from investing activities: Marketable securities: Sales - 19,949 Purchases (3,536) (481) Acquisition of Century Contractors West Inc. - (1,360) Additions to property plant and equipment (390) (19,414) Proceeds from sales of subsidiaries and assets 8,115 2,413 Investments in affiliates: Contributions (1,814) (6,197) Distributions 522 520 Power plants under development (4,765) - -------- -------- Net cash used in investing activities (1,868) (4,570) Cash flows from financing activities: Other notes payable: Proceeds - 1,678 Payments (3,700) (8,493) Proceeds on bank loan borrowings 11,516 56,000 Payments on bank loan borrowings (5,000) - Proceeds from issuance of common stock, net 234 1,867 Payment of preferred stock dividends - (4,282) -------- -------- Net cash provided by financing activities 3,050 46,770 -------- -------- Decrease in cash and cash equivalents (8,415) (14,955) Cash and cash equivalents at beginning of period 16,842 42,618 Cash and cash equivalents at end of period $ 8,427 $ 27,663 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 7 KENETECH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) for the quarterly period and twenty-six weeks ended June 30, 1996 and July 1, 1995 1. GENERAL AND BASIS OF PRESENTATION The interim consolidated financial statements presented herein include the accounts of KENETECH Corporation ("KENETECH" or the "Company") and certain subsidiaries. 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, 1995, which include information as to significant accounting policies. Such interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary 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 of a full year. The Company's quarterly periods represent thirteen weeks of operations; accordingly, the second quarter of 1996 and 1995 ended June 30, 1996 and July 1, 1995 respectively. The consolidated financial statements of KENETECH Corporation and certain subsidiaries as of and for the periods ending June 30, 1996 and December 31, 1995 have been prepared assuming the Company will continue as a going concern. On May 29, 1996, the Company's windpower subsidiary, KENETECH Windpower, Inc. ("KWI"), filed for protection under Chapter 11 of the Federal Bankruptcy Code and reported an excess of liabilities over the fair value of its assets. Although the Company continues to own the common stock of KWI and provides certain day-to-day management under the jurisdiction of the Bankruptcy Court, the Company believes it is probable that such ownership and control will not exist after completion of the bankruptcy proceedings. Accordingly, as of May 29, 1996 KWI ceased to be accounted for as a consolidated subsidiary of the Company. The Company's investment in KWI is recorded as zero in "Investments in Affiliates" in the accompanying June 30, 1996 consolidated balance sheet. Revenues and expenses of KWI from January 1, 1996 through May 29, 1996 are reflected in consolidated statements of operations and cash flows (see Note 3 on KWI). The Company has announced its intention to sell its construction subsidiary, CNF Industries, Inc. ("CNF"). Since the Company continues to own the common stock of CNF and controls its operations, the consolidated financial statements continue to reflect the consolidation of the assets, liabilities, revenues and expenses of CNF. 2. LIQUIDITY AND GOING CONCERN As stated above, the consolidated financial statements as of and for the periods ending June 30, 1996 and December 31, 1995 have been prepared assuming the Company will continue as a going concern. The Company incurred a significant loss in 1995, a substantial portion of which was a result of special charges. The Company also incurred a loss during the twenty-six week period ended June 30, 1996, has negative working capital and its liquidity is severely constrained. Also, as mentioned above, KWI filed for protection under Chapter 11 of the Federal Bankruptcy Code and reported an excess of liabilities over the fair value of its assets. Even excluding KWI, the Company projects negative operating cash flows for the remainder of 1996 and certain lenders and creditors are seeking repayment and/or restructuring of the amounts due them. These factors raise substantial doubt about the Company's ability to continue as a going concern in its current form. Management's plans to address its liquidity and its future operations excluding KWI include: 1) The sale of certain assets, primarily development projects and subsidi- aries not engaged in windpower activities, for which it expects to receive substantial cash proceeds and gains. (see Notes 8 and 12). 2) Discussion and negotiations of corporate obligations and commitments with lenders, suppliers and other creditors. There are numerous risks and uncertainties which may prevent the Company from successfully implementing its strategy. These include the failure to sell assets or subsidiaries within the necessary time frame or for the estimated amounts, and the impacts of certain litigation. Although the Company intends to aggressively market for sale certain of its assets and subsidiaries for which it anticipates substantial proceeds, there is no assurance as to whether they will be sold or the price or timing of such sales. There can be no assurance that the Company will be successful in implementing its plans and that the Company will continue as a going concern. 8 KENETECH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) for the quarterly period and twenty-six weeks ended June 30, 199 and July 1, 1995 3. UNCONSOLIDATED SUBSIDIARY As mentioned previously, KWI filed for protection on May 29, 1996 under Chapter 11 of the Federal Bankruptcy Code and reported an excess of liabilities over the fair value of its assets. Although the Company continues to own the common stock of KWI and provides certain day-to-day management under the jurisdiction of the Bankruptcy Court, the Company believes it is probable that such ownership and control will not exist after completion of the bankruptcy proceedings. Accordingly, as of May 29, 1996 KWI ceased to be accounted for as a consolidated subsidiary of the Company. The balance sheet of KWI as of June 30, 1996 was prepared under the guidance of Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" and not on a liquidation basis. KENETECH WINDPOWER, INC. CONSOLIDATED BALANCE SHEET June 30, 1996 (unaudited, in thousands) Assets: Liabilities and Stockholder's Cash $ 7,582 Deficiency: Funds in Escrow 8,108 Bank Loan Payable $ 12,050 Accounts Receivable 18,182 Accounts Payable 31,930 Partnership Notes and Accrued Liabilities 27,752 Interest Receivable 16,380 Accrued Warranty Liabilities 64,462 Due From Affiliates 732 Accrued Loss on Contracts 33,704 Inventories 32,264 Other Notes Payable 36,876 Projects Held for Sale 17,850 -------- Other Assets 3,771 Total Liabilities 206,774 Net Property, Plant and Equipment 79,065 Stockholder's Deficiency (12,821) Development Costs 7,541 Investment in Affiliates 2,478 -------- Total Liabilities Total Assets $193,953 and Equity $ 193,953 ======== ======== KWI's 1996 operations through May 29, 1996 are reflected in the accompanying consolidated financial statements. KWI's operating results for June 1996 generated a net loss of $164,000 which is not included in the consolidated income statement of the Company. The Company's investment in KWI is recorded as zero in "Investments in Affiliates" in the accompanying June 30, 1996 consolidated balance sheet. Deferred Taxes: As of December 31, 1995 KWI had recognized a valuation allowance equal to the balance of its net deferred tax assets due to the uncertainty regarding KWI's ability to utilize such assets. Bank Loan Payable: On September 30, 1994, KWI entered into a $75,000,000 two year revolving credit agreement (the Windplant construction line) to finance the construction of Windplants with a group of seven banks. This agreement requires KWI to meet certain financial ratios and net worth tests. In February 1996 the Company and KWI entered into a Waiver Agreement with the banks that did not include waiver of the financial ratios and net worth requirements. However, under the terms of this Waiver Agreement, the banks agreed to fund a draw request and waive declaring a default based upon a "material adverse change" and the Company agreed to suspend payment of dividends on its preferred stock so long as borrowings remain outstanding. On May 13, 1996 KWI and the banks agreed to reduce the size of the facility to $12,050,000 (the amount outstanding). As of June 30, 1996, there was $12,050,000 in borrowings outstanding and no amounts committed as letters of credit or bankers' acceptances under this revolving credit agreement. As of June 30, 1996 KWI was not in compliance with these financial ratios or net worth requirements; however, no demand for payment of the amounts outstanding has been made. KWI is negotiating with a third party buyer for the purchase of a project held for sale. The proceeds from this sale when consummated would repay the amount due under this revolving credit agreement. 9 KENETECH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) for the quarterly period and twenty-six weeks ended June 30, 1996 and July 1, 1995 4. NET LOSS PER SHARE Net loss per share amounts (in thousands, except per share amounts) were calculated as follows:
Quarterly Period Ended Twenty-Six Weeks Ended June 30, 1996 July 1, 1995 June 30, 1996 July 1, 1995 Net (loss) income $ (32,435) $ 1,492 $ (49,186) $ (1,559) Less preferred stock dividends (2,141) (2,141) (4,282) (4,282) ----------- ----------- ----------- ----------- Net loss used in per share calculations $ (34,576) $ (649) $ (53,468) $ (5,841) =========== =========== =========== =========== Weighted average shares used in per share calculations 36,826 36,334 36,732 36,203 =========== =========== =========== =========== Net loss per share $ (0.94) $ (0.02) $ (1.46) $ (0.16) =========== =========== =========== ===========
Preferred stock dividends are added to the net loss for the calculation of net loss per share. Since the Company incurred net losses during the periods, common stock equivalents are not included in weighted average shares used in the loss per share calculation since they would be anti-dilutive (reduce the loss per share). 5. CASH FLOW INFORMATION Short term investments purchased with original maturities of three months or less are considered cash equivalents. Additional cash flow information (in thousands) for the twenty-six week periods ended June 30, 1996 and July 1, 1995 is presented below: June 30, July 1, 1996 1995 Non cash investing activity: Capital leases for equipment $ - $ 183 ======== ======== Supplemental cash flow information: Cash paid (received) for: Income taxes paid $ 17 $ 225 Income taxes refunded (420) (125) -------- -------- Net cash flow from income taxes $ (403) $ 100 ======== ======== Interest paid $ 3,403 $ 10,608 Capitalized interest (587) (2,625) Interest accrued but not paid, net 9,246 3,478 Interest paid but accrued in prior periods (1,554) (1,560) Amortization of deferred financing costs 279 442 -------- -------- Interest expense $ 10,787 $ 10,343 ======== ======== Capitalized interest charged to costs of revenues totaled $587 for the twenty-six weeks ended June 30, 1996 and $2,297 for the comparable 1995 period. 10 KENETECH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) for the quarterly period and twenty-six weeks ended June 30, 1996 and July 1, 1995 6. INVENTORIES Inventories (in thousands) at June 30, 1996 and December 31, 1995 consisted of: June 30, December 31, 1996 1995 Current inventories: Work-in-process $ - $ 5,616 Unassembled parts and supplies 1,107 15,114 Projects held for sale: Texas Windplant (under construction in 1994) - 3,568 Projects in construction: Costa Rica Windplant - 14,386 -------- -------- Total current inventories $ 1,107 $ 38,684 ======== ======== Long-term inventories: Long-term inventory $ - $ 33,177 Reserve - (14,746) -------- -------- Total long-term inventories $ - $ 18,431 ======== ======== As of June 30, 1996 KWI has $50,114 of inventory including projects held for sale (see Note 3). 7. DEFERRED TAXES Deferred income tax assets and liabilities reflect the tax effects of temporary differences between the tax basis of assets and liabilities and the reported amounts of these assets and liabilities for financial reporting purposes. SFAS No. 109 requires that a valuation allowance be recorded against deferred tax assets which are more likely than not to not be realized. The ultimate realization of the Company's net deferred tax asset will require taxable income in future years which the Company believes is more likely than not to be realized primarily from the sale of assets with appreciated values. The reduction of deferred tax assets of $23,393,000 charged to income tax expense in the quarter ended June 30, 1996 is attributable to the deferred tax assets generated by KWI which the Company may not be able to utilize due to KWI's bankruptcy filing. 11 KENETECH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENT(UNAUDITED) for the quarterly period and twenty-six weeks ended June 30, 1996 and July 1, 1995 8. OTHER NOTES PAYABLE Other notes payable at June 30, 1996 and December 31, 1995 consisted of the following (in thousands): June 30, December 31, 1996 1995 Notes bearing interest at 7.5% to 11.5%, due in equal semi-annual installments of principal and interest through 2003, collateralized by Windplants and $25,862,000 of notes receivable from the sale of Windplants $ - $ 37,031 Note bearing interest at 11.3%, due in equal annual installments of principal and interest through 2002, collateralized by a cogeneration facility owned by the Company and requires an escrow account 9,159 9,624 Borrowings under a $15,000,000 term loan agreement, interest at specified rates through 2002 (11% at December 31, 1995) - 14,512 Notes bearing interest at 10.8%, due through 2001, collateralized by real property - 3,317 Borrowings under a $5,000,000 revolving credit agreement bearing interest at 1% above the bank's prime rate through April 30, 1997 166 - Borrowings under a $7,500,000 term loan agreement bearing interest at the bank's prime rate through August 31, 1996 and at 1% above the bank's prime rate thereafter, due in quarterly installments of $267,857 plus interest through December 31, 2000 and $2,142,860 due on March 31, 2001 7,500 - Borrowings under a $4,400,000 revolving loan agreement, interest rate selected by the Company from specified alternatives (7.4% and 7.6% at June 30, 1996 and December 31, 1995, respectively), semi-annually payable under a 15 year amortization schedule with a balloon payment for the balance outstanding at January 2, 1999, collateralized by land, building and equipment 3,723 3,797 Notes bearing interest at 7.0% due through 1999 600 600 Other obligations bearing interest at 4.9% to 14.3% due through 1999, collateralized by equipment 1,494 3,074 -------- -------- Total other notes payable 22,642 71,955 Less current portion (22,642) 18,794 -------- -------- Long term portion $ - $ 53,161 ======== ======== The Company maintained an additional revolving credit agreement for working capital purposes which was due to expire on May 30, 1996. This agreement required the Company to meet certain financial ratios, net worth tests and indebtedness tests. In April 1996, the Company renegotiated the revolving credit agreement to provide for up to $5,000,000 for working capital purposes for the Company's construction subsidiary (CNF) through April 30, 1997. The renegotiated agreement also provided a term loan of $7,500,000 which was used to pay the $5,000,000 which was outstanding at March 30, 1996 and which also provided cash collateral for up to $2,500,000 in outstanding letters of credit. The loan becomes immediately payable on the sale of CNF. The agreement requires CNF to meet certain net worth, financial ratio and debt service coverage tests. At June 30, 1996 CNF was not in compliance with these covenants. The bank has issued a notice of default letter because of the KENETECH Windower, Inc. bankruptcy filing and because of certain other covenant violations. 12 KENETECH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) for the quarterly period and twenty-six weeks ended June 30, 1996 and July 1, 1995 The bank stated in this letter that due to KWI's bankruptcy filing and the covenant violations it would not make any further advances under the revolving credit agreement. The ability of CNF to transfer cash to KENETECH Corporation is strictly limited by provisions of this line of credit. CNF's cash and marketable securities totaled $6,343,000 at June 30, 1996. As of June 30, 1996 KWI has $36,876,000 of other Notes Payable (see Note 3). 9. SENIOR SECURED NOTES PAYABLE In December 1992 the Company sold $100,000,000 of 12-3/4% Senior Secured Notes due 2002. The notes were sold at a discount of $1,389,000. Such discount is being amortized on the effective yield method through 2002. The unamortized discount was $1,054,000 at June 30, 1996. Interest on these notes is due June 15 and December 15 of each year. The Company did not make the June 15, 1996 interest payment and is in default on the notes. Accordingly the notes are classified as current on the June 30, 1996 balance sheet. It is uncertain when or if future payments will be made. The Notes are redeemable, at the option of the Company, beginning December 15, 1998 at 103% of par, and beginning December 15, 1999 at par. Under the terms of the note indenture, the Company is restricted from paying cash dividends on its common stock and must comply with certain convenants, the most restrictive of which place limitations on payments of such dividends, repurchasing common stock, incurring additional indebtedness, pledging of assets and advances or loans to affiliates. 10. CONTINGENCIES On September 28, 1995 a complaint was filed against the Company and certain of its officers and directors in the United States District Court for the Northern District of California alleging federal securities laws violations. On November 2, 1995 an amended complaint was filed naming additional defendants, including underwriters of the Company's securities. The amended complaint alleges claims under sections 11 and 15 of the Securities Act of 1933, and sections 10(b) and 20(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, based on alleged misrepresentations and omissions in the Company's public statements, on behalf of a class consisting of persons who purchased the Company's common stock during the period from September 21, 1993 (the date of the Company's initial public offering) through August 8, 1995 and persons who purchased the Company's preferred stock during the period from April 28, 1994 (the public offering date of the preferred stock) through August 8, 1995. The amended complaint alleges that the defendants misrepresented the Company's progress on the development of its Model KVS-33 wind turbines and the Company's future prospects. The amended complaint seeks unspecified damages and other relief. The Company intends to contest the action vigorously. It is not feasible to predict or determine if the ultimate outcome of these matters will have a material adverse effect on the Company's financial position. The Company is a party to various legal proceedings normally incident to its business activities. The Company intends to defend itself vigorously against those actions in which the Company is a defendant. After reviewing such proceedings with counsel, management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. 11. SALES OF SUBSIDIARIES AND FIXED ASSETS In conjunction with management's plans to address its liquidity the following transactions were entered into during the second quarter of 1996: 1) In April 1996, the Company signed a purchase and sale agreement for its subsidiary which holds equity investments in several funds which make investments in power projects. The Company received $4,500,000 in cash and the final price is subject to adjustment after due diligence. The Company's equity investment (shown in "Investments in Affiliates") was reduced for this $4,500,000 received. These equity investments were recorded at approximately $9,300,000 prior to a write-down of $4,800,000 in 1995 based upon management's estimate of ultimate recoverability. 13 KENETECH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) for the quarterly period and twenty-six weeks ended June 30, 1996 and July 1, 1995 2) In the second quarter of 1996 the Company sold its demand side manage- ment business for approximately $400,000 in cash and assumption of the debt associated with these operations. The Company incurred no loss on the sale of these operations. 3) In May 1996 the Company sold its subsidiary which supplies wood fuel to wood-fired electric power plants for approximately $1,970,000 in cash and the assumption of debt associated with these operations. The Company incurred no loss on the sale of these operations. 4) In May 1996 the Company sold a manufacturing facility in Waco, Texas. The Company received approximately $1,200,000 in cash and incurred a small loss on the sale of this building. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW Historically, the Company through its windpower subsidiary KENETECH Windpower, Inc. (KWI) was a manufacturer, developer and operator of utility-scale wind powered electric powerplants. KWI manufactured wind turbines and designed and constructed Windplants which incorporated large arrays of such turbines. As discussed below, as of May 29, 1996 KWI is no longer consolidated in the Company's financial statements. The Company is currently developing one large thermal power plant and marketing certain assets, primarily development projects and subsidiaries not engaged in windpower activities. As the project developer, the Company has incurred and expects to continue to incur substantial costs prior to the commencement of construction of this thermal powerplant. RESULTS OF OPERATIONS The consolidated financial statements of KENETECH Corporation and certain subsidiaries as of and for the periods ending June 30, 1996 and December 31, 1995 have been prepared assuming the Company will continue as a going concern. On May 29, 1996, KWI filed for protection under Chapter 11 of the Federal Bankruptcy Code and reported an excess of liabilities over the fair value of its assets. Although the Company continues to own the common stock of KWI and provides certain day-to-day management under the jurisdiction of the Bankruptcy Court, the Company believes it is probable that such ownership and control will not exist after completion of the bankruptcy proceedings. Accordingly, as of May 29, 1996 KWI ceased to be accounted for as a consolidated subsidiary of the Company. The Company's investment in KWI is recorded at zero in "Investments in Affiliates" in the accompanying June 30, 1996 consolidated balance sheet. Revenues and expenses of KWI from January 1, 1996 through May 29, 1996 are reflected in consolidated statements of operations and cash flows (see Note 3 to the financial statements). KENETECH incurred a net loss of $32.4 million and $49.2 million during the second quarter and the twenty-six week period ending June 30, 1996 compared to income of $1.5 million and a loss of $1.6 million for the comparable 1995 periods. As expected, the same factors which resulted in a significant change in the Company's short-term prospects during 1995 continue to reflect themselves in 1996's operations 15 QUARTERS ENDED JUNE 30, 1996 AND JULY 1, 1995 The following table sets forth the Company's revenues, costs, and gross margin in millions of dollars derived from its products and services for the quarterly periods. Quarter Ended June 30, 1996 July 1, 1995 Gross Gross Revenues Costs Margins Revenues Costs Margins Construction services $ 12.5 $ 10.8 $ 1.7 $ 16.2 $ 16.0 $ 0.2 Maintenance, management fees and other (1) 7.2 n/a 7.2 10.5 n/a 10.5 Energy sales (1) 5.4 n/a 5.4 13.0 n/a 13.0 Energy plant operations (1) n/a 9.8 (9.8) n/a 17.5 (17.5) ------ ------ ------ ------ ------ ------ Total energy plant operations 12.6 9.8 2.8 23.5 17.5 6.0 Windplant sales 3.6 0.6 3.0 57.5 44.8 12.7 Interest on partnership notes and funds in escrow 0.5 n/a 0.5 1.5 n/a 1.5 Energy management services 0.3 0.1 0.2 2.1 0.7 1.4 ------ ------ ------ ------ ------ ------ Total $ 29.5 $ 21.3 $ 8.2 $100.8 $ 79.0 $ 21.8 ====== ====== ====== ====== ====== ====== (1)Maintenance, management fees and other revenues are earned by the Company for maintaining and operating Windplants and thermal power plants owned by third parties and from the sale of fuel to wood-fired electric power plants. Energy sales are the revenues generated by Windplants owned or leased by the Company and a thermal power plant owned by the Company. Energy plant operations represents the expenses incurred to generate these revenues. Construction services revenues (recorded under the percentage-of-completion method) decreased to $12.5 million for the quarter ended June 30, 1996 from $16.2 million for the comparable period in 1995; however the gross margin increased to 14% for the quarter ended June 30, 1996 from 1% for the comparable period in 1995. The fluctuation in revenues is attributable to a 95 MW cogeneration plant construction job started in March 1995 and completed prior to year-end. The low gross margin during the second quarter of 1995 was due to an unfavorable arbitration ruling which resulted in a $2.1 million expense. The Company intends to sell its construction subsidiary. Energy plant operations: The discussion regarding energy plant operations aggregates revenues earned from maintaining and managing Windplants and thermal power plants owned by third parties, energy sales from Windplants and a thermal power plant owned by the Company, and sales of fuel to wood-fired electric power plants with the expenses incurred to generate these revenues. Maintenance, management fees and other revenues decreased to $7.2 million for the quarter ended June 30, 1996 compared to $10.5 million for the comparable period in 1995 due to: i. the inclusion of only two months of operations of KWI in the con- solidated income statement for the second quarter of 1996. ii. a decrease in deferred revenue recognized. This deferred revenue relates to Windplants sold prior to 1990 which was being recog- nized as the principal on the related partnership notes was received. iii. A decline of wood revenues because the Company sold, during the second quarter of 1996, the subsidiary that performed those operations. 16 Energy sales decreased to $5.4 million for the quarter ended June 30, 1996 from $13.0 million due to: i. the inclusion of only two months of operations of KWI in the consolidated income statement for the second quarter of 1996. ii. a decrease in the price received for energy. The average price per kWh earned by Windplants owned or leased by the Company was significantly lower during the second quarter of 1996 than 1995's comparable period because of the expirations of the fixed price periods in the Power Purchase Agreements 73% of the Windplants owned or leased by KWI operate under. Energy plant operations: The expenses related to energy sales, mainten- ance and management fees, and wood fuel sales decreased to $9.8 million for the quarter ended June 30, 1996 from $17.5 million for the compara- ble period in 1995. This decrease is the net effect of: i. the inclusion of only two months of operations of KWI in the consolidated income statement during the second quarter of 1996. ii. a decrease in lease expenses since the Company acquired a Wind- plant it had previously leased, and iii. a decline in the costs of wood revenues because the Company sold, during the second quarter of 1996, the subsidiary that performed those operations. Windplant sales decreased to $3.6 million for the quarter ended June 30, 1996 from $57.5 million for the comparable period in 1995 due to decreased activity in 1996. During the second quarter of 1996 the Company sold wind turbines to an affiliated partnership to replace machines which had been destroyed by a severe wind storm in West Texas and miscellaneous parts sales. By comparison 1995's second quarter activities included continued construction on the Windplant in Texas, the sale of Windplants under construction in Spain and The Netherlands and the sale of Windplant equipment to a third party developer in India. Gross margin increased for the quarter ended June 30, 1996 to 83% of Windplant sales from 22% for the comparable period in 1995. This significant fluctuation in gross margin results from the Company recognizing the gain on the sale of the replacement turbines in Texas when cash related to such gain was received. During the first quarter of 1996 the Company received cash to cover its direct costs and deferred any margin until receipt of additional cash, which occurred in the second quarter. Interest on partnership notes and funds in escrow decreased to $0.5 million for the quarter ended June 30, 1996 from $1.5 million for the comparable period in 1995, as a result of: i. lower outstanding balances of notes and escrowed amounts on which such interest is earned. The decreases in interest bearing balances are primarily related to the payments received on partnership notes in conjunction with the Company's acquisition of such partnerships. ii. the inclusion of only two months of operations of KWI in the consolidated income statement during the second quarter of 1996. Energy management services revenues decreased to $0.3 million for the quarter ended June 30, 1996 from $1.5 million for the comparable period in 1995. This operation was sold in the second quarter of 1996 (see Note 11 to the consolidated financial statements and the discussion on sales of subsidiaries and fixed assets). Engineering expenses decreased to $1.6 million for the quarter ended June 30, 1996 compared to $3.5 million for the comparable period in 1995 due to decreased engineering activity and headcount. Project development and marketing expenses decreased for the quarter ended June 30, 1996 to $2.5 million from $2.9 million for the comparable period in 1995. However, during the second quarter of 1995 the Company incurred $3.9 million of expenditures related to project development and marketing of which $1.0 million was capitalized or allocated to cost of sales. By comparison the Company incurred $2.5 million in the second quarter of 1996. The reduction in gross costs was due to decreased prospecting for new windpower projects and reduced headcount. 17 General and administrative expenses remained at about $8.5 million for the quarters ended June 30, 1996 and July 1, 1995. However, during the second quarter of 1995 the Company incurred $16.2 million of general and administrative expenditures of which $7.6 million was allocated to projects (allocated to cost of sales or capitalized) including certain general and administrative expense incurred by the Company's development subsidiary. By comparison, the Company incurred $13.0 million in the sec- ond quarter of 1996 of which only $4.5 million was allocated to projects. Legal expense was the component of general and administrative expenses which increased the most for the second quarter of 1996 when compared to the second quarter of 1995 primarily due to the Chapter 11 filing at KWI. Furthermore legal expense can be expected to be a significant cost during 1996. Other general and administrative expenditures decreased due to down- sizing. Interest income decreased to $0.3 million for the quarter ended June 30, 1996 from $0.5 million for the comparable period in 1995 due to lower interest earned as a result of declining cash and investment balances. Interest expense decreased to $5.1 million for the quarter ended June 30, 1996 from $5.3 million for the comparable period in 1995 due to: i. during the second quarter of 1995, $2.3 million of interest expense was capitalized compared to $0.3 million in the second quarter of 1996. ii. the inclusion of only two months of operations of KWI in the con- solidated income statement during the second quarter of 1996. Equity (loss) income of unconsolidated affiliates: Equity investments in affiliates resulted in a net loss of $0.1 million for the quarter ended June 30, 1996, compared to a net income of $0.5 million for the comparable period in 1995 due to the differing performance of investments accounted for on the equity method. Sales of subsidiaries and fixed assets: During the second quarter of 1996 the Company sold its demand side management business, its wood-fuel business, a manufacturing facility, and various fixed assets. On an aggregated basis these transactions generated cash of $3.6 million and a net income of $253 thousand. Income taxes: The Company uses the asset and liability approach for financial accounting and reporting for income taxes. The Company recorded no tax benefit for the quarter ended June 30, 1996 as compared to a provision of $1.1 million for the comparable period in 1995. Although a loss was incurred in the second quarter of 1996, no tax benefit was recorded because of the uncertainty about the Company's ability to utilize such a benefit. The reduction of deferred tax assets of $23.4 million charged to income tax expense in the quarter ended June 30, 1996 is attributable to the deferred tax assets generated by KWI which the Company may not be able to utilize due to KWI's bankruptcy filing. 18 TWENTY-SIX WEEKS ENDED JUNE 30, 1996 AND JULY 1, 1995 The following table sets forth the Company's revenues, costs, and gross margin in millions of dollars derived from its products and services for the twenty-six weeks ended June 30, 1996 and July 1 , 1995. Twenty-six weeks Ended June 30, 1996 July 1, 1995 Gross Gross Revenues Costs Margins Revenues Costs Margins Construction services $ 23.4 $ 20.1 $ 3.3 $ 29.1 $ 28.2 $ 0.9 Maintenance, management fees and other (1) 14.5 n/a 14.5 17.6 n/a 17.6 Energy sales (1) 10.2 n/a 10.2 17.3 n/a 17.3 Energy plant operations (1) n/a 24.3 (24.3) n/a 32.7 (32.7) ------ ------ ------ ------ ------ ------ Total energy plant operations 24.7 24.3 0.4 34.9 32.7 2.2 Windplant sales 6.9 4.0 2.9 104.6 79.1 25.5 Interest on partnership notes and funds in escrow 1.1 n/a 1.1 2.8 n/a 2.8 Energy management services 1.1 0.2 0.9 4.3 1.8 2.5 ------ ------ ----- ----- ------ ------ Total $ 57.2 $ 48.6 $ 8.6 $175.7 $141.8 $ 33.9 ====== ====== ====== ====== ====== ====== (1)Maintenance, management fees and other revenues are earned by the Company for maintaining and operating Windplants and thermal power plants owned by third parties and from the sale of fuel to wood-fired electric power plants. Energy sales are the revenues generated by Windplants and a thermal power plant owned by the Company. Energy plant operations expenses are incurred to generate these revenues. Construction services revenues (recorded under the percentage-of-completion method) decreased to $23.4 million for the twenty-six weeks ended June 30, 1996 from $29.1 million for the comparable period in 1995; however the gross margin increased to 14% for the twenty-six weeks ended June 30, 1996 from 3% for the comparable period in 1995. A portion of these fluctuations is attributable to a 126 MW cogeneration plant construction job with a low margin which was completed during 1995. The size and low margin on this project impacted the results of construction service activities in the 1995 period. Additionally, the revenue fluctuation is partially due to a 95 MW cogeneration plant construction job started in March 1995 and completed prior to year-end. Also, the low gross margin during 1995 was partially due to an unfavorable arbitration ruling in the second quarter of 1995 which resulted in a $2.1 million expense. The Company intends to sell its construction subsidiary. Energy plant operations: The discussion regarding energy plant operations aggregates revenues earned from maintaining and managing Windplants and thermal power plants owned by third parties, energy sales from Windplants owned or leased by the Company and a thermal power plant owned by the Company, and sales of fuel to wood-fired electric power plants with the expenses incurred to generate these revenues. Maintenance, management fees and other revenues decreased to $14.5 million for the twenty-six weeks ended June 30, 1996 compared to $17.6 million for the comparable period in 1995 due to: i. the inclusion of only five months of operations of the Windplant subsidiary in the consolidated income statement for the first twenty-six weeks of 1996. ii. a decrease in deferred revenue recognized. This deferred revenue relates to Windplants sold prior to 1990 which was being recog- nized as the principal on the related partnership notes was received. 19 Energy sales decreased to $10.2 million for the twenty-six weeks ended June 30, 1996 from $17.3 million due to: i. the inclusion of only five months of operations of the Windplant subsidiary in the consolidated income statement for the first twenty-six weeks of 1996. ii. a decrease in the price received for energy. The average price earned per kWh for energy generated by Windplants owned or leased by the Company was significantly lower during the first twenty-six weeks of 1996 compared to 1995's comparable period because of the expirations of the fixed price periods in the Power Purchase Agreements 73% of the Windplants owned or leased by KWI operate under. Energy plant operations, the expenses related to energy sales, maint- enance and management fees, and wood fuel sales decreased to $24.3 million for the first twenty-six weeks ended June 30, 1996 from $32.7 million for the comparable period in 1995. This decrease is the net effect of: i. the inclusion of only five months of operations of the Windplant subsidiary in the consolidated income statement during the first twenty-six weeks of 1996. ii. a decrease in lease expenses because the Company acquired a Windplant it had previously leased, and iii. a decline in the costs of wood revenues because the Company sold, during the second quarter of 1996, the subsidiary that performed those operations. Windplant sales decreased to $6.9 million for the twenty-six weeks ended June 30, 1996 from $104.6 million for the comparable period in 1995 due to decreased activity in 1996. During the first twenty-six weeks of 1996 the Company sold wind turbines to an affiliated partnership to replace machines which had been destroyed by a severe wind storm in West Texas and miscellaneous parts sales. By comparison, activities in 1995's comparable periods included continued construction on the Windplant in Texas, the sale of Windplants under construction in Spain and The Netherlands and the sale of Windplant equipment to a third party developer in India. Gross margin increased for the twenty-six weeks ended June 30, 1996 to 42% of Windplant sales from 24% for the comparable period in 1995. Interest on partnership notes and funds in escrow decreased to $1.1 million for the first twenty-six weeks of 1996 from $2.7 million for the comparable period in 1995, as a result of: i. the inclusion of only five months of operations of the Windplant subsidiary in the consolidated income statement during the first twenty-six weeks of 1996. ii. lower outstanding balances of notes and escrowed amounts on which such interest is earned. The decreases in interest bearing balances are primarily related to the payments received on partnership notes in conjunction with the Company's acquisition of such partnerships. Energy management services revenues decreased to $1.1 million for the first twenty-six weeks of 1996 from $4.3 million for the comparable period in 1995. This operation was sold in the second quarter of 1996 (see Note 9 to the consolidated financial statements). Engineering expenses decreased to $4.2 million for the first twenty-six weeks of 1996 compared to $6.2 million for the comparable period in 1995. However, during the comparable 1995 period, the Company incurred $7.2 million of engineering expenditures of which $1.0 million was capitalized. By comparison the Company capitalized no engineering expenditures in the first twenty-six weeks of 1996. Project development and marketing expenses for the first twenty-six weeks of both 1996 and 1995 were $4.5 million. However, during the first twenty-six weeks of 1995 period the Company incurred $8.1 million of expenditures related to project development and marketing of which $3.6 million was capitalized or allocated to cost of sales. By comparison the Company incurred $4.7 million during the first twenty-six weeks of 1996 of which $0.2 million was capitalized. 20 General and administrative expenses decreased to $15.7 million for the first twenty-six weeks of 1996 from $16.2 million for the comparable period in 1995. However, during the first twenty-six weeks of 1995 the Company incurred $27.0 million of general and administrative expenditures of which $10.8 million was allocated to projects (allocated to cost of sales or capitalized). By comparison, the Company incurred $22.0 million in the first twenty-six weeks of 1996 of which only $6.3 million was allocated to projects. Certain general and administrative expenses incurred by the Company's development subsidiar are allocated to projects (capitalized to an asset or allocated to cost of sales). Legal expense was the component of general and administrative expenses which increased the most for the first twenty-six weeks of 1996 when compared to the first twenty-six weeks of 1995 primarily due to implementation of the Chapter 11 filing at KWI and management's plan to address its liquidity and future operations. Furthermore legal expenses can be expected to be a significant cost during 1996. Interest income decreased to $0.8 million for the first twenty-six weeks of 1996 from $1.5 million for the comparable period in 1995 due to lower interest earned as a result of declining cash and investment balances. Interest expense increased to $10.9 million for the first twenty-six weeks of 1996 from $10.3 million for the comparable period in 1995. During the first twenty-six weeks of 1995 $2.6 million of interest expense was capitalized compared to only $0.6 million in 1996. Less interest was incurred in 1996 because of the sale of the demand side management and wood fuel businesses and the deconsolidation of KWI. Equity income (loss) of unconsolidated affiliates: Equity investments in affiliates resulted in net loss of $0.1 million for the first twenty-six weeks of 1996, compared to $0.6 million for the comparable period in 1995 due to the differing performance of investments accounted for on the equity method. Sale of subsidiaries and fixed assets: During the first twenty-six weeks of 1996 the Company sold its demand side management business, its wood-fuel business, a manufacturing facility, and various fixed assets. On an aggregated basis these transactions generated cash of $3.6 million and a net loss of $43 thousand. Income taxes: The Company uses the asset and liability approach for financial accounting and reporting for income taxes. The Company recorded no tax benefit for the first twenty-six weeks ended June 30, 1996 as compared to a provision of $1.1 million for the comparable period in 1995. Although a loss was incurred in the first twenty-six weeks of 1996, no tax benefit was recorded because of the uncertainty about the Company's ability to utilize such a benefit. The reduction of deferred tax assets of $23.4 million charged to income tax expense in the quarter ended June 30, 1996 is attributable to the deferred tax assets generated by KWI which the Company may not be able to utilize due to KWI's bankruptcy filing. LIQUIDITY AND CAPITAL RESOURCES The Company is currently developing one large thermal power plant. As the project developer, the Company has incurred and expects to continue to incur substantial costs prior to the commencement of construction of this thermal powerplant. Operating activities: During the first twenty-six weeks of 1996 operating activities used cash of $9.6 million. This primarily results from failure of the Company's gross margin to cover the engineering, project development and marketing, and general and administrative expenses. The Company expects a loss from operations in 1996 even excluding KWI. Investing activities: During the first twenty-six weeks of 1996 investing activities used cash of $1.9 million. This usage is the net of capitalized development costs of $4.8 million for the thermal power project in Puerto Rico and CNF's purchases of marketable securities offset by cash received from the sale of subsidiaries and assets. Financing activities: During the first twenty-six weeks of 1996 financing activities provided $3.1 million of cash. KWI borrowed $3.9 million on the revolving credit agreement to finance the construction of Windplants for work being performed on a 20 megawatt Windplant the Company is constructing in Costa Rica under an agreement with a third-party developer. KWI is negotiating with a third party buyer for the sale of this Windplant. The proceeds from this sale, when consummated, would repay the amount due ($12.1 million) under the revolving credit agreement. 21 Liquidity Status: At June 30, 1996 the Company's working capital deficit is $127.9 million, which is $124.7 million greater than at December 31, 1995. This increase is the result of long term debt being classified as current due to the Company's inability to meet various covenants (see Notes 3, 8 and 9). During the first twenty-six weeks of 1996 the Company's liquidity became severely constrained. The Company projects negative operating cash flows in 1996. The Company is unable to borrow money and is delaying all payments except for essential services while it attempts to raise cash through asset sales, financing or other means. In that regard, the Company has targeted certain subsidiaries, development projects and other assets for sale. The Company believes substantial proceeds (and gains) could result from these sales; however, there can be no assurances that such sales can be consummated or that substantial proceeds can be received. If the Company is unable to sell these or other assets its liquidity will be further constrained. Strategy: The consolidated financial statements as of and for the first twenty-six weeks ended June 30, 1996 and as of and for the year ended December 31, 1995 have been prepared assuming the Company will continue as a going concern. The Company incurred significant losses in the first twenty-six weeks of 1996 and in 1995, has negative working capital and its liquidity has become severely constrained. Also, as mentioned previously, KWI filed for protection under Chapter 11 of the Federal Bankruptcy Code and reported an excess of liabilities over the fair value of its assets. Even excluding KWI the Company projects negative operating cash flows for the remainder of 1996 and certain lenders and creditors are seeking repayment and/or restructuring of the amounts due them. These factors raise substantial doubt about the Company's ability to continue as a going concern in its current form. Management's plans to address its liquidity and its future operations include: 1) The sale of certain assets, primarily development projects and subsidiaries not engaged in windpower activities, for which it expects to receive substantial cash proceeds and gains. 2) Discussions and negotiations of corporate obligations and commit- ments with lenders, suppliers and other creditors. There can be no assurance that the Company will be successful in implementing its plans and that the Company will continue as a going concern. Risks and Uncertainties: There are numerous risks and uncertainties which may prevent the Company from successfully implementing its strategy. These include the failure to sell assets or subsidiaries within the necessary time frame or for the estimated amounts. Although the Company intends to aggressively market for sale certain of its assets and subsidiaries for which it anticipates substantial proceeds, there is no assurance as to whether they will be sold or the price or timing of such sales. The Company continues to evaluate other strategies and opportunities which include merger, sale or bankruptcy. 22 PART II Item 4. Defaults Upon Senior Securities. (a) Senior Secured Notes Payable - In December 1992 the Company sold $100,000,000 of 12 3/4% Senior Secured Notes due 2002. Interest on these notes is due June 15 and December 15 of each year. The Company did not make the June 15, 1996 payment of $6,375,000 and is in default. Item 6. Exhibits and Reports on Form 8-K. (a) None (b) Reports filed on Form 8-K during the quarterly period ended June 30, 1996 and through the date hereof: 1) May 29, 1996 Item 5 Other Information - On May 29, 1996 KENETECH Windpower, Inc. a wholly-owned subsidiary of the Registrant, filed a voluntary petition to reorganize under Chapter 11 of the United States Bankruptcy Code. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned therewith duly authorized. KENETECH Corporation August 27, 1996 By: /s/ Mark D. Lerdal Date Mark D. Lerdal President and Chief Executive Officer August 27, 1996 By: /s/ Nicholas H. Politan Date Nicholas H. Politan Chief Financial Officer August 27, 1995 By: /s/ Mervin E. Werth Date Mervin E. Werth Corporate Controller 24 -----END PRIVACY-ENHANCED MESSAGE-----