WHEELABRATOR TECHNOLOGIES INC /DE/, 10-Q/A, 1998-03-02

WHEELABRATOR TECHNOLOGIES INC /DE/
10-Q/A, 1998-03-02
COGENERATION SERVICES & SMALL POWER PRODUCERS

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<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q/A

(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1997

[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to _____

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 (IRS Employer Identification No.)
incorporation or organization)

4 LIBERTY LANE WEST
HAMPTON, NEW HAMPSHIRE 03842
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 929-3000

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 __________
---------

SHARES OF REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE, ISSUED AND OUTSTANDING AT
OCTOBER 31, 1997:

156,682,954

<PAGE>

WHEELABRATOR TECHNOLOGIES INC.

FORM 10-Q/A

FOR THE QUARTER ENDED SEPTEMBER 30, 1997
----------------------------------------

INDEX
-----

<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:

Item 1 - Financial Statements

Consolidated Balance Sheets as of December 31, 1996, and
September 30, 1997................................................... 1

Consolidated Statements of Income for the Three Months and Nine Months
Ended September 30, 1996 and 1997.................................... 2

Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and 1997.......................................... 3

Consolidated Statements of Changes in Stockholders' Equity for the
Nine Months Ended September 30, 1996 and 1997........................ 4

Notes to Consolidated Financial Statements.............................. 5

Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition ..................................... 15

PART II. OTHER INFORMATION:

Item 1 - Legal Proceedings................................................. 27
Item 5 - Other Information................................................. 28
Item 6 - Exhibits and Reports on Form 8-K.................................. 28
SIGNATURE.................................................................. 29
Exhibit Index.............................................................. 30
</TABLE>
<PAGE>

PART I. FINANCIAL INFORMATION

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - RESTATED
(000s omitted, except share amounts)
(unaudited)

<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................... $ 306,072 $ 413,857
Receivables, net of allowance of $5,094 in 1996
and $4,067 in 1997..................................... 123,164 133,482
Costs and earnings in excess of billings................ 10,632 16,765
Other current assets.................................... 72,148 60,439
---------- ----------
Total current assets.................................. 512,016 624,543

Property, plant and equipment, net........................ 1,561,925 1,517,323
Cost in excess of net assets of acquired businesses, net.. 63,707 62,154
Investments in affiliates................................. 479,505 457,480
Net assets of discontinued operations..................... 54,776 -
Other assets.............................................. 374,854 365,040
---------- ----------
Total assets........................................ $3,046,783 $3,026,540
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
Current maturities of long-term debt.................... $ 35,832 $ 43,765
Accounts payable........................................ 37,084 34,852
Accrued liabilities..................................... 236,426 174,415
Advance payments on contracts........................... 16,194 20,093
---------- ----------
Total current liabilities............................. 325,536 273,125

Long-term debt............................................ 800,153 804,403
Deferred income taxes..................................... 445,582 448,948
Deferred income........................................... 67,678 61,388
Other long-term liabilities............................... 261,954 275,441

Commitments and contingencies.............................

Stockholders' equity:
Preferred stock, par value $1.00 per share, 50,000,000
shares authorized, none issued or outstanding.......... - -
Common stock, par value $0.01 per share, 500,000,000
shares authorized, 189,545,407 shares issued
in 1996 and 1997....................................... 1,895 1,895
Capital in excess of par value.......................... 875,584 874,950
Cumulative translation adjustments...................... (4,721) (26,346)
Treasury stock at cost; 28,094,425 shares in 1996
and 32,916,221 shares in 1997.......................... (436,306) (499,609)
Retained earnings....................................... 709,428 812,345
---------- ----------
Total stockholders' equity............................ 1,145,880 1,163,235
---------- ----------
Total liabilities and stockholders' equity.......... $3,046,783 $3,026,540
========== ==========
</TABLE>

The accompanying notes are an integral part of these balance sheets.

1
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - RESTATED
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(000s omitted, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
- ----------------------------------------------------------------------------------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue........................................... $242,683 $249,869 $706,589 $754,092

Operating expenses................................ 155,745 161,696 454,640 503,396
Selling and administrative expenses............... 10,431 10,079 32,414 30,474
Interest expense.................................. 15,638 14,133 42,761 40,650
Interest income................................... (1,012) (5,649) (4,165) (14,614)
Equity in earnings of affiliates.................. (12,550) (2,266) (23,042) (2,854)
Other (income) expense, net....................... 969 (1,824) 2,172 (267)
-------- -------- -------- --------
Income from continuing operations before
income taxes.................................... 73,462 73,700 201,809 197,307

Income tax provision.............................. 23,933 28,231 70,541 76,819
-------- -------- -------- --------
Income from continuing operations................ 49,529 45,469 131,268 120,488

Discontinued operations:
Gain on disposal of discontinued operations
less applicable income taxes of $78.0
million......................................... - - - 1,210
Income from discontinued operations less
applicable income taxes of $2.8 million and
$7.4 million for the three months and nine
months ended September 30, 1996, respectively... 1,830 - 6,975 -
Equity in loss on disposal of Rust discontinued
operations...................................... (32,752) - (23,554) -
Equity income from Rust discontinued
operations...................................... 218 - 954 -
-------- -------- -------- --------

Net income...................................... $ 18,825 $ 45,469 $115,643 $121,698
======== ======== ======== ========

Weighted average common shares outstanding........ 161,600 156,600 171,000 158,500
======== ======== ======== ========

Basic earnings (loss) per common share:

Continuing operations............................ $ 0.31 $ 0.29 $ 0.77 $ 0.76
Gain on disposal of discontinued operations...... - - - 0.01
Income from discontinued operations.............. 0.01 - 0.04 -
Equity loss from Rust discontinued operations.... (0.20) - (0.13) -
-------- -------- -------- --------

Net income...................................... $ 0.12 $ 0.29 $ 0.68 $ 0.77
======== ======== ======== ========

Diluted earnings (loss) per common share:

Continuing operations............................ $ 0.31 $ 0.29 $ 0.76 $ 0.76
Gain on disposal of discontinued operations...... - - - 0.01
Income from discontinued operations.............. 0.01 - 0.04 -
Equity loss from Rust discontinued operations.... (0.20) - (0.13) -
-------- -------- -------- --------

Net income...................................... $ 0.12 $ 0.29 $ 0.67 $ 0.77
======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - RESTATED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(000s omitted)
(unaudited)

<TABLE>
<CAPTION>
1996 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 115,643 $121,698
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization............................. 80,749 69,797
Deferred income taxes..................................... 30,629 6,831
Undistributed earnings of affiliates...................... (23,042) (2,854)
Equity in discontinued operations of Rust................. 22,600 -
Gain on disposal of discontinued operations............... - (1,210)
Gain from sale of marketable securities................... - (4,510)
Changes in assets and liabilities, net of
effects of acquisitions and dispositions:
Receivables, net........................................ (12,334) (7,150)
Costs and earnings in excess of billings................ 9,213 (1,277)
Other current assets.................................... 3,843 12,638
Accounts payable and accrued liabilities................ 1,726 (59,937)
Advance payments on contracts........................... (216) (957)
Other long-term liabilities............................. (16,885) (23,136)
Other, net................................................ (4,733) (8,871)
--------- --------
Net cash provided by operating activities................. 207,193 101,062
--------- --------

INVESTING ACTIVITIES:
Capital expenditures........................................ (56,789) (18,915)
Investments held by trustees................................ 907 6,777
Cash paid for acquisitions, net of acquired cash............ (4,483) -
Cash paid for investment.................................... (15,415) -
Proceeds from disposal of discontinued operations........... - 10,478
Proceeds from sale of securities............................ - 68,477
Other, net.................................................. 9,669 8,794
--------- --------
Net cash provided by (used for) investing activities...... (66,111) 75,611
--------- --------

FINANCING ACTIVITIES:
Additions to long-term debt................................. 58,550 38,817
Repayments of long-term debt................................ (8,876) (26,042)
Net borrowings from Waste Management, Inc................... 75,192 -
Proceeds from exercise of stock options..................... 8,977 2,931
Stock repurchase program.................................... (302,861) (67,398)
Dividends paid.............................................. (20,689) (18,781)
Other, net.................................................. 1,451 1,585
--------- --------
Net cash used for financing activities.................... (188,256) (68,888)
--------- --------

Net increase (decrease) in cash and cash equivalents........ (47,174) 107,785
Cash and cash equivalents at beginning of period............ 54,003 306,072
--------- --------
Cash and cash equivalents at end of period.................. $ 6,829 $413,857
========= ========

Supplemental disclosure:
Interest paid, net of amounts capitalized................. $ 37,590 $ 33,914
========= ========
Income taxes paid......................................... $ 31,957 $118,126
========= ========
Significant noncash investing activities:
Liabilities assumed in acquisitions....................... $ 2,675 $ -
========= ========
Marketable securities received upon sale of discontinued
operations.............................................. $ - $ 63,967
========= ========
</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 - RESTATED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(000s omitted, except share amounts)
(unaudited)

Capital Cumulative
Common Excess of Translation Treasury Retained
Stock Par Value Adjustment Stock Earnings Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 $1,895 $876,595 $ (9,986) $(146,494) $726,277 $1,448,287

Net income - - - - 115,643 115,643
Dividends declared
($0.12 per share) - - - - (20,689) (20,689)
Foreign currency
translation - - 658 - - 658
Exercise of
stock options - (2,534) - 11,511 - 8,977
Tax benefit from
stock options - 1,427 - - - 1,427
Stock repurchases
(18,917,200 shares) - - - (303,028) - (303,028)
------ -------- -------- --------- -------- ----------
Balance,
September 30, 1996 $1,895 $875,488 $ (9,328) $(438,011) $821,231 $1,251,275
====== ======== ======== ========= ======== ==========

Balance,
December 31, 1996 $1,895 $875,584 $ (4,721) $(436,306) $709,428 $1,145,880

Net income - - - - 121,698 121,698
Dividends declared
($0.12 per share) - - - - (18,781) (18,781)
Foreign currency
translation - - (21,625) - - (21,625)
Exercise of
stock options - (1,164) - 4,095 - 2,931
Tax benefit from
stock options - 530 - - - 530
Stock repurchases
(5,106,200 shares) - - - (67,398) - (67,398)
------ -------- -------- --------- -------- ----------
Balance,
September 30, 1997 $1,895 $874,950 $(26,346) $(499,609) $812,345 $1,163,235
====== ======== ======== ========= ======== ==========
</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)

(000s omitted in all tables, except per share amounts)

NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES

The accompanying financial statements have been prepared by Wheelabrator
Technologies Inc. ("Wheelabrator" or the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. 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. The results for interim periods are not necessarily indicative of the
results to be expected for the full year. Certain prior period amounts have
been reclassified to conform with the current presentation.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets, liabilities, income and expenses, and
disclosures of contingencies. Future events could alter such estimates.

Wheelabrator is a majority-owned subsidiary of Waste Management, Inc. ("Waste
Management"), formerly named WMX Technologies, Inc. Wheelabrator and Waste
Management are parties to a Master Intercorporate Agreement that provides, among
other things, for Wheelabrator to lend excess cash to Waste Management at
interest rates at least as favorable as those Wheelabrator could otherwise
obtain. Under the terms of this agreement, in the event the Company requires
short-term cash for the conduct of its business and operations, Waste Management
will make available to Wheelabrator such amounts as Wheelabrator requires, up to
a total of $100.0 million in excess of amounts loaned by Wheelabrator to Waste
Management. At September 30, 1997, cash and cash equivalents included
approximately $406.6 million of net investments with Waste Management under the
terms of this agreement.

5
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings Per
Share" ("EPS"), which supersedes Accounting Principles Board Opinion No. 15.
Primary EPS is replaced by Basic EPS, which is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Fully diluted EPS is replaced by Diluted EPS,
which gives effect to all dilutive potential common shares. All prior periods
presented have been restated.

Diluted EPS from continuing operations is computed as follows:

<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1997 1996 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Income from continuing operations as reported $ 49,529 $ 45,469 $131,268 $120,488
Add or (deduct) -
Dilution from potential common shares of:
WM International - - - -
-------- -------- -------- --------
Adjusted income from continuing operations $ 49,529 $ 45,469 $131,268 $120,488
======== ======== ======== ========

Weighted average common shares outstanding as
reported 161,600 156,600 171,000 158,500
Add -
Effect of stock options after applying
the "treasury stock" method 400 600 600 500
-------- -------- -------- --------
Adjusted average common shares outstanding 162,000 157,200 171,600 159,000
======== ======== ======== ========
Diluted EPS from continuing operations $ 0.31 $ 0.29 $ 0.76 $ 0.76
======== ======== ======== ========
</TABLE>

An aggregate of 1.5 million common shares potentially issuable upon exercise of
stock options have been excluded from the calculation of Diluted EPS at
September 30, 1997, because their effect is antidilutive. During the nine months
ended September 30, 1997, the Company issued 284.4 thousand shares upon exercise
of stock options.

DERIVATIVE FINANCIAL INSTRUMENTS: From time to time, the Company uses
derivatives to manage interest rate and currency risk. The Company's policy is
to use derivatives for risk management purposes only, and it does not enter into
such contracts for trading purposes. The Company enters into derivatives only
with counterparties which are financial institutions having credit ratings of at
least A- or A3, to minimize credit risk. The amount of derivatives outstanding
at any one point in time and gains or losses

6
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

from their use have not been and are not expected to be material to the
Company's financial statements.

Instruments used as hedges must be effective at managing risk associated with
the exposure being hedged and must be designated as a hedge at the inception of
the contract. Accordingly, changes in market values of hedge instruments must
have a high degree of inverse correlation with changes in market values or cash
flows of underlying hedged items. Derivatives that meet the hedge criteria are
accounted for under the deferral or accrual method, except for currency
agreements as discussed below. If a derivative does not meet or ceases to meet
the aforementioned criteria, or if the designated hedged item ceases to exist,
then the Company subsequently uses fair value accounting for the derivative,
with gains or losses included in other income. If a derivative is terminated
early, any gain or loss, including the amounts previously deferred, is deferred
and amortized over the remaining life of the terminated contract or until the
anticipated transaction occurs.

INTEREST RATE AGREEMENTS: From time to time, the Company has entered into
interest rate swap agreements to balance fixed and floating rate debt in
accordance with management's criteria. The agreements are contracts to exchange
fixed and floating interest rate payments periodically over a specified term
without the exchange of the underlying notional amounts. The agreements
provide only for the exchange of interest on the notional amounts at the stated
rates, with no multipliers or leverage. Differences paid or received are
accrued in the financial statements as a part of interest expense on the
underlying debt over the life of the agreements, and the swap is not marked to
market.

CURRENCY AGREEMENTS: The Company has used foreign currency derivatives to seek
to mitigate the impact of translation on foreign earnings and income from
foreign investees. Typically these have taken the form of purchased put options
or offsetting put and call options with different strike prices. The Company
receives or pays, based on the notional amount of the option, the difference
between the average exchange rate of the hedged currency against the base
currency and the average (strike price) contained in the option. Complex
instruments involving multipliers or leverage are not used. Although the purpose
for using such derivatives is to mitigate currency risk, they do not qualify for
hedge accounting under generally accepted accounting principles and accordingly,
must be adjusted to market value at the end of each accounting period with gains
or losses included in income.

7
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has occasionally used foreign currency forward contracts to hedge
committed transactions when the terms of such a transaction are known and there
is a high probability that the transaction will occur. Gains or losses on
forward contracts pertaining to such transactions are deferred until the
designated transaction is completed. The impact of the forward contract is then
included with the results of the underlying transaction in the financial
statements.

NOTE 2 - RESTATEMENT OF FINANCIAL INFORMATION

The Company has restated the accompanying financial statements to reflect
adjustments recorded by Rust for the carrying value of certain of Rust's equity
investments and businesses held for sale and for reclassifying to continuing
operations the results of operations for certain Rust businesses previously
reported as discontinued operations in 1996. Accordingly, the Company has
restated to reflect the impact of these adjustments and reclassifications on its
equity income and investment. In the opinion of management, all material
adjustments necessary to correct the financial statements have been recorded.

The impact of the Rust restatements on the Company's financial results as
originally reported is summarized below:

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended

September 30, September 30
------------------ --------------------
<S> <C> <C> <C> <C>
Equity in earnings of affiliates:
As reported $ 6,390 $ 5,085 $ 16,702 $ 8,902
As restated 12,550 2,266 23,042 2,854
Income from continuing operations:
As reported $ 44,807 $48,288 $127,266 $126,536
As restated 49,529 45,469 131,268 120,488
Equity income (loss) from Rust
discontinued operations:
As reported $ 1,438 $ - $ 4,105 $ -
As restated (32,534) - (22,600) -
Net income:
As reported $ 48,075 $48,288 $138,446 $127,746
As restated 18,825 45,469 115,643 121,698
</TABLE>

8
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<S> <C> <C> <C> <C>
Diluted earnings per common share:
Continuing operations:
As reported $ 0.28 $ 0.31 $ 0.74 $ 0.79
As restated 0.31 0.29 0.76 0.76
Equity income (loss) from Rust
discontinued operations:
As reported $ 0.01 $ - $ 0.02 $ -
As restated (0.20) - (0.13) -
Net income:
As reported $ 0.30 $ 0.31 $ 0.81 $ 0.80
As restated 0.12 0.29 0.67 0.77
</TABLE>

<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ -------------
<S> <C> <C>
Investments in affiliates:
As reported $ 484,141 $ 468,164
As restated 479,505 457,480
Total assets:
As reported $3,051,419 $3,037,224
As restated 3,046,783 3,026,540
Retained earnings:
As reported $ 714,064 $ 823,029
As restated 709,428 812,345
Total stockholders' equity:
As reported $1,150,516 $1,173,919
As restated 1,145,880 1,163,235
</TABLE>

NOTE 3 - ACQUISITION OF PUBLIC SHARES

9
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

of independent directors. The special committee subsequently retained
independent legal and financial advisors to assist it in considering the
proposal. Should the special committee ultimately recommend stockholder approval
of a transaction with Waste Management, it is unlikely that a meeting of the
Company's stockholders for the purpose of considering such a recommendation
could occur before the first quarter of 1998. Several lawsuits have also been
filed which seek, among other things, to enjoin the proposed transaction. See
Part II -Other Information - Legal Proceedings for additional discussion.

NOTE 4 - ACQUISITIONS AND DIVESTITURES

ACQUISITIONS: No acquisitions were made during the first nine months of 1997.
During the first nine months of 1996, the Company acquired for $7.0 million in
cash and assumed debt, an industrial cogeneration facility in Martell,
California, and several wastewater treatment operating contracts that were
subsequently sold as part of the discontinued operations discussed below. Also
during 1996, the Company acquired a 20 percent interest in Glegg Industries
("Glegg"), a privately held ultrapure water company, for $15.4 million. In
conjunction with the water business divestiture, Glegg's majority owners
acquired the right to repurchase Wheelabrator's interest before March 31, 1999,
at the Company's original purchase price. Accordingly, this investment is now
being accounted for using the cost method of accounting. The pro forma effect
of the 1996 acquisitions and investment is not material.

DISCONTINUED OPERATIONS: In November 1996, Wheelabrator sold its water-related
equipment manufacturing and process systems businesses, including substantially
all of the Company's foreign operations and also certain air pollution control
units, to United States Filter Corporation ("U.S. Filter") for $369.6 million in
cash. The discussions also led to a definitive agreement with U.S. Filter in
early 1997 to sell the Company's water and wastewater facility operations and
privatization business. In April 1997, the Company completed the sale of its
water and wastewater operations and maintenance subsidiary for 2.3 million
registered shares of U.S. Filter common stock. The discontinued businesses
(collectively the "Water Business") have been segregated, and the accompanying
consolidated balance sheets, statements of income and related footnote
information have been restated. In the second quarter, Wheelabrator recorded a
gain on the Water Business divestiture of $1.2 million after tax. In the third
quarter, the Company liquidated its U.S. Filter stock holdings for $68.5 million
and reported a $4.5 million pretax gain on the transaction in other income.

10
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Revenues of the discontinued businesses were $14.3 million in 1997 versus $358.0
million in the first nine months of 1996. Results of operations during 1997
were not material and were recognized as part of the gain recorded in the second
quarter.

During the fourth quarter of 1995, Rust announced it would sell or discontinue
its process engineering, construction, specialty contracting and similar lines
of business. Rust sold its engineering and construction business in the second
quarter of 1996, and its industrial scaffolding business in the third quarter of
that year. In the fourth quarter it announced that it also planned to divest its
remaining domestic and international environmental and infrastructure
engineering and consulting businesses. Wheelabrator has reported its 40 percent
equity interest in the net loss provisions for the planned disposition of these
businesses separately from continuing operations. In addition, the Company's
equity in the historical operating results of those businesses sold within one
year of their announced disposition is also reported separately from continuing
operations. Historical results of those Rust businesses included in the
disposition plan but not sold within one year have been restated and are now
included in the Company's results from continuing operations.

NOTE 5 - COMMITMENTS AND CONTINGENCIES

In May 1994, the U.S. Supreme Court ruled that state and local governments may
not constitutionally restrict the free movement of trash in interstate commerce
through the use of regulatory flow control laws. Such laws typically involve a
local government specifying a jurisdictional disposal site for all solid waste
generated within its borders. Since the ruling, several decisions of state or
federal courts have invalidated regulatory flow control schemes in a number of
jurisdictions. Other judicial decisions have upheld nonregulatory means by
which municipalities may effectively control the flow of municipal solid waste.
In addition, federal legislation has been proposed, but not yet enacted, to
effectively grandfather existing flow control mandates. There can be no
assurance that such alternatives to regulatory flow control will in every case
be found to be lawful or that such legislation will be enacted into law.

The Supreme Court's 1994 ruling and subsequent court decisions have not had a
material adverse effect to date on any of the Company's trash-to-energy
operations. In the event that remedial legislation is not adopted, the Company
believes that affected local governmental bodies with contractual obligations to
the Company may endeavor to implement alternative lawful means to direct the
flow of waste. In view of the uncertain state of the law at this time, however,
the Company is unable to predict which of the Company's customers will attempt
such efforts and, if attempted, whether such efforts would be

11
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

successful, or what impact, if any, this matter generally might have on the
Company's trash-to-energy facilities.

The Company's Gloucester County, New Jersey, facility relies on a disposal
franchise for substantially all of its supply of municipal solid waste. On May
1, 1997, the Third Circuit Court of Appeals ("Third Circuit") permanently
enjoined the State of New Jersey from enforcing its franchise system as a form
of unconstitutional solid waste flow control, but stayed the injunction for so
long as any appeals were pending. On November 10, 1997, the United States
Supreme Court announced its decision not to review the Third Circuit decision,
thereby ending the stay. The State had continued to enforce flow control during
the stay period.

Under the reimbursement agreement between the project company that owns the
Gloucester facility and the bank that provides credit support to the project,
the termination of the waste franchise constitutes an event of default. The
Company and the credit support bank are presently discussing the consequences of
these developments.

The New Jersey legislature has been considering various legislative solutions,
including a bill to authorize counties and county authorities to implement a
constitutionally permissible system of "economic flow control" designed to
recover waste disposal costs previously incurred in reliance on the State's
franchise system. The Company currently believes that, through either
legislative action or a project recapitalization, the Gloucester project can be
restructured to operate profitably in the absence of regulatory flow control.

Within the next several years, the air pollution control systems at certain
trash-to-energy facilities owned or leased by Wheelabrator most likely will be
required to be modified to comply with more stringent air pollution control
standards adopted by the United States Environmental Protection Agency in
December 1995 for municipal waste combusters. The compliance dates will vary by
facility, but all affected facilities will be required to be in compliance with
the new rules by the end of the year 2000. Currently available technologies will
be adequate to meet the new standards. Although the total expenditures required
for such modifications are estimated to be in the $180-$220 million range, 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 generally allow the Company to recover from customers
the majority of incremental capital and operating costs.

12
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Utilities Regulatory Policies Act of 1978 ("PURPA") should be voidable as
"stranded assets." The Company's power production facilities are qualifying
facilities under PURPA and depend on the sanctity of their power sales
agreements for their economic viability. Recent state and federal agency and
court decisions have unanimously upheld the inviolate nature of these contracts.
The Company believes that federal law offers strong protection to its PURPA
contracts. However, there is a risk that future utility restructurings, court
decisions and/or legislative or administrative action in this area will have a
material and adverse effect on the business of the Company.

There are various lawsuits and claims pending against Wheelabrator that have
arisen in the normal course of Wheelabrator's business and relate mainly to
matters of environmental and product liability, personal injury, and property
damage. The outcome of these matters is not presently determinable, but in the
opinion of management, based on the advice of counsel, the ultimate resolution
of these matters will not have a material adverse effect on the financial
condition or results of operations of the Company. It is reasonably possible,
however, that a change in the Company's estimate of its probable liability with
respect to these matters could occur in the near-term.

NOTE 6 - ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income" and
FAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." Both statements are effective for fiscal years beginning after
December 15, 1997. FAS No. 130 requires only a different format for
presentation of information already included in the Company's financial
statements. FAS No. 131 modifies and expands required segment disclosure but
does not affect accounting principles, and accordingly will not require any
change to reported financial position, results of operations or cash flows.

In October 1996, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
96-1, "Environmental Remediation Liabilities," which became effective in 1997.
The SOP provides that environmental remediation liabilities should be accrued
when the criteria of FAS No. 5, "Accounting for Contingencies," are met.
Included in the SOP are benchmarks to aid in the determination of when such
criteria are met and environmental remediation liabilities should be recognized.
The SOP also provides that an accrual for environmental liabilities should
include future costs of compensation and benefits for employees expected to
devote a significant amount of time directly to the remediation effort. The
adoption of SOP 96-1 did not have a material impact on Wheelabrator's financial
statements since its previous accounting was in substantial compliance with the
new standard.

13
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company was also required in 1997 to begin presenting earnings per share in
accordance with FAS No. 128 as discussed above.

14
<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

Wheelabrator Technologies Inc. ("Wheelabrator" or the "Company"), is primarily
engaged in the ownership and operation of trash-to-energy, waste-fuel powered
independent power, and biosolids pelletizer facilities as well as in providing
biosolids land application services and air quality control equipment design and
installation services. Wheelabrator is a majority-owned subsidiary of Waste
Management, Inc. ("Waste Management"), formerly named WMX Technologies, Inc.,
and holds minority interests in two other Waste Management-controlled
subsidiaries: Waste Management International plc ("WM International") and Rust
International Inc. ("Rust").

On June 20, 1997, the Company received a proposal from its majority shareholder,
Waste Management, to acquire for $15.00 per share in cash all of the outstanding
publicly held Wheelabrator shares that Waste Management does not already own.
Waste Management owns approximately 67 percent of Wheelabrator's 156.6 million
outstanding shares. The proposed transaction is subject to the approval of both
a committee of the Company's independent directors and the holders of a majority
of the Company's outstanding shares (other than shares held by Waste Management)
voting at a stockholders' meeting. In June, the proposal was referred by the
Company's Board of Directors to a special committee consisting solely of
independent directors. The special committee subsequently retained independent
legal and financial advisors to assist it in considering the proposal. Should
the special committee ultimately recommend stockholder approval of a transaction
with Waste Management, it is unlikely that a meeting of the Company's
stockholders for the purpose of considering such a recommendation could occur
before the first quarter of 1998. Several lawsuits have also been filed which
seek, among other things, to enjoin the proposed transaction. See Part II -
Other Information - Legal Proceedings for additional discussion.

In November 1996, Wheelabrator sold its water-related equipment manufacturing
and process systems businesses to United States Filter Corporation ("U.S.
Filter") for $369.6 million in cash. The discussions also led to a definitive
agreement with U.S. Filter in early 1997 to sell the Company's water and
wastewater facility operations and privatization business. In April 1997, the
Company completed the sale of its water and wastewater operations and
maintenance subsidiary for 2.3 million registered shares of U.S. Filter common
stock. These businesses (collectively the "Water Business") have been accounted
for as discontinued operations in the accompanying financial statements. In the
second quarter, Wheelabrator recorded a gain on the Water Business divestiture
of $1.2 million after tax. In the third quarter, the Company liquidated its
U.S. Filter stock holdings for $68.5 million and reported a $4.5 million pretax
gain on the transaction in other income.

15
<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND
FINANCIAL CONDITION (CONTINUED)

During the fourth quarter of 1995, Rust announced it would sell or discontinue
its process engineering, construction, specialty contracting and similar lines
of business. In 1996, Rust sold the engineering and construction business, as
well as its industrial scaffolding business, and announced that it also planned
to divest its remaining domestic and international environmental and
infrastructure engineering and consulting businesses. Wheelabrator has reported
its 40 percent equity interest in Rust's gains and loss provisions associated
with planned disposition of these businesses separately from continuing
operations. The Company recognized a $9.2 million second quarter 1996 gain
related to Rust's sale of its engineering and construction business and a $32.8
million third quarter 1996 loss in conjunction with Rust's industrial scaffold
business sale. The Company's equity in the historical operating results of those
businesses sold within one year of their announced disposition is also reported
separately from continuing operations. Historical results of those Rust
businesses included in the disposition plan but not sold within one year have
been restated and are now included in the Company's results from continuing
operations.

The Company reorganized and streamlined its operating structure in conjunction
with the Water Business divestiture. The biosolids pelletizer facilities, which
have long-term contractual obligations, operating characteristics, customers,
and capital requirements similar to trash-to-energy facilities, were integrated
into the Company's energy plant operating organization. In light of this
reorganization and the sale of the Water Business, the Company now reports its
operating results in one industry segment. Wheelabrator's biosolids land
application and air pollution control businesses, which are not significant, are
also included in this segment. Quarterly results from prior years, during which
the Company reported its results in two industry segments, Clean Energy and
Clean Water, have been restated to conform to the current presentation.

In April 1997, Wheelabrator announced the formation of a strategic alliance with
Treated Water Outsourcing, a joint venture between U.S. Filter and Nalco
Chemical Corporation, to enhance its marketing capabilities for outsourcing
industrial energy infrastructure projects.

RESULTS OF OPERATIONS
- ---------------------

For the three months ended September 30, 1997, consolidated revenue was $249.9
million and income from continuing operations and net income were both $45.5
million, or $0.29 per share. In the third quarter of 1996, consolidated revenue
was $242.7 million, income from continuing operations was $49.5 million, or
$0.31 per share, and net income was $18.8 million, or $0.12 per share. All
earnings per share figures are presented herein on a diluted basis.

16
<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND
FINANCIAL CONDITION (CONTINUED)

For the nine months ended September 30, 1997, consolidated revenue was $754.1
million, income from continuing operations was $120.5 million, or $0.76 per
share, and net income was $121.7 million, or $0.77 per share. In the comparable
1996 period, consolidated revenue was $706.6 million, income from continuing
operations was $131.3 million, or $0.76 per share, and net income was $115.6
million, or $0.67 per share.

Revenue in 1997 included $12.8 million and $47.0 million of construction revenue
for the three and nine-month periods, respectively, related to the retrofit of
the Pinellas County, Florida, trash-to-energy facility and construction of a
biosolids compost facility for Burlington County, New Jersey. There was no
construction revenue during the first nine months of 1996. New industrial
cogeneration plants (so-called "inside-the-fence" facilities) acquired in 1996
contributed $4.1 million of revenue for the quarter and $14.3 million for the
first nine months. The Company is attempting to leverage its energy plant
operating capabilities and project financing expertise by owning and/or
operating inside-the-fence power plants for industrial customers. The Company's
second pelletizer facility in Baltimore, Maryland, began commercial operations
during the quarter and contributed $1.3 million to revenue. Revenue from
existing business decreased for the quarter and nine-month period due to land
spreading divestitures and a lack of new air pollution control group business
from third parties, offsetting growth at existing energy and thermal plants. The
Company's plant operations, land spreading, air business and construction
represented 83 percent, 9 percent, 3 percent and 5 percent, respectively, of
consolidated revenue in the third quarter of 1997, versus 81 percent, 11
percent, 8 percent and 0 percent, respectively, during the third quarter of
1996. For the nine-month period ended September 30, 1997, the Company's plant
operations, land spreading, air business and construction represented 81
percent, 8 percent, 5 percent and 6 percent, respectively, of consolidated
revenue versus 83 percent, 10 percent, 7 percent and 0 percent during the
comparable 1996 period.

Operating income of $78.1 million for the quarter and $220.2 million for the
first nine months was $1.6 million and $0.7 million, respectively, higher than
the comparable 1996 periods. Excluding construction margin, operating income
was flat for the quarter due to operating income from the new inside-the-fence
facilities and improved profitability from the 1996 land spreading restructuring
being offset by a $2.0 million litigation reserve. For the nine-month period,
again excluding construction margin, operating income declined $4.5 million.
Increased maintenance expense, higher environmental compliance costs at the New
York Organic Fertilizer Company ("NYOFCO") biosolids pelletizer project, and the
fact that certain energy plant purchases are no longer eliminated due to the
Water Business divestiture all contributed to the nine-month operating income
decline. Selling and administrative expenses declined $0.4 million for the
quarter and $1.9 million for the nine months due to reduced corporate overhead
from the Water Business divestiture and from the 1996 land spreading
restructuring. Operating margin for the quarter, excluding construction

17
<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND
FINANCIAL CONDITION (CONTINUED)

margin, improved almost a full percentage point versus the comparable 1996
quarter to 32.3 percent.

Income from continuing operations decreased $4.1 million and $10.8 million for
the quarter and nine months, respectively, versus the comparable 1996 periods.
During the quarter, the Company recognized a $4.5 million pretax gain from the
liquidation of the U.S. Filter common stock received in connection with the
Water Business sale. The gain was partially offset by $1.8 million of
nonoperating real estate asset writedowns. Income from continuing operations for
the quarter was further impacted by a $10.3 million decrease in equity in
earnings of affiliates. Included in the 1997 nine-month period is the indirect
impact on the Company ($4.8 million) of a second quarter charge recognized by an
equity investee of Rust, OHM Corporation, and a $3.0 million third quarter
charge associated with certain other impairment losses recognized by Rust.
Absent these charges, 1997 income from continuing operations would have been
$128.3 million through nine months. This represents a $3.0 million decrease from
the prior year as lower equity income from both Rust and WM International offset
favorable interest earnings. The earnings per share impact of lower income from
continuing operations for the year-to-date period was mitigated by lower average
shares outstanding due to share repurchases.

Net income for the nine months includes a $1.2 million after tax gain on the
Water Business divestiture. Prior year quarter and nine-month results include
income from discontinued Water Business operations and net equity losses from
Rust discontinued operations that total to a $30.7 million loss for the quarter
and a $15.6 million loss for the nine months.

OTHER ITEMS
- -----------

INTEREST: Interest expense for the third quarter and first nine months of 1997
decreased $1.5 million and $2.1 million, respectively, compared with the prior
year, due mainly to short-term borrowings from Waste Management incurred in
connection with the second quarter 1996 share repurchases. Interest income
increased $4.6 million and $10.4 million, respectively, from the third quarter
and first nine months of 1996 because of higher average invested balances, which
included proceeds from the Water Business sale.

EQUITY IN EARNINGS OF AFFILIATES: Equity income from the continuing operations
of Wheelabrator's affiliates for the third quarter and nine months ended
September 30, totaled $2.3 million and $2.9 million, respectively, in 1997 and
$12.6 million and $23.0 million, respectively, in 1996. The Company's equity in
Rust's earnings decreased $9.0 million and $17.6 million, respectively, for the
third quarter and nine-month period compared to the prior year. Write-offs taken
by OHM Corporation in the second quarter of 1997 accounted for $4.8 million of
the nine-month decrease, while goodwill write-offs associated with closing

18
<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)

certain locations contributed $3.0 million to the third quarter and $4.9 million
to the year-to-date decrease. The balance of the Rust decrease was attributable
to lower earnings at certain businesses Rust is holding for sale. The Company's
equity in WM International's earnings decreased $1.2 million for the third
quarter and $2.3 million for the nine months due to translation losses resulting
from the strength of the British pound against other world currencies and a
reduction of its equity income resulting from the 1996 sale of its minority
interest in Wessex Water Plc.

INCOME TAXES: The Company's effective tax rates excluding equity income, which
is reported net of tax, for the nine months ended September 30, 1997 and 1996,
were both 39.5 percent. On a go-forward basis, the Company expects its effective
tax rate excluding equity income to be between 39.0 and 40.0 percent.

DISCONTINUED OPERATIONS: As previously discussed, in 1996, the Company decided
to divest its Water Business. This business included the Company's domestic and
international water process systems and equipment manufacturing units, its water
and wastewater treatment plant operations and privatization business, its
material cleaning company, and certain specialized air pollution control units.
Revenues of the discontinued businesses were $14.3 million in 1997 versus $358.0
million in the first nine months of 1996. Results of operations during 1997
were not material and were recognized as part of the gain recorded in the second
quarter.

ENVIRONMENTAL MATTERS: The majority of Wheelabrator's business is involved with
the protection of the environment. As such, a significant portion of the
Company's operating costs and capital expenditures could be characterized as
costs of environmental protection. While the Company is faced, in the normal
course of its business, with the need to expend funds for environmental
protection, it does not expect such expenditures to have a material adverse
effect on its financial condition or results of operations because its business
is based upon compliance with environmental laws and regulations and its
products and services are priced accordingly. Although unlikely in the near-
term, such ongoing compliance costs may increase in the future as a result of
legislation or regulation. However, the Company believes that in general it
benefits from increased government regulation, which may increase the demand for
its products and services, and that it has the resources and experience to
manage environmental risk.

Estimated closure and postclosure monitoring costs associated with ash residue
monofills for which the Company is responsible include items such as final cap
and cover on the site, leachate management, and groundwater monitoring. These
costs are recognized in proportion to use of the permitted capacity at such
disposal sites. Such costs are estimated based on the technical requirements of
the United States Environmental Protection Agency ("EPA") or

19
<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND
FINANCIAL CONDITION (CONTINUED)

applicable state regulations, whichever are stricter. These accruals for closure
and postclosure costs relate to expenditures to be incurred after a monofill
ceases to accept ash residue. To the extent similar costs are incurred during
the active life of the site, they are expensed as incurred. Preparation costs
associated with these sites and their individual cells are capitalized and
amortized over the respective estimated life of the disposal site or individual
cell.

Wheelabrator has instituted procedures to periodically evaluate other identified
and potential environmental exposures. When the Company concludes it is
probable that a liability has been incurred, provision is made in the financial
statements, based upon management's judgment and prior experience, for the
Company's best estimate of the liability. Such estimates are subsequently
revised as deemed necessary when additional information becomes available.
While the Company does not anticipate that any such adjustment would be material
to its financial statements, it is reasonably possible that future
technological, regulatory, or enforcement developments, results of environmental
studies, or other factors could alter this expectation and necessitate the
recording of additional liabilities, which could be material.

Wheelabrator also 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. From time to time, the Company pays fines and penalties
as a result of such proceedings. To date, such fines and penalties have not been
material and, in the opinion of management, the ultimate liability, if any, with
respect to these matters 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 operation.

ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") FAS
No. 130, "Reporting Comprehensive Income" and FAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." Both statements are
effective for fiscal years beginning after December 15, 1997. FAS No. 130
requires only a different format for presentation of information already
included in the Company's financial statements. FAS No. 131 modifies and expands
required segment disclosure but does not affect accounting principles, and
accordingly will not require any change to reported financial position, results
of operations or cash flows.

In October 1996, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
96-1, "Environmental

20
<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)

Remediation Liabilities," which became effective in 1997. The SOP provides that
environmental remediation liabilities should be accrued when the criteria of FAS
No. 5, "Accounting for Contingencies," are met. Included in the SOP are
benchmarks to aid in the determination of when such criteria are met and
environmental remediation liabilities should be recognized. The SOP also
provides that an accrual for environmental liabilities should include future
costs of compensation and benefits for employees expected to devote a
significant amount of time directly to the remediation effort. The adoption of
SOP 96-1 did not have a material impact on Wheelabrator's financial statements
since its previous accounting was in substantial compliance with the new
standard.

The Company was also required in 1997 to begin presenting earnings per share in
accordance with FAS No. 128.

FINANCIAL CONDITION
- -------------------

LIQUIDITY AND CAPITAL RESOURCES: Operating activities continue to be
Wheelabrator's principal source of liquidity and provided $101.1 million of cash
for the first nine months of 1997 compared to $207.2 million during the same
period of 1996. The majority of the decrease was attributable to approximately
$65 million of tax payments resulting from the Water Business sale to U.S.
Filter, cash generated last year by the discontinued Water Business, increased
income tax payments resulting from the reversal of deferred income tax timing
differences, and the payment of approximately $8 million of previously accrued
costs related to the Company's casualty insurance program.

Investing activities provided $75.6 million of cash during the first nine months
of 1997. During the comparable 1996 period, investing activities utilized $66.1
million of cash. The Company received $10.5 million from the disposal of
discontinued operations during 1997 as certain amounts held in escrow were
released. During the third quarter of 1997, the Company received $68.5 million
from the liquidation of the U.S. Filter stock holdings which it had received in
connection with the Water Business sale. Wheelabrator spent $5.2 million on
project construction during the first nine months of 1997 versus $34.4 million
in 1996, primarily because of lower construction activity on a second Company-
owned pelletizer facility in Baltimore, Maryland. The majority of the 1997
construction activity was funded by draw downs from investments held by
trustees. Nonproject capital expenditures were $13.7 million and $22.4 million
in the first nine months of 1997 and 1996, respectively. There were no
acquisitions made during the first nine months of 1997. During the first nine
months of 1996, acquisitions used $7.0 million in cash and assumed debt. Also
during 1996, the Company acquired a 20 percent interest in Glegg Industries
("Glegg"), a privately held ultrapure water company, for $15.4 million. In
conjunction with the Water Business

21
<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)

divestiture, Glegg's majority owners acquired the right to repurchase
Wheelabrator's interest before March 31, 1999, at the Company's original
purchase price. Accordingly, this investment is now being accounted for using
the cost method of accounting. The pro forma effect of the 1996 acquisitions and
investment is not material.

Financing activities required $68.9 million and $188.3 million of cash during
the first nine months of 1997 and 1996, respectively. Wheelabrator repurchased
18.9 million shares of its common stock at an aggregate cost of $303.0 million
($0.2 million of which was in accounts payable at September 30, 1996) during the
first nine months of 1996. During 1997, Wheelabrator repurchased 5.1 million
shares of its common stock in open market transactions at an aggregate cost of
$67.4 million, none of which were purchased in the third quarter. The Company is
authorized to repurchase approximately 24.9 million additional shares of its
common stock during 1997 and 1998 on the open market or in privately negotiated
or other transactions. However, given the Waste Management offer to acquire the
outstanding publicly held shares of Wheelabrator, the Company has suspended its
repurchase activity.

The Company currently expects that its major uses of capital during the balance
of 1997 will include spending on facility retrofits related to the Clean Air Act
Amendments of 1990 (see Contingencies below), scheduled debt repayments, and
nonproject capital expenditures. The Company completed a $13.9 million
refinancing of the tax-exempt project debt on its Claremont, New Hampshire,
facility in January 1997 and a $24.9 million limited-recourse financing
associated with the Lassen, California, facility in April 1997.

Wheelabrator had net working capital of $351.4 million as of September 30, 1997,
compared with net working capital of $186.5 million at December 31, 1996.
Included in September 30, 1997, working capital was $413.9 million in cash and
cash equivalents. This cash, short-term borrowings from Waste Management and
cash generated by operating activities are expected to be sufficient to meet the
Company's anticipated short-term capital expenditure, debt retirement, and
operating liquidity needs. Pursuant to the Master Intercorporate Agreement,
which governs borrowings and lending between the Company and Waste Management,
Wheelabrator may borrow up to $100.0 million in excess of any amounts loaned to
Waste Management. This agreement automatically renews annually unless either
party provides 90-day notice of termination. Acquisition and development
activities may be funded by external, long-term financing of certain unleveraged
projects, in addition to using available internally-generated cash, proceeds of
the 1997 Lassen project financing and the after-tax proceeds from the
liquidation of the U.S. Filter stock received in connection with the second-
stage Water Business divestiture transaction. Wheelabrator's ratio of total
debt to total capital was approximately 42 percent at September 30, 1997, which
the Company

22
<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)

believes to be indicative of additional unused borrowing capacity given its
historically strong ability to generate cash from operations.

DERIVATIVES: In connection with the Lassen financing, the Company entered into
an interest rate swap agreement to manage the impact of changes in interest
rates on the underlying variable rate term loan. Under the agreement,
Wheelabrator pays a fixed interest rate and receives floating interest rate
payments over the term of the agreement without the exchange of the underlying
notional amount. The $24.7 million notional amount of this agreement is used to
measure interest to be paid or received and does not represent the amount of
exposure to credit loss. Differences paid or received are recognized in the
financial statements as a part of interest expense on the underlying debt over
the life of the agreement. Wheelabrator's use of derivatives has not been and
is not expected to be material to the Company's financial statements.

CONTINGENCIES: In May 1994, the U.S. Supreme Court ruled that state and local
governments may not constitutionally restrict the free movement of trash in
interstate commerce through the use of regulatory flow control laws. Such laws
typically involve a local government specifying a jurisdictional disposal site
for all solid waste generated within its borders. Since the ruling, several
decisions of state or federal courts have invalidated regulatory flow control
schemes in a number of jurisdictions. Other judicial decisions have upheld
nonregulatory means by which municipalities may effectively control the flow of
municipal solid waste. In addition, federal legislation has been proposed, but
not yet enacted, to effectively grandfather existing flow control mandates.
There can be no assurance that such alternatives to regulatory flow control will
in every case be found to be lawful or that such legislation will be enacted
into law. The Supreme Court's 1994 ruling and subsequent court decisions have
not had a material adverse effect to date on any of the Company's trash-to-
energy operations. In the event that remedial legislation is not adopted, the
Company believes that affected local governmental bodies with contractual
obligations to the Company may endeavor to implement alternative lawful means to
direct the flow of waste. In view of the uncertain state of the law at this
time, however, the Company is unable to predict which of the Company's customers
will attempt such efforts and, if attempted, whether such efforts would be
successful, or what impact, if any, this matter generally might have on the
Company's trash-to-energy facilities.

23
<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)

United States Supreme Court announced its decision not to review the Third
Circuit decision, thereby ending the stay. The State had continued to enforce
flow control during the stay period.

Within the next several years, the air pollution control systems at certain
trash-to-energy facilities owned or leased by Wheelabrator most likely will be
required to be modified to comply with more stringent air pollution control
standards adopted by the EPA in December 1995 for municipal waste combusters.
The compliance dates will vary by facility, but all affected facilities will be
required to be in compliance with the new rules by the end of the year 2000.
Currently available technologies will be adequate to meet the new standards.
Although the total expenditures required for such modifications are estimated to
be in the $180-$220 million range, 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
generally allow the Company to recover from customers the majority of
incremental capital and operating costs.

As the states and the U.S. Congress have accelerated their consideration of ways
in which economic efficiencies can be gained by deregulating the electric
generation industry, some have argued that over-market power sales agreements
entered into pursuant to the Public Utilities Regulatory Policies Act of 1978
("PURPA") should be voidable as "stranded assets." The Company's power
production facilities are qualifying facilities under PURPA and depend on the
sanctity of their power sales agreements for their economic viability. Recent
state and federal agency and court decisions have unanimously upheld the
inviolate nature of these contracts. The Company believes that federal law
offers strong protection to its PURPA contracts. However, there is a risk that
future utility restructurings, court decisions and/or legislative or
administrative action in this area will have a material and adverse effect on
the business of the Company.

24
<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)

OUTLOOK:
- -------

The Company's principal focus is on further optimizing operations while pursuing
domestic opportunities to own and operate inside-the-fence power plants for
industrial customers. In addition, development or acquisition of trash-to-
energy and other waste fuel-fired power plants will be pursued on an
opportunistic basis both domestically and internationally. Such development
activities typically require multi-year efforts.

The Company expects the profitability of two of its facilities to be negatively
impacted within a year. The Shasta project will reach the end of the ten-year
fixed price portion of its power sales contract with Pacific Gas and Electric
Co. and will begin to receive significantly lower, avoided cost-based electric
rates. The exact end date is currently the subject of litigation. In addition,
NYOFCO will reach the end of its initial five-year contract with New York City
on June 30, 1998. The terms of the renewal, which are subject to final approval
by New York City, will result in lower revenue and lower operating margins, in
part because the initial contract provided for Wheelabrator to recover its
invested capital in NYOFCO during the five-year contract term. On a combined
basis, these two contract matters are expected to decrease 1998 revenue and net
income by approximately $44 million and $17 million, respectively. Revenue and
net income are anticipated to decline approximately an additional $31 million
and $9 million, respectively, in 1999 as the full year impact of these contract
changes is recognized.

The Company continues to anticipate cash flow from operations in 1997 of
approximately $220 million before approximately $100 million of tax payments
relating to the Water Business sale, utilization of approximately $30 million of
previously unavailable tax credits, and capital expenditures of $30 to $40
million.

FORWARD-LOOKING INFORMATION: Except for historical data, the information herein
constitutes forward-looking statements. Forward-looking statements are
inherently uncertain and subject to risks. Such statements should be viewed
with caution. Actual results or experience could differ materially from the
forward-looking statements as a result of many factors,

25
<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)

including, but not limited to, fluctuation in spot pricing for trash disposal,
unanticipated plant maintenance or repair expense, adverse weather conditions,
increased project development opportunities, slowing of the overall economy,
increased interest costs, the nature and timing of electric utility deregulation
and adverse flow control developments. The Company makes no commitment to
disclose any revisions to forward-looking statements, or any facts, events or
circumstances after the date hereof, that may bear upon forward-looking
statements.

26
<PAGE>

WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

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, 1997, the Company was not involved in any such proceeding where
the Company believes sanctions involved may exceed $100,000.

Several purported class action lawsuits and one purported derivative lawsuit
seeking injunctive relief and unspecified money damages were filed in the
Chancery Court for New Castle County, Delaware against the Company, Waste
Management, Inc., formerly known as WMX Technologies, Inc. ("Waste Management"),
and individual directors of the Company in connection with the June 20, 1997,
proposal by Waste Management, the Company's majority stockholder, to acquire all
of the shares of the Company's common stock which Waste Management does not own
(the "Waste Management Proposal"). The Waste Management Proposal contemplates a
merger in which the Company's stockholders would receive $15.00 in cash per
share of the Company's common stock, subject to the approval of both a special
committee consisting of independent directors of the Company and the holders of
a majority of the Company's outstanding shares (other than shares held by Waste
Management) voting at a stockholders' meeting. The lawsuits allege, among other
things, that the defendants have breached fiduciary duties to the Company's
minority stockholders because the merger consideration contemplated by the Waste
Management Proposal is inadequate and unfair. In addition, the purported
derivative lawsuit alleges that the Waste Management Proposal is part of a plan
to permit Waste Management to misappropriate the Company's corporate

27
<PAGE>

opportunity to repurchase its own shares. The Company believes that its actions
and those of its Board of Directors in connection with the Waste Management
Proposal have been in accordance with Delaware law. Accordingly, the Company
intends to contest these lawsuits vigorously.

In addition, there are other routine lawsuits and claims, including certain
environmental matters, pending against Wheelabrator 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, 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.

ITEM 5 - OTHER INFORMATION

On October 29, 1997, the Chairman of the Company's Board of Directors, Ronald T.
LeMay, resigned, effective immediately. On November 10, 1997, the Company's
Board of Directors appointed Robert S. Miller to fill the vacancy, and elected
Mr. Miller Chairman of the Board of Directors.

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:
During the quarter ended September 30, 1997, the Company filed no reports
on Form 8-K.

28
<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.

/s/ Robert J. Gagalis
-----------------------------------------------
Vice President, Chief Financial
Officer and Treasurer

March 1, 1998
29
<PAGE>

WHEELABRATOR TECHNOLOGIES INC.

EXHIBIT INDEX

Number and Description of Exhibit/*/
- ---------------------------------

2 None

3 None

4 None

10 None

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

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JANUARY 01, 1997, CONSOLIDATED BALANCE SHEET - RESTATED AND THE CONSOLIDATED
STATEMENT OF INCOME - RESTATED FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
AND THE FOOTNOTES THERETO.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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