<PAGE>
____________________________
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For The Quarterly Period Ended September 30, 1994
------------------
Commission file number 0-14246
-------
Wheelabrator Technologies Inc.
---------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2678047
- ---------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Liberty Lane, Hampton, New Hampshire 03842
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(603) 929-3000
-----------------------------
(Registrant's telephone number,
including area code)
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
--------- ---------
Number of shares of common stock outstanding at October 31, 1994-188,725,007
<PAGE>
WHEELABRATOR TECHNOLOGIES INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1994
----------------------------------------
INDEX
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Part I - Financial Information: Page No.
- ------------------------------- --------
Item 1 - Financial Statements
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1993 and 1994................. 1
Consolidated Balance Sheets as of December 31, 1993 and
September 30, 1994....................................... 2
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1993 and 1994........................ 3
Consolidated Statements of Changes in Stockholders' Equity for
the Nine Months Ended September 30, 1993 and 1994........ 4
Notes to Consolidated Financial Statements...................... 5
Item 2 - Management's Discussion and Analysis of Results
of Operations and Financial Condition................. 8
Part II - Other Information:
- ----------------------------
Item 1 - Legal Proceedings........................................ 14
Item 6 - Exhibits and Reports on Form 8-K......................... 15
SIGNATURE......................................................... 16
Exhibit Index..................................................... 17
<PAGE>
PART I. FINANCIAL INFORMATION
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1994
(000's omitted, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1993 1994 1993 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue..................................... $283,882 $334,707 $809,385 $937,700
Operating expenses.......................... 194,619 228,624 559,968 642,716
Selling and administrative expenses......... 26,540 30,055 77,176 85,322
Interest expense............................ 15,849 12,801 48,413 36,883
Interest income............................. (4,080) (4,229) (13,880) (11,159)
Equity in earnings of affiliates............ (12,279) (9,718) (33,217) (28,185)
Gain from stock transactions of affiliate... - - (7,680) -
Other (income) or expense, net.............. (2,038) 209 (5,736) (2,006)
-------- -------- -------- --------
Income before income taxes................ 65,271 76,965 184,341 214,129
Income tax provision........................ 29,537 27,576 65,399 75,990
-------- -------- -------- --------
Net income................................ $ 35,734 $ 49,389 $118,942 $138,139
======== ======== ======== ========
Weighted average common shares outstanding.. 188,900 190,400 188,600 190,400
======== ======== ======== ========
Earnings per common share................... $ 0.19 $ 0.26 $ 0.63 $ 0.73
======== ======== ======== ========
Dividends declared per common share......... $ - $ - $ 0.08 $ 0.10
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's omitted, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1993 1994
------------ -------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents..................................................... $ 36,719 $ 33,651
Receivables, net.............................................................. 188,241 239,776
Costs and earnings in excess of billings...................................... 25,712 32,897
Other current assets.......................................................... 84,684 92,894
---------- ----------
Total current assets.................................................... 335,356 399,218
Property, plant and equipment, net............................................... 1,653,920 1,686,057
Cost in excess of net assets of acquired businesses.............................. 205,886 222,808
Investments in affiliates........................................................ 561,045 615,482
Other assets..................................................................... 334,071 320,067
---------- ----------
Total assets......................................................... $3,090,278 $3,243,632
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term project debt.................................. $ 33,754 $ 38,831
Accounts payable.............................................................. 70,762 91,028
Accrued liabilities........................................................... 197,123 190,364
Advance payments on contracts................................................. 28,147 51,990
---------- ----------
Total current liabilities............................................... 329,786 372,213
---------- ----------
Long-term project debt........................................................... 776,858 753,990
---------- ----------
Deferred income taxes............................................................ 292,364 328,728
---------- ----------
Other long-term liabilities...................................................... 404,432 354,121
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $1.00 per share, 50,000,000 authorized, none
issued or outstanding...................................................... - -
Common stock, par value $0.01 per share, 500,000,000 authorized, 188,820,322
shares outstanding in 1993, 189,457,407 shares outstanding in 1994......... 1,888 1,895
Capital in excess of par value................................................ 874,580 884,065
Cumulative translation adjustments............................................ (33,670) (13,940)
Treasury stock, 43,127 shares in 1993 and 87,500 shares in 1994, at cost...... (717) (1,382)
Retained earnings............................................................. 444,757 563,942
---------- ----------
Total stockholders' equity.............................................. 1,286,838 1,434,580
---------- ----------
Total liabilities and stockholders' equity........................... $3,090,278 $3,243,632
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1994
(000's omitted)
(unaudited)
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................................................. $ 118,942 $ 138,139
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation and amortization........................................................... 50,834 69,028
Deferred taxes.......................................................................... 42,423 36,058
Undistributed earnings of affiliates.................................................... (33,217) (28,185)
Gains from stock transactions of affiliate.............................................. (7,680) -
Changes in assets and liabilities, net of effects of acquired and contributed businesses:
Receivables, net........................................................................ (33,789) (47,322)
Costs and earnings in excess of billings................................................ (7,358) (5,866)
Other current assets.................................................................... (12,558) (1,515)
Accounts payable and accrued liabilities................................................ (65,230) (5,118)
Advance payments on contracts........................................................... 3,228 16,602
Other long-term liabilities............................................................. (2,996) (42,280)
Other, net.............................................................................. (5,629) (5,553)
--------- ---------
Net cash provided by operating activities............................................... 46,970 123,988
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures....................................................................... (228,938) (90,743)
Investments held by trustees............................................................... 9,903 6,132
Cash paid for acquisitions, net of acquired cash........................................... (2,553) (16,114)
Other...................................................................................... 4,278 6,864
--------- ---------
Net cash used for investing activities.................................................. (217,310) (93,861)
--------- ---------
FINANCING ACTIVITIES:
Additions to long-term project debt........................................................ - 112,985
Repayments of long-term project debt....................................................... (66,706) (131,037)
Proceeds from exercise of stock options.................................................... 6,149 7,808
Dividends paid............................................................................. (16,826) (18,954)
Other...................................................................................... 395 (3,997)
--------- ---------
Net cash used for financing activities.................................................. (76,988) (33,195)
--------- ---------
Decrease in cash and cash equivalents...................................................... (247,328) (3,068)
Cash and cash equivalents at beginning of period........................................... 291,271 36,719
--------- ---------
Cash and cash equivalents at end of period................................................. $ 43,943 $ 33,651
========= =========
Supplemental disclosure:
Interest paid, net of amounts capitalized............................................... $ 46,900 $ 34,715
========= =========
Income taxes paid....................................................................... $ 14,000 $ 63,361
========= =========
Significant noncash investing activities:
Net assets contributed to Rust International Inc........................................ $ 244,278 $ -
========= =========
Businesses acquired for common stock.................................................... $ 30,972 $ 2,900
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1994
(000's omitted)
(unaudited)
<TABLE>
<CAPTION>
Capital in Cumulative
Common Excess of Translation Treasury Retained
Stock Par Value Adjustment Stock Earnings Total
------ ---------- ------------ --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $1,865 $758,646 $(17,785) $ - $296,617 $1,039,343
Net income - - - - 118,942 118,942
Dividends declared - - - - (14,962) (14,962)
Foreign currency translation - - (10,400) - - (10,400)
Exercise of stock options 5 4,504 - - - 4,509
Tax benefit from stock
options - 1,640 - - - 1,640
Common stock issued
for acquisitions 16 30,707 - 249 - 30,972
Investment in Rust
International Inc. - 77,662 - - - 77,662
------ -------- -------- ------- -------- ----------
Balance, September 30, 1993 $1,886 $873,159 $(28,185) $ 249 $400,597 $1,247,706
====== ======== ======== ======= ======== ==========
Balance, December 31, 1993 $1,888 $874,580 $(33,670) $ (717) $444,757 $1,286,838
Net income - - - - 138,139 138,139
Dividends declared - - - - (18,954) (18,954)
Foreign currency translation - - 19,730 - - 19,730
Exercise of stock options 5 4,460 - 1,216 - 5,681
Tax benefit from stock
options - 2,127 - - - 2,127
Common stock issued
for acquisitions 2 2,898 - - - 2,900
Stock repurchased - - - (1,382) - (1,382)
Treasury stock received as
settlement for claims - - - (499) - (499)
------ -------- -------- ------- -------- ----------
Balance, September 30, 1994 $1,895 $884,065 $(13,940) $(1,382) $563,942 $1,434,580
====== ======== ======== ======= ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(unaudited)
NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying financial statements have been prepared by Wheelabrator
Technologies Inc. ("WTI" or the "Company"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
The financial information presented herein reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Certain prior period amounts have been reclassified to
conform with the current presentation. The results for interim periods are not
necessarily indicative of the results to be expected for the full year.
WTI is a majority-owned subsidiary of WMX Technologies, Inc. ("WMX"). WTI
and WMX are parties to an agreement which provides, among other things, for WTI
to lend excess cash to WMX at interest rates at least as favorable as those WTI
could otherwise obtain. Under the terms of this agreement, in the event WTI
requires short-term cash for the conduct of its business and operations, WMX
will make available to WTI such amounts as WTI requires, up to a total of $100
million in excess of amounts loaned by WTI to WMX. As of September 30, 1994,
there were no borrowings outstanding under the terms of this agreement.
From time to time, the Company uses foreign currency derivatives to
mitigate the impact of currency fluctuations on its equity income from Waste
Management International plc ("WM International"). Although the Company's
purpose for using such derivatives is to hedge currency risk, they do not
qualify for hedge accounting under generally accepted accounting principles and
accordingly, must be marked to market at the end of each accounting period.
Gains and losses on currency derivatives to date have not been material.
As of September 30, 1994, the Company was a party to the following average
rate currency collars, structured as offsetting puts and calls with different
strike prices (all options settle at expiration of the option period):
Notional
Currency Amount Duration
-------- -------- --------
Sterling 21,000,000 Feb-Dec '94
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (continued)
-----------------------------------------------------
The notional amounts of the contracts are used to measure cash payments at
settlement and do not represent the amount of exposure to credit loss. In
addition, the counterparties are major financial institutions which are expected
to fully perform under the terms of the contracts.
Earnings per common share are calculated using the weighted average number
of shares outstanding for each period, including the effect of common stock
equivalents using the treasury stock method. Common stock equivalents consist
of unexercised stock options.
Effective January 1, 1994, WTI adopted Statement of Financial Accounting
Standards No. 112, Employer's Accounting for Postemployment Benefits ("FAS
112"). The adoption of FAS 112 did not have a significant effect on earnings
for the three and nine months ended September 30, 1994, since WTI's accounting
prior to adoption of FAS 112 was substantially in compliance with the new
standard.
NOTE 2 - ACQUISITIONS
During the first nine months of 1994, WTI acquired wastewater treatment
operating contracts and eight businesses engaged in providing air and water
quality related environmental products and services and in manufacturing shot
blast machinery in exchange for approximately 156 thousand shares of WTI common
stock and $16 million of cash. During 1993 the Company acquired seven
businesses engaged in providing water and air quality related environmental
products and services as well as independent power in exchange for approximately
1.6 million shares of WTI common stock and $15 million of cash. The proforma
effect of these 1993 and 1994 acquisitions on the Company's results of
operations for 1993 and the nine months ended September 30, 1994, is not
material.
NOTE 3 - TAXES
WTI and Koll Real Estate Group, Inc. ("KREG") are parties to a tax sharing
agreement which covers periods ending prior to December 31, 1988, during which
the Company, KREG, The Henley Group Inc. ("Henley") and their respective
affiliates were included in the same consolidated group for federal income tax
purposes. Pursuant to a recapitalization of Henley in 1992, Abex Inc. ("Abex")
has assumed certain of Henley's obligations to KREG under a similar tax sharing
agreement.
In March 1994, WTI and the Internal Revenue Service ("IRS") filed a
Stipulation of Settlement with the U.S. Tax Court resolving the disputed
treatment of an issue related to the 1988 sale of a former subsidiary. On April
15, 1994, the Company paid its approximately $30 million share of the stipulated
settlement liability pursuant to the tax sharing agreement, and Abex paid its
share of the liability pursuant to its indemnity
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (continued)
-----------------------------------------------------
obligations to KREG. WTI's obligation had been previously recorded in the
Company's consolidated balance sheets. On October 4, 1994, the U.S. Tax Court
issued its decision accepting the Stipulation of Settlement agreed to by WTI and
the IRS. Prior to April 15, KREG advised the Company and Abex that it would not
pay its approximately $21 million share of the settlement liability.
Accordingly, the Company and Abex have filed a lawsuit against KREG seeking to
require KREG to honor its obligations under the tax sharing agreement. A trial
was held in September 1994, and the parties are awaiting the decision of the
Delaware Chancery Court. Although the Company may be obligated to initially pay
the portion of the settlement liability applicable to KREG pending resolution of
the lawsuit relating to the tax sharing agreement, it does not believe the
ultimate resolution of this matter will have a material adverse effect on its
financial condition or results of operations.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
On February 16, 1994, a Connecticut Superior Court judge issued a decision
on appeals of the Connecticut Department of Environmental Protection's ("DEP")
issuance of a permit to construct the Lisbon, Connecticut trash-to-energy
facility currently being built by WTI. In the ruling, the judge agreed with the
Company's position on all issues raised in the appeals but remanded the permit
back to the DEP for further proceedings on an uncontested permit condition that
requires the Lisbon facility to dispose of only Connecticut waste. The Company
continues to pursue a favorable resolution of this permit remand through
appropriate judicial and regulatory proceedings. Although WTI believes that the
probability of an adverse determination as a result of the judge's remand order
is remote, such a determination could result in the permanent termination of
facility construction. Through a guarantee agreement with the Eastern
Connecticut Resource Recovery Authority, the facility's owner, such a
consequence may require the Company to redeem the debt issued to finance the
facility. In the unlikely event this were to occur, the resulting payments
could have a material adverse impact on the Company's financial condition and
results of operations.
The majority of the businesses in which the Company is engaged are
intrinsically connected with the protection of the environment, and the
potential exists for the discharge of regulated materials into the environment.
In addition, there are routine lawsuits and claims, including certain
environmental matters, pending against WTI and its subsidiaries that arise in
the normal course of business. In the opinion of the Company's management, the
ultimate liability, if any, with respect to these incidental lawsuits and claims
will not have a material adverse effect on the business and properties of the
Company, taken as a whole, or its financial position or results of operations.
7
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations
and Financial Conditions
RESULTS OF OPERATIONS
Revenue for the three and nine month periods ended September 30, 1994,
increased 17.9 percent and 15.9 percent, respectively, versus revenue in the
comparable 1993 periods. Approximately 40 percent of this revenue growth
reflects the impact of water businesses acquired during the last twelve months.
The balance of the revenue increase is attributable to the Company's New York
Organic Fertilizer Company ("NYOFCO") biosolids pelletizer facility,
construction revenue from the Lisbon, Connecticut trash-to-energy facility being
built by WTI, and the third quarter 1994 commencement of commercial operations
at the Company's Falls Township trash-to-energy facility near Philadelphia,
Pennsylvania and the wood waste, scrap tire and landfill gas-fired Ridge
Generating Station in Polk County, Florida. The Company's energy, water and air
businesses represented approximately 54 percent, 34 percent and 12 percent,
respectively, of total revenue during the three month period ended September 30,
1994, compared with 52 percent, 31 percent and 17 percent in the third quarter
of 1993. Similarly, the energy, water and air businesses contributed
approximately 53 percent, 34 percent and 13 percent, respectively, of total
year-to-date revenue compared with 53 percent, 29 percent and 18 percent,
respectively, of total revenue for the same period in 1993. Current year air
business revenue declined from 1993 levels due to the completion in 1993 of
certain contracts related to Phase I of the Clean Air Act Amendments of 1990
(the "CAAA") and delays in discretionary spending by industrial customers.
Operating expenses constituted 68.3 percent and 68.5 percent of revenue for
the three and nine months ended September 30, 1994, respectively, compared with
68.6 percent and 69.2 percent of revenue during the comparable periods in 1993.
These reductions reflect the improved operating performance of certain of the
Company's energy facilities and the addition of the NYOFCO facility. Selling
and administrative expenses decreased as a percent of revenue to 9.0 percent and
9.1 percent, respectively, for the quarter and nine month periods versus 9.3
percent and 9.5 percent of revenue for the comparable year earlier periods.
This decline is primarily attributable to the integration of acquired companies
into existing businesses, to on-going Company-wide administrative cost
containment activities and to revenue growth in excess of associated selling and
administrative cost increases.
Interest expense for the third quarter and first nine months declined
compared to 1993 principally as a result of lower outstanding debt principal,
the March 1994 refinancing of $113 million of project debt associated with the
Company's Westchester County, New York trash-to-energy facility, and increased
capitalization of interest costs related to projects under construction. As
these projects begin commercial operations, interest capitalization ceases and
interest expense increases accordingly. Interest income for the first nine
months of 1994 is lower than the first nine months of 1993 due largely to lower
cash balances throughout the year when compared to the prior year period.
Equity income from the investment in WM International increased in both the
quarter and nine months ended
8
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations
and Financial Conditions (continued)
September 30, 1994, when compared to the same periods in 1993. WTI's equity in
the earnings of Rust International Inc. ("Rust") decreased compared to prior
year results due to an earnings decline at Rust resulting from a shift in
business mix into lower margin work and customer postponement of certain project
awards and start-ups.
Excluding a $7.7 million increase in the Company's 1993 income tax
provision due to the Omnibus Budget Reconciliation Act of 1993 ("OBRA"), third
quarter net income climbed 13.7 percent to $49.4 million or $0.26 per share,
compared with $43.4 million or $0.23 per share, in the year earlier period. Net
income for the first nine months of 1994 totaled $138.1 million, or $0.73 per
share, compared to $118.9 million, or $0.63 per share, in the first nine months
of 1993. Excluding a second quarter 1993 non-operating gain from a stock
transaction of Rust and the deferred tax impact of OBRA, net income rose 17.3
percent in the first nine months of 1994 compared with the first nine months of
1993. The increase in operations-related earnings for the third quarter and
first nine months reflect the strong performance of the Company's existing
energy facilities and NYOFCO, the commencement of commercial operations at the
two new energy facilities and businesses acquired in the past year.
In May of this year, the U.S. Supreme Court ruled that residual ash from
the combustion of municipal solid waste is not exempt from federal hazardous
waste regulations. The U.S. Environmental Protection Agency ("EPA") and most
states had previously taken the position that residual ash was exempt from such
regulation pursuant to the Clarification of Household Waste Exclusion contained
in the Resource Conservation and Recovery Act. On May 27, 1994, the EPA
announced its determination as a result of the Supreme Court's decision that ash
from combustion of municipal solid waste is subject to regulation as a hazardous
waste, thereby requiring it to be tested and disposed of appropriately if
hazardous. The EPA also announced that it will develop land disposal
restrictions in the event ash must be disposed of as a hazardous waste. WTI's
energy facilities in New Hampshire and New Jersey are currently subject to such
testing requirements and, after treating the ash with the Company's patented
WES-Phix(R) process, are able to dispose of their residual ash as non-hazardous
waste. The Company has recently completed the installation of WES-Phix(R)
technology at all of its other facilities and does not expect the incremental
expenditures required to treat, test and dispose of residual ash at these
facilities to have a material adverse impact on WTI's financial condition or
results of operations.
Also in May of this year, the U.S. Supreme Court ruled that state and local
governments may not restrict the free movement of trash in interstate commerce
through the use of flow control laws. Such laws typically involve a
municipality specifying the disposal site for all solid waste generated within
its borders. Since the ruling, legislation has been proposed to effectively
grandfather existing flow control mandates. Regardless of whether such
legislation is passed, the Company does not believe the Supreme Court's
9
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations
and Financial Conditions (continued)
decision will have a material adverse impact on WTI's financial condition or
results of operations.
The majority of the businesses in which the Company is engaged are
intrinsically connected with the protection of the environment and involve the
potential for discharge of regulated materials into the environment. In
addition, the Company becomes involved, in the normal course of business, in
judicial and administrative proceedings related to alleged violations of
licenses, permits, laws or regulations or differing interpretations of
applicable requirements. WTI has instituted procedures to periodically evaluate
potential environmental exposures. When the Company concludes it is probable
that a liability has been incurred, provision is made in the financial
statements for the Company's best estimate of the liability. These estimates
are adjusted as necessary when additional information becomes available. To
date, such provisions have not been material.
From time to time, the Company uses foreign currency derivatives to
mitigate the impact of currency fluctuations on its equity income from WM
International. Although the Company's purpose for using such derivatives is to
hedge currency risk, they do not qualify for hedge accounting under generally
accepted accounting principles and accordingly, must be marked to market at the
end of each accounting period. Gains and losses on currency derivatives to date
have not been material. See Notes to Consolidated Financial Statements for
further discussion of the use of and accounting for such instruments.
LIQUIDITY AND CAPITAL RESOURCES
The principal uses of capital during the first nine months of 1994 were
investments in new projects under construction, retirement of project debt and a
$30 million payment of a previously recorded liability relating to a federal
income tax settlement for the period ended December 31, 1988. WTI currently has
several projects in various stages of development and construction. The Company
also intends to continue its diversification through selected acquisitions of
air and water quality control technologies and companies, both domestically and
internationally.
WTI believes it has access to sufficient capital resources to finance its
development and construction projects along with future acquisitions. Operating
cash flows or borrowings from WMX pursuant to the Master Intercorporate
Agreement between the Company and WMX may be utilized to meet short-term funding
requirements. The Company may borrow up to $100 million in excess of any amount
loaned to WMX until September 1995 pursuant to this agreement. As of September
30, 1994, there were no borrowings outstanding under the terms of this
agreement. Future needs for long-term external capital are anticipated to be
met by permanently financing certain projects.
10
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations
and Financial Conditions (continued)
During the first nine months of 1994, construction continued on the
Company's 1,500 ton-per-day trash-to-energy facility and associated recycling
center in Falls Township, Pennsylvania and on WTI's wood waste, scrap tire and
landfill gas-fired generating facility in Polk County, Florida. Both of these
facilities commenced commercial operations in August.
Additionally, mechanical completion has been reached on a biosolids
pelletizer facility in Baltimore, Maryland, with commercial operations expected
to begin during the fourth quarter of 1994. Several other energy and water
projects are presently in the permitting and regulatory approval stage of
development. The Company also expanded its capabilities within its air and
water quality control lines of business by acquiring several businesses during
the quarter. To date, funding for these projects and acquisitions has been
provided by WTI's available cash.
WTI has continued to refinance at lower interest rates, or repay prior to
maturity, certain of its existing project debt. In March 1994, the Company
completed a refinancing of the remaining $113 million of project debt associated
with the Westchester County facility. The refinancing decreased the interest
rate on this debt from approximately 10.25 percent to 5.6 percent. In
conjunction with this transaction, the Company agreed to share one-half of the
interest rate savings with Westchester County in exchange for certain agreements
relating to the County's involvement in the retrofit of the facility to meet the
requirements of the CAAA and a five-year extension of the solid waste disposal
agreement with the County. Additionally, the County has agreed, subject to
certain regulatory requirements and other conditions, to finance 80 percent of
the cost of the retrofit and, in turn, the Company has agreed to provide the
funds necessary to pay the remaining costs for the retrofit. WTI began
realizing the benefits of the refinancing in March 1994, while the costs
associated with the facility retrofit are not expected to be incurred until the
latter part of this decade. Taken together, these activities are not expected
to have a material impact on the Company's liquidity or results of operations.
Before the turn of the century, the air pollution control systems at
certain other trash-to-energy facilities owned or leased by WTI will be required
to be modified to comply with more stringent air pollution control standards
such as those in the CAAA. Although the expenditures related to such
modifications will likely be significant, they are not expected to have a
material adverse effect on the Company's liquidity or results of operations
because provisions in the impacted facilities' long-term waste supply agreements
allow the Company to recover from customers the great majority of incremental
capital and operating costs.
During the first nine months of 1994, WTI acquired wastewater treatment
operating contracts and eight businesses engaged in providing air and water
quality related
11
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations
and Financial Conditions (continued)
environmental products and services, and in manufacturing shot blast machinery
in exchange for approximately 156 thousand shares of WTI common stock and $16
million of cash. During 1993 the Company acquired seven businesses engaged in
providing water and air quality related environmental products and services as
well as independent power in exchange for approximately 1.6 million shares of
WTI common stock and $15 million of cash. The proforma effect of these 1993 and
1994 acquisitions on the Company's results of operations for 1993 and the nine
months ended September 30, 1994, is not material.
In February 1994, a Connecticut Superior Court judge issued a decision on
appeals of the DEP's issuance of a permit to construct the Lisbon, Connecticut
trash-to-energy facility currently being built by WTI. In the ruling, the judge
agreed with the Company's position on all issues raised in the appeals but
remanded the permit back to the DEP for further proceedings on an uncontested
permit condition that requires the Lisbon facility to dispose of only
Connecticut waste. The Company continues to pursue a favorable resolution of
this permit remand through appropriate judicial and regulatory proceedings and
has continued to construct the facility, which was approximately 35 percent
completed as of September 30, 1994. Although WTI believes that the probability
of an adverse determination as a result of the judge's remand order is remote,
such a determination could result in the permanent termination of facility
construction. Through a guarantee agreement with the Eastern Connecticut
Resource Recovery Authority, the facility's owner, such a consequence may
require the Company to redeem the debt issued to finance the facility. In the
unlikely event this were to occur, the resulting payments could have a material
adverse impact on the Company's financial condition and results of operations.
WTI and KREG are parties to a tax sharing agreement which covers periods
ending prior to December 31, 1988, during which the Company, KREG, Henley and
their respective affiliates were included in the same consolidated group for
federal income tax purposes. Pursuant to a recapitalization of Henley in 1992,
Abex has assumed certain of Henley's obligations to KREG under a similar tax
sharing agreement. In March 1994, WTI and the IRS filed a Stipulation of
Settlement with the U.S. Tax Court resolving the disputed treatment of an issue
related to the 1988 sale of a former subsidiary. On April 15, 1994, the Company
paid its approximately $30 million share of the stipulated settlement liability
pursuant to the tax sharing agreement and Abex paid its share of the liability
pursuant to its indemnity obligations to KREG. WTI's obligation had been
previously recorded in the Company's consolidated balance sheets. On October 4,
1994, the U.S. Tax Court issued its decision accepting the Stipulation of
Settlement agreed to by WTI and the IRS. Prior to April 15, KREG advised the
Company and Abex that it would not pay its approximately $21 million share of
the settlement liability. Accordingly, the Company and Abex have filed a
lawsuit against KREG seeking to require KREG to honor its obligations under the
tax sharing agreement. A trial was held in September 1994, and the parties are
awaiting the decision of the Delaware Chancery Court. Although the Company may
be obligated to
12
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations
and Financial Conditions (continued)
initially pay the portion of the settlement liability applicable to KREG pending
resolution of the lawsuit relating to the tax sharing agreement, it does not
believe the ultimate resolution of this matter will have a material adverse
effect on its financial condition or results of operations.
On March 15, 1994, WTI announced that its Board of Directors had authorized
the repurchase of up to 3.8 million shares of common stock from time to time
over the following two years in the open market or in privately negotiated
transactions. During the first nine months of 1994, 87,500 shares were
repurchased.
In April 1994, WTI filed an updated "shelf" registration statement with the
SEC covering 11.1 million shares of the Company's common stock for issuance in
connection with future acquisitions. On May 9, 1994, the Board of Directors
declared an annual cash dividend of $0.10 per common share which was paid on
July 7, 1994, to stockholders of record on June 22, 1994. The 1994 dividend
represents a 25 percent increase over total dividends declared in 1993.
FINANCIAL CONDITION
The Company's financial condition at September 30, 1994, compared to
December 31, 1993, generally reflects the results of normal operating activities
as well as the use of funds for investments in new projects under construction,
retirement of project debt and payment of a previously recorded federal income
tax liability. During the first nine months of 1994, net property, plant and
equipment increased by approximately $32 million as a result of construction
activities, offset in part by depreciation. Debt retirement and successful
refinancing activities reduced total debt approximately $18 million from
December 31, 1993, levels and reduced interest rates on $113 million of long-
term debt maturing through July 2009.
Net working capital as of September 30, 1994, increased approximately $21
million from year-end 1993 levels due largely to the start of commercial
operations at the Company's Falls Township and Ridge Generating Station energy
facilities. An additional $100 million of borrowings are available to meet
short-term funding requirements under the terms of the Company's Master
Intercorporate Agreement with WMX. In addition, other long-term liabilities
were reduced by the payment of the Company's remaining $30 million obligation
under the tax sharing agreement with Abex and KREG.
13
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
---------------------------
ITEM 1 - Legal Proceedings
-----------------
Regulatory - The business in which the Company is engaged is intrinsically
connected with the protection of the environment and the potential exists for
the discharge of materials into the environment. In the ordinary course of
conducting its business activities, the Company becomes involved in judicial and
administrative proceedings involving governmental authorities at the federal,
state and local level including, in certain instances, proceedings instituted by
citizens or local governmental authorities seeking to overturn governmental
action in which governmental officials or agencies are named as defendants
together with the Company or one or more of its subsidiaries, or both. In the
majority of the situations where proceedings are commenced by governmental
authorities, the matters involved relate to alleged technical violations of
licenses or permits pursuant to which the Company operates or is seeking to
operate or laws or regulations to which its operations are subject or are the
result of different interpretations of the applicable requirements. At
September 30, 1994, the Company was involved in two such proceedings where the
Company believes sanctions involved may exceed $100,000.
Other - In addition, there are other routine lawsuits and claims, including
certain environmental matters, pending against WTI and its subsidiaries which
are incidental to its businesses. In the opinion of the Company's management,
the ultimate liability, if any, with respect to the above proceedings and such
other lawsuits and claims will not have a material adverse effect on the
business and properties of the Company, taken as a whole, or its financial
position and results of operations.
14
<PAGE>
ITEM 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
The exhibits to this report are listed on the Exhibit Index elsewhere
herein.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1994.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
WHEELABRATOR TECHNOLOGIES INC.
November 11, 1994
/s/ John D. Sanford
-----------------------------
John D. Sanford
Vice President and
Chief Financial Officer
16
<PAGE>
WHEELABRATOR TECHNOLOGIES INC.
EXHIBIT INDEX
Number and Description of Exhibit/*/
---------------------------------
2 None
4 None
10 Amendment adopted on August 29, 1994 to
the 1991 Stock Option Plan for Non-
Employee Directors of the registrant.
11 None
15 None
18 None
19 None
22 None
23 None
24 None
27 Financial Data Schedule
99 None
- --------------------------
* Exhibits not listed are inapplicable
17
<PAGE>
Exhibit 10
WHEELABRATOR TECHNOLOGIES INC.
AMENDMENT TO 1991 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
1. The Wheelabrator Technologies Inc. 1991 Stock Option Plan for Non-
Employee Directors (the "Directors Plan") is hereby amended by replacing the
existing subparagraph (d) to Paragraph 3 thereof in its entirety with the
following new subparagraph (d):
"(d) Notwithstanding the provisions of subparagraph 3(a) to the
contrary, in the event an option expires unexercised as to any shares
of Stock as the result of the resignation of a director for any Bona
Fide Reason (as hereinafter defined), a new option grant equal to the
lesser of (i) the number of shares of Stock which expired unexercised
and (ii) 15,000 shares of Stock, shall be automatically granted to
such person upon re-election or reappointment as a director of the
Company. For purposes hereof, a resignation for a "Bona Fide Reason"
shall include a resignation by a director (w) to avoid a conflict of
interest or the appearance of impropriety upon entering government
service or occasioned by such director's serving as an officer or
director of any other entity or unincorporated association with an
interest in any matter that may be adverse to that of the Company, (x)
to respond to a temporary family emergency or (y) because of temporary
disability, in each case as determined by the Board of Directors based
upon the advice of counsel.
2. The Directors Plan is hereby amended by replacing the existing
Paragraph 5 in its entirety with the following new Paragraph 5:
"5. DURATION OF OPTIONS, INCREMENTS AND EXTENSIONS. Subject to the
provisions of Paragraph 7, each option shall be for a term of ten
years. Each option shall become exercisable with respect to 20% of
the total number of shares subject to the option six months after the
date of grant and with respect to an additional 20% at the end of each
twelve-month period thereafter during the succeeding four years;
provided, however, that (a) solely for purposes of determining the
number of shares of Stock vested at any given point in time, the
option grants made on June 10, 1991 upon adoption of this Plan shall
be deemed to have been made on the date as of which the optionee was
initially elected to the Board of Directors of the
<PAGE>
Company or to the Board of Directors of the Company's predecessor
company which was previously known as Wheelabrator Technologies Inc.,
(b) credit towards vesting for previous service shall only include
periods during which such director would have satisfied the provisions
of Paragraph 2, and (c) if a grant is made to a director pursuant to
subparagraph 3(d) within 12 months following such director's
resignation from the Board of Directors for any Bona Fide Reason, the
vesting of the initial 20% of the Stock subject to such option shall
occur upon the later of (x) the date six months following the date of
such grant and (y) the next scheduled vesting date under such
director's original stock option grant, and the vesting of the
remaining Stock subject to such option shall occur with respect to an
additional 20% at the end of each twelve-month period thereafter
during the succeeding four years.
3. The amendments to the Directors Plan hereby adopted and approved shall
be deemed to be effective as of, and shall apply to any grants made subsequent
to, December 22, 1993, the date on which the Directors Plan was amended, subject
to the receipt of a no-action letter from the Securities and Exchange
Commission, to allow for subsequent grants to be made to newly re-elected
Directors in the limited circumstances set forth in the foregoing amendments.
2
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1994 CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1994 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES
THERETO.
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