-----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, Sj02lSdnnpu8GyHKn4HJr5uDM3rI5QOtY/tkmGye9u2x0hEk25FNDvUlTQj+ywVH xo8URPHvSIl23ZhjO/ghLA== 0000807708-96-000011.txt : 19961210 0000807708-96-000011.hdr.sgml : 19961210 ACCESSION NUMBER: 0000807708-96-000011 CONFORMED SUBMISSION TYPE: NT 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961115 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: NT 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22072 FILM NUMBER: 96666900 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 NT 10-Q 1 10-Q 3RD QTR FOR KENETECH CORP UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 November 13, 1996, there were 36,829,618 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 September 30, 1996 and 1995 3 Consolidated Statements of Operations for the thirty-nine weeks ended September 30, 1996 and 1995 4 Consolidated Balance Sheets, September 30, 1996 and December 31, 1995 5 Consolidated Statement of Stockholders' Equity for the thirty-nine weeks ended September 30, 1996 6 Consolidated Statements of Cash Flows for the thirty-nine weeks ended September 30, 1996 and 1995 7 Notes to Consolidated Financial Statements 8 - 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 16 - 23 Part II Item 3. Defaults Upon Senior Secured Notes Payable and Other Notes Payable 24 Item 4. Submission of Matters to a Vote of Security Holders. 24 2 KENETECH CORPORATION ---------------- CONSOLIDATED STATEMENTS OF OPERATIONS for the quarterly periods ended September 30, 1996 and 1995 (unaudited, in thousands, except per share amounts) September 30, September 30, 1996 1995 (See Note 1) Revenues: Construction services $ 12,681 $ 15,792 Maintenance, management fees and other 1,555 16,003 Energy sales 2,004 15,697 Windplant sales 215 53,884 Interest on partnership notes and funds in escrow - 1,927 Energy management services - 1,594 -------- -------- Total revenues 16,455 104,897 Costs of revenues: Construction services 13,133 12,319 Energy plant operations 2,905 14,382 Windplant sales 175 53,522 Energy management services - 944 -------- -------- Total costs of revenues 16,213 81,167 Gross margin 242 23,730 Engineering expenses - 3,160 Project development and marketing expenses 104 2,992 General and administrative expenses 6,404 8,673 -------- -------- (Loss) Income from operations (6,266) 8,905 Interest income 159 501 Interest expense (4,096) (5,276) Equity loss of unconsolidated affiliates (46) (300) Gain on sales of subsidiaries and fixed assets 94 - -------- -------- (Loss) Income before taxes (10,155) 3,830 Income tax provision - 1,498 -------- -------- Net (loss) income $(10,155) $ 2,332 ========= ======== Net (loss) income per common share $ (0.33) $ 0.01 Weighted average number of common shares used in computing per share amounts 36,827 36,591 The accompanying notes are an integral part of these consolidated financial statements. 3 KENETECH CORPORATION ---------------- CONSOLIDATED STATEMENTS OF OPERATIONS for the thirty-nine weeks ended September 30, 1996 and 1995 (unaudited, in thousands, except per share amounts) September 30, September 30, 1996 1995 (See Note 1) Revenues: Construction services $ 36,074 $ 44,910 Maintenance, management fees and other 16,062 33,599 Energy sales 12,188 33,024 Windplant sales 7,157 158,490 Interest on partnership notes and funds in escrow 1,125 4,639 Energy management services 1,047 5,889 -------- -------- Total revenues 73,653 280,551 Costs of revenues: Construction services 33,281 40,475 Energy plant operations 27,175 47,123 Windplant sales 4,147 132,603 Energy management services 250 2,781 -------- -------- Total costs of revenues 64,853 222,982 Gross margin 8,800 57,569 Engineering expenses 4,205 9,354 Project development and marketing expenses 4,626 7,529 General and administrative expenses 21,991 24,853 -------- -------- (Loss) Income from operations (22,022) 15,833 Interest income 933 1,968 Interest expense (14,883) (15,619) Equity loss of unconsolidated affiliates (136) (886) Gain on sales of subsidiaries and fixed assets 160 - -------- -------- (Loss) Income before taxes (35,948) 1,296 Income tax provision 23,393 523 -------- -------- Net (loss) income $(59,341) $ 773 ======== ======== Net loss per common share $ (1.79) $ (0.16) Weighted average number of common shares used in computing per share amounts 36,764 36,276 The accompanying notes are an integral part of these consolidated financial statements. 4 KENETECH CORPORATION ---------------- CONSOLIDATED BALANCE SHEETS September 30, 1996 and December 31, 1995 (unaudited, in thousands, except share amounts) ASSETS September 30, December 31, 1996 1995 (See Note 1) Current assets: Cash and cash equivalents $ 16,722 $ 16,842 Funds in escrow, net 354 12,531 Accounts receivable 16,315 52,593 Partnership notes and interest receivable, net 777 1,477 Inventories 909 38,684 Investment in power plant held for sale 19,972 19,951 Deferred tax assets, net - 2,764 Other assets 4,372 5,980 -------- -------- Total current assets 59,421 150,822 Accounts receivable and funds in escrow, net 4,878 21,031 Partnership notes and interest receivable, net 6,731 22,566 Inventories, net - 18,431 Property, plant and equipment, net 27,796 118,214 Power plants under development 13,084 14,956 Investments in affiliates 60 9,686 Deferred tax assets, net 17,912 38,235 Other assets 6,740 7,308 -------- -------- Total assets $136,622 $401,249 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable $ 20,494 $ 38,663 Accrued liabilities 21,403 56,950 Accrued interest 10,445 2,115 Bank loan payable 8,387 13,200 Debt associated with power plant held for sale 16,958 16,958 Other notes payable 21,386 18,794 Estimated warranty costs - 7,374 Senior secured notes payable 98,976 - -------- -------- Total current liabilities 198,049 154,054 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 965 62,643 Accrued dividends on preferred stock 7,492 1,071 -------- -------- Total liabilities 207,637 406,808 Commitments and contingencies Stockholders' deficiency: Convertible preferred stock - 10,000,000 shares authorized, $.01 par value; issued and outstanding 102,492, $111,266 liquidation preference 99,561 99,561 Common stock - 110,000,000 shares authorized, $.0001 par value; issued and outstanding 36,829,618 in 1996 and 36,533,836 in 1995 4 4 Additional paid-in capital 138,362 144,551 Unearned compensation - (281) Cumulative foreign exchange (121) 86 Accumulated deficit (308,821) (249,480) -------- -------- Total stockholders' deficiency (71,015) (5,559) Total liabilities and stockholders' deficiency $136,622 $401,249 The accompanying notes are an integral part of these consolidated financial statements. 5 KENETECH CORPORATION ---------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY for the thirty-nine weeks ended September 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 - - 295,782 - 234 - - - 234 Recognition of unearned compensation - - - - - 281 - - 281 Preferred stock dividends - - - - (6,423) - - - (6,423) Foreign exchange - - - - - - (207) - (207) Net loss - - - - - - - (59,341) (59,341) -------- -------- --------- ------ -------- --------- -------- ---------- --------- Balance, September 30, 1996 102,492 $ 99,561 36,829,618 $ 4 $ 138,362 $ - $ (121) $ (308,821) $ (71,015) ======= ======== ========== ====== ========= ========= ======== ========== =========
The accompanying notes are an integral part of these consolidated financial statements. 6 KENETECH CORPORATION ---------------- CONSOLIDATED STATEMENTS OF CASH FLOWS for the thirty-nine weeks ended September 30, 1996 and 1995 (unaudited, in thousands) September 30, September 30, 1996 1995 (See Note 1) Cash flows from operating activities: Net (loss) income $(59,341) $ 773 Adjustments to reconcile net loss to net cash used in operating activities: Deferred income taxes 23,393 (223) Depreciation, amortization and other 2,303 12,493 Changes in assets and liabilities: Funds in escrow, net 3,127 (128) Accounts receivable 23,749 (14,370) Partnership notes and interest receivable, net 290 (203) Inventories 1,694 (14,758) Power plants under development (5,613) (2,806) Other assets (1,469) (2,251) Accounts payable and accrued liabilities (244) 2,857 Estimated warranty costs (1,491) - Accrued loss on contracts (2,157) - -------- -------- Net cash used in operating activities (15,759) (18,616) Cash flows from investing activities: Marketable securities: Sales 3,536 19,949 Purchases (3,536) (481) Acquisition of Century Contractors West Inc. - (1,360) Property plant and equipment: Additions (486) (27,093) Proceeds from sales - 2,690 Proceeds from sales of subsidiaries and assets 8,115 - Proceeds from sale of partnership interest in cogeneration facility 200 4,069 Investments in affiliates: Contributions (1,814) (8,435) Distributions 530 739 -------- -------- Net cash provided by (used in) investing activities 6,545 (9,922) Cash flows from financing activities: Other notes payable: Proceeds 166 1,678 Payments (5,122) (12,781) Proceeds on bank loan borrowings 18,816 79,000 Payments on bank loan borrowings (5,000) (52,000) Proceeds from issuance of common stock, net 234 2,771 Payment of preferred stock dividends - (6,423) -------- -------- Net cash provided by financing activities 9,094 12,245 -------- -------- Decrease in cash and cash equivalents (120) (16,293) Cash and cash equivalents at beginning of period 16,842 42,618 -------- -------- Cash and cash equivalents at end of period $ 16,722 $ 26,325 ======== ======== 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 thirty-nine weeks ended September 30, 1996 and 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 consolidated financial statements of KENETECH Corporation and certain subsidiaries as of and for the periods ending September 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 September 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 September 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 thirty-nine week period ended September 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 problems 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. (See Notes 7 and 12). 2) Discussions and negotiations of corporate obligations and commitments with lenders, suppliers and other creditors. 8 KENETECH CORPORATION ---------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) for the quarterly period and thirty-nine weeks ended September 30, 1996 and 1995 There are numerous risks and uncertainties which may prevent the Company from successfully implementing its plans and continuing as a going concern. 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. In addition, management believes such sales will not generate sufficient proceeds to ultimately provide any return of invested capital to the holders of the Company's stock. At this time the Company has not finalized plans for future operations. There can be no assurance that the Company will be successful in implementing its plans to improve its liquidity and that the Company will continue as a going concern. 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 September 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 September 30, 1996 (unaudited, in thousands) Assets: Liabilities and Stockholder's Deficiency: Cash $ 16,199 Accounts Payable $ 35,634 Funds in Escrow 12,458 Accrued Liabilities 28,382 Accounts Receivable 14,505 Accrued Warranty Liabilities 64,462 Partnership Notes and Accrued Loss on Contracts 33,704 Interest Receivable 16,786 Other Notes Payable 36,728 Due From Affiliates 718 --------- Inventories 20,759 Total Liabilities 198,910 Projects Held for Sale 3,568 Net Property, Plant and Equipment 77,095 Development Costs 6,012 Stockholder's Deficiency (25,960) Investment in Affiliates 2,460 --------- Other Assets 2,390 --------- Total Liabilities Total Assets $ 172,950 and Equity $ 172,950 ========= ========= KWI's 1996 operations through May 29, 1996 are reflected in the accompanying consolidated financial statements. KWI's operating results for the period May 30 through September 30, 1996 generated a net loss of $13,302 which is not included in the consolidated income statement of the Company. The decrease in inventories from the June 30, 1996 balance of $32,264 primarily represents an adjustment to fair market value. The Company's investment in KWI is recorded as zero in "Investments in Affiliates" in the accompanying September 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 (See Note 7). 9 KENETECH CORPORATION --------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) for the quarterly period and thirty-nine weeks ended September 30, 1996 and 1995 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 required 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 at that time). Subsequently, KWI sold a project held for sale. The proceeds from this sale repaid the amount due and the revolving credit agreement was terminated. 4. NET LOSS PER SHARE Net loss per share amounts (in thousands, except per share amounts) were calculated as follows:
Quarterly Period Ended Thirty-nine weeks Ended September 30, September 30, 1996 1995 1996 1995 --------- --------- --------- -------- Net (loss) income $ (10,155) $ 2,332 $ (59,341) $ 773 Less preferred stock dividends (2,141) (2,141) (6,423) (6,423) --------- --------- --------- ------- Net (loss) income used in per share calculations $ (12,296) $ 191 $ (65,764) $(5,650) ========= ========= ========= ======= Weighted average shares outstanding 36,827 36,421 36,764 36,276 Common stock equivalents - 170 - - --------- --------- --------- ------- Weighted average shares used in per share calculations 36,827 36,591 36,764 36,276 ========= ========= ========= ======= Net (loss) income per share $ (0.33) $ 0.01 $ (1.79) $ (0.16) ========= ========= ========= =======
Preferred stock dividends are added to the net loss for the calculation of net loss per share or deducted from net income for the calculation of net income per share. If 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). 10 KENETECH CORPORATION ---------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) for the quarterly period and thirty-nine weeks ended September 30, 1996 and 1995 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 thirty-nine week periods ended September 30, 1996 and 1995 is presented below: September 30, September 30, 1996 1995 Non cash investing activity: Capital leases for equipment $ - $ 381 ------- ------- Supplemental cash flow information: Cash paid (received) for: Income taxes paid $ 45 $ 348 Income taxes refunded (420) (178) ------- ------- Net cash flow from income taxes $ (375) $ 170 ======= ======= Interest paid $ 4,156 $13,909 Capitalized interest (587) (4,560) Interest accrued but not paid 12,477 3,893 Interest paid but accrued in prior periods (1,555) - Amortization of deferred financing costs 392 2,377 ------- ------- Interest expense $14,883 $15,619 ======= ======= Capitalized interest charged to costs of revenues totaled $587 for the thirty-nine weeks ended September 30, 1996 and $3,236 for the comparable 1995 period. 6. INVENTORIES Inventories (in thousands) at September 30, 1996 and December 31, 1995 consisted of: September 30, December 31, 1996 1995 Current inventories: Work-in-process $ - $ 5,616 Unassembled parts and supplies 909 15,114 Projects held for sale: Texas Windplant - 3,568 Projects in construction: Costa Rica Windplant - 14,386 -------- -------- Total current inventories $ 909 $ 38,684 ======== ======== Long-term inventories: Long-term inventory $ - $ 33,177 Reserve - $(14,746) -------- -------- Total long-term inventories $ - $ 18,431 ======== ======== As of September 30, 1996 KWI has $20,759 of inventory including projects held for sale (see Note 3). 11 KENETECH CORPORATION ---------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) for the quarterly period and thirty-nine weeks ended September 30, 1996 and 1995 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 during 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. 8. BANK LOAN PAYABLE On August 30, 1996, the Company entered into a $30,000,000 loan agreement to be used for the one large thermal power plant being developed by the Company. Amounts borrowed under this agreement bear interest at the 90 day LIBOR plus 7.5%. This rate can change when the project reaches certain milestones. The 90 day LIBOR rate was 5.625% at September 30, 1996. As of September 30, 1996, there was $8,387,282 outstanding. The loan is collateralized by the stock of a special purpose entity formed to hold through affiliates the Company's interest in this thermal power plant. 12 KENETECH CORPORATION ---------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) for the quarterly period and thirty-nine weeks ended September 30, 1996 and 1995 9. OTHER NOTES PAYABLE Other notes payable at September 30, 1996 and December 31, 1995 consisted of the following (in thousands): September 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 monthly installments of principal and interest through 2002, collateralized by a cogeneration facility owned by the Company and requires an escrow account 8,917 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 7,232 - Borrowings under a $4,400,000 revolving loan agreement, interest rate selected by the Company from specified alternatives (7.4% and 7.6% at September 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 3,645 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 826 3,074 -------- -------- Total other notes payable 21,386 71,955 Less current portion 21,386 18,794 -------- -------- Long term portion $ - $ 53,161 ======== ======== 13 KENETECH CORPORATION ---------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) for the quarterly period and thirty-nine weeks ended September 30, 1996 and 1995 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 outstanding at March 30, 1996 and to provide cash collateral for up to $2,500,000 in outstanding letters of credit. The loan becomes immediately payable on the sale of CNF. The agreement requires CNF to meet certain net worth, financial ratio and debt service coverage tests. At September 30, 1996 CNF was not in compliance with these covenants. The bank has issued a notice of default letter because of the bankruptcy filing and because of certain other covenant violations. 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 cash equivalents totaled $9,376,000 at September 30, 1996. As of September 30, 1996 KWI has $36,728,000 of Other Notes Payable (see Note 3). 10. SENIOR SECURED NOTES PAYABLE In December 1992 the Company sold $100,000,000 of 12-3/4% Senior Secured Notes due 2002. The notes were sold at a discount of $1,389,000. Such discount is being amortized on the effective yield method through 2002. The unamortized discount was $1,024,000 at September 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 a current liability on the September 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. 11. 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. On March 29, 1996 a second amended complaint was filed. The complaint, as amended, 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 there- under, 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 misrepre- sented 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. 14 KENETECH CORPORATION ---------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) for the quarterly period and thirty-nine weeks ended September 30, 1996 and 1995 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. 12. SALES OF SUBSIDIARIES AND FIXED ASSETS In conjunction with management's plans to address its liquidity the following transactions were entered into during 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. Currently, the Company and buyer are in arbitration over the final purchase price. 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. 2) In the second quarter of 1996 the Company sold its demand side management business for approximately $400,000 in cash and the 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. 5) In September 1996 the Company sold a subsidiary that held a 25% equity interest in a district steam heating facility located in New Haven, Connecticut for $200,000 cash and realized a small gain on this transaction. 15 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, operating its construction subsidiary 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. FORWARD LOOKING INFORMATION Certain information included in this report contains forward looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Act of 1934, as amended. Such forward looking information is based on information available when such statements are made and is subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. RESULTS OF OPERATIONS The consolidated financial statements of KENETECH Corporation and certain subsidiaries as of and for the periods ending September 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 September 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 $10.2 million and $59.3 million during the third quarter and the thirty-nine week period ending September 30, 1996 compared to income of $2.3 million and $0.8 million for the comparable 1995 periods. 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. 16 QUARTERS ENDED SEPTEMBER 30, 1996 AND 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 September 30, 1996 September 30, 1995 Gross Gross Revenues Costs Margins Revenues Costs Margins Construction services $ 12.7 $ 13.1 $ (0.4) $ 15.8 $ 12.3 $ 3.5 Maintenance, management fees and other (1) 1.6 n/a 1.6 16.0 n/a 16.0 Energy sales (1) 2.0 n/a 2.0 15.7 n/a 15.7 Energy plant operations (1) n/a 2.9 (2.9) n/a 14.4 (14.4) ------ ------ ------ ------- ------ ------ Total energy plant operations 3.6 2.9 0.7 31.7 14.4 17.3 Windplant sales 0.2 0.2 - 53.9 53.5 0.4 Interest on partnership notes and funds in escrow - n/a - 1.9 n/a 1.9 Energy management services - - - 1.6 1.0 0.6 ------ ------ ------ ------- ------ ------ Total $ 16.5 $ 16.2 $ 0.3 $ 104.9 $ 81.2 $ 23.7 ====== ====== ====== ======= ====== ====== (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 $12.7 million for the quarter ended September 30, 1996 from $15.8 million for the comparable period in 1995. However, costs of construction services exceeded revenues for the quarter ended September 30, 1996 due to the additional costs incurred on a 250 MW cogeneration plant construction project and the reduction of the total estimated revenue on the project. The Company is currently pursuing reimbursement for the costs incurred. The gross margin was 22% 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 Company's financial condition and the bankruptcy filing of KWI increases the difficulty of establishing backlog. 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 $1.6 million for the quarter ended September 30, 1996 compared to $16.0 million for the comparable period in 1995 due to: i. the exclusion of KWI's operations in the consolidated income statement for the third quarter of 1996. ii. A decline of wood revenues because the Company sold, during the second quarter of 1996, the subsidiary that performed those operations. 17 Energy sales decreased to $2.0 million for the quarter ended September 30, 1996 from $15.7 million due to the exclusion of KWI's operations in the consolidated income statement for the third quarter of 1996. Energy plant operations: The expenses related to energy sales, maintenance and management fees, and wood fuel sales decreased to $2.9 million for the quarter ended September 30, 1996 from $14.4 million for the comparable period in 1995 for the same reasons discussed above about the decline in maintenance management fees and other revenues. Windplant sales decreased to $0.2 million for the quarter ended September 30, 1996 from $53.9 million for the comparable period in 1995 due to decreased activity in 1996. During the third quarter of 1996 the Company sold some wind turbine parts. By comparison 1995's third quarter activities included the sale of Windplants under construction in Spain and The Netherlands and the sale of Windplant equipment to a third party developer in India. Interest on partnership notes and funds in escrow decreased to zero for the quarter ended September 30, 1996 from $1.5 million for the comparable period in 1995, as a result of the exclusion of KWI's operations in the consolidated income statement during the third quarter of 1996. Energy management services revenues decreased to zero for the quarter ended September 30, 1996 from $1.6 million for the comparable period in 1995 since this operation was sold in the second quarter of 1996 (see Note 12 to the consolidated financial statements and the discussion on sales of subsidiaries and fixed assets). Engineering expenses decreased to zero for the quarter ended September 30, 1996 compared to $3.2 million for the comparable period in 1995 due to the exclusion of KWI in the consolidated income statement during the third quarter of 1996. Project development and marketing expenses decreased for the quarter ended September 30, 1996 to $0.1 million from $3.0 million for the comparable period in 1995 due to the exclusion of the operations of KWI in the consolidated income statement during the third quarter of 1996. General and administrative expenses decreased to $6.4 million for the quarter ended September 30, 1996 compared to $8.7 million for the comparable 1995 period. The major components of 1996's expenses were employee compensation and legal costs of which a significant portion is related to management's activity in conjunction with the sale of assets and subsidiaries. The Company is capitalizing significantly lower amounts during 1996 compared to 1995 since only one large thermal power project is being developed. Certain general and administrative expenses incurred by the Company's development subsidiary are allocated to projects (capitalized to an asset or allocated to costs of sales). Interest income decreased to $0.2 million for the quarter ended September 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 $4.1 million for the quarter ended September 30, 1996 from $5.3 million for the comparable period in 1995 due to: i. during the third quarter of 1995, $1.7 million of interest expense was capitalized compared to no capitalization of interest in the third quarter of 1996. ii. the exclusion of KWI's operations in the consolidated income statement during the third quarter of 1996. Equity (loss) income of unconsolidated affiliates: Equity investments in affiliates resulted in a net loss of $46 thousand for the quarter ended September 30, 1996, compared to a net loss of $0.3 million for the comparable period in 1995 due to the differing performance of investments accounted for on the equity method and the sale by the Company of subsidiaries that held investments accounted for on the equity basis. 18 Sales of subsidiaries and fixed assets: During the third quarter of 1996 the Company sold a subsidiary that held a 25% equity interest in a district steam heating facility located in New Haven, Connecticut for $200 thousand cash and realized a small gain on this transaction. 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 September 30, 1996 as compared to a provision of $1.5 million for the comparable period in 1995. Although a loss was incurred in the third quarter of 1996, no tax benefit was recorded because of the uncertainty about the Company's ability to utilize such a benefit. THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 1996 AND 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 thirty-nine weeks ended September 30, 1996 and 1995. Thirty-nine weeks Ended September 30, 1996 September 30, 1995 Gross Gross Revenues Costs Margins Revenues Costs Margins Construction services $ 36.1 $ 33.3 $ 2.8 $ 44.9 $ 40.5 $ 4.4 Maintenance, management fees and other (1) 16.1 n/a 16.1 33.6 n/a 33.6 Energy sales (1) 12.2 n/a 12.2 33.0 n/a 33.0 Energy plant operations (1) n/a 27.2 (27.2) n/a 47.1 (47.1) ------ ------ ------ ------ ------ ------ Total energy plant operations 28.3 27.2 1.1 66.6 47.1 19.5 Windplant sales 7.2 4.1 3.1 158.5 132.6 25.9 Interest on partnership notes and funds in escrow 1.1 n/a 1.1 4.6 n/a 4.6 Energy management services 1.0 0.3 0.7 6.0 2.8 3.2 ------ ------ ------ ------ ------ ------ Total $ 73.7 $ 64.9 $ 8.8 $280.6 $223.0 $ 57.6 ====== ====== ====== ====== ====== ====== (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 $36.1 million for the thirty-nine weeks ended September 30, 1996 from $44.9 million for the comparable period in 1995. The gross margin decreased to 8% for the thirty-nine weeks ended September 30, 1996 from 10% for the comparable period in 1995. A portion of the revenue fluctuation is attributable to 126 MW and 95 MW cogeneration plant construction jobs which were completed during 1995. The low gross margin during 1996 was due to the additional costs incurred on a 250 MW cogeneration plant construction project. The Company is currently pursuing reimbursement for the costs incurred. The Company's financial condition and the bankruptcy filing of KWI increased the difficulty of establishing backlog. 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. 19 Maintenance, management fees and other revenues decreased to $16.1 million for the thirty-nine weeks ended September 30, 1996 compared to $33.6 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 thirty-nine weeks of 1996. ii. a decrease in deferred revenue recognized. This deferred revenue relates to Windplants sold prior to 1990 which was being recognized as the principal on the related partnership notes was received. iii. a decline in wood revenues because the Company sold, during the second quarter, the subsidiary that performed those operations. Energy sales decreased to $12.2 million for the thirty-nine weeks ended September 30, 1996 from $33.0 million due to: i. the inclusion of only five months of operations of the Windplant subsidiary in the consolidated income statement during 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 thirty-nine 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, maintenance and management fees, and wood fuel sales) decreased to $27.2 million for the first thirty-nine weeks ended September 30, 1996 from $47.1 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 1996. ii. a decrease in lease expenses because the Company acquired a Windplant it had previously leased. 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 $7.2 million for the thirty-nine weeks ended September 30, 1996 from $158.5 million for the comparable period in 1995 due to decreased activity in 1996. During the first thirty-nine 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. By comparison, activities in 1995's comparable period 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 thirty-nine weeks ended September 30, 1996 to 43% of Windplant sales from 16% for the comparable period in 1995. Interest on partnership notes and funds in escrow decreased to $1.1 million for the first thirty-nine weeks of 1996 from $4.6 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 thirty-nine 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. 20 Energy management services revenues decreased to $1.0 million for the first thirty-nine weeks of 1996 from $6.0 million for the comparable period in 1995. This operation was sold in the second quarter of 1996 (see Note 12 to the consolidated financial statements). Engineering expenses decreased to $4.2 million for the first thirty-nine weeks of 1996 compared to $9.4 million for the comparable period in 1995 due to the inclusion of only five months of operations of the windpower subsidiary in the consolidated income statement during 1996. Project development and marketing expenses for the first thirty-nine weeks of 1996 were $4.6 million compared to $7.5 million for the comparable 1995 period. However, during the first thirty-nine weeks of 1995 the Company incurred $14.7 million of expenditures related to project development and marketing of which $7.2 million was capitalized or allocated to cost of sales. By comparison the Company incurred $4.8 million during the first thirty-nine weeks of 1996 of which $0.2 million was capitalized. General and administrative expenses decreased to $22.0 million for the first thirty-nine weeks of 1996 from $24.9 million for the comparable period in 1995. However, during the first thirty-nine weeks of 1995 the Company incurred $37.1 million of general and administrative expenditures of which $12.2 million was allocated to projects (allocated to cost of sales or capitalized). By comparison, the Company is capitalizing significantly lower amounts during 1996 since only one large thermal power project is being developed. Certain general and administrative expenses incurred by the Company's development subsidiary are allocated to projects (capitalized to an asset or allocated to cost of sales). The major components of 1996's expenses were an allowance for doubtful accounts by the Company's construction subsidiary for a receivable from KWI which filed for protection under chapter 11 of the Federal Bankruptcy Code, employee compensation, and legal expenses. Interest income decreased to $0.9 million for the first thirty-nine weeks of 1996 from $2.0 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 $14.9 million for the first thirty-nine weeks of 1996 from $15.6 million for the comparable period in 1995. During the first thirty-nine weeks of 1995 $4.3 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 $0.2 million for the first thirty-nine weeks of 1996, compared to $0.9 million for the comparable period in 1995 due to the differing performance of investments accounted for on the equity method and the sale by the Company of subsidiaries that held investments accounted for on the equity basis. Sale of subsidiaries and fixed assets: During the first thirty-nine 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 $8.3 million and a net gain of $160 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 thirty-nine weeks ended September 30, 1996 as compared to a provision of $0.5 million for the comparable period in 1995. Although a loss was incurred in the first thirty-nine 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 thiry-nine weeks ended September 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. 21 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 thirty-nine weeks of 1996 operating activities used cash of $15.8 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; expenditures for the one large thermal power plant; and the uncertainty regarding the Company's ability to use its deferred tax assets. The Company expects a loss from operations in 1996 even excluding KWI. Investing activities: During the first thirty-nine weeks of 1996 investing activities provided cash of $6.5 million primarily through the sales of subsidiaries and assets. Financing activities: During the first thirty-nine weeks of 1996 financing activities provided $9.1 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 constructed in Costa Rica under an agreement with a third-party developer. The balance outstanding of $12,050,000 was repaid in the third quarter when this Windplant was sold and the revolving credit agreement was terminated. Also, in August 1996, the Company through a special purpose entity entered into a $30,000,000 loan agreement related to the aforementioned thermal project. As of September 30, 1996, $8,387,282 had been drawn under this agreement. At the time of the filing of this report the Company had requested approximately $10,000,000 of additional advances. No further advances will be available under this agreement since the remaining funding capacity must accommodate accrued and unpaid interest for the remaining term of the loan. Liquidity Status: At September 30, 1996 the Company's working capital deficit is $138.6 million, which is $135.4 million greater than at December 31, 1995. This increase is the result of long term debt being classified as a current liability due to the Company's default on the interest payments on the senior secured notes and resulting covenant violations. During the first thirty-nine weeks of 1996 the Company's liquidity became severely constrained. The Company projects negative operating cash flows in 1996. On August 30, 1996 the Company entered into a $30.0 million loan agreement related to the aforementioned thermal power plant. The loan is collateralized by the stock of a special purpose entity formed to hold through affiliates the Company's interest in this thermal power plant. This source of funding provides short-term liquidity primarily for the continued development of this specific project but will not enable the Company to pursue other significant development opportunities. Of the Company's $16.7 million cash, $9.4 is related to the construction subsidiary which is prohibited by financial covenants from upstreaming cash. The development subsidiary's cash will largely be consumed by the continued development of the one large thermal power project. And as discussed above under financing activities after the next draw, there is no additional funding available under the $30.0 million loan agreement. This leaves little additional cash available for the development of other projects or general corporate uses. 22 The Company is unable to borrow other money and is delaying all payments except for essential services while it attempts to raise cash through asset sales, financing or other means. The ability of the construction subsidiary to reestablish its backlog is hampered by the Company's financial condition and KWI's bankruptcy filing. 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. Management Plans: The consolidated financial statements as of and for the periods ending September 30, 1996 and December 31, 1995 have been prepared assuming the Company will continue as a going concern. The Company incurred significant losses in the first thirty-nine weeks of 1996 and in 1995, has negative working capital and its liquidity is 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 problems 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 commitments with lenders, suppliers and other creditors. Risks and Uncertainties: There are numerous risks and uncertainties which may prevent the Company from successfully implementing its plans and continuing as a going concern. 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. In addition, management believes that such sales will not generate sufficient proceeds to ultimately provide any return of invested capital to the holders of the Company's stock. At this time the Company has not finalized plans for future operations. There can be no assurance that the Company will be successful in implementing its plans to improve its liquidity or that the Company will continue as going concern. The Company continues to evaluate other strategies and opportunities which include merger, sale or bankruptcy. 23 PART II Item 3. Defaults Upon Senior Secured Notes Payable and Other Notes Payable (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. Other Notes Payable - The borrowings under the $5,000,000 revolving credit agreement, the $7,500,000 term loan agreement and the $4,400,000 revolving loan agreement are in default due to KENETECH Windpower, Inc. bankruptcy filing, cross default provisions, and failure to meet financial covenants. Item 4. Submission of Matters to a Vote of Security-Holders. (a) The 1996 Annual Meeting of Stockholders was held August 7, 1996. (b) The meeting involved the election of three Class III Directors for a term of three years. The following individuals were elected as Class III Directors. Term Expires on the Date of the Director Annual Stockholder Meeting in: Charles Christenson 1999 Angus M. Duthie 1999 Mark D. Lerdal 1999 The term of office as a director continued after the meeting for Gerald R. Alderson (term expiring in 1997) and Howard W. Pifer III (term expiring in 1998). c) The matters voted upon at the meeting, and vote tabulations for each matter, were as follows: (1) Election of Directors: Charles Christenson In Favor 33,454,603 Against 0 Withheld 441,671 Abstentions 0 Broker Non-Voters 0 Angus M. Duthie In Favor 33,454,603 Against 0 Withheld 441,671 Abstentions 0 Broker Non-Voters 0 Mark D. Lerdal In Favor 33,470,959 Against 0 Withheld 425,315 Abstentions 0 Broker Non-Voters 0 (2) Ratification of the selection of KPMG as the independent auditors of the Company for its fiscal year ending December 31, 1996. In Favor 33,619,943 Against 137,276 Abstentions 139,055 Broker Non-Voters 0 (d) There were no settlements between the Company and any other participant terminating any solicitation subject to Rule 14a-11. 24 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 November 14, 1996 By: Date Mark D. Lerdal President and Chief Executive Officer November 14, 1996 By: Date Nicholas H. Politan Chief Financial Officer November 14, 1996 By: Date Mervin E. Werth Corporate Controller 25 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 November 14, 1996 By: /s/ Mark D. Lerdal Date Mark D. Lerdal President and Chief Executive Officer November 14, 1996 By: /s/ Nicholas H. Politan Date Nicholas H. Politan Chief Financial Officer November 14, 1996 By: /s/ Mervin E. Werth Date Mervin E. Werth Corporate Controller EX-27 2 FDS --
5 This schedule contains summary information extracted from the KEN10-Q3rd Quarter and is qualified in its entirety by reference to such financial statements. 0000807708 KENETECH CORPORATION 1 U.S. DOLLARS 9-mos DEC-31-1996 JAN-1-1996 SEP-30-1996 1 16,722 0 701 0 909 59,421 41,925 14,129 136,622 198,049 98,976 99,561 0 4 (170,580) 136,622 55,419 73,653 64,603 95,675 136 0 14,883 (35,948) (23,393) (59,341) 0 0 0 (59,341) (1.79) (1.79)
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