-----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, O5gRiu7qe3zm+01of9YcIubabFiwjno/MByJPsmMtWEouZ5q4FAY56ZHjB/+g7mM yWF6rrGCfCTc6ZGRQFXcUQ== 0000807708-97-000025.txt : 19970812 0000807708-97-000025.hdr.sgml : 19970812 ACCESSION NUMBER: 0000807708-97-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970628 FILED AS OF DATE: 19970811 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENETECH CORP CENTRAL INDEX KEY: 0000807708 STANDARD INDUSTRIAL CLASSIFICATION: COGENERATION SERVICES & SMALL POWER PRODUCERS [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: 97655491 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 twenty-six weeks ended June 28, 1997 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 July 31, 1997, there were 36,829,618 shares of the issuer's Common Stock, $.0001 par value outstanding. 2 PART I - FINANCIAL INFORMATION Part I Item 1. Financial Statements. KENETECH Corporation Consolidated Financial Statements Page Consolidated Statements of Operations for the thirteen weeks ended June 28, 1997 and June 30, 1996 ..... 4 Consolidated Statements of Operations for the twenty-six weeks ended June 28, 1997 and June 30, 1996 ... 5 Consolidated Balance Sheets, June 28, 1997 and December 31, 1996 ........................................ 6 Consolidated Statement of Stockholders' Deficiency for the twenty-six weeks ended June 28, 1997 ................. 7 Consolidated Statements of Cash Flows for the twenty-six weeks ended June 28, 1997 and June 30, 1996 .............. 8 Notes to Consolidated Financial Statements ................. 9 - 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................... 18 - 23 Part II Item 1. Legal Proceedings. 24 Item 3. Defaults Upon Senior Securities. 24 3 KENETECH CORPORATION -------------------- CONSOLIDATED STATEMENTS OF OPERATIONS for the thirteen weeks ended June 28, 1997 and June 30, 1996 (unaudited, in thousands, except per share amounts) June 28, June 30, 1997 1996 (see Note 1) -------- ---------- Revenues: Construction services ............................ $ 11,380 $ 12,498 Energy sales ..................................... 1,498 5,429 Maintenance, management fees and other ........... 40 7,238 Windplant sales .................................. -- 3,560 Interest on partnership notes and funds in escrow ....................................... -- 457 Energy management services ....................... -- 309 -------- ---------- Total revenues ................................. 12,918 29,491 Costs of revenues: Construction services ............................ 11,418 10,839 Energy plant operations .......................... 1,541 9,797 Windplant sales .................................. -- 628 Energy management services ....................... -- 64 -------- ---------- Total costs of revenues ........................ 12,959 21,328 Gross margin (Excess of expenses over revenues)..... (41) 8,163 Project development and marketing expenses ......... 5 2,520 Engineering expenses ............................... -- 1,603 General and administrative expenses ................ 2,589 8,491 -------- ---------- Loss from operations ............................... (2,635) (4,451) Interest income .................................... 367 299 Interest expense ................................... (3,011) (5,053) Equity loss of unconsolidated affiliates ........... (6) (90) Gain on disposition of subsidiaries and assets ..... 411 253 -------- ---------- Loss before taxes .................................. (4,874) (9,042) Income tax provision................................ -- 23,393 -------- ---------- Net loss ..................................... $ (4,874) $ (32,435) ======== ========== Net loss per common share - Primary and Fully diluted $ (0.19) $ (0.94) Weighted average number of common shares used in computing per share amounts - Primary and Fully diluted 36,830 36,826 The accompanying notes are an integral part of these consolidated financial statements. 4 KENETECH CORPORATION -------------------- CONSOLIDATED STATEMENTS OF OPERATIONS for the twenty-six weeks ended June 28, 1997 and June 30, 1996 (unaudited, in thousands, except per share amounts) June 28, June 30, 1997 1996 (See Note 1) -------- ---------- Revenues: Construction services ............................ $ 21,531 $ 23,393 Energy sales ..................................... 2,840 10,184 Maintenance, management fees and other ........... 527 14,507 Windplant sales .................................. -- 6,942 Interest on partnership notes and funds in escrow ....................................... -- 1,125 Energy management services ....................... -- 1,047 -------- -------- Total revenues ................................. 24,898 57,198 Costs of revenues: Construction services ............................ 21,388 20,148 Energy plant operations .......................... 3,256 24,270 Windplant sales .................................. -- 3,972 Energy management services ....................... -- 250 -------- -------- Total costs of revenues ........................ 24,644 48,640 Gross margin ....................................... 254 8,558 Project development and marketing expenses ......... 26 4,522 Engineering expenses ............................... -- 4,205 General and administrative expenses ................ 8,275 15,587 -------- -------- Loss from operations ............................... (8,047) (15,756) Interest income .................................... 575 774 Interest expense ................................... (7,760) (10,787) Equity loss of unconsolidated affiliates ........... (11) (90) Gain on disposition of subsidiaries and assets ..... 463 66 -------- -------- Loss before taxes .................................. (14,780) (25,793) Income tax provision................................ -- 23,393 -------- -------- Net loss ..................................... $(14,780) $(49,186) ======== ======== Net loss per common share - Primary and Fully diluted $ (0.52) $ (1.46) Weighted average number of common shares used in computing per share amounts - Primary and Fully diluted 36,830 36,732 The accompanying notes are an integral part of these consolidated financial statements. 5 KENETECH CORPORATION -------------------- CONSOLIDATED BALANCE SHEETS June 28, 1997 and December 31, 1996 (unaudited, in thousands, except share amounts) ASSETS June 28, December 31, 1997 1996 --------- ------------ Current assets: Cash and cash equivalents ....................... $ 11,553 $ 17,208 Funds in escrow, net ............................ 3,377 5,221 Accounts receivable ............................. 8,976 17,940 Inventories ..................................... 135 135 Investment in power plant held for sale ......... 18,971 19,209 Deferred tax assets, net ........................ 4,300 4,300 Other ........................................... 2,728 3,986 --------- ------------ Total current assets ............................... 50,040 67,999 Property, plant and equipment, net ................. 23,296 24,735 Power plants under development ..................... 18,624 11,507 Investments in affiliates .......................... 22 32 Deferred tax assets, net ........................... 13,613 13,613 Other assets ....................................... 3,485 5,425 --------- ------------ Total assets ................................. $ 109,080 $ 123,311 ========= ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable ................................ $ 19,826 $ 18,841 Bank loan payable ............................... 20,196 18,860 Accrued interest ................................ 20,003 13,462 Accrued liabilities ............................. 14,303 21,010 Debt associated with power plant held for sale .................................. 16,360 16,578 Other notes payable ............................. 19,398 20,165 Senior secured notes payable .................... 99,072 99,005 Accrued losses on contracts ..................... 1,699 1,699 --------- ------------ Total current liabilities ..................... 210,857 209,620 Accrued losses on contracts ........................ 245 897 Accrued dividends on preferred stock ............... 13,915 9,633 Other long-term obligations ........................ 1,025 1,061 --------- ------------ Total liabilities .............................. 226,042 221,211 Commitments and contingencies Stockholders' deficiency: Convertible preferred stock - 10,000,000 shares authorized, $.01 par value; issued and outstanding 102,492, $117,688 liquidation preference ....... 99,561 99,561 Common stock - 110,000,000 shares authorized, $.0001 par value; 36,829,618 issued and outstanding in 1997 and at December 31, 1996 .... 4 4 Additional paid-in capital ...................... 131,939 136,221 Cumulative foreign exchange ..................... 35 35 Accumulated deficit ............................. (348,501) (333,721) --------- ------------ Total stockholders' deficiency ................. $(116,962) (97,900) --------- ------------ Total liabilities and stockholders' deficiency .................... $ 109,080 $ 123,311 ========= ============ The accompanying notes are an integral part of these consolidated financial statements. 6 KENETECH CORPORATION -------------------- CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY for the twenty-six weeks ended June 28, 1997 (unaudited, in thousands, except share amounts)
Effect of Convertible Common Stock Additional Cumulative Preferred Stock Series A Paid-In Foreign Accumulated Shares Amount Shares Amount Capital Exchange Deficit Total Balance, December 31, 1996 102,492 $99,561 36,829,618 $4 $136,221 $35 $(333,721) $ (97,900) Preferred stock dividends -- -- -- - (4,282) -- -- (4,282) Net loss -- -- -- - -- -- (14,780) (14,780) ------- ------- ---------- -- -------- --- --------- --------- Balance, June 28, 1997 102,492 $99,561 36,829,618 $4 $131,939 $35 $(348,501) $(116,962) ======= ======= ========== == ======== === ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 7 KENETECH CORPORATION -------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS for the twenty-six weeks ended June 28, 1997 and June 30, 1996 (unaudited, in thousands) June 28, June 30, 1997 1996 (See Note 1) -------- ---------- Cash flows from operating activities: Net loss .......................................$ (14,780) $ (49,186) Adjustments to reconcile net loss to net cash used in operating activities: Deferred income taxes ....................... - 23,393 Depreciation, amortization and other ........ 6,699 (2,050) Changes in assets and liabilities: Funds in escrow, net ....................... 1,844 2,870 Accounts receivable ........................ 8,859 25,024 Partnership notes and interest receivable, net ........................... - 290 Inventories ................................ - 1,496 Other assets ............................... 2,317 (935) Accounts payable, accrued liabilities and accrued interest ...................... (4,386) (6,851) Accrued loss on contracts .................. (652) (2,157) Estimated warranty costs ................... - (1,491) --------- --------- Net cash used in operating activities ..... (99) (9,597) Cash flows from investing activities: Marketable securities: Purchases .................................... - (3,536) Additions to property, plant and equipment .... - (390) Proceeds from sales of subsidiaries and assets 1,268 8,115 Investments in affiliates: Contributions ................................ - (1,814) Distributions ................................ 14 522 Power plants under development ................ (7,117) (4,765) --------- --------- Net cash used in investing activities ..... (5,835) (1,868) Cash flows from financing activities: Proceeds from other notes payable ............. 1,376 - Payments on other notes payable ............... (1,097) (3,700) Proceeds from bank loan ....................... - 11,516 Payments on bank loan borrowings .............. - (5,000) Proceeds from issuance of common stock, net ... - 234 --------- --------- Net cash provided by financing activities . 279 3,050 --------- --------- Decrease in cash and cash equivalents (5,655) (8,415) Cash and cash equivalents at beginning of period ........................ 17,208 16,842 ---------- --------- Cash and cash equivalents at end of period .............................. $ 11,553 $ 8,427 ========== ========= The accompanying notes are an integral part of these consolidated financial statements. 8 1. General The interim consolidated financial statements presented herein include the accounts of KENETECH Corporation and its consolidated subsidiaries (the "Company"). These interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and the notes thereto for the year ended December 31, 1996. These interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary (consisting of items of a normal recurring nature) for a fair presentation of the Company's interim financial position, results of operations and cash flows. Results of operations for interim periods are not necessarily indicative of those for a full year. The Company's thirteen weeks represent thirteen weeks of operations; accordingly the second quarters of 1997 and 1996 ended June 28, 1997 and June 30, 1996, respectively. The consolidated financial statements of KENETECH Corporation and certain subsidiaries as of June 28, 1997 and December 31, 1996 and for the periods ending June 28, 1997 and June 30, 1996, have been prepared assuming the Company will continue as a going concern (see Note 3). Intercompany balances and transactions for consolidated subsidiaries are eliminated in consolidation. On May 29, 1996, the Company's windpower subsidiary, KENETECH Windpower, Inc. ("KWI"), filed for protection under Chapter 11 of the Federal Bankruptcy Code and reported an excess of liabilities over its assets. Although the Company continues to own the common stock of KWI and provides certain services under the jurisdiction of the Bankruptcy Court, the Company believes it is probable that such ownership will not exist after completion of the bankruptcy proceedings. Accordingly, as of May 29, 1996 KWI ceased to be accounted for as a consolidated subsidiary of the Company and no activities of KWI have been reflected in the consolidated financial statements of the Company since that date. The Company's investment in KWI is recorded as zero in "Investments in Affiliates" in the accompanying June 28, 1997 and December 31, 1996 consolidated balance sheets. Revenues and expenses of KWI from January 1, 1996 through May 29, 1996 are reflected in consolidated statements of operations and cash flows. KWI 1996 operations through May 29, 1996 reflect an excess of expenses over revenues of $164,000. 2. Significant Accounting Policies Foreign Currency Translation: Assets and liabilities of certain non-U.S. subsidiaries are translated at current exchange rates, and related revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a component of stockholders' deficiency. Revenues: Revenues from Windplant sales and construction services are recognized on the percentage-of-completion, cost-to-cost method. Costs of such revenues include all direct material and labor costs and those indirect costs related to contract performance such as indirect labor, supplies and tool costs that can be attributed to specific contracts. Estimated future warranty costs are recognized as units are sold and adjusted as circumstances require. Indirect costs not specifically allocable to contracts and general and administrative expenses are charged to operations as incurred. Revisions to contract revenue and cost estimates are recognized in the accounting period in which they are determined. Provision for estimated losses on uncompleted contracts is made in the period in which such losses are determined. Maintenance and management fees are recognized as earned under various long-term agreements to operate and maintain the energy plants which the Company has developed. Many of these fees are a percentage of owners' energy sales which fluctuate based on production and price. Other revenues include development fees earned under various independent power plant development activities. 9 2. Significant Accounting Policies (continued) Energy sales revenue is recognized when electrical power or steam is supplied to a purchaser, generally the local utility company or site host, at the contract rate in place at the time of delivery. Certain contracts have fixed prices for the first few years after which the prices are based on the "avoided costs" price of utility purchasers. Depreciation: Depreciation is recorded on a straight-line basis over the estimated useful lives as shown below: Buildings and improvements 30 years Windplants 20 to 30 years Cogeneration and substation facilities 30 years Machinery and equipment 2 to 10 years Furniture and fixtures 3 to 5 years Leasehold improvements Shorter of estimated life or term of lease Income Taxes: The Company accounts for income taxes using the liability method under which deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Changes in deferred tax assets and liabilities include the impact of any tax rate changes enacted during the year and changes in the valuation allowance. Accounts Receivable/Accrued Liabilities: Costs incurred and estimated earnings in excess of billings on uncompleted contracts are included in accounts receivable. Billings in excess of costs and estimated earnings on uncompleted contracts are included in accrued liabilities (See Note 8). Inventories: Inventories are stated at the lower of cost or market, principally using the average-cost method (See Note 9). Power Plant Held for Sale: Power plant held for sale represents the Company's share of a completed power plant (see Note 10). Power Plants Under Development: Power plants under development include project development costs, representing preconstruction costs incurred to complete the design of windpower plants, independent power plants and cogeneration facilities, to secure the necessary permits, to negotiate the contracts to construct and operate the project, to obtain construction financing and for other development services. Project development costs are capitalized once a project has reached the design and permitting stage and the Company has obtained a power purchase agreement or other enforceable right to sell power. Such capitalized development costs are transferred to construction in progress after construction begins. When it is probable that future projects will not be completed or costs may not be recovered, such costs are written off or reserved for. At June 28, 1997 and December 31, 1996 the Company's only project under active development is the Puerto Rico project. Other Assets: Other assets include debt issuance costs of $2,769,000 at June 28, 1997 and $3,860,000 at December 31, 1996 which are amortized on a straight-line basis over the term of the related debt. Such amortization expense was $1,050,000 and $623,000 respectively for the first twenty-six weeks of 1997 and 1996. 3. Liquidity and Going Concern The consolidated financial statements as of and for the periods ending June 28, 1997, June 30, 1996 and December 31, 1996 have been prepared assuming the Company will continue as a going concern. The Company incurred significant losses in the first twenty-six weeks of 1997 and for the years ending December 31, 1996 and 1995, has negative working capital and its liquidity is severely constrained. Certain lenders and creditors are seeking repayment and/or restructuring of the amounts due them. In 1997 the Company expects to generate operating losses before the sale of assets due to administrative expenses in excess of gross margin and interest expense on debt. These factors raise substantial doubt about the Company's ability to continue as a going concern in its current form. 10 3. Liquidity and Going Concern (continued) Management's plan to address its liquidity involves sales by subsidiaries of their respective interests in the Puerto Rico construction contract and the Puerto Rico project for which the Company expects to receive substantial cash proceeds. There can be no assurance that the Company will be successful in implementing its plan, that the sales of the Puerto Rico construction contract and/or the interests in the Puerto Rico project will be consummated, that substantial proceeds will be received, or that the Company will continue as a going concern. Management believes that such sales even if consummated will not generate sufficient proceeds to ultimately provide any return of invested capital to the holders of the Company's stock. The Company believes that any proceeds received from asset sales will be used in operations or paid to creditors. In addition, the Company believes KWI will assert certain claims in bankruptcy against the Company. Consequently, after, or as a part of a sale of the Company's subsidiaries' interests in the Puerto Rico project (the Company's only active development project), the Company believes that it is likely that it will seek protection under the Federal Bankruptcy Code. 4. Construction Subsidiary The Company has announced its intention to dispose of 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. At June 28, 1997 the Company had not completed the disposition of CNF, therefore the Company's financial statements do not include any adjustment or reserves that might result from the disposition. The Company's consolidated statement of operations for the twenty-six weeks ended June 28, 1997 and consolidated balance sheet as of June 28, 1997 include the following amounts relating to CNF: Twenty-six weeks ended June 28, 1997 (in thousands) Revenues .......................... $ 21,531 Costs of revenues ................. 21,388 -------- Gross margin ..... ................ 143 General and administrative expenses 3,978 -------- Loss from operations .............. (3,835) Other .......................... (195) -------- Loss before income taxes ......... $ (4,030) ======== As of June 28, 1997 (in thousands) Assets: Liabilities and owner's deficiency: Current assets $ 9,862 Current liabilities $28,254 Property plant and Long term liabilities 1,025 equipment 3,654 Owner's deficiency (14,810) Other long term assets 953 ------- ------- Total assets $14,469 Total liabilities and equity $14,469 ======= ======= CNF has a joint venture interest in the engineering, procurement and construction ("EPC") contract for the Puerto Rico project described above. The Company has signed a letter of intent to sell this interest in the EPC contract and intends to dispose of its construction subsidiary in 1997. There can be no assurance that the Company will be successful in selling CNF's interest in the EPC contract or disposing of CNF's remaining assets. 11 5. Net Loss Per Share Net loss per share amounts for the periods ending June 28, 1997 and June 30, 1996 were calculated as follows: Primary and Fully Diluted (in thousands, except per share amounts)
Thirteen Weeks Ended Twenty-Six Weeks Ended June 28, June 30, June 28, June 30, 1997 1996 1997 1996 --------- --------- --------- --------- Net loss $ (4,874) $ (32,435) $ (14,780) $ (49,186) Less preferred stock dividends (2,141) (2,141) (4,282) (4,282) --------- --------- --------- --------- Net loss used in per share calculations $ (7,015) $ (34,576) (19,062) (53,468) ========= ========= ========= ========= Weighted average shares used in per share calculations 36,830 36,826 36,830 36,732 ========= ========= ========= ========= Net loss per share $ (0.19) $ (0.94) $ (0.52) $ (1.46) ========= ========= ========= =========
Preferred stock dividends increase the net loss for the calculation of net loss per share. Common stock equivalents are not included in weighted average shares used in the calculations of net loss per share because they would be anti-dilutive (reducing the amount of net loss per share) due to the fact that the Company incurred net losses during the periods. 6. Cash Flow Information Short term investments purchased with original maturities of three months or less are considered cash equivalents. Additional cash flow information is presented below: June 28, June 30, 1997 1996 --------- --------- (in thousands) Supplemental cash flow information: Cash paid (received) for: Income taxes paid ...................... $ 134 $ 17 Income taxes refunded .................. (38) (420) --------- --------- Net cash flow from income taxes .......... $ 96 $ (403) ========= ========= Interest activity: Interest paid ........................... $ 863 $ 3,403 Capitalized interest ..................... (1,962) (587) Interest accrued but not paid, net ....... 7,883 9,246 Interest paid but accrued in prior periods (74) (1,554) Amortization of deferred financing costs . 1,050 279 --------- --------- Interest expense ........................ $ 7,760 $ 10,787 ========= ========= Capitalized interest charged to costs of revenues was $1,962,00 for the twenty-six weeks ended June 28, 1997 and $587,000 for the comparable 1996 period. 12 7. Funds in Escrow The Company has various debt and other agreements which have escrow fund requirements and certain debt service payments are made from these escrow accounts. The escrow account balances at June 28, 1997 and December 31, 1996 were as follows: June 28, December 31, 1997 1996 -------- ------------ (in thousands) Other notes payable $ 1,653 $ 1,581 Letters of credit collateral 150 1,086 Project collateral 1,574 2,554 -------- ------------ $ 3,377 $ 5,221 ======== ============ As of June 28, 1997, funds in escrow were invested in short-term cash investments with interest rates ranging from zero to 5.5%. As previously discussed, KWI's funds in escrow are not reflected in either the June 28, 1997 or the December 31, 1996 balance sheet. 8. Accounts Receivable Accounts Receivable: Accounts receivable at June 28, 1997 and December 31, 1996 consisted of: June 28, December 31, 1997 1996 -------- ------------ (in thousands) Contracts - Billed: Completed contracts .............. $ -- $ 1,981 Contracts in progress ............ 1,945 9,106 Retained ......................... 1,942 2,216 Contracts - Unbilled .............. 3,932 2,782 Operations and other .............. 1,157 1,855 -------- ------------ $ 8,976 $ 17,940 ======== ============ At June 28, 1997 and December 31, 1996 billed and unbilled receivables did not include any amounts from related parties. Operations and other receivables include $33,000 from related parties at June 28, 1997 and December 31, 1996. As previously discussed, receivables of KWI are not reflected in the accompanying June 28, 1997 and December 31, 1996 balance sheets. A summary of costs incurred and estimated earnings on uncompleted contracts at June 28, 1997 and December 31, 1996 is as follows: June 28, December 31, 1997 1996 --------- ------------ (in thousands) Costs incurred and estimated earnings on uncompleted contracts ............ $ 179,167 $ 151,850 Billings to date ................... 176,481 157,346 --------- ------------ $ 2,686 $ (5,496) ========= ============ Such amounts were included in the consolidated balance sheets at June 28, 1997 and December 31, 1996 as follows: June 28, December 31, 1997 1996 --------- ------------ (in thousands) Costs incurred and estimated earnings in excess of billings on uncompleted contracts (accounts receivable) ...... $ 3,932 $ 2,782 Billings in excess of costs and estimated earnings on uncompleted contracts (accrued liabilities) .... (1,246) (8,278) --------- ------------ $ 2,686 $ (5,496) ========= ============ 13 9. Inventories Inventories (in thousands) at June 28, 1997 and December 31, 1996 consisted of: June 28, December 31, 1997 1996 --------- ------------ (in thousands) Unassembled parts and supplies $ 135 $ 135 ========= ============ Unassembled parts and supplies consists of fuel and maintenance parts for the Company's wholly-owned cogeneration facility. 10. Investment in Power Plant Held for Sale and Debt Associated With Power Plant Held for Sale Investment in power plant held for sale at June 28, 1997 and December 31, 1996 consisted of: June 28, December 31, 1997 1996 --------- ------------ (in thousands) Chateaugay power plant $ 18,971 $ 19,209 ========= ============ The Company owns a 50% ownership interest in a 17.0 megawatt wood-fired electric power plant it constructed in Chateaugay, New York in September 1993. Debt associated with this project held for sale at June 28, 1997 and December 31, 1996 consisted primarily of tax-exempt bonds. In July 1991, the Company entered into an agreement with the County of Franklin (New York) Industrial Development Authority (the "Authority") whereby the Authority loaned the Company the proceeds of the Authority's Series 1991A Bonds issued of $34,800,000 to finance the construction of the Chateaugay project. The bonds are due July 1, 2021. As the Partnership makes debt payments, the Company reduces its pro rata 50% share of the debt. Accordingly, $16,360,000 was outstanding at June 28, 1997. Additionally, the Company has borrowed $1,200,000 against its equity in this project. 11. Bank Loan Payable On August 30, 1996, the Company entered into a $30,000,000 loan agreement to be used for the Puerto Rico project being developed by the Company's development subsidiary and affiliates of Enron Corporation. 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 13.28% at June 28, 1997. 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. No further funds are available under this agreement because the remaining funding capacity accommodates accrued and unpaid interest for the remaining term of the loan. The outstanding balance on this bank loan was $20,196,000 at June 28, 1997. 14 12. Other Notes Payable Other notes payable at June 28, 1997 and December 31, 1996 consisted of the following: June 28, December 31, 1997 1996 --------- ------------ (in thousands) 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 requiring an escrow account. $ 8,268 $ 8,667 Borrowings under a $5,000,000 revolving credit agreement bearing interest at 1% above the bank's prime rate through April 30, 1997.(1) 166 166 Borrowings under a $7,500,000 term loan agreement bearing interest at 2% above the bank's prime rate due in quarterly installments of $267,857 plus interest through December 31, 2000 and $2,142,860 due on March 31, 2001.(1) 6,132 6,351 Borrowings under a $4,400,000 revolving loan agreement, interest rate selected by the Company from specified alternatives (7.6% and 7.4% at June 28, 1997 and December 31, 1996, respectively), convertible to a 15-year term, loan payable semi-annually, collateralized by land, building and equipment.(1) 3,565 3,645 Borrowings under a $1,200,000 loan agreement, due in 1999 bearing interest at prime plus 3% (11.25% at June 28, 1997 and December 31, 1996). 1,139 641 Notes bearing interest at 7.0% due through 1999.(2) 74 504 Other obligations bearing interest at 9.9% due through 1999, collateralized by equipment. 54 191 --------- ------------ $ 19,398 $ 20,165 ========= ============ (1) Facility associated with the Company's construction subsidiary. See discussion below regarding defaults. (2) The Company did not make the required principal and interest payment on December 1, 1996 and certain holders of the notes notified the Company of their intention to accelerate the obligation to pay the unpaid balance of the notes plus accrued interest. On February 21, 1997, the Company paid $322,000 in full settlement of $460,000 of unpaid principal and interest. The Company maintained a 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 upon the disposition of CNF. The agreement requires CNF to meet certain net worth, financial ratio and debt service coverage tests. At June 28, 1997 and December 31, 1996 CNF was not in compliance with these covenants. The bank has issued a notice of default letter which states that due to KWI's bankruptcy filing and certain covenant violations it would not make any further advances under the revolving credit agreement. CNF is prohibited from transferring cash to KENETECH Corporation by provisions of this line of credit. CNF's cash and cash equivalents totaled $1,614,000 at June 28, 1997. Certain of the debt agreements provide events of default including provisions which allow the lenders to accelerate repayment of the debt should other debt of the Company experience an event of default which would cause such other debt to be accelerated. Because of these provisions all other notes payable are classified as current in the accompanying June 28, 1997 and December 31, 1996 balance sheets. 15 13. 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 $928,000 at June 28, 1997. Interest on these notes is due June 15 and December 15 of each year. The Notes are redeemable, at the option of the Company, beginning December 15, 1997 at 106% of par, beginning December 15, 1998 at 103% of par, and beginning December 15, 1999 at par. Under the terms of the note indenture, the Company is restricted from paying cash dividends on its common stock and must comply with certain covenants, the most restrictive of which place limitations on payments of such dividends, repurchasing common stock, incurring additional indebtedness, pledging of assets and advances or loans to affiliates. The indenture provides for an event of default (including the acceleration of the repayment of the Notes) should other debt of the Company be accelerated because the other debt was in default. The Company has not paid an interest payment since December 15, 1995 and is in default. The debt is classified as a current liability. The Company has accrued unpaid interest on these notes of $19,125,000 as of June 28, 1997. 14. Contingencies Litigation: On September 28, 1995, a class action complaint was filed against the Company and certain of its officers and directors (namely, Stanley Charren, Maurice E. Miller, Joel M. Canino and Gerald R. Alderson) in the United States District Court for the Northern District of California alleging federal securities laws violations. On November 2, 1995, a First Amended Complaint was filed naming additional defendants, including underwriters of the Company's securities and certain other officers and directors of the Company (namely, Charles Christenson, Angus M. Duthie, Steven N. Hutchinson, Howard W. Pifer III and Mervin E. Werth). Subsequent to the Court's partial grant of the Company's and the underwriter defendants' motions to dismiss, a Second Amended Complaint was filed on March 29, 1996. The amended complaint alleges claims under sections 11 and 15 of the Securities Act of 1933, and sections 10(b) and 20(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, based on alleged misrepresentations and omissions in the Company's public statements, on behalf of a class consisting of persons who purchased the Company's common stock during the period from September 21, 1993 (the date of the Company's initial public offering) through August 8, 1995 and persons who purchased the Company's preferred stock during the period from April 28, 1994 (the public offering date of the preferred stock) through August 8, 1995. The amended complaint alleges that the defendants misrepresented the Company's progress on the development of its latest generation of wind turbines and the Company's future prospects. The amended complaint seeks unspecified damages and other relief. On December 4, 1996, with underwriters and their counsel and the insurance carriers' counsel in attendance, a mediation occurred in San Francisco in an attempt to settle the action; however, the parties were unsuccessful. Plaintiffs' motion for class certification was heard and taken under submission by the Court on January 31, 1997. By order dated March 24, 1997, the Court granted the underwriter defendants' motion to dismiss any claim based on section 11 of the Securities Act of 1933 that would require tracing back to the initial public offering of KENETECH securities. In addition, in separate orders dated March 24, 1997 and April 16, 1997, the Court granted plaintiffs' motion for certification of a plaintiff class consisting of all persons or entities who purchased KENETECH common stock between September 21, 1993 and August 8, 1995 or KENETECH depository shares between April 28, 1994 and August 8, 1995, appointed representatives of the certified plaintiff class, appointed counsel for the certified class and denied without prejudice plaintiffs' motion for certification of an underwriter defendant class. The Company intends to continue to contest the action vigorously. 16 14. Contingencies (continued) On January 6, 1996, a breach of contract action was filed in the Superior Court for Middlesex County, Massachusetts, by Tennessee Gas Pipeline Company ("Tennessee") against Pepperell Power Associates Limited Partnership (the "Pepperell Partnership"), its general partner, KES Pepperell, Inc. (each in whole or in part directly or indirectly owned by KENETECH Energy Systems, Inc. ("KES"), a wholly-owned subsidiary of the Company), and its other general partner, in connection with the termination of a natural gas transportation agreement, seeking to recover alleged unpaid charges of approximately $1,800,000. KES Pepperell, Inc. has filed a counterclaim in the action. On December 2, 1996, Tennessee filed another action in the Superior Court for Middlesex County, Massachusetts, against KES Pepperell, Inc. and KES, among others, seeking to recover an $810,000 payment made to the Pepperell Partnership plus treble damages and attorneys' fees. In June 1997 a tentative settlement was reached with Tennessee which included resolution of claims involving Flagg Energy Development Corporation ("Flagg"), a wholly-owned subsidiary of KES, which obtains gas transportation services from Tennessee for the Hartford Hospital co-generation plant. The settlement was to be finalized and executed by July 15, 1997, but was not due to Tennessee's delay. On July 16, 1997, the Federal Energy Regulatory Commission ordered Tennesse to refund in excess of $2,500,000 to Flagg involving the gas transportation services described above. Tennessee has now filed a motion seeking an emergency order to compel KES and its subsidiaries to effect the tentative settlement. KES has opposed such motion. On March 13, 1997, Mision Industrial de Puerto Rico, Inc., the Union de Trabajadores de la Industria Electrica y Riego (UTIER), Guayamenses Pro-Salud y Buen Ambiente, Bartolome Diana, SURCCO, Inc. and Jose E. Olivieri Antonmarchi (the Appellants) timely filed an appeal before the Circuit Court of Appeal of Puerto Rico (No. KLAN 97-00236), appealing the judgment entered against them on January 21, 1997, in the Ponce Superior Division of the Court of First Instance of Puerto Rico (the trial court) (No. JPE 96-0345) dismissing Appellants' complaint against the Puerto Rico Electric Power Authority ("PREPA") requesting injunctive and declaratory relief. Appellants are environmental groups, citizens and the union which represents PREPA's electrical workers; they had brought their civil action challenging the procedure used by PREPA to select two independent power producers (one of which is the Company's wholly-owned development subsidiary) to design, finance, construct, own and operate the Puerto Rico project. The trial court held that PREPA's selection of the independent power producers need not have been done through public bidding pursuant to section 205 of PREPA's Organic Act. The partnership which holds the power purchase agreement for the Puerto Rico project intervened in the action before the trial court and intends to contest the action vigorously. The Company is also a party to various other legal proceedings normally incident to its business activities. The Company intends to defend itself vigorously against these actions. It is not feasible to predict or determine whether the ultimate outcome of the above-described matters will have a material adverse effect on the Company's financial position. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview -------- KENETECH Corporation ("KENETECH"), a Delaware corporation, is a holding company which participated through its subsidiaries in the electric utility market. As used in this document "Company" refers to KENETECH and its wholly-owned subsidiaries (including KENETECH Windpower, Inc. (KWI) only through May 29, 1996). The Company develops, constructs, finances, sells and operates and manages independent power projects. A wholly-owned development subsidiary is a joint venture partner with an affiliate of Enron Corporation in a project in late stage development in Puerto Rico. The project is a 507 MW (net) natural gas cogeneration facility and associated liquified natural gas facility which will produce electricity to be sold to Puerto Rico Electric Power Authority pursuant to a 22 year Power Purchase Agreement dated March 10, 1995. The power plant will be a combined cycle cogeneration facility consisting of two combustion turbines capable of operating on LNG, LPG, or fuel oil to generate electricity, and is expected to produce approximately 4 million Mwh of electricity annually under baseload conditions. Steam generated will also be used to convert sea water into fresh water in a desalination plant, which is expected to produce approximately 4 million gallons of potable water per day, of which approximately 1 million gallons per day will be required by the project, with the remainder being available for sale to local entities. This is the only project the Company (through its wholly-owned development subsidiary) has in active development. The Company's wholly-owned development subsidiary intends to sell its interest in this project in 1997. One of the Company's subsidiaries is a general contractor which has constructed independent power projects since 1988. This subsidiary competes for contracts for engineering, procurement and construction (EPC) and for construction only. Historically, the Company has constructed all of the thermal energy power projects it developed and recently has constructed all of the Windplants it developed. Substantially all construction work performed by the Company for third parties is competitively bid and most is performed under turnkey contracts. This construction subsidiary has a joint venture interest in the EPC contract for the Puerto Rico project described above. The Company has signed a letter of intent to sell its interest in this EPC contract and intends to dispose of its construction subsidiary in 1997. The chapter 11 filing of KWI discussed below has materially adversely affected the Company's construction subsidiary and its ability to procure contracts. KWI manufactured wind turbines and designed and operated utility-scale wind powered electric powerplants which incorporated large arrays of such turbines. On May 29, 1996, KWI filed for protection under chapter 11 of the Federal Bankruptcy Code and reported an excess of liabilities over the fair value of its assets. Although the Company continues to own the common stock of KWI and provides certain services under the jurisdiction of the Bankruptcy Court, the Company believes it is probable that such ownership will not exist after completion of the bankruptcy proceedings. Accordingly, as of May 29, 1996 KWI ceased to be accounted for as a consolidated subsidiary of the Company. The Company's financial statements exclude all KWI activities after that date. Cautionary Statement -------------------- Certain information included in this report contains forward looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Act of 1934, as amended. Such forward looking information is based on information available when such statements are made and is subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. 18 Results of Operations --------------------- The consolidated financial statements of KENETECH Corporation and certain subsidiaries as of and for the quarterly periods ending June 28, 1997 and June 30, 1996 have been prepared assuming the Company will continue as a going concern (see Note 3). As mentioned previously, as of May 29, 1996 KWI ceased to be accounted for as a consolidated subsidiary of KENETECH and no activities of KWI have been reflected in the consolidated financial statements of the Company since that date. The Company's investment in KWI is recorded at zero in "Investments in Affiliates" in the accompanying June 28, 1997 and December 31, 1996 consolidated balance sheets. Revenues and expenses of KWI from January 1, 1996 through May 29, 1996 are reflected in the 1996 consolidated statement of operations and cash flows. The Company incurred a net loss for the first twenty-six weeks of 1997 of $14.8 million as compared to a net loss for the first twenty-six weeks of of 1996 of $49.2 million. This does not indicate an improvement in the Company's prospects. Instead this loss reflects the elimination of activities associated with divested subsidiaries and divisions and KWI. In 1997 the Company expects to generate operating losses before the sale of assets described above in "Overview" due to administrative expenses and interest expense on debt in excess of gross margin. THIRTEEN WEEKS ENDED JUNE 28, 1997 AND JUNE 30, 1996 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.
Thirteen Weeks Ended June 28, 1997 June 30, 1996 ------------------------ ------------------------ (in millions) Gross Gross Revenues Costs Margins Revenues Costs Margins -------- ----- ------- -------- ----- ------- ............................ Construction services ........... $ 11.4 $11.4 $ 0.0 $ 12.5 $10.8 $ 1.7 Energy sales (1) ................ 1.5 N/A 1.5 5.4 N/A 5.4 Maintenance, management fees and other (1).............. 0.0 N/A 0.0 7.2 N/A 7.2 Energy plant operations (1)...... N/A 1.5 (1.5) N/A 9.8 (9.8) -------- ----- ------- -------- ----- ------- Total energy plant operations 1.5 1.5 0.0 12.6 9.8 2.8 Windplant sales ................. -- -- -- 3.6 0.6 3.0 Interest on partnership notes and funds in escrow ........... -- -- -- 0.5 N/A 0.5 Energy management services ...... -- -- -- 0.3 0.1 0.2 -------- ----- ------- -------- ----- ------- Total ............................ $ 12.9 $12.9 $ 0.0 $ 29.5 $21.3 $ 8.2 ======== ===== ======= ======== ===== ======= (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.
19 Construction services revenues (recorded under the percentage-of-completion method) decreased to $11.4 million for the thirteen weeks ended June 28, 1997 from $12.5 million for the comparable period in 1996; accompanied by a decline in the gross margin to zero for the thirteen weeks ended June 28, 1997 from 14% for the comparable period in 1996. The gross margin for the second thirteen weeks of 1996 was favorably impacted by the resolution of change orders on another cogeneration project. The Company intends to dispose of its construction business in 1997. Energy plant operations, Windplant sales, Interest on partnership notes and funds in escrow and Engineering expenses all declined significantly because of the deconsolidation of KWI. Subsequent to June 28, 1997, the Company's Hartford Hospital co-generation facility incurred mechanical problems and is currently not generating any energy sales. Management is seeking a resolution to these mechanical problems. Energy management services revenues decreased to zero for the thirteen weeks ended June 28, 1997 from $0.3 million for the comparable period in 1996 because this operation was sold in the second quarter of 1996. Project development and marketing expenses decreased to $5 thousand for the thirteen weeks ended June 28, 1997 from $2.5 million for the comparable period in 1996. Project development expenses declined significantly since the only project the Company has in active development is the Puerto Rico project and expenditures for that project are being capitalized. The costs expensed here represent expenditures to market assets and/or to keep various assets marketable. General and administrative expenses decreased to $2.6 million for the thirteen weeks ended June 28, 1997 from $8.5 million for the comparable period in 1996 due to downsizing of the Company's operations. Interest income increased to $367 thousand for the thirteen weeks ended June 28, 1997 from $299 thousand for the comparable period in 1996 due to higher balances earning interest during 1997's second quarter compared to 1996's second quarter. Interest expense decreased to $3.0 million for the thirteen weeks ended June 28, 1997 from $5.1 million for the comparable period in 1996 due to the deconsolidation of KWI and capitalization of interest expense to the Puerto Rico project. Equity loss of unconsolidated affiliates. Equity investments in affiliates resulted in a net loss of $6 thousand for the thirteen weeks ended June 28, 1997, compared to a net loss of $90 thousand for the comparable period in 1996 due to the sale of the Company's interests in entities accounted for on an equity basis and the deconsolidation of KWI. Income taxes. The Company uses the asset and liability approach for financial accounting and reporting for income taxes was recorded for the thirteen weeks ended June 28, 1997 and June 30, 1996. Although a loss was incurred, no tax benefit was recorded because of the uncertainty about the Company's ability to utilize such a benefit. 20 TWENTY-SIX WEEKS ENDED JUNE 28, 1997 AND JUNE 30, 1996 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 28, 1997 and June 30, 1996. Twenty-six weeks Ended June 28, 1997 June 30, 1996
Gross Gross Revenues Costs Margins Revenues Costs Margins Construction services $ 21.5 $ 21.4 $ 0.1 $ 23.4 $ 20.1 $ 3.3 Maintenance, management fees and other (1) 0.5 n/a 0.5 14.5 n/a 14.5 Energy sales (1) 2.9 n/a 2.9 10.2 n/a 10.2 Energy plant operations (1) n/a 3.3 (3.3) n/a 24.3 (24.3) -------- ------ ------- -------- ------ ------- Total energy plant operations 3.4 3.3 0.1 24.7 24.3 0.4 Windplant sales - - - 6.9 4.0 2.9 Interest on partnership notes and funds in escrow - n/a - 1.1 n/a 1.1 Energy management services - - - 1.1 0.2 0.9 -------- ------ ------- -------- ------ ------- Total $ 24.9 $ 24.7 $ 0.2 $ 57.2 $ 48.6 $ 8.6 ======== ====== ======= ======== ====== =======
(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 $21.5 million for the twenty-six weeks ended June 28, 1997 from $23.4 million for the comparable period in 1996; however the gross margin decreased to 1% for the twenty-six weeks ended June 28, 1997 from 14% for the comparable period in 1996. The Company intends to sell its construction subsidiary. Energy plant operations, Windplant sales, Interest on partnership notes and funds in escrow and Engineering expenses all declined significantly because of the deconsolidation of KWI. Subsequent to June 28, 1997, the Company's Hartford Hospital co-generation facility incurred mechanical problems and is currently not generating any energy sales. Management is seeking a resolution to these mechanical problems. Energy management services revenues decreased to zero for the first twenty-six weeks of 1997 from $1.1 million for the comparable period in 1996. This operation was sold in the second quarter of 1996. Project development and marketing expenses decreased to $26 thousand for the twenty-six weeks ended June 28, 1997 from $4.5 million for the comparable period in 1996. Project development expenses declined significantly since the only project the Company has in active development is the Puerto Rico project and expenditures for that project are being capitalized. The costs expensed here represent expenditures to market assets and/or to keep various assets marketable. 21 General and administrative expenses decreased to $8.3 million for the first twenty-six weeks of 1997 from $15.6 million for the comparable period in 1996 due to the deconsolidation of KWI and downsizing of the Company. Interest income decreased to $0.6 million for the first twenty-six weeks of 1997 from $0.8 million for the comparable period in 1996 due to lower interest earned as a result of declining cash and investment balances. Interest expense decreased to $7.8 million for the first twenty-six weeks of 1997 from $10.8 million for the comparable period in 1996 due to the deconsolidation of KWI, the sale of subsidiaries and increased capitalization of interest to the Puerto Rico project ($2.0 million in 1997 versus $0.6 million in 1996). Equity income (loss) of unconsolidated affiliates: Equity investments in affiliates resulted in net loss of $11 thousand for the first twenty-six weeks of 1997, compared to $90 thousand for the comparable period in 1996 due to the deconsolidation of KWI and sale of equity investments. Sale of subsidiaries and fixed assets: During the first twenty-six weeks of 1997 the Company sold fixed assets and some projects in the initial stages of development. On an aggregated basis, these transactions generated cash of $1.3 million and a net gain of $463 thousand. 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 gain of $66 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 twenty-six weeks ended June 28, 1997 and June 30, 1996 because of the uncertainty about the Company's ability to utilize such a benefit. Liquidity and Capital Resources ------------------------------- Operating activities During the first twenty-six weeks of 1997 operations activities used cash of $99 thousand. As previously stated, the Company expects a loss from operations in 1997 before the sale of the assets described above in "Overview" due to administrative expenses and interest on debt in excess of gross margin. Investing activities During the first twenty-six weeks of 1997 the Company capitalized $7.1 million of its development activities for the continued work on the Puerto Rico power project. Financing activities During the first quarter of 1997 the Company paid $1.1 million of principal on other notes payable. Status ------ At June 28, 1997 the Company's working capital deficit is $160.8 million, which is $19.2 million greater than at December 31, 1996. During 1996 the Company's liquidity became severely constrained as it consumed its cash. On February 2, 1996 the Company announced that it would not pay the dividend scheduled for February 15, 1996 on its preferred stock. The Company paid no dividends on the preferred stock in 1996, has not paid any dividends in 1997 and does not expect to be able to for the foreseeable future. Under the terms of the preferred stock, dividends accrue until paid. In December 1992 the Company sold $100.0 million of 12 3/4% Senior Secured Notes due 2002. Interest on these notes is due June 15 and December 15 of each year. The Company did not make the 1996 interest payments, has not made the June 15, 1997 interest payment and is in default. Also, the borrowings under the $5.0 million revolving credit agreement, the $7.5 million term loan agreement and the $4.4 million revolving loan agreement (included in Other Notes Payable on the June 28, 1997 and December 31, 1996 balance sheets) are in default due to KWI's bankruptcy filing, cross default provisions, failure to meet financial covenants and the Company's default on the interest payment on the senior secured notes. The Company does not expect to cure these defaults in the foreseeable future. 22 The Company was able to continue its activities because it generated $13.5 million in 1996 by selling assets and drew $18.9 million from the $30.0 million Puerto Rico project loan obtained by a wholly-owned subsidiary. This loan is collateralized by the stock of a special purpose entity formed to hold the Company's interest in the Puerto Rico power project. No further funds are available under this agreement because the remaining funding capacity accommodates accrued and unpaid interest for the remaining term of the loan. The development subsidiary's cash of $7.4 million at June 28, 1997 will be consumed by the continued development of the project. Of the Company's $11.6 million cash at June 28, 1997 $1.6 million is related to the construction subsidiary which is prohibited by financial covenants from transferring cash to KENETECH. The ability of the construction subsidiary to reestablish its backlog has been severely hampered by the Company's financial condition and KWI's bankruptcy filing. The Company has signed a letter of intent to sell its interest in the EPC construction contract related to the Puerto Rico project and intends to dispose of its construction subsidiary in 1997. There can be no assurance that the construction subsidiary will be successful in selling its interest in the EPC contract or disposing of its remaining assets. Certain lenders and other creditors are seeking repayment and/or restructuring of the amounts due them. The Company is unable to borrow money and is delaying all payments except for essential services while it attempts to raise cash through additional asset sales. There can be no assurances that asset sales will be consummated or that substantial proceeds will be received. If the Company is unable to sell assets its liquidity will be further constrained. Management believes that such sales even if consummated will not generate sufficient proceeds to ultimately provide any return of invested capital to the holders of the Company's stock. It is expected that all proceeds received from asset sales will be used in operations or paid to creditors. Consequently, after, or as a part of a sale of the Company's subsidiaries' interests in its only active development project, the Company believes that it is likely that it will seek protection under the Federal Bankruptcy Code. Risks and Uncertainties ----------------------- The consolidated financial statements as of and for the periods ended June 28, 1997 have been prepared assuming the Company will continue as a going concern. The Company incurred significant losses in 1996 and 1995, has negative working capital and its liquidity is severely constrained. Certain lenders and creditors are seeking repayment and/or restructuring of the amounts due them. In 1997 the Company expects to generate operating losses before the sale of assets due to administrative expenses in excess of gross margin and interest expense on debt. These factors raise substantial doubt about the Company's ability to continue as a going concern in its current form. Management's plan to address its liquidity involves the sale of the Company's development subsidiary's interest in the Puerto Rico project and its construction subsidiary's interest in the Puerto Rico construction contract for which it expects to receive substantial cash proceeds. There can be no assurance that the Company will be successful in implementing its plans, that the sales of the Puerto Rico construction contract and/or interests in the Puerto Rico project will be consummated, that substantial proceeds will be received, or that the Company will continue as a going concern. Management believes that such sales even if consummated will not generate sufficient proceeds to ultimately provide any return of invested capital to the holders of the Company's stock. The Company believes that any proceeds received from asset sales will be used in operations or paid to creditors. In addition, the Company believes KWI will assert certain claims in bankruptcy against the Company. Consequently, after, or as a part of a sale of the Company's subsidiaries' interests in its only active development project, the Company believes that it is likely that it will seek protection under the Federal Bankruptcy Code. 23 Part II Item 1. Legal Proceedings. ------------------ (a) See discussion under Note 14 of Item 1, Part I incorporated herein by reference. Item 3. Defaults Upon Senior Securities. -------------------------------- (a) See discussion under Notes 12 and 13 of Item 1, Part I and discussion under the heading "status" of Item 2, Part I incorporated herein by reference. 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 By: Date: August 8, 1997 Mark D. Lerdal President, Chief Executive Officer, and Director By: Date: August 8, 1997 Nicholas H. Politan Chief Financial Officer, Vice President, and Assistant Secretary By: Date: August 8, 1997 Mervin E. Werth Corporate Controller, Chief Accounting Officer, and Assistant Treasurer 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 By: /s/ Mark D. Lerdal Date: August 8, 1997 Mark D. Lerdal President, Chief Executive Officer, and Director By: /s/ Nicholas H. Politan Date: August 8, 1997 Nicholas H. Politan Chief Financial Officer, Vice President, and Assistant Secretary By: /s/ Mervin E. Werth Date: August 8, 1997 Mervin E. Werth Corporate Controller, Chief Accounting Officer, and Assistant Treasurer 25 EX-27 2 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE KEN10-Q 2ND QUARTER AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000807708 KENETECH CORPORATION 1 U.S. DOLLARS 6-mos DEC-31-1997 JAN-1-1997 JUN-28-1997 1 11,553 0 8,976 0 135 50,040 35,003 11,707 109,080 210,857 0 99,561 0 4 (116,962) 109,080 24,898 24,898 24,644 24,644 8,301 0 (7,760) (14,780) 0 (14,780) 0 0 0 (14,780) (0.52) (0.52)
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