<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 June 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 July 31, 1997:
156,592,602
===============================================================================
<PAGE>
WHEELABRATOR TECHNOLOGIES INC.
FORM 10-Q/A
FOR THE QUARTER ENDED JUNE 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 June 30, 1997.. 1
Consolidated Statements of Income for the Three Months and Six Months
Ended June 30, 1996 and 1997......................................... 2
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1996 and 1997............................................... 3
Consolidated Statements of Changes in Stockholders' Equity for the
Six Months Ended June 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 ..................................... 14
Part II. Other Information:
Item 1 - Legal Proceedings................................................. 25
Item 4 - Submission of Matters to a Vote of Security Holders............... 26
Item 6 - Exhibits and Reports on Form 8-K.................................. 26
SIGNATURE.................................................................. 27
Exhibit Index.............................................................. 28
</TABLE>
<PAGE>
Part I. FINANCIAL INFORMATION
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - RESTATED
(000s omitted, except share amounts)
(unaudited)
December 31, June 30,
1996 1997
- --------------------------------------------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
Current assets:
<S> <C> <C>
Cash and cash equivalents.............................. $ 306,072 $ 300,534
Short-term investments................................. 1,050 63,768
Receivables, net of allowance of $5,094 in 1996
and $4,157 in 1997.................................... 123,164 134,697
Costs and earnings in excess of billings............... 10,632 15,241
Other current assets................................... 71,098 70,623
---------- ----------
Total current assets................................. 512,016 584,863
Property, plant and equipment, net....................... 1,561,925 1,532,734
Cost in excess of net assets of acquired businesses, net. 63,707 62,671
Investments in affiliates................................ 479,505 460,489
Net assets of discontinued operations.................... 54,776 -
Other assets............................................. 374,854 359,522
---------- ----------
Total assets....................................... $3,046,783 $3,000,279
========== ==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Current maturities of long-term debt.......................... $ 35,832 $ 37,201
Accounts payable.............................................. 37,084 50,722
Accrued liabilities........................................... 236,426 201,085
Advance payments on contracts................................. 16,194 20,104
---------- ----------
Total current liabilities................................... 325,536 309,112
Long-term debt.................................................. 800,153 815,741
Deferred income taxes........................................... 445,582 441,909
Deferred income................................................. 67,678 63,085
Other long-term liabilities..................................... 261,954 252,360
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................................ 875,584 875,011
Cumulative translation adjustments............................ (4,721) (24,396)
Treasury stock at cost; 28,094,425 shares in 1996
and 32,981,790 shares in 1997................................ (436,306) (500,564)
Unrealized loss on available-for-sale securities.............. - (750)
Retained earnings............................................. 709,428 766,876
---------- ----------
Total stockholders' equity.................................. 1,145,880 1,118,072
---------- ----------
Total liabilities and stockholders' equity................ $3,046,783 $3,000,279
========== ==========
</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 SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(000s omitted, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
- ----------------------------------------------------------------------------------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue.......................................... $244,436 $256,059 $463,906 $504,223
Operating expenses............................... 157,426 170,441 298,895 341,700
Selling and administrative expenses.............. 10,993 10,398 21,983 20,395
Interest expense................................. 13,665 13,541 27,123 26,517
Interest income.................................. (1,416) (4,470) (3,153) (8,965)
Equity in (earnings) loss of affiliates.......... (6,496) 651 (10,492) (588)
Other expense, net............................... 448 707 1,203 1,557
-------- -------- -------- --------
Income from continuing operations before
income taxes................................. 69,816 64,791 128,347 123,607
Income tax provision............................. 25,098 26,161 46,608 48,588
-------- -------- -------- --------
Income from continuing operations.............. 44,718 38,630 81,739 75,019
Discontinued operations:
Gain on disposal of discontinued operations
less applicable income taxes of $78.0
million...................................... - 1,210 - 1,210
Income from discontinued operations less
applicable income taxes of $2.5 million and
$4.6 million for the three months and six
months ended June 30, 1996, respectively..... 2,650 - 5,145 -
Equity in gain on disposal of Rust
discontinued operations..................... 9,198 - 9,198 -
Equity income (loss) from Rust discontinued
operations................................... (476) - 736 -
-------- -------- -------- --------
Net income................................... $ 56,090 $ 39,840 $ 96,818 $ 76,229
======== ======== ======== ========
Weighted average common shares outstanding....... 171,800 157,300 175,600 159,400
======== ======== ======== ========
Basic earnings per common share:
Continuing operations.......................... $ 0.26 $ 0.24 $ 0.46 $ 0.47
Gain on disposal of discontinued operations.... - 0.01 - 0.01
Income from discontinued operations............ 0.02 - 0.03 -
Equity income from Rust discontinued
operations................................... 0.05 - 0.06 -
-------- -------- -------- --------
Net income................................... $ 0.33 $ 0.25 $ 0.55 $ 0.48
======== ======== ======== ========
Diluted earnings per common share:
Continuing operations.......................... $ 0.26 $ 0.24 $ 0.46 $ 0.47
Gain on disposal of discontinued operations.... - 0.01 - 0.01
Income from discontinued operations............ 0.02 - 0.03 -
Equity income from Rust discontinued
operations................................... 0.05 - 0.06 -
-------- -------- -------- --------
Net income................................... $ 0.33 $ 0.25 $ 0.55 $ 0.48
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - RESTATED
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(000s omitted)
(unaudited)
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................. $ 96,818 $ 76,229
Adjustments to reconcile net income to cash flows from
operating activities:
Depreciation and amortization .......................... 54,108 46,721
Deferred income taxes .................................. 19,734 (690)
Undistributed earnings of affiliates ................... (10,492) (588)
Equity in discontinued operations of Rust .............. (9,934) -
Gain on disposal of discontinued operations ............ - (1,210)
Changes in assets and liabilities, net of effects of
acquisitions and dispositions:
Receivables, net ................................... (15,312) (8,365)
Costs and earnings in excess of billings ........... 6,601 (3)
Other current assets ............................... (1,024) (1,650)
Accounts payable and accrued liabilities ........... (13,806) (64,100)
Advance payments on contracts ...................... 5,286 (946)
Other long-term liabilities ........................ (16,844) (10,978)
Other, net ............................................. 5,040 (1,498)
--------- --------
Net cash provided by operating activities .............. 120,175 32,922
--------- --------
INVESTING ACTIVITIES:
Capital expenditures ....................................... (37,127) (11,283)
Investments held by trustees ............................... (1,131) 5,656
Cash paid for acquisitions, net of acquired cash ........... (4,483) -
Cash paid for investment ................................... (15,415) -
Proceeds from discontinued operations ...................... - 10,478
Other, net ................................................. 1,057 4,155
--------- --------
Net cash provided by (used for) investing activities ... (57,099) 9,006
--------- --------
FINANCING ACTIVITIES:
Additions to long-term debt ................................ 58,550 38,817
Repayments of long-term debt ............................... (6,081) (21,832)
Net borrowings from Waste Management, Inc. ................. 128,645 -
Proceeds from exercise of stock options .................... 8,693 2,115
Stock repurchase program ................................... (296,070) (67,398)
Other, net ................................................. 732 832
--------- --------
Net cash used for financing activities ................. (105,531) (47,466)
--------- --------
Net decrease in cash and cash equivalents .................. (42,455) (5,538)
Cash and cash equivalents at beginning of period ........... 54,003 306,072
--------- --------
Cash and cash equivalents at end of period ................. $ 11,548 $300,534
========= ========
Supplemental disclosure:
Interest paid, net of amounts capitalized .............. $ 27,175 $ 24,243
========= ========
Income taxes paid ...................................... $ 23,117 $ 99,568
========= ========
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 SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(000s omitted, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Loss on
Capital in Cumulative Available-
Common Excess of Translation Treasury For-Sale Retained
Stock Par Value Adjustment Stock Securities Earnings Total
=================================================================================================
<S> <C> <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 - - - - - 96,818 96,818
Dividends declared
($0.12 per share) - - - - - (20,689) (20,689)
Foreign currency
translation - - (824) - - - (824)
Exercise of
stock options - (2,358) - 11,051 - - 8,693
Tax benefit from
stock options - 1,356 - - - - 1,356
Stock repurchases
(18,444,700 shares) - - - (296,250) - - (296,250)
------ -------- -------- --------- ----- -------- ----------
Balance,
June 30, 1996 $1,895 $875,593 $(10,810) $(431,693) $ - $802,406 $1,237,391
====== ======== ======== ========= ===== ======== ==========
Balance,
December 31, 1996 $1,895 $875,584 $ (4,721) $(436,306) $ - $709,428 $1,145,880
Net income - - - - - 76,229 76,229
Dividends declared
($0.12 per share) - - - - - (18,781) (18,781)
Foreign currency
translation - - (19,675) - - - (19,675)
Exercise of
stock options - (1,025) - 3,140 - - 2,115
Tax benefit from
stock options - 452 - - - - 452
Unrealized loss on
available-for-sale
securities, less tax
benefit of $499 - - - - (750) - (750)
Stock repurchases
(5,106,200 shares) - - - (67,398) - - (67,398)
------ -------- -------- --------- ----- -------- ----------
Balance,
June 30, 1997 $1,895 $875,011 $(24,396) $(500,564) $(750) $766,876 $1,118,072
====== ======== ======== ========= ===== ======== ==========
</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 June 30, 1997, cash and cash equivalents included approximately
$293.7 million of net investments with Waste Management under the terms of this
agreement.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting ("FAS") No. 128, "Earnings Per Share" ("EPS"),
which supersedes Accounting Principles Board Opinion No. 15. Primary EPS is
replaced by Basic EPS, which is
5
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 Six Months
Ended June 30, Ended June 30,
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income from continuing operations as reported $ 44,718 $ 38,630 $ 81,739 $ 75,019
Add or (deduct) -
Dilution from potential common shares of:
WM International - - - -
-------- -------- -------- --------
Adjusted income from continuing operations $ 44,718 $ 38,630 $ 81,739 $ 75,019
======== ======== ======== ========
Weighted average common shares outstanding as
reported 171,800 157,300 175,600 159,400
Add -
Effect of stock options after applying
the "treasury stock" method 600 300 700 400
-------- -------- -------- --------
Adjusted average common shares outstanding 172,400 157,600 176,300 159,800
======== ======== ======== ========
Diluted EPS from continuing operations $ 0.26 $ 0.24 $ 0.46 $ 0.47
======== ======== ======== ========
</TABLE>
An aggregate of 3.4 million common shares potentially issuable upon exercise of
stock options have been excluded from the calculation of Diluted EPS at June 30,
1997, because their effect is antidilutive. During the six months ended June
30, 1997, the Company issued 218.8 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 from their use have not been and
are not expected to be material to the Company's financial statements.
6
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
The Company also 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
7
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1997 1996 1997
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Equity in earnings (loss) of affiliates:
As reported $ 6,587 $ 645 $10,312 $ 3,817
As restated 6,496 (651) 10,492 588
Income from continuing operations:
As reported $45,809 $39,926 $82,559 $78,248
As restated 44,718 38,630 81,739 75,019
Equity income from Rust
discontinued operations:
As reported $ 1,342 - $ 2,667 -
As restated 8,722 - 9,934 -
Net income:
As reported $49,801 $41,136 $90,371 $79,458
As restated 56,090 39,840 96,818 76,229
</TABLE>
8
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
Diluted earnings per common share:
Continuing operations:
<S> <C> <C> <C> <C>
As reported $ 0.27 $ 0.25 $0.47 $0.49
As restated 0.26 0.24 0.46 0.47
Equity income from Rust
discontinued operations:
As reported $ 0.01 - $0.01 -
As restated 0.05 - 0.06 -
Net income:
As reported $ 0.29 $ 0.26 $0.51 $0.50
As restated 0.33 0.25 0.55 0.48
December 31, June 30,
1996 1997
----------- ----------
Investments in affiliates:
As reported $ 484,141 $ 468,354
As restated 479,505 460,489
Total assets:
As reported $3,051,419 $3,008,144
As restated 3,046,783 3,000,279
Retained earnings:
As reported $ 714,064 $ 774,741
As restated 709,428 766,876
Total stockholders' equity:
As reported $1,150,516 $1,125,937
As restated 1,145,880 1,118,072
</TABLE>
NOTE 3 - ACQUISITION OF PUBLIC SHARES
On June 20, 1997, the Company announced that Waste Management had offered to
acquire, for $15.00 per share in cash, all of the outstanding Wheelabrator
shares that it does not already own. Waste Management owns approximately 67
percent of Wheelabrator's 156.6 million outstanding shares. The Company's Board
of Directors has referred the proposal to a special committee of independent
directors. The Waste Management proposal is subject to the approval of both the
special committee and the holders of a majority of outstanding Wheelabrator
shares (other than shares held by Waste Management) who vote at a special
meeting called to consider the proposal. Several lawsuits have also been filed
which seek, among other things,
9
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 six months of 1997.
During the first six 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 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 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 July 1997, the Company liquidated its U.S. Filter stock
holdings.
Revenues of the discontinued businesses were $14.3 million in the first six
months of 1997 versus $241.6 million in the comparable 1996 period. Results of
operations for the six months ended June 30, 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. 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. Rust recorded net loss
provisions in both years for the planned disposition of these businesses.
10
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company has reported its equity in these loss provisions separately from
continuing operations. In addition, the Company's equity in the historical
operating results of the Rust businesses sold within one year of their announced
disposition is also reported separately from continuing operations. Operating
results of those businesses included in the disposition plan but not sold within
one year have been reclassified and are now included in 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
municipality specifying the 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. There can be no assurance
that such alternatives to regulatory flow control will in every case be found to
be lawful.
The Company's Gloucester County, New Jersey, facility relies on a disposal
franchise for substantially all of its supply of municipal solid waste. In July
1996, a Federal District Court 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 its ruling was on appeal plus
an additional period of two years to enable the State to devise an alternative
nondiscriminatory approach. On May 1, 1997, the Third Circuit Court of Appeals
affirmed the District Court's ruling as to the unconstitutionality of New
Jersey's flow control system but vacated the lower court's two-year "post-
appeal" stay. However, the Court did grant a continued stay for so long as any
appeals are pending. This will delay the effect of the ruling until such time as
the State has exhausted its appeal rights to the U.S. Supreme Court. The State
has announced its intention to enforce flow control during the stay period.
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. The New Jersey legislature is now considering a bill to authorize
counties and authorities, including the Gloucester County Improvement Authority,
which administers the Company's franchise there, 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.
11
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In addition, federal legislation has been proposed, but not yet enacted, to
effectively grandfather existing flow control mandates, including Gloucester
County, New Jersey.
In the event that neither New Jersey nor Congress adopts such remedial
legislation, the Company believes that affected local governmental bodies may
endeavor to implement alternative lawful means in a continuing attempt 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 whether such efforts will be attempted
by the Company's customers and, if attempted, whether such efforts would be
successful, or what impact, if any, this matter might have on the Company's
trash-to-energy facilities.
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.
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.
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
12
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
The Company was also required in 1997 to begin presenting earnings per share in
accordance with FAS No. 128 as discussed above.
13
<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 announced that Waste Management had offered to
acquire, for $15.00 per share in cash, all of the outstanding Wheelabrator
shares that it does not already own. Waste Management owns approximately 67
percent of Wheelabrator's 156.6 million outstanding shares. The Company's Board
of Directors has referred the proposal to a special committee of independent
directors. The Waste Management proposal is subject to the approval of both the
special committee and the holders of a majority of outstanding Wheelabrator
shares (other than shares held by Waste Management) who vote at a special
meeting called to consider the proposal. 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 July 1997, the Company liquidated its U.S. Filter
stock holdings.
During the fourth quarter of 1995, Rust announced that 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. Rust recorded net loss
provisions in both years for the planned disposition of these businesses. The
Company has reported its equity in these loss provisions separately from
continuing
14
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
operations. In addition, the Company's equity in the historical operating
results of the Rust businesses sold within one year of their announced
disposition is also reported separately from continuing operations. Operating
results for those businesses included in the disposition plans but not sold
within one year have been reclassified and are now included in 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 June 30, 1997, consolidated revenue was $256.1
million, income from continuing operations was $38.6 million, or $0.24 per
share, and net income was $39.8 million, or $0.25 per share. In the second
quarter of 1996, consolidated revenue was $244.4 million, income from continuing
operations was $44.7 million, or $0.26 per share, and net income was $56.1
million, or $0.33 per share. Earnings per share figures are presented herein on
a diluted basis.
For the six months ended June 30, 1997, consolidated revenue was $504.2 million,
income from continuing operations was $75.0 million, or $0.47 per share, and net
income was $76.2 million, or $0.48 per share. In the comparable 1996 period,
consolidated revenue was $463.9 million, income from continuing operations was
$81.7 million, or $0.46 per share, and net income was $96.8 million, or $0.55
per share.
Revenue in 1997 included $18.3 million and $34.2 million of construction revenue
for the three and six-month periods, respectively, related to the retrofit of
Pinellas County, Florida's trash-to-energy facility and construction of a
biosolids compost facility for Burlington County, New Jersey. There was no
construction revenue during the first half of 1996. New industrial cogeneration
plants (so-called "inside-the-fence" facilities) acquired
15
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
in 1996 contributed $3.8 million of revenue for the quarter and $10.2 million
for the first six 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. Existing
business revenue decreased for the quarter and six-month period due to land
spreading divestitures, a lack of new air pollution control group business, and
a slight decline in trash deliveries offsetting contractual price escalation.
The decline in trash deliveries resulted from dry weather in the Mid-Atlantic
and New England states decreasing the weight of trash delivered to certain
plants. The Company's plant operations, land spreading, air business and
construction represented 79 percent, 8 percent, 6 percent and 7 percent,
respectively, of consolidated revenue in the second quarter of 1997, versus 81
percent, 11 percent, 8 percent and 0 percent, respectively, during the second
quarter of 1996. The percentages and year-over-year comparisons were
approximately the same for the six-month period.
Operating income of $75.2 million for the quarter and $142.1 million for the
first six months was essentially flat versus the comparable 1996 periods.
Excluding construction margin, operating income declined $3.3 million for the
quarter and $4.4 million for the six months. The timing and scope of energy
plant outages, increased environmental compliance costs at the New York Organic
Fertilizer Company ("NYOFCO") biosolids pelletizer project, the lower operating
revenue mentioned above, and the fact that certain energy plant purchases are no
longer eliminated due to the Water Business divestiture all contributed to this
operating income decline. Selling and administrative expenses declined $0.6
million for the quarter and $1.6 million for the six months due to reduced
corporate overhead from the Water Business divestiture and from the 1996 land
spreading restructuring.
Income from continuing operations decreased $6.1 million for the quarter and
$6.7 million for the six months versus the comparable 1996 periods. The
majority of this decrease was attributable to the indirect impact on the Company
($4.8 million) of a charge recognized by an equity investee of Rust, OHM
Corporation. Absent this charge, second quarter income from continuing
operations would have been $43.4 million, or $0.28 per share. This represents a
$1.3 million decrease from the prior year due primarily to lower equity income
from both Rust and WM International since the aforementioned operating income
decrease was offset by favorable interest earnings. Six-month income from
continuing operations, absent this charge, would have been $79.8 million, or
$0.50 per share, which represents a decrease of $1.9 million from the prior year
as equity income declines more than offset favorable interest earnings. The
earnings per share impact of lower income from continuing operations for the
quarter and year-to-date period was mitigated by lower average shares
outstanding due to share repurchases.
Net income for the quarter and six months includes a $1.2 million after tax gain
on the Water Business divestiture. Prior year quarter and six-month results
include discontinued Water Business operations and equity income from Rust
discontinued operations totaling $11.4
16
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
million for the quarter and $15.1 million for the six months. The Rust
contribution included Wheelabrator's share of a gain recognized on the sale of
their domestic engineering and construction business.
Other Items
- -----------
Interest: Interest expense for the second quarter and first six months of 1997
decreased $0.1 million and $0.6 million, respectively, compared with 1996 due
mainly to increased capitalized interest related primarily to the construction
of the Baltimore II Dryer facility (see "Financial Condition" below). Interest
income increased $3.1 million and $5.8 million, respectively, from the second
quarter and first half of 1996 because of higher average invested balances,
which included proceeds from the Water Business sale.
Equity in Earnings of Affiliates: Equity income (loss) from the continuing
operations of Wheelabrator's affiliates for the second quarter and six months
ended June 30, totaled $6.5 million and $10.5 million, respectively, in 1996 and
$(0.7) million and $0.6 million, respectively, in 1997. The Company's equity in
Rust's continuing earnings decreased approximately $6.4 million for the second
quarter and $8.7 million for the six months, $4.8 million of which was
attributable to write-offs taken by OHM Corporation. The balance of the Rust
decrease relates primarily to second quarter losses at certain Rust businesses
held for sale. The Company's equity in WM International's earnings decreased
$0.6 million for the second quarter and $1.1 million for the six 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, were 39.5 percent for the six-month periods ended June
30, 1997 and 1996. On a go-forward basis, the Company expects its effective tax
rate excluding equity income to continue to be approximately 39.5 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 the first six
months of 1997 versus $241.6 million in the comparable 1996 period. Results of
operations for the six months ended June 30, 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
17
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
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 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.
18
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
Accounting Pronouncements: In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("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.
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 $32.9 million of cash
for the first six months of 1997 compared to $120.2 million during the same
period of 1996. The majority of the decrease was attributable to approximately
$50 million of tax payments resulting from the November 1996 Water Business sale
to U.S. Filter, cash generated last year by the discontinued Water Business and
increased income tax payments resulting from the reversal of deferred tax timing
differences.
Investing activities provided $9.0 million of cash during the first six months
of 1997. During the comparable 1996 period, investing activities utilized $57.1
million of cash. The Company received $10.5 million from discontinued operations
during the quarter as certain amounts held in escrow were released. Wheelabrator
spent $3.7 million on project construction during the first six months of 1997
versus $22.4 million in 1996, primarily because of lower construction activity
on a second Company-owned pelletizer facility in
19
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
Baltimore, Maryland. The majority of the 1997 construction activity was funded
by draw downs from investments held by trustees. Nonproject capital expenditures
were $7.5 million and $14.7 million in the first six months of 1997 and 1996,
respectively. There were no acquisitions made during the first six months of
1997. During the first six 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 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 $47.5 million and $105.5 million of cash during
the first six months of 1997 and 1996, respectively. Wheelabrator repurchased
18.4 million shares of its common stock at an aggregate cost of $296.3 million
($0.2 million of which was in accounts payable at June 30, 1996) during the
first half 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. 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 its major uses of capital during 1997 will include
spending on facility retrofits related to the Clean Air Act Amendments of 1990
(see Contingencies below), continued acquisitions of inside-the-fence industrial
cogeneration facilities, and project investments, in addition to dividends,
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 $275.8 million as of June 30, 1997,
compared with net working capital of $186.5 million at December 31, 1996.
Included in June 30, 1997, working capital was $300.5 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, dividend payment, 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
20
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
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 43% at June 30, 1997, which the Company
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 $24.9 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 municipality specifying the 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.
There can be no assurance that such alternatives to regulatory flow control will
in every case be found to be lawful.
The Company's Gloucester County, New Jersey, facility relies on a disposal
franchise for substantially all of its supply of municipal solid waste. In July
1996, a Federal District Court 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 its ruling was on appeal plus
an additional period of two years to enable the State to devise an alternative
nondiscriminatory approach. On May 1, 1997, the Third Circuit Court of Appeals
affirmed the District Court's ruling as to the unconstitutionality of New
21
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
Jersey's flow control system but vacated the lower court's two-year "post-
appeal" stay. However, the Court did grant a continued stay for so long as any
appeals are pending. This will delay the effect of the ruling until such time as
the State has exhausted its appeal rights to the U.S. Supreme Court. The State
has announced its intention to enforce flow control during the stay period.
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. The New Jersey legislature is now considering a bill to authorize
counties and authorities, including the Gloucester County Improvement Authority,
which administers the Company's franchise there, 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. In
addition, federal legislation has been proposed, but not yet enacted, to
effectively grandfather existing flow control mandates, including Gloucester
County, New Jersey.
In the event that neither New Jersey nor Congress adopts such remedial
legislation, the Company believes that affected local governmental bodies may
endeavor to implement alternative lawful means in a continuing attempt 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 whether such efforts will be attempted
by the Company's customers and, if attempted, whether such efforts would be
successful, or what impact, if any, this matter might have on the Company's
trash-to-energy facilities.
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."
22
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
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.
23
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition (continued)
Outlook
- -------
The Company's focus in 1997 will be 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 beginning in 1998. 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. In addition, NYOFCO will reach the end of its initial five-year
contract with New York City on June 30, 1998. The Company has been awarded a
15-year renewal of this contract which is subject to final city approval. The
terms of the proposed renewal are anticipated to 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
anticipates that its earnings per share for 1997 will be $1.10 to $1.15, and
that earnings per share for 1998 and 1999 will also be correspondingly lower
than previous estimates. The 1997 earnings per share goal set forth above
assumes average outstanding shares of approximately 158 million.
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 $50 to $60
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, 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.
24
<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 June 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 in and 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 asserted to be 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
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.
25
<PAGE>
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 4 - Submission of Matters to a Vote of Securities Holders
At the Company's annual meeting of stockholders on April 30, 1997, the only
proposal submitted to the Company's stockholders was the election of three
directors of the Company for terms expiring at the annual meeting of the
Company's stockholders in 2000. The nominees elected by the stockholders with
votes cast were as follows:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
- ------- ----------- --------------
<S> <C> <C>
Dean L. Buntrock 146,117,048 3,728,575
James E. Koenig 146,102,032 3,743,591
Thomas P. Stafford 146,362,821 3,482,802
</TABLE>
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 June 30, 1997, the Company filed a report dated
June 20, 1997, on Form 8-K reporting under Item 5 that the Company issued a
news release announcing an offer by its parent company, Waste Management,
to acquire all of the shares of the Company that Waste Management does not
already own.
26
<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
27
<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
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE JUNE 30, 1997, CONSOLIDATED BALANCE SHEET - RESTATED AND THE
CONSOLIDATED STATEMENT OF INCOME - RESTATED FOR THE SIX-MONTH PERIOD ENDED JUNE
30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AND THE FOOTNOTES THERETO.</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 300,534
<SECURITIES> 63,768
<RECEIVABLES> 138,854
<ALLOWANCES> 4,157
<INVENTORY> 0
<CURRENT-ASSETS> 584,863
<PP&E> 1,997,727
<DEPRECIATION> 464,993
<TOTAL-ASSETS> 3,000,279
<CURRENT-LIABILITIES> 309,112
<BONDS> 815,741
0
0
<COMMON> 1,895
<OTHER-SE> 1,116,177
<TOTAL-LIABILITY-AND-EQUITY> 3,000,279
<SALES> 0
<TOTAL-REVENUES> 504,223
<CGS> 0
<TOTAL-COSTS> 341,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 521
<INTEREST-EXPENSE> 26,517
<INCOME-PRETAX> 123,607
<INCOME-TAX> 48,588
<INCOME-CONTINUING> 75,019
<DISCONTINUED> 1,210
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,229
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
