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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] 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 (I.R.S. Employer Identification No.)
incorporation or organization)
4 Liberty Lane West
Hampton, New Hampshire 03842
(Address of principal executive offices)
Registrant's telephone number, including area code: 603/929-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 ____
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
stockholders who were not affiliates (as defined by regulations of the
Securities and Exchange Commission) of the registrant was approximately
$958,284,304 at February 3, 1997 (based on the closing sale price on the New
York Stock Exchange Composite Tape on January 31, 1997, as reported by The Wall
Street Journal (Midwest Edition)). At March 19, 1997, the registrant had issued
and outstanding an aggregate of 161,597,573 shares of its common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 30, 1997 are incorporated by reference into
Part III.
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PART I
Item 1 -- Business
General
Wheelabrator Technologies Inc. is a leading developer of facilities and
systems for, and provider of services to, the trash-to-energy and waste fuel
powered independent power markets. The Company develops, arranges financing
for, operates and owns facilities that dispose of trash and other waste
materials in an environmentally acceptable manner by recycling them into
electrical or steam energy. The Company is also pursuing the development,
ownership and/or operation of power plants for industrial customers. In
addition, the Company is involved in the treatment and management of biosolids
resulting from the treatment of wastewater by converting them into useful
fertilizers and the recycling of organic wastes into compost material useable
for horticultural and agricultural purposes. Finally, the Company designs and
installs technologically advanced air pollution control systems and equipment.
The Company's predecessor companies and subsidiaries have been active in
project development for approximately 22 years, and in related activities since
the turn of the century. A description of projects in operation which are
owned, leased or operated under long-term operating agreements by the Company's
subsidiaries or affiliates is contained in Item 2 -- Properties. In addition to
the projects described in Item 2, the Company has domestic and international
projects in various stages of development that, in most cases, are subject to
contingencies, many of which are beyond the Company's control. Such
contingencies include, without limitation, obtaining required permits or
approvals, obtaining equity and/or debt financing and consummating required
project agreements.
The Company (then known as The Henley Group, Inc.) was incorporated in
Delaware in December 1985. The name of the Company was changed in December 1988
to The Wheelabrator Group Inc. and again in August 1989 to Wheelabrator
Technologies Inc. Unless the context indicates to the contrary, as used in this
report, the term "Company" refers to Wheelabrator Technologies Inc. and its
subsidiaries. Unless otherwise indicated, all statistical and financial
information under Item 1 and Item 2 of this report is given as of December 31,
1996
Approximately 65% of the Company's common stock, par value $0.01 per share
(the "Common Stock"), outstanding as of March 1, 1997 was owned by Waste
Management, Inc. (formerly named WMX Technologies, Inc.) ("WMX") or its
affiliates.
Services and Products
As further described herein, in 1996 the Company disposed of its water
process, manufacturing and custom engineered businesses and is in the process of
divesting the water contract operations, outsourcing and privatization
businesses. The Company has therefore reported its continuing operations as
being within one industry segment.
Energy Projects The Company, through Wheelabrator Environmental Systems
Inc. and its subsidiaries, is a leading developer, operator and owner of trash-
to-energy and waste fuel powered independent power facilities in the United
States. These facilities, either owned or operated, give the Company
approximately 920 megawatts per hour of electric generating capacity. The
Company's trash-to-energy projects utilize proven boiler and grate technology
and are capable of processing up to 23,750 tons of trash per day. The heat from
this combustion process is converted into high-pressure steam, which typically
is used to generate electricity for sale to public utility companies under long-
term contracts.
The Company's trash-to-energy development activities have historically
involved a number of contractual arrangements with a variety of private and
public entities, including municipalities (which supply trash for combustion),
utilities or other power users (which purchase the energy produced by the
facility), lenders, public debtholders, joint venture partners and equity
investors (which provide financing for the project) and the contractors or
subcontractors responsible for building the facility. In addition, the
Company's activities have often
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included identifying and acquiring sites for the facility and for the disposal
of residual ash produced by the facility and obtaining necessary permits and
licenses from local, state and federal regulatory authorities.
The Company also develops, operates and, in some cases, owns independent
power projects, which either cogenerate electricity and thermal energy or
generate electricity alone for sale to customers, including utilities and
private industry. Cogeneration is a technology which allows the simultaneous
production of two or more useful forms of energy from a single primary fuel
source, thus providing a more efficient use of a fuel's total energy content.
These power systems use waste wood, waste tires, waste coal or natural gas as
fuel, and employ state-of-the-art technology, such as fluidized-bed combustion,
to ensure the efficient burning of fuel with reduced emission levels. The
Company acquired two industrial cogeneration plants (so-called "inside-the-
fence" facilities) during the year as part of its strategy to leverage its
energy plant operating capabilities and project financing expertise by owning
and/or operating power plants for industrial customers. The first facility,
located in Martell, California, was acquired in February 1996 and the second
plant, located in Anderson, California, near one of the Company's other
facilities, was purchased in November 1996.
Biosolids Management Through Wheelabrator Water Technologies Inc. and its
subsidiaries, the Company develops, operates and owns projects that compost
organic wastes and treat and manage biosolids. The Company offers generators of
biosolids (the non-hazardous sludges resulting from treatment of municipal and
industrial wastewater) alternatives to landfilling or other disposal options.
The Company currently provides a range of management services, including land
application, drying, pelletizing, alkaline stabilization and composting to more
than 400 communities, typically pursuant to multi-year contracts under which the
Company is paid by the generator to make beneficial use of the biosolids.
Regulations issued by the United States Environmental Protection Agency ("EPA")
in December 1992 under the Clean Water Act encourage the beneficial use of
municipal sewage sludge by recognizing the resource value of biosolids as a
fertilizer and soil conditioner, and establish requirements for land application
designed to protect human health and the environment.
Land application involves the application of non-hazardous biosolids as a
natural fertilizer on farmland pursuant to rigorous site-specific permits issued
by applicable state authorities. Biosolids are also used in land-reclamation
projects such as strip mines. Land-applied biosolids are often stabilized prior
to application using proprietary technology. The Company also develops and
operates facilities at which biosolids are dried and pelletized, and has three
facilities currently in operation and one other facility presently undergoing
start-up activities. Development of dryer facilities generally involves various
contractual arrangements with a variety of private and public entities,
including municipalities (which generate the biosolids), lenders, contractors
and subcontractors which build the facilities, and end-users of the fertilizer
generated from the treatment process. These facilities incorporate a variety of
biosolids drying and emission control technologies, some proprietary and some
licensed to the Company under exclusive licensing arrangements. See "Patents,
Trademarks, Licenses and Other Agreements." The Company has approximately 635
dry-tons-per-day of biosolids drying capacity either in operation or under
construction. Biosolids which have been dried and pelletized are generally used
as fertilizer by farmers, commercial landscapers and nurseries and as a bulking
agent by fertilizer manufacturers.
Air Quality The Company's subsidiaries design and install advanced air
pollution control equipment. The Company offers electrostatic precipitators,
flue-gas desulfurization systems (scrubbers), and fabric-filter systems
(baghouses), which remove pollutants from the emissions of the Company's trash-
to-energy facilities as well as power plants and other industrial facilities.
The Company also designs, constructs and maintains tall concrete chimneys and
storage silos. The Company's expertise in air pollution control technologies and
chimney design and construction are used in the design and construction of the
Company's trash-to-energy facilities, which the Company believes strengthens its
competitive position.
Regulation
While in general the Company's businesses have benefited substantially from
increased governmental regulation, the industry itself is subject to extensive
and evolving regulation by federal, state, local and foreign authorities. Due to
the complexity of regulation of the industry and to public pressure,
implementation of existing and future laws, regulations or initiatives by
different levels of government may be inconsistent and difficult to
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foresee. In addition, the demand for certain of the Company's services may be
adversely affected by the amendment or repeal, or reduction in enforcement of,
federal, state and foreign laws and regulations on which the Company's
businesses engaged in providing such services are dependent. Demand for certain
of the Company's services may also be adversely affected by delays or reductions
in funding, or failure of legislative bodies to fund, agencies or programs under
such laws and regulations. The Company makes a continuing effort to anticipate
regulatory, political and legal developments that might affect its operations
but is not always able to do so. The Company cannot predict the extent to which
any legislation or regulation that may be enacted, amended, repealed or
enforced, or any failure or delay in enactment or enforcement of legislation or
regulations or funding of government agencies or programs, in the future may
affect its operations.
The Company's business activities are subject to environmental regulation
under the same federal, state and local laws and regulations which apply to the
Company's customers, including the Clean Air Act, as amended, the Clean Water
Act, as amended, and the Resource Conservation and Recovery Act of 1976, as
amended ("RCRA"). The Company believes that it conducts its businesses in an
environmentally responsible manner and believes itself to be in material
compliance with applicable laws and regulations. The Company does not anticipate
that maintaining compliance with current requirements will result in any
material decrease in earnings. There can be no assurance, however, that such
requirements will not change so as to require significant additional
expenditures. In particular, within the next several years, the air pollution
control systems at certain trash-to-energy facilities owned or leased by the
Company most likely will be required to be modified to comply with more
stringent air pollution control standards adopted by the EPA in October 1995 for
municipal waste combusters. The compliance dates will vary by facility, but
subject to the final decision in certain litigation which could result in up to
an 18-month delay in the deadlines, all affected facilities most likely will be
required to be in compliance with the standards 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 $190 million to $230 million, 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. There can be no assurance, however,
that the Company would be able to recover, for each project, all such increased
costs from its customers. Moreover, it is possible that future developments,
such as increasingly strict requirements of environmental laws and enforcement
policies thereunder, could affect the manner in which the Company operates its
projects and conducts its business, including the handling, processing or
disposal of the wastes, by-products and residues generated thereby.
The EPA released a draft Dioxin Reassessment Report in 1994 which was
intended to update the Agency's scientific understanding of the sources of
dioxin emissions, the fate and transport of those emissions, and any potential
links between dioxin in environmental media and adverse human health effects.
The EPA has substantially revised its estimates of dioxin emissions downward
from 1990 to 1995. It is estimated by the EPA Office of Air Quality that the
trash-to-energy industry will be contributing approximately 24 grams of dioxins
per year by 2000 (less than 1 percent of overall dioxin emissions) due to a
strict dioxin emission limit adopted in December 1995. The Company does not
believe that the EPA's dioxin reassessment, or compliance with the new dioxin
emissions limit, will have a material adverse effect on the Company's operations
or financial condition.
In May 1994, the U.S. Supreme Court ruled that residual ash from the
combustion of municipal solid waste is not exempt from federal hazardous waste
regulations. The EPA and most states had previously taken the position that
residual ash was exempt from such regulation pursuant to the Clarification of
Household Waste Exclusion contained in RCRA. As a result of the Supreme Court's
decision, the EPA announced that ash from the combustion of municipal solid
waste is subject to regulation as a hazardous waste if, when characterized, it
exhibits hazardous characteristics. In response to these developments, the
Company installed its patented WES-PHix(R) technology at all of its trash-to-
energy facilities not previously subject to characterization requirements. In
January 1995, the EPA resolved a significant issue with respect to
characterization of such ash with its determination that ash is only required to
be characterized at the end of the trash-to-energy process in the majority of
such facilities. This determination by the EPA, coupled with the use of the WES-
PHix technology, has enabled the Company to continue to manage its residual ash
as non-hazardous waste. Incremental expenditures required to treat and test
residual ash at the impacted facilities, net of expected contractual
reimbursements from customers, have not had
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and are not expected to have a material adverse impact on the Company's
financial condition or results of operations.
Flow Control
Also 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 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 non-regulatory 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. For example, 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 solid waste
regulatory flow control system, which was held to be unconstitutional, but
stayed the injunction for as long as its ruling is on appeal plus an additional
period of two years to enable the State to devise an alternative
nondiscriminatory approach. The State has indicated that it will continue to
enforce flow control during the two-year transition period and has filed an
appeal of the Federal District Court's ruling. 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 incurred in reliance on
the state's franchise system. In addition, plaintiffs have asked the Third
Circuit Court of Appeals to shorten the stay period. A decision by the appeals
court is expected during the second quarter of 1997.
The Supreme Court's 1994 ruling and subsequent court decisions have not to
date had a material adverse effect on any of the Company's trash-to-energy
facilities. Federal legislation has been proposed, but not yet enacted, to
effectively grandfather existing flow control mandates. In the event that such
legislation is not adopted, the Company believes that affected municipalities
will endeavor to implement alternative lawful means to continue controlling 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 would be successful or
what impact, if any, this matter might have on its trash-to-energy facilities.
Public Utility Regulatory Policies Act
The Company's energy facilities are subject to the provisions of various
energy-related laws and regulations, including the Public Utility Regulatory
Policies Act of 1978 ("PURPA"). The ability of the Company's trash-to-energy and
small power production facilities to sell power to electric utilities on
advantageous terms and conditions and to avoid burdensome public utility
regulation has historically depended, in part, upon the applicability of certain
provisions of PURPA, which generally exempts the Company from state and federal
regulatory control over electricity prices charged by, and the finances of, the
Company and its energy producing subsidiaries. As the states and the United
States Congress have accelerated their consideration of the manner in which
economic efficiencies can be gained by deregulating the electric generation
industry, utilities and others have taken the position that power sales
agreements entered into pursuant to PURPA which provide for rates in excess of
current market rates should be voidable as "stranded assets." The Company's 25
power production facilities are qualifying facilities under PURPA and depend on
the sanctity of their power sales agreements for their economic viability.
Although a repeal or modification of PURPA is possible within the next two
years, the Company believes it unlikely that such action would retroactively
abrogate the long-term contracts and rate orders pursuant to which most of the
Company's existing projects sell electricity. Furthermore, the operations of the
Company's trash-to-energy and other small power production facilities business
are not expected to be materially and adversely affected if the various benefits
of PURPA are repealed or substantially reduced on a prospective basis. Finally,
the passage of the Energy Policy Act of 1992 created an alternative ownership
mechanism by which the Company's future independent power projects would be able
to participate in the electricity generation industry without the burdens of
traditional public utility regulation. Notwithstanding the above, however, the
Company can
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give no assurances that future utility restructurings, court decisions, or
legislative or administrative action in this area will not have a material
adverse impact upon the Company's financial position or results of operations.
Competition
The Company experiences substantial competition in all aspects of its
business. It competes with a number of firms, both nationally and
internationally, some of which may have substantially greater financial and
technical resources than the Company.
The principal competitive factors with respect to the Company's project
development activities include technological performance, service, technical
know-how, price and performance guarantees. Competing for selection as a project
developer may require commitment of substantial resources over a long period of
time, without any certainty of ultimately being selected. Competition for
attractive development opportunities is intense, as there are a number of
competitors in the trash-to-energy, independent power, and biosolids management
industries interested in such opportunities. The Company believes that its
comprehensive project development capabilities, operating experience and
financing capabilities will enable it to continue to compete effectively.
In its biosolids management business, the Company competes with several
large national and regional firms and numerous competitors which provide service
in local markets. In the biosolids market, the principal competitive factors are
price, availability of sites for temporary storage and beneficial reuse of
biosolids and technical experience. In the air pollution control business, the
Company competes with several large and small firms, both nationally and
internationally, depending on the type and size of project being performed. The
principal competitive factors in the air pollution control industry are price,
technological capabilities and service.
At the time of the 1990 merger between the Company and a subsidiary of WMX
which resulted in WMX's acquisition of a controlling interest in the Company
(the "1990 Merger"), the Company was granted an option to acquire an equity
interest in WMX's international waste services operations, now conducted through
WM International plc ("WM International"), a majority-owned subsidiary of WMX.
In connection with the acquisition of an equity interest in WM International in
1991, the Company agreed that it would not conduct waste management services
operations or engage in the operation and maintenance of water and wastewater
treatment facilities outside of North America, other than through its ownership
interest in WM International, until the later of (i) July 1, 2000 and (ii) the
date on which WMX ceases to beneficially own a majority of the outstanding
shares of common stock or a majority of all outstanding voting equity interests
of WM International.
Notwithstanding the foregoing, in 1995, the Company and WM International
entered into a joint venture agreement whereby the Company will have primary
responsibility for the early stage development of trash-to-energy projects
outside North America (except in Italy and Germany) and WM International will
have the right to acquire up to 49% of all equity of any such project available
to WM International, the Company and their affiliates, with the Company or other
investors owning the balance. Subject to some exceptions, the Company has
committed to expend $10 million in development costs during the initial term of
the joint venture, which expires on July 1, 2000. Thereafter, the joint venture
will continue indefinitely, subject to the right of either WM International or
the Company to terminate it by giving one year's written notice.
In connection with the initial public offering of ordinary shares of WM
International, the Company, WM International, Chemical Waste Management, Inc.
("CWM") and WMX entered into an International Business Opportunities Agreement
which incorporates certain previously existing agreements among certain of the
parties thereto made in connection with the 1990 Merger. The International
Business Opportunities Agreement was amended and restated in connection with the
organization of Rust International Inc. ("Rust"), to which the Company
transferred, among other things, its engineering, environmental consulting and
construction businesses in 1993 in exchange for an equity interest in Rust, and
Rust became a party thereto. Under the Amended and Restated International
Business Opportunities Agreement, the parties agreed that in order to minimize
the potential for conflicts of interest among various subsidiaries under the
common control of WMX, WMX has the right to direct business opportunities to the
WMX controlled subsidiary which, in the reasonable and good faith judgment of
WMX, has the most experience and expertise in the particular line of business
involved.
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Opportunities in North America relating to (i) the operation and maintenance
and, with respect to item (c) below, design, engineering and construction, of
(a) municipal trash-to-energy facilities, (b) water, wastewater and sewage
treatment facilities (excluding facilities designed to treat hazardous waste
streams), (c) chimneys and air pollution control equipment and facilities (which
allocation is worldwide), and (d) small power projects and independent power
generation facilities (except for landfill gas recovery facilities which are
covered under the Intellectual Property Licensing Agreement described under
"Patents, Trademarks, Licenses and Other Agreements"); and (ii) facilities which
treat or otherwise stabilize ash residues from trash-to-energy facilities, have
been allocated to the Company. The Agreement allocates certain business
opportunities, some of which were previously allocated to the Company, to Rust.
In connection with the Company's sale of its water process, manufacturing
and custom engineering business, WMX and the Company agreed with the purchaser
of such businesses not to engage in such businesses in the United States or any
other country in which the Company conducted such business at the time of sale
until 2001.
Research and Development
The Company undertakes research and development in numerous areas of its
operations, including energy generation, environmental control and the handling
and recovery of waste materials and waste gases. The Company's expenditures for
research and development for its continuing operations are not material to its
business. Significant technological benefits are also realized through the
Company's experience in operating its existing projects.
Patents, Trademarks, Licenses and Other Agreements
The Company owns or licenses a number of patents and patent applications or
other proprietary technology that are important to various aspects of its
business. While certain of such licenses or patented technology may be material
to the development of a given project, the Company believes that its overall
business depends primarily on such factors as project development capability,
engineering skill, and research and production techniques rather than on patent
protection. The Company owns several patents for a heavy metal stabilization
technology marketed worldwide as the WES-Phix Process. The Company uses this
process to stabilize ash residues from its trash-to-energy facilities, and also
licenses the process to other facilities. In 1997, the Company plans to market
the process to other industries for the stabilization of wastes such as foundry
sands, baghouse dusts, and contaminated soils.
Pursuant to a long-standing arrangement between the Company and von Roll
Ltd. ("von Roll"), the Company has an exclusive license in the United States and
Mexico to use certain combustion-grate technology owned by von Roll. The Company
uses this technology in its trash-to-energy projects. The license agreement runs
through December 31, 1998, subject to additional three-year-term renewals unless
either party gives 12 months written notice of termination to the other. Either
party to the license agreement may also terminate the contract upon one year's
written notice and payment of a termination fee. Neither party has provided a
termination notice.
The Company has an agreement (the "Boiler Purchase Agreement") with Babcock
& Wilcox Company ("B&W"), whereby B&W has agreed to provide, and the Company has
agreed to purchase, certain boilers suitable for use in the Company's trash-to-
energy facilities having a combustion capacity equal to or greater than 250
tons-per-day. In addition, B&W agrees to maintain the confidentiality of the
Company's proprietary information incorporated in the boiler design, and not to
use such information except for the purpose of manufacturing boilers for sale to
the Company or its affiliates. The confidentiality provisions will survive the
termination of the Boiler Purchase Agreement. The Boiler Purchase Agreement will
remain in effect until June 30, 1997, subject to additional three-year-term
renewals.
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The Company possesses foreign and domestic patents on various biosolids
treatment processes. In August 1994, the Company entered into a Know-How and
Patent License Agreement with SC Technology AG of Switzerland pursuant to which
the Company obtained certain exclusive patent and proprietary rights in the
United States with respect to Swiss Combi dryer technology applicable to the
drying and pelletizing of non-hazardous biosolids. The agreement has a five-year
term with certain renewal rights. The Swiss Combi technology has been
incorporated into the Baltimore, Maryland dryer and pelletizer facility which is
now under construction. In addition, the Company holds several patents relating
to the processing of biosolids through a direct biosolids dryer system.
The Company is a party to a Land Option Agreement, as amended (the "Land
Option Agreement"), with Waste Management, Inc. ("Waste Management"), a wholly-
owned subsidiary of WMX, providing the Company until December 31, 2020 with the
right, subject to certain restrictions, to acquire or lease sites for future
trash-to-energy, biosolids management, organic waste composting or, subject to
certain pre-conditions, medical waste incineration and autoclave facilities at
any of Waste Management's existing or future landfills in the United States and
Canada. Under the Land Option Agreement, Waste Management is obligated to pay
the Company, at the end of the stated term of the agreement, an amount in cash
equal to the Company's book value (less related deferred taxes) for such portion
of the option as has not been allocated to acquired or leased parcels. In
addition, the Company is a party to an Airspace Dedication Agreement, as
amended, with Waste Management permitting the Company, for a period ending
August 12, 2008, and subject to certain conditions and restrictions, to reserve
capacity at Waste Management landfills for the disposal of certain wastes for
fees generally on terms at least as favorable as those charged to other
customers, and granting disposal credits to be credited against future disposal
fees.
In connection with the 1990 Merger, the predecessor of WM International,
Waste Management International, Inc. ("WMII"), and Waste Management entered into
an Intellectual Property Licensing Agreement with the Company. WM International
has succeeded to the rights and obligations of WMII under the Intellectual
Property Licensing Agreement as well as certain other agreements to which the
Company and WMII were parties. Pursuant to the Intellectual Property Licensing
Agreement: (i) WM International granted the Company a 10-year, non-exclusive,
royalty-free license, with two successive 5-year renewal options, to the "BRINI"
recycling and composting technology owned by WM International; (ii) Waste
Management granted the Company a 10-year, non-exclusive, royalty-free license,
with two successive 5-year renewal options, to the Recycle America(R) and
Recycle Canada(R) trademarks and logos and the related materials separation and
processing technology of Waste Management for use in conjunction with recycling
operations at or adjacent to any Company facility; (iii) Waste Management agreed
to use reasonable efforts to enable the Company to sell recyclable materials to
joint ventures or other markets developed by Waste Management; (iv) Waste
Management agreed, to the extent consistent with its business plans, to use good
faith efforts to develop its curbside recycling programs and free-standing
recyclable materials recovery facilities to also support Company facilities; (v)
the Company agreed to designate Waste Management as the provider of recyclable
collection services for Company facilities to the extent possible, before
offering such opportunity to any third party; (vi) Waste Management granted the
Company a 10-year, non-exclusive, royalty-free license, with two successive 5-
year renewal options, to all of Waste Management's proprietary technology and
know-how in the area of landfill gas recovery and the conversion of such gas to
energy (such license does not extend to the use by the Company of technology and
know-how at sanitary landfill sites owned, operated or maintained by Waste
Management or its subsidiaries and affiliates, other than the Company and its
subsidiaries); and (vii) Waste Management agreed that only the Company, and not
Waste Management, may develop the business of designing, constructing, operating
and maintaining landfill gas recovery facilities for governmental, industrial
and third party customers. To the extent the Company develops landfill gas
recovery technology and know-how during the period of its license (and renewals)
from Waste Management, it will share such technology and know-how with Waste
Management on a similar royalty-free basis. The Company may waive its rights to
develop landfill gas recovery systems on a case-by-case basis in those
situations in which financial objectives specified by the Company's Board of
Directors cannot be achieved by the Company through development of such
projects. Projects waived by the Company may be developed by Waste Management.
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The licenses and related rights and obligations to conduct business granted
under the Intellectual Property Licensing Agreement terminate, as to facilities
not already operational, contractually committed or the subject of, or
contemplated by, a bid or other submission previously made by the Company or
Waste Management, as the case may be, at the earlier of the termination of the
stated license periods, the expiration of any patent licensed under the
agreement, or the date on which the Company is no longer a majority-owned
subsidiary of WMX.
The Company, WMX, CWM, Rust and WM International are also parties to a
First Amended and Restated Master License Agreement. Under the Master License
Agreement, as amended, each of the Company, WMX, Rust and CWM, on the one hand,
and WM International, on the other, is granted the right to license, on a non-
exclusive basis, certain proprietary rights of the other. The consideration for
any such license will be based upon the fair market value of a license for the
licensed technology at the time of grant, but may not exceed the most favorable
price charged an unaffiliated licensee for a comparable license.
Raw Materials
Raw materials used by the Company, including fuel for its projects (such as
trash, waste wood, waste tires, waste coal and natural gas), are generally
readily available from many different suppliers. The majority of the solid waste
disposed at the Company's energy projects is commonly obtained through long-term
supply contracts with solid waste disposal authorities and municipalities under
which minimum disposal fees are fixed and which generally provide for escalation
in accordance with various price indexes.
Employees
The Company has approximately 2,100 full-time employees in its continuing
operations. The Company considers relations with its employees to be
satisfactory.
Financing Capabilities and Funding Support Agreements
One of the most significant costs associated with the Company's own-and-
operate projects may be debt service or lease rentals payable in connection with
financing for the projects. Financing structures vary substantially from
transaction to transaction. The amount of annual financing cost is directly
related to the capital cost of the facility, which may vary greatly from plant
to plant, even with regard to similarly sized plants, due to a number of
factors. These include the type of technology utilized, the amount of site
preparation required and, where applicable, the form of energy generated and the
proximity to the energy delivery point.
Financing Capabilities
Each trash-to-energy, cogeneration and biosolids pelletizer project
developed by the Company requires substantial amounts of capital that generally
range from $30 million to $400 million. Historically, such capital requirements
have been financed through the issuance of project debt and the investment of
Company funds and third party equity. The debt has primarily consisted of long-
term tax-exempt or taxable bonds secured by a pledge of project revenues and
assets, with certain additional security being provided, in some cases, directly
or indirectly, by the Company, WMX or another project support entity. The
Company has also used partnership, joint venture and sale and leaseback
structures to bring third party equity into its project financings. The Company
expects to finance its working capital requirements with its available cash. To
the extent required, the Company has additional cash available to it pursuant to
the Restated Funding Agreement described below or through the working capital
program established between the Company and WMX described below under "Master
Intercorporate Agreement." Certain agreements with respect to the Company's
financing capabilities and funding support are described below.
8
<PAGE>
Restated Funding Agreement
Pursuant to a Restated Funding Agreement between WMX and the Company, WMX
agreed to use reasonable efforts to assist the Company, at the Company's
request, in obtaining and maintaining a credit rating of "A" or better from
Standard & Poor's Corporation or Moody's Investors Service for the Company's
long-term unsecured debt securities. WMX's obligations under the Restated
Funding Agreement, which terminate on August 12, 2008, may involve anything from
contingent credit support obligations to and including WMX's purchase from the
Company of up to $200 million principal amount of Company securities, which may
be either debt, equity or a combination thereof (the "Securities"). WMX's
obligations will be deemed satisfied by the purchase of such Securities, even if
the purchase of all of the Securities does not enable the Company to obtain an
"A" rating. In addition, the obligation to purchase any of the Securities will
be suspended if the Company does not reasonably demonstrate its ability to pay
interest or cash dividends, as the case may be, on the Securities. WMX's
obligations will also be suspended during any period in which the Company
obtains and maintains an "A" rating and will be reduced to the extent that the
purchase of a lesser amount of Securities will allow the Company to obtain or
maintain such a rating. Any Securities issued to WMX will be subject to
mandatory repayment or redemption in equal annual installments during the 25
years following their date of issuance, and they may be prepaid or redeemed by
the Company, at its option, if the directors of the Company not affiliated with
WMX or the Company conclude that such repayment or redemption is in the best
interests of the Company and its stockholders. Any Securities redeemed or
prepaid prior to August 12, 2008 will restore availability under the $200
million purchase obligation referred to above.
Master Support Agreement
Under a Master Support Agreement between Resco Holdings Inc. ("Resco"), a
wholly-owned subsidiary of the Company, and AlliedSignal Inc. ("AlliedSignal"),
Resco is required to reimburse AlliedSignal for any credit support payments
AlliedSignal is required to make under various credit support agreements with
respect to trash-to-energy projects of Resco. In addition, Resco is required to
maintain its Consolidated Tangible Net Worth (as defined in the Master Support
Agreement) at an amount equal to $549.8 million, which amount is automatically
increased (but not decreased) to 90% of Resco's Consolidated Tangible Net Worth
at the end of each quarter. As of December 31, 1996, Resco was in compliance
with this provision. Resco is prohibited from paying cash dividends or acquiring
any shares of its capital stock if its Consolidated Tangible Net Worth is, or
would as a consequence of such payment or acquisition be, less than the required
amount. The Master Support Agreement also restricts the ability of Resco to
subject its property or the properties of its subsidiaries to liens securing
indebtedness for money borrowed or similar indebtedness and may require Resco,
under certain circumstances, to refinance indebtedness of trash-to-energy
projects for which AlliedSignal's credit support is provided. AlliedSignal is
providing credit support in respect of one of the Company's trash-to-energy
facilities pursuant to the Master Support Agreement, which support represents a
potential exposure to Allied Signal of less than $1.8 million.
Master Intercorporate Agreement
In connection with the 1990 Merger, the Company, WMX and CWM entered into a
Master Intercorporate Agreement. Among other things, the Company and WMX agreed
to implement a cash management and working capital program under the agreement.
The agreement was amended and restated in 1993 to modify certain aspects of the
cash management program established thereunder and again in 1995 to extend the
term of the $100 million funding commitment, as described below. Subject to
certain restrictions specified in the agreement, WMX agreed to fund the
Company's working capital requirements at rates equal to or lower than those the
Company would otherwise be able to obtain on the open market. The Company may
borrow up to $100 million from WMX through December 1997, with automatic annual
renewal periods thereafter, pursuant to the Master Intercorporate Agreement,
plus the amount of cash invested by the Company with WMX. The remaining
obligations of WMX under the Master Intercorporate Agreement will terminate at
the time that both (i) WMX does not own a majority of the capital stock of the
Company and (ii) WMX does not exercise, prior to its expiration, the option to
maintain majority ownership of the capital stock of the Company (as provided in
the Master Intercorporate Agreement).
9
<PAGE>
Acquisitions and Dispositions
During 1996, the Company acquired a 42 megawatt, gas-fired cogeneration
facility in Anderson, California and an 18 megawatt wood waste cogeneration
facility in Martell, California. The consideration paid in these transactions
was determined by direct negotiations with the owners of the acquired
businesses. These acquisitions were not material to the Company's business as a
whole.
During 1996, the Company also acquired a 20% interest in Glegg Industries,
Inc., a privately-held ultrapure water company ("Glegg"). In conjunction with
divestiture of the water business described below, Glegg's majority owners
acquired the right to repurchase Wheelabrator's interest before March 31, 1999,
at the Company's original purchase price.
On December 2, 1996, the Company completed the disposition to United States
Filter Corporation ("U.S. Filter") of its industrial water process,
manufacturing and custom-engineered systems businesses for $369.6 million in
cash. Ten million dollars of the purchase price has been placed in escrow which
will be released to the Company upon the receipt of certain approvals with
respect to the transfer to U.S. Filter of a carbon reactivation facility which
constituted a portion of the purchased assets. In conjunction with the sale, the
parties also entered into a Business Development Agreement which provides that
U.S. Filter will promote to its customers various of the Company's businesses in
consideration of which the Company has agreed to pay to U.S. Filter an aggregate
of $25 million over five years. The businesses that were sold provide a broad
range of water and wastewater engineering, technology and systems, including the
businesses located in the United States, The Netherlands, Singapore, Taiwan,
Australia, England, France, Japan, Germany and Spain.
On February 20, 1997, the Company and U.S. Filter entered into a definitive
agreement pursuant to which U.S. Filter agreed to purchase the Company's water
privatization, industrial outsourcing and contract operations business. The
purchase price is $77.4 million plus the aggregate amount of payments made to
U.S. Filter under certain existing subcontracts between the Company and U.S.
Filter. The purchase price is payable in the stock of U.S. Filter. The Company
has agreed not to sell the stock prior to June 30, 1997. The Company anticipates
liquidating such stock subsequent to that time. The Company and U.S. Filter have
also entered into a Business Development Agreement which provides that U.S.
Filter will promote to its customers various of the Company's businesses in
consideration of which the Company has agreed to pay to U.S. Filter an aggregate
of $5 million over three years. It is anticipated that this transaction will
close in the second quarter of 1997. However, the closing of this transaction is
conditioned upon numerous events and the Company can give no assurances that the
conditions precedent will be met or met by such time.
Equity Investments
Rust International Inc.
The Company owns approximately 40% of the outstanding common stock of Rust,
and the remaining shares are held by CWM (56%) and WMX (4%). Rust, through its
subsidiaries, provides environmental and infrastructure engineering and
consulting services and on-site industrial services. Rust also has an
approximately 41% interest in NSC Corporation, a publicly traded provider of
asbestos abatement and other specialty contracting services and an approximately
37% interest in OHM Corporation, a publicly traded provider of environmental
remediation services. It has been announced that it is the intention of Rust to
sell its domestic and international environmental and infrastructure engineering
and consulting businesses. In June 1996, Rust sold its process engineering and
construction business to Raytheon Engineering, Inc.; in September 1996, Rust
sold its scaffolding services business to Brand Scaffold Services, Inc. for
approximately $190 million and during 1996 and early 1997, Rust sold various
industrial service businesses.
Rust's environmental and infrastructure engineering and consulting services
provide alternative solutions for client problems relating to removing and
disposing of hazardous and toxic substances; managing solid waste, water and
wastewater, groundwater and air resources; design and construction oversight of
transportation facilities; and photogrammetry. Such services are provided to
private industry, as well as federal, state and local governments, including the
Department of Defense (the "DoD") and the Department of Energy (the "DOE"). The
services include performing remedial investigations for the purpose of
characterizing hazardous waste sites,
10
<PAGE>
preparing feasibility studies setting forth recommended alternative remedial
actions, and providing engineering design and construction oversight services
for remediation projects. The services provided also include the siting,
permitting, design and construction oversight of solid and hazardous waste
landfills and related facilities. Study, design and construction oversight
services are also provided, primarily to municipalities, special government
agencies and, to some extent, private industry in connection with wastewater
collection and treatment, potable water supply treatment and distribution,
stormwater management and the building of streets, highways, airports, bridges,
waterways and rail services. Rust also provides architectural services in
connection with these and other activities. Additional services provided through
Rust include environmental assessment services, the design of systems to
properly and safely store, convey, treat and dispose of industrial, hazardous
and radioactive materials and consulting services regarding disposal, waste
minimization methods and techniques, air quality regulation and industrial
hygiene and safety.
Rust also has an international environmental and infrastructure engineering
and consulting, process engineering and construction and related services
business performing projects in various countries. In Europe, Rust has offices
in the United Kingdom, Germany, Sweden and Turkey, and in the Asia-Pacific
region, in Australia, Hong Kong, China, Singapore, Malaysia and Indonesia. In
the Middle East and Africa, Rust also has offices in the United Arab Emirates,
Saudi Arabia and South Africa. Rust's overseas operations provide such services
to the World Bank and associated lending agencies, national, regional and local
governments and to clients in the utility and industrial power and general
manufacturing industries. In addition, Rust provides such services to WM
International worldwide.
Rust Industrial Services Inc., a subsidiary of Rust ("RIS"), performs a
variety of types of industrial services -- water blasting, tank cleaning,
explosives blasting, chemical cleaning, industrial vacuuming, catalyst handling,
and separation technologies -- primarily for clients in the petrochemical,
chemical, and pulp and paper industries, utilities and, to a lesser extent, the
public sector. RIS assists clients in the nuclear and utility industries in
solving electrical, mechanical, engineering and related technical services
problems.
Rust also provides hazardous, radioactive and mixed waste program and
facilities management services primarily to the United States Department of
Energy and other federal government agencies. Such services include waste
treatment, storage, characterization and disposal and privatization services.
Waste Management International plc
The Company owns approximately 12% of the outstanding ordinary shares of WM
International. Approximately 56% of WM International's outstanding ordinary
shares are held indirectly by WMX, and an additional 12% of such shares are held
by Rust. The remaining outstanding ordinary shares of WM International are held
by public stockholders.
WM International's business may broadly be characterized into two areas of
activity, collection services and treatment and disposal services. The following
table shows the derivation of WM International's revenues for the years
indicated and includes revenue from construction of treatment or disposal
facilities for third parties under "Treatment and Disposal Services":
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Collection Services.............. 64% 64% 65%
Treatment and Disposal Services.. 36% 36% 35%
</TABLE>
The bulk of WM International's operations and revenues are derived from the
acquisition from 1990 to 1995 of numerous companies and interests in Europe.
However, with its acquisition goals largely completed, WM International has
engaged in only a few additional small acquisitions since 1995 and has begun to
dispose of certain operations which do not fit its long-term strategy.
11
<PAGE>
In accordance with its objective of maintaining a local identity, WM
International, in certain cases, also operates through other companies or joint
ventures in which WM International and its affiliates own less than a 100%
interest. For example, through a joint venture with Wessex Water Plc, an English
publicly traded company providing water treatment, water distribution,
wastewater treatment and sewerage services ("Wessex"), WM International provides
waste management and related services in the United Kingdom.
WM International's revenue mix by country varies from year to year.
Countries in which revenue exceeded 10% of WM International's consolidated total
were: Italy (26%) and Germany (12%) in 1994, Italy (23%), Germany (14%), The
Netherlands (11%) and The United Kingdom (11%) in 1995 and Italy (25%), the
United Kingdom (12%), Germany (11%) and The Netherlands (11%) in 1996.
While WM International has considerable experience in mobilizing for and
managing foreign projects, its operations continue to be subject generally to
such risks as currency fluctuations and exchange controls, the need to recruit
and retain suitable local labor forces and to control and coordinate operations
in different jurisdictions, changes in foreign laws or governmental policies or
attitudes concerning their enforcement, political changes, local economic
conditions and international tensions. In addition, price adjustment provisions
based on certain formulae or indices may not accurately reflect the actual
impact of inflation on the cost of performance.
WM International records and reports its earnings in pounds sterling.
Currency fluctuations affecting the pounds sterling exchange rates will cause
the Company's earnings from WM International to fluctuate. The Company may from
time to time engage in hedging transactions in order to seek to mitigate the
effect of such exchange rate fluctuations.
Following a strategic assessment of the European markets, WM International
intends to reduce its investment in France, Spain and Austria during 1997
through joint ventures or the sale of various operations within those countries.
WM International intends to focus its resources on those markets in which it
believes it can attain significant market share. WM International has also
written off the investment in its hazardous waste disposal facility in Germany
because recent regulatory changes have adversely affected its volumes. In
addition, WM International has divested itself of the 20% interest it held in
Wessex.
Collection Services
Collection services include collection and transportation of solid,
hazardous and medical wastes and recyclable material from residential,
commercial and industrial customers. WM International provided collection
services as of December 31, 1996 to governmental and private customers in ten
European countries, Argentina, Australia and New Zealand. Business is obtained
through public bids or tenders, negotiated contracts, and, in the case of
commercial and industrial customers, direct contracts. WM International operates
318 collection and staging facilities and 76 waste transfer facilities.
Residential solid waste collection is normally performed by WM International
pursuant to municipal contracts. WM International has approximately 1,420
municipal contracts, serving more than 6.3 million residential properties. The
scope, specifications, services provided and duration of such contracts vary
substantially, with some contracts encompassing landfill disposal of collected
waste, street-sweeping and other related municipal services. The largest number
of municipal contracts held by WM International is in Italy where WM
International services approximately 1,85 million residential properties.
Pricing for municipal contracts is generally based on volume of waste, number
and frequency of collection pick-up, and disposal arrangements. Longer-term
contracts typically have formulae for periodic price increases or adjustments.
WM International also provides curbside recycling services.
Street, industrial premises, office and parking lot cleaning services are
also performed by WM International, along with portable sanitation/toilet
services for such occasions as outdoor concerts and special events.
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<PAGE>
WM International's commercial and industrial solid and hazardous waste
collection services are generally contracted for by individual establishments.
In addition to solid waste collection customers, WM International provides
services to small quantity waste generators, as well as larger petrochemical,
pharmaceutical and other industrial customers, including collection of
hazardous, chemical or medical wastes or residues. WM International has
approximately 300,000 commercial and industrial customers. Contract terms and
prices vary substantially between jurisdictions and types of customer. WM
International also provides commercial and industrial recycling services.
Treatment and Disposal Services
Treatment and disposal services include processing of recyclable materials,
operation of both solid and hazardous waste landfills, operation of municipal
and hazardous waste incinerators, operation of a trash-to-energy facility,
operation of water and wastewater treatment facilities, operation of hazardous
waste treatment facilities and construction of treatment or disposal facilities
for third parties. Treatment and disposal services are provided under contracts
which may be obtained through public bid or tender or direct negotiation, and
are also provided directly to other waste service companies. At December 31,
1996, WM International owned, operated or maintained 26 waste treatment
facilities, 85 recycling and recyclables processing facilities, 8 incinerators
and 56 landfills.
Once collected, solid wastes may be processed in a recyclables processing
facility for sale or other disposition for use in various applications.
Unprocessed solid wastes, or the portion of the waste stream remaining after
recovery of recyclable materials, require disposal, which may be accomplished
through incineration (in connection with which the energy value may be recovered
in a trash-to-energy facility) or through disposal in a solid waste landfill.
The relative use of landfills versus incinerators differs from country to
country and will depend on many factors, including the availability of land,
geological and hydrological conditions, the availability and cost of technology
and capital, and the regulatory environment. The main determinants of disposal
method are the disposal costs at local landfills, as incineration is generally
more expensive, community preference and regulatory provisions.
At present, in most countries in which WM International operates,
landfilling is the predominant disposal method employed. WM International owns
or operates solid waste landfills in Argentina, Australia, Brazil, Denmark,
France, Germany, Hong Kong, Italy, New Zealand, Spain, Sweden and the United
Kingdom. Landfill disposal agreements may be separate contracts or an integrated
portion of collection or treatment contracts.
Demand for solid waste incineration is affected by landfill disposal costs
and government regulations. The incineration process for non-hazardous solid
waste has also been influenced by two significant factors in recent years: (i)
increasingly strict control over air emissions from incinerators; and (ii)
increasing emphasis on trash-to-energy incinerators, which utilize heat produced
by incinerators to generate electricity and other energy. Incineration generates
approximately 30% residue (by weight), which is either landfilled or, if
permitted, recycled for use as a road base or in other construction uses.
WM International's trash-to-energy incinerator in Hamm is a German-designed
plant and the only privately operated trash-to-energy facility in Germany. It is
among the first trash-to-energy facilities to fully comply with that country's
stringent air pollution requirements. The facility serves the household and
commercial solid waste incineration needs of a population of approximately
600,000 in Hamm and nearby towns. Under its current permits, the facility is
able to produce 18 megawatts per hour of steam-generated electricity and sold
approximately 49,000 megawatt hours to the local power grid in 1996.
In 1992, WM International entered into a contract with the County of
Gutersloh, Germany to design, construct, own and operate a trash-to-energy
facility. The facility is designed to convert 268,000 metric tons per year of
municipal waste and sewage sludge into energy. During 1995, WM International's
permit application to develop and operate the Gutersloh facility was denied. WM
International believes it is entitled to the permit and is appealing the denial.
During 1996, WM International and the County discussed the viability of the
project, as well as the County's ability to terminate the operations and lease
agreements for the project site, which WM
13
<PAGE>
International opposes unless there is adequate compensation. WM International
also operates seven small conventional municipal solid and other waste
incineration facilities. WM International and the Company have also formed a
joint venture to develop trash-to-energy projects outside Germany, Italy and
North America.
WM International owns or operates hazardous waste treatment facilities in
Finland, France, Germany, Hong Kong, Indonesia, Italy, The Netherlands, Spain,
Sweden and the United Kingdom and has entered into agreements with respect to
the development of hazardous waste treatment facilities in Argentina and
Thailand.
WM International operates facilities in Hong Kong which are owned by the
Hong Kong government. Control of the Hong Kong government passes to The People's
Republic of China in 1997. WM International is unable to predict what impact, if
any, this change will have on its operation in Hong Kong.
Executive Officers of the Registrant
Set forth below are the names and ages of the Company's executive officers
(as defined by the regulations of the Securities and Exchange Commission), the
principal positions they hold with the Company and with WMX and its affiliates
as of March 1, 1997, and summaries of their business experience. Experience
shown with the Company includes experience with a predecessor of the Company
prior to the August 1989 merger of such predecessor into Resco. Executive
officers are elected by the Board of Directors and serve at the discretion of
the Board. Dean L. Buntrock, the Company's Chairman, is also an executive
officer of WMX and certain of its affiliates other than the Company and devotes
a majority of his working time to his responsibilities in such other capacities.
However, the Company anticipates that he will devote sufficient time and
attention to the Company's business as reasonably may be required to fulfill the
duties of his office.
<TABLE>
<CAPTION>
Name and Title Age Business Experience
- -------------- --- -------------------
<S> <C> <C>
Dean L. Buntrock,............ 65 A director since 1988 and Chairman of the Board since March 1997.
Chairman of the Board Director and Chairman of the Board of WMX since 1968 and Chief
Executive Officer of WMX from 1968 until June 1996 and from
February 1997 to the present. Mr. Buntrock is also a director of
Boston Chicken, Inc. and WM International.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
John M. Kehoe, Jr................... 63 A director of the Company since May 1996. Appointed Chief
President and Chief Executive Executive Officer in January 1997. President and Chief Operating
Officer Officer of the Company since January 1993. Vice President of the
Company from December 1991 through December 1992. President of
Wheelabrator Environmental Systems Inc. ("WESI"), a subsidiary of
the Company, from November 1990. Managing Director of the Company
from June 1988 to November 1990.
Robert J. Gagalis................... 42 Vice President, Chief Financial Officer and Treasurer since
Vice President, Chief Financial January 1997. Vice President Finance in the Energy Line of
Officer and Treasurer Business from March 1996 to January 1997 and Staff Vice
President, Corporate Development from August 1994 to March 1996.
Director of Corporate Development from August 1993 to August
1994. Vice President and Chief Financial Officer of Signal
Capital Corporation for 1986 to 1993.
Richard S. Haak, Jr................. 42 Controller of the Company since November 1993 and a Vice
Controller President since March 1997. Vice President and
Controller-Operations of WESI from September 1987 until November
1993.
Lawrence W. Plitch 46 Vice President and General Counsel since January 1997. Vice
Vice President and General Counsel President and General Counsel of WESI from 1994 to 1997. Vice
President and Deputy General Counsel of WESI from 1992 to 1994
and Assistant General Counsel of WESI from 1986 to 1992.
</TABLE>
Item 2 -- Properties
The Company owns the building and surrounding grounds comprising its
principal executive offices, located at 4 Liberty Lane West, Hampton, New
Hampshire 03842. The Company believes that its property and equipment are
generally well maintained, in good operating condition and adequate for its
present needs. The inability to renew any short-term real property lease by the
Company or any of its subsidiaries would not have a material adverse effect on
its results of operations. The Company regularly upgrades and modernizes
facilities and equipment and expands its facilities as necessary.
The following tables set forth the Company's principal facility locations
in operation and their use (including those operated by the Company for others
under long-term contracts or similar arrangements) as of December 31, 1996.
Description of Owned, Leased and/or Long-Term Operated Projects
Set forth below is a description of projects in operation or under
construction which are owned, leased or operated under long-term operating
agreements by Company subsidiaries, partnerships or joint ventures controlled by
Company subsidiaries. Unless indicated to the contrary below, each project is
owned by subsidiaries or affiliates of the Company. While the Company
exercises, or will exercise, operating control over each such project, the
Company has no ownership interest in certain of the projects.
15
<PAGE>
Projects in Operation
<TABLE>
<CAPTION>
Design Design
Project Output Capacity Comments
------- ------ -------- --------
<S> <C> <C> <C>
1. Amarillo, Texas............... N/A 3,500,000 Owned and operated since 1976 by the
Coal Handling Facility TPY Company and its predecessors.
2. Anderson, California.......... 42mW N/A Owned and operated by the Company since
Gas fired Cogeneration
Facility
3. Anderson, California.......... 6mW 210 TPD Owned and operated by the Company since
Wood Waste Cogeneration mid-1993.
Facility
4. Baltimore, Maryland........... 60mW 2,250 TPD Owned and operated by the Company from 1985
Trash-to-Energy Facility to 1988. Operated by the Company since 1988
Owner: Ford Motor Credit under a long-term lease expiring in 2007,
Company ("Ford Credit") with certain renewal and purchase options.
5. Baltimore, Maryland........... N/A 110 DTPD Owned and operated by the Company since
Biosolids Dryer and January 1995.
Pelletizer (Back River
Project)
6. Bridgeport, Connecticut....... 70mW 2,250 TPD Operated since 1988 by the Company under a
Trash-to-Energy Facility long-term lease expiring in 2009, with
Owner: Ford Credit certain renewal and purchase options.
7. Broward County, Florida....... 70mW 2,250 TPD Owned and operated by the Company since
South Site mid-1991.
Trash-to-Energy Facility
8. Broward County, Florida....... 70mW 2,250 TPD Owned and operated by the Company since
North Site early 1992.
Trash-to-Energy Facility
9. Claremont, New Hampshire...... 5mW 200 TPD Owned and operated by the Company since 1987.
Trash-to-Energy Facility
10. Concord, New Hampshire........ 14mW 575 TPD Owned and operated by the Company since 1989.
Trash-to-Energy Facility
11. Earth, Texas.................. N/A 3,500,000 Owned and operated since 1982 by the Company
Coal Handling Facility TPY and its predecessors.
12. Falls Township, Pennsylvania.. 53mW 1,500 TPD Owned and operated by the Company since
Trash-Energy Facility August 1994.
13. Frackville, Pennsylvania...... 47mW 1,700 TPD Owned and operated by the Company since 1989.
Anthracite Culm
Cogeneration Facility
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C>
14. Franklin, Ohio............... N/A 4.5 MGD Owned and operated by the Company since July
MCD Franklin Wastewater 1995 under a long-term contract expiring in
Treatment Plant 2015, with certain renewal options. This
property is a part of the discontinued
operations to be divested to U.S. Filter.
15. Hagerstown, Maryland......... N/A 16 DTPD Operated by the Company since late 1992
Biosolids Dryer and under a lease expiring in 1998, with a
Pelletizer renewal option.
Owner: Hagerstown,
Maryland
16. Gloucester County, New Jersey 14mW 575 TPD Owned and operated by the Company since 1990.
Trash-to-Energy Facility
17. Lisbon, Connecticut.......... 13mW 500 TPD Operated since January 1996 by the Company
Trash-to-Energy Facility under a long-term contract expiring in 2020.
Owner: Eastern Connecticut
Resource Recovery Authority
18. Martell, California.......... 18mW 800 DTPD Operated by the Company since February 1996.
Wood Waste Cogeneration Owned and operated by the Company since May
Facility 1996.
19. Millbury, Massachusetts...... 45mW 1,500 TPD Operated by the Company since 1987 under a
Trash-to-Energy Facility long-term lease expiring in 2007, with
Owner: Ford Credit certain renewal and purchase options.
20. New York, New York........... N/A 300 DTPD Owned and operated by the Company since
Biosolids Dryer and mid-1993.
Pelletizer
21. North Andover, Massachusetts. 40mW 1,500 TPD Owned and operated by the Company since 1985.
Trash-to-Energy Facility
22. Norwalk, California.......... 28mW N/A Operated by the Company since 1988 under a
Gas Cogeneration Facility lease expiring in 2008, with an option to
Owner: Signal Capital buy, subject to prior rights of the State of
Corporation California to purchase the lease and the
facility after 2003.
23. Pinellas County, Florida..... 5mW 3,000 TPD Operated by the Company since 1983 under a
Trash-to-Energy Facility long-term contract expiring in 2003.
Owner: Pinellas County,
Florida
24. Polk County, Florida......... 40mW 1,000 TPD Owned and operated since August 1995 by a
Urban Wood Waste-to-Energy partnership in which the Company owns an 81%
Facility interest.
25. Saugus, Massachusetts........ 40mW 1,500 TPD Operated by the Company since 1975;
Trash-to-Energy Facility wholly-owned by the Company since 1987.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
26. Shasta County, California 49mW 2,400 TPD Operated by the Company since 1988 under a
Wood Waste Small Power long-term lease expiring in 2007, with
Production Facility renewal and purchase options.
Owner: Ford Credit
27. Sherman Station, Maine.. 18mW 800 TPD Operated by a partnership in which the
Wood Waste Cogeneration Company has a 60% interest since 1986.
Facility Leased by the Company under a long-term
Owner: Chrysler Financial contract expiring in 2006, with renewal and
Corporation purchase options.
28. Spokane, Washington..... 26mW 800 TPD Operated by the Company since late 1991
Trash-to-Energy Facility under a long-term contract expiring in 2011.
Owner: City of Spokane,
Washington
29. Tampa, Florida.......... 20mW 1,000 TPD Operated by the Company since 1988 under a
Trash-to-Energy Facility long-term contract expiring in 2005.
Owner: City of Tampa,
Florida
30. Westchester County,..... 60mW 2,250 TPD Owned and operated since 1984 by Westchester
New York Resco Company L.P. ("Westchester Resco") (1)
Trash-to-Energy Facility
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Westchester Resco is a limited partnership, 75% held by the Company,
and 25% held indirectly by John Hancock Mutual Life Insurance Co. as a
limited partner.
Project Under Construction
<TABLE>
<CAPTION>
Design Design
Project Output Capacity Comments
------- ------ -------- --------
<S> <C> <C> <C>
Baltimore, Maryland N/A 110 DTPD Owned by the Company. Construction
Biosolids Dryer and Pelletizer expected to be completed in mid-1997.
(Patapsco Project)
KEY: mW--Megawatts DTPD--Dry Tons Per Day TPD--Tons Per Day TPY--Tons Per Year
MGD--Millions of Gallons Per Day
</TABLE>
18
<PAGE>
Non-Project Facilities
Set forth below is a list of all of the primary non-project facilities
owned by the Company as of December 31, 1996, and each of the principal plants
and offices leased by the Company as of that date. Such list does not purport to
be a complete list of all of the Company's leased properties.
<TABLE>
<CAPTION>
Location Site Use Nature of Interest
- -------- -------- ------------------
<S> <C> <C>
Annapolis, Maryland Offices Lease
Hampton, New Hampshire Offices Own
Pittsburgh, Pennsylvania Offices Lease
</TABLE>
Item 3 -- Legal Proceedings
The business in which the Company is engaged is intrinsically connected
with the protection of the environment and involves the potential 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. From time to
time the Company pays fines or penalties in proceedings relating to the
Company's compliance with various environmental laws and regulations. At
December 31, 1996, the Company was not involved in any proceedings where it is
believed that sanctions involved may exceed $100,000.
In addition, there are other routine lawsuits and claims pending against
the Company and its subsidiaries incidental to their businesses. In the opinion
of the Company's management, the ultimate liability, if any, with respect to the
above proceedings and such other lawsuits and claims will not have a material
adverse effect on the business and properties of the Company, taken as a whole,
or its financial position or results of operations.
Item 4 -- Submission of Matters to a Vote of Security Holders
No matters were submitted to the Company's security holders during the
fourth quarter of 1996.
PART II
Item 5 -- Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock is traded on The New York Stock Exchange under the symbol
"WTI." The table below sets forth by quarter, for the last two years, the high
and low sales prices of the Common Stock on The New York Stock Exchange
Composite Tape as reported by The Wall Street Journal (Midwest Edition) and also
shows the cash dividends declared per share during such periods:
19
<PAGE>
<TABLE>
<CAPTION>
Market Price (1)
-------------------- Cash Dividends
High Low Declared Per Share
---- --- ------------------
1995
----
<S> <C> <C> <C>
First Quarter $17-1/2 $12-1/2 --
Second Quarter 15-3/4 13-5/8 $0.11
Third Quarter 17 14-1/4 --
Fourth Quarter 16-3/4 14 --
1996
----
First Quarter $17-1/2 $14-3/4 --
Second Quarter 17-1/8 14-3/4 $0.12
Third Quarter 15-1/2 13-7/8 --
Fourth Quarter 16-3/4 14-3/4 --
</TABLE>
The approximate number of holders of record of Common Stock as of March 19,
1997 was 14,770.
During 1996, the Board of Directors declared, and the Company paid, an
annual dividend in the amount of $0.12 per share. Future cash dividends will be
considered by the Board of Directors based upon the Company's earnings and
financial position and such other business considerations as the Board of
Directors considers relevant.
In February 1997, the Company announced that the Board of Directors had
authorized the repurchase of up to 30 million shares of Common Stock from time
to time during 1997 and 1998 in the open market, in privately negotiated
transactions or through issuer tender offers. During 1996, the Company
repurchased a total of 19,117,200 shares.
Item 6 -- Selected Financial Data
The following selected consolidated financial information for each of the
five years in the period ended December 31, 1996 is derived from the Company's
Consolidated Financial Statements, which have been audited by Arthur Andersen
LLP, independent public accountants, whose report thereon is included in Item 8
of this report. The information below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Company's Consolidated Financial Statements, and the related
Notes, included elsewhere in this report.
20
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED SELECTED FINANCIAL DATA - RESTATED
-----------------------------------------------
(000s omitted, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31, 1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of Operations
Revenue $1,230,983 $ 828,520 $ 926,879 $ 956,088 $ 952,312
Income from continuing operations 173,342 146,361 159,043 129,384 110,501
Net income 134,152 160,060 185,996 137,821 3,840
Weighted average common shares outstanding 187,100 187,800 189,100 184,400 168,900
Basic earnings per common share:
Income from continuing operations $ 0.93 $ 0.78 $ 0.84 $ 0.70 $ 0.65
Net income 0.72 0.85 0.98 0.75 0.02
Diluted earnings per common share:
Income from continuing operations $ 0.92 $ 0.77 $ 0.84 $ 0.70 $ 0.65
Net income 0.71 0.85 0.98 0.74 0.02
Dividends declared per common share 0.04 0.08 0.10 0.11 0.12
Financial Condition (at year end)
Total assets $2,905,015 $2,977,745 $3,099,606 $3,067,929 $3,046,783
Working capital 206,270 (14,650) (48,067) 32,286 186,480
Long-term debt 857,330 777,111 735,855 703,855 800,153
Stockholders' equity 1,039,343 1,283,796 1,422,941 1,448,287 1,145,880
</TABLE>
21
<PAGE>
. The Company has restated its consolidated financial statements to reflect
certain adjustments recorded by Rust International Inc. ("Rust"). See
Note 3 of the Notes to Consolidated Financial Statements as it pertains to
Rust.
. Certain prior period amounts have been reclassified to conform with the
current year presentation.
. 1992 income from continuing operations includes a $47.0 million nontaxable
gain related to the initial public offering of shares by Waste Management
International plc ("WM International").
. 1992 net income includes one-time charges of $42.2 million related to the
adoption of two new financial accounting standards: Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," and Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
. Beginning in 1993, the Company no longer consolidates the financial results
of certain businesses contributed to form, in part, Rust International Inc.
("Rust"). Revenue from the contributed businesses amounted to approximately
$554.7 million in 1992. Beginning in 1993, the Company's share of Rust's
net income is included in equity in earnings of affiliates. See Note 3 of
the Notes to Consolidated Financial Statements.
. 1993 income from continuing operations includes a $7.7 million nontaxable
gain related to issuance of stock by Rust and a $6.5 million increase in
the income tax provision due to revaluing deferred income taxes as a result
of the enactment of the Omnibus Budget Reconciliation Act of 1993.
. During 1995 and 1996, the weighted average common and common equivalent
shares outstanding decreased due to stock repurchases. See Note 5 of the
Notes to Consolidated Financial Statements.
. During the fourth quarter of 1996, the Company began implementing a plan to
divest its Water Business. Accordingly, these businesses have been
segregated as discontinued operations in the financial statements. See Note
3 of the Notes to Consolidated Financial Statements.
--------------------
22
<PAGE>
Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 providing
biosolids land application services and air quality control equipment design and
installation services (collectively the "Core Operations"). 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").
Results of Operations
Consolidated revenue from continuing operations totaled $952.3 million in 1996
compared with $956.1 million in 1995 and $926.9 million in 1994. Revenue in 1995
and 1994 included $37.5 million and $54.3 million, respectively, of construction
revenue related to the Lisbon, Connecticut, trash-to-energy facility built and
operated by Wheelabrator for the Eastern Connecticut Resource Recovery
Authority. Net income from continuing operations was $110.5 million, or $0.65
per share, for 1996 versus $129.4 million, or $0.70 per share, in 1995 and
$159.0 million, or $0.84 per share, in 1994. Net income for 1996 was $3.8
million, or $0.02 per share, compared with $137.8 million, or $0.74 per share,
in 1995 and $186.0 million, or $0.98 per share, in 1994. All per share amounts
herein are presented on a diluted basis.
Net income in all three years included discontinued operations, 1994 and 1996
included special charges by Rust, and 1995 and 1996 included the impact of
special charges by WM International. The following table reconciles reported
earnings per share to earnings per share from continuing operations excluding
these items:
23
<PAGE>
<TABLE>
<CAPTION>
1994 1995 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Reported diluted earnings per share $ 0.98 $ 0.74 $ 0.02
Income and equity in income from
discontinued operations (see Note 3 to
Consolidated Financial Statements) (0.14) (0.12) (0.06)
Equity in provision for loss on disposal
of Rust operations (see Note 3 to
Consolidated Financial Statements) - 0.08 0.69
------ ------ ------
Reported diluted earnings per share from
continuing operations 0.84 0.70 0.65
Special charges by Rust and WM International
(see Note 3 to Consolidated Financial Statements) 0.01 0.14 0.30
------ ------ ------
Diluted earnings per share from continuing
operations excluding above items $ 0.85 $ 0.84 $ 0.95
====== ====== ======
Contributed by-
Core Operations $ 0.72 $ 0.77 $ 0.83
Equity in earnings of affiliates,
excluding Rust and WM International special
charges noted above 0.13 0.07 0.12
------ ------ ------
$ 0.85 $ 0.84 $ 0.95
====== ====== ======
</TABLE>
24
<PAGE>
The earnings per share contribution from the Company's Core Operations increased
between 1994 and 1995 primarily because of the net income growth associated with
new facilities coupled with share repurchases. Continued share buy-back activity
accounted for the growth between 1995 and 1996. Net income from Core Operations
declined slightly during 1996 due to a $7.3 million after-tax restructuring
charge in the Company's biosolids land application business.
During 1996, Wheelabrator undertook a review of its strategic options for its
water businesses. The study concluded that, given the multiples being paid for
water companies in the marketplace, the best strategy was to sell these
businesses. Consequently, negotiations were begun that led to the November sale
of Wheelabrator's equipment manufacturing and process systems businesses to
United States Filter Corporation ("U.S. Filter") for $369.6 million in cash.
These negotiations 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 for $77.4 million worth of U.S. Filter common stock. The
Company intends to liquidate this stock. These businesses (collectively the
"Water Business") have been accounted for as discontinued operations in the
accompanying financial statements. The second and final stage of the Water
Business divestiture is expected to close in the second quarter of 1997.
Wheelabrator expects to realize a gain on the Water Business divestiture upon
its completion.
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 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.
In 1995, WM International recorded a fourth quarter pretax charge related to
actions it had decided to take to sell or otherwise dispose of noncore
businesses and investments, as well as core businesses and investments in low
potential markets, abandon certain hazardous waste treatment and processing
facilities, and streamline its country management organization. In 1996, WM
International wrote down its investments in France, Austria and Spain, in
contemplation of exiting all or part of these markets or forming joint ventures,
and wrote off a hazardous waste disposal facility in Germany because regulatory
changes adversely affected its volumes. It also recognized a provision for loss
related to an agreement to sell its interest in Wessex Water Plc. The Company's
equity in these charges is included in Equity in (earnings) loss of affiliates
in the Consolidated Statements of Income.
25
<PAGE>
The Company has 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, have been integrated into the Company's energy plant operating
organization. In light of this reorganization and the sale of the Water
Business, the Company will now report its operating results in one industry
segment. Wheelabrator's biosolids land application and air pollution control
businesses, which are not significant, will also be included in this segment.
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
with the current presentation.
1995 Operations Compared with 1994
Excluding the no-margin revenue from construction of the Lisbon facility,
revenue grew $46.0 million or 5.3% in 1995, from $872.6 million the previous
year to $918.6 million. New facilities were primarily responsible for the growth
and included the Falls Township trash-to-energy facility located outside
Philadelphia, Pennsylvania, the Ridge Generating Station in Polk County,
Florida, and the Baltimore I biosolids pelletizer plant in Baltimore, Maryland.
Both the Falls Township and Ridge Generating Station facilities began operation
during 1994, while the Baltimore I facility commenced operations at the start of
1995. Revenue from existing energy and pelletizer facilities grew $10.9 million
during 1995. Contractual price escalation on long-term contracts, offset in part
by increased curtailment of electrical purchases by certain utility customers,
accounted for this increase. Spot trash pricing, on the whole, was stable since
competition-driven declines in the Dade County, Florida, and metro New York City
areas were offset by increases in other regions. Biosolids land application
revenue increased $13.4 million and represented 9.2% of consolidated 1995
revenue compared with 8.0% in 1994. Offsetting these increases was a marked
decline in air business revenue attributable to a lull in air pollution control
retrofit activity by utilities between Phases I and II of the Clean Air Act
Amendments of 1990 (the "CAAA") and limited enforcement of industrial air
pollution standards. The air pollution control business generated 10.0% and
7.5%, respectively, of 1994 and 1995 revenue.
Operating income increased $12.8 million, or 4.8%, from $268.1 million in 1994
to $280.9 million in 1995, and also increased as a percent of revenue by 0.5
percentage point to 29.4%. Gross margin improved 0.9 percentage point to 35.2%,
while selling and administrative expenses increased to 5.8% of 1995 revenue
compared with 5.4% in the previous year. The gross margin improvement resulted
from reduced recognition of no-margin Lisbon facility construction revenue as
well as cost optimization programs at operating facilities focused on areas such
as chemical usage, maintenance, and manpower.
Higher corporate costs to support the growth of the Water Business was the
primary reason for the selling and administrative cost increase. In addition,
the energy business' international development activity expanded
26
<PAGE>
modestly following the July 1995 formation of a trash-to-energy development
joint venture with WM International. Previously, under the terms of an
intercompany business allocation agreement, Wheelabrator was not permitted to
develop trash-to-energy projects outside North America.
1996 Operations Compared With 1995
After adjusting for 1995 Lisbon construction revenue, 1996 revenue grew $33.8
million, or 3.7%, to $952.3 million. Commercial operations of the Lisbon
facility, which began in January 1996, contributed $18.4 million of the
increase. The Company acquired two industrial cogeneration plants (so-called
"inside-the-fence" facilities) during the year as part of its strategy to
leverage its energy plant operating capabilities and project financing expertise
by owning and/or operating power plants for industrial customers. The first
facility, located in Martell, California, was acquired in February. The second
plant, known as the "Lassen facility," located in Anderson, California, near the
existing Shasta facility was purchased in November. Together these two inside-
the-fence acquisitions contributed an additional $7.3 million of 1996 revenue
growth. Contractual price escalation at existing energy and pelletizer
facilities, additional processing at several trash-to-energy facilities, lower
curtailment, and the addition of new biosolids land spreading contracts on the
West Coast were responsible for the balance of the growth. Overall, spot pricing
was stable during the year as continued degradation in the Dade County area of
Florida was offset by modest gains elsewhere. The biosolids land spreading and
air pollution control businesses accounted for 9.9% and 7.0%, respectively, of
1996 revenue.
Operating income grew $8.7 million, or 3.1%, to $289.6 million in 1996 and also
increased as a percent of revenue by one percentage point to 30.4%. Lower
selling and administrative expenses accounted for the improvement. Operating
expenses remained relatively flat compared with the prior year both in absolute
dollars and as a percent of revenue. Gross margin improvements realized through
the absence of no-margin Lisbon construction revenue and from continued cost
reduction efforts at operating facilities were offset by higher biosolids land
application costs and an $8.3 million pretax fourth quarter restructuring
charge. The charge related to rationalizing the biosolids land application
business and exiting certain unprofitable market regions. Overall gross margin
was 35.0% of revenue compared with 35.2% in 1995. The selling and administrative
cost reduction, which totals $11.8 million or 21.2%, reflects primarily the
impact of air business downsizing efforts undertaken in 1995 along with sharply
reduced corporate overhead.
Other Items
Interest: Interest expense increased $8.1 million to $59.9 million during 1995
because a reduction in interest capitalization more than offset the benefit of
lower average project debt balances. Interest costs associated with
27
<PAGE>
three major facilities (Falls Township, Ridge Generating Station, and Baltimore
I) were capitalized during 1994 prior to these plants commencing commercial
operations. One Company-owned facility, a second pelletizer in Baltimore (the
"Baltimore II facility"), was in the early stage of construction during 1995.
Interest expense declined $2.4 million during 1996 to $57.5 million, primarily
as a result of lower average project debt balances. Interest income decreased
from $13.5 million in 1994 to $9.8 million and $6.1 million in 1995 and 1996,
respectively, because of lower average investment balances with Waste Management
and lower rates.
Equity in Earnings of Affiliates: Equity earnings from the continuing operations
of Wheelabrator's affiliates was a loss of $13.8 million in 1995 compared with
income of $23.0 million in 1994. WM International recognized a special charge in
1995 related to the actions it took to exit noncore businesses and investments
as well as core businesses and investments in low potential markets, abandon
certain hazardous waste treatment and processing technologies, and streamline
its country management organization. The charge followed a thorough review of WM
International's operations and management structure and reflected WM
International's intention to refocus on its core waste services business.
Wheelabrator's share of this charge, including the Company's equity in the
portion recognized by Rust, was $25.6 million and was the principal reason for
the decline in equity income from continuing operations. Wheelabrator's share of
WM International's 1995 earnings excluding the special charge declined $2.0
million from the prior year to $13.2 million. After excluding the impact of the
WM International charges on Rust, the Company's equity in the earnings of Rust's
continuing operations declined from $7.8 million of income in 1994 to a $1.5
million loss in 1995. The decline relates primarily to a Rust fourth quarter
1995 provision for claims associated with retained assets and liabilities of
businesses sold in previous periods. Rust's 1994 continuing results included a
charge to adjust the carrying value of one of its equity investments to market.
Wheelabrator's share of this charge was $2.0 million.
Wheelabrator's equity in the continuing earnings of its affiliates declined to a
loss of $24.3 million in 1996, primarily because of the previously discussed WM
International special charges. Wheelabrator's share of these charges, including
the Company's equity in the portion recognized by Rust, totaled $43.3 million.
In addition, the Company recorded a $4.6 million deferred tax liability related
to passive foreign income associated with the Wessex sale. Excluding these one-
time items, the Company's equity in WM International's earnings increased $0.9
million to $14.1 million, reflecting the benefits of the prior year
restructuring partially offset by a stronger dollar versus pound exchange rate.
Equity earnings from Rust's continuing businesses increased to $3.3 million in
1996 after excluding the impact of the WM International charges primarily as a
result of Rust's fourth quarter 1995 claims provision. The Company's 1996 equity
in earnings of Rust included Wheelabrator's $2.2 million share of Rust charges
to further write-down the value of a Rust equity investee and to recognize a
loss on the sale of a small subsidiary.
28
<PAGE>
Income Taxes: The Company's effective tax rates for continuing operations
(excluding equity income, which is reported net of tax), were approximately
40.8%, 38.9%, and 43.1% in 1994, 1995, and 1996, respectively. The decreased
1995 rate reflected the impact of ongoing tax planning activities and certain
tax benefits associated with the liquidation of Wheelabrator's investment in
Abex Inc. Domestic taxes related to the Company's share of WM International's
tax gain on the Wessex sale, coupled with the write-off of nondeductible
goodwill as part of the biosolids land application restructuring charge, made
the 1996 rate unusually high. (See Note 4 of the Notes to Consolidated Financial
Statements for additional tax information.)
Discontinued Operations: As discussed previously, the Company decided in 1996
to divest its Water Business. These businesses include the Company's domestic
and international water process systems and equipment manufacturing units, its
water and wastewater treatment plant operations and privatization businesses,
its materials cleaning company, and certain specialized air pollution control
units. Revenue for these businesses, which are being accounted for as
discontinued operations, was $397.7 million in 1994, $495.6 million in 1995, and
$447.4 million in 1996. Their net income totaled $14.5 million, $13.8 million,
and $8.0 million in 1994, 1995, and 1996, respectively.
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. 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 plans but not successfully sold within
one year have been reclassified and are now included in the Company's results
from continuing operations. (See Note 3 of the Notes to Consolidated Financial
Statements for additional information.)
Environmental Matters: The majority of Wheelabrator's businesses are 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. (See Note 9 of the Notes to Consolidated Financial
Statements for additional information.) 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.
29
<PAGE>
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. The 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: Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards ("FAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The adoption of FAS 121 did not have a material impact on its financial
statements since Wheelabrator's accounting was substantially in compliance with
the new standard.
Also during 1996, FAS No. 123, "Accounting for Stock-Based Compensation," became
effective. FAS 123 provides an optional new method of accounting for employee
stock options and expands required disclosure about stock options. If the
optional method of determining compensation cost is not adopted, disclosure is
to be made, if material, of pro forma net income and earnings per share as if it
were. The impact on net income and earnings per
30
<PAGE>
share of applying the optional new method was immaterial, and the Company has
elected not to adopt the optional new accounting methodology.
In February 1997, the Financial Accounting Standards Board issued 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.
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 is effective beginning 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 when environmental remediation liabilities should be
recognized. The SOP provides that an accrual for environmental liabilities
should include costs of compensation and benefits for employees expected to
devote a significant amount of time directly to the remediation effort.
Wheelabrator does not believe the adoption of SOP 96-1 will have a material
impact on its financial statements since its current accounting is in
substantial compliance with the new standard.
Financial Condition
Liquidity and Capital Resources: Operating activities continue to be
Wheelabrator's principal source of liquidity and provided $266.3 million of cash
in 1996 compared with $237.3 million in 1995 and $178.9 million in 1994.
Operating cash flows increased $58.5 million between 1994 and 1995, with $29.8
million of the pick-up accounted for by a 1994 payment to the Internal Revenue
Service for previously recorded indemnities. Higher net income before
depreciation and amortization and before equity in the earnings and provision
for discontinued operations of affiliates contributed an additional $18.9
million of the increase. An increase in deferred income tax benefits and lower
cash funding of working capital growth, net of a decrease in long-term
liabilities, was responsible for the balance. Cash provided by operating
activities improved an additional $29.0 million between 1995 and 1996. Internal
emphasis on working capital reduction provided $18.2 million of the growth.
Increased long-term liabilities provided $22.8 million of cash, which was
partially offset by lower depreciation and amortization and lower net income
before undistributed earnings of affiliates and provision for the Company's
equity in discontinued operations of Rust. The Company expects to generate
approximately $220 million of operating cash flow from its continuing operations
during 1997. This amount excludes approximately $85 million of taxes due on the
portion of the Water Business divestiture that closed during 1996.
31
<PAGE>
Investing activities utilized $137.6 million of cash in 1994, but generated $4.8
million and $198.5 million of cash in 1995 and 1996, respectively. Lower capital
spending for new project construction was the main reason for the change between
1994 and 1995, coupled with a reduction in acquisition activity and substitution
of Company-backed letters of credit or guarantees for certain investments held
by trustees. Proceeds from the Water Business sale received in 1996, which
totaled $348.9 million before taxes and net of cash relinquished and certain
amounts held in escrow, account for the increased cash generated by investing
activities between 1995 and 1996. Higher capital expenditures, greater
acquisition spending, and higher investments held by trustees partially offset
these sale proceeds. Wheelabrator spent $77.0 million on energy and pelletizer
project construction during 1994 compared with $5.1 million in 1995 and $23.5
million in 1996. During 1994, construction was completed on the Falls Township,
Ridge Generating Station, and Baltimore I facilities. Baltimore II construction
accounts for the project spending in 1995 and 1996. Non-project capital
expenditures for Wheelabrator's continuing businesses were $23.0 million, $22.3
million, and $18.2 million for 1994, 1995, and 1996, respectively. The balance
of capital spending in all three years related to the discontinued Water
Business.
Cash payments for acquisitions, net of acquired cash, were $36.0 million in 1996
compared to $12.6 million in 1995 and $25.8 million in 1994. Acquisitions made
in 1994 and 1995 related to the discontinued Water Business, with the decreased
spending reflecting management's concern that the prices being paid for water
companies were inconsistent with the creation of long-term shareholder value.
The Martell and Lassen inside-the-fence energy facilities accounted for 1996
acquisition spending. The pro forma effect of the 1996 acquisitions on the
Company's results of operations is not material. During 1996, the Company also
acquired a 20% interest in Glegg Industries, a privately- held ultrapure water
company. 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
being accounted for on a cost basis.
Financing activities required $212.7 million of cash in 1996 versus $56.9
million and $200.8 million in 1994 and 1995, respectively. Major uses included
debt repayments, stock repurchases, and dividends. Dividend payments totaled
$19.0 million in 1994, $20.3 million in 1995, and $20.7 million in 1996 as the
Company increased its declared dividends from $0.10 per common share in 1994 to
$0.11 and $0.12 per common share in 1995 and 1996, respectively. During 1994,
1995, and 1996, Wheelabrator repurchased 3.3 million, 7.2 million, and 19.1
million shares of its common stock at an aggregate cost of $47.6 million, $104.2
million, and $306.0 million, respectively. Short-term borrowings pursuant to the
Master Intercorporate Agreement between the Company and Waste Management funded
the 1994 share repurchases and were repaid using operating cash flow during the
first half of 1995. The Company is authorized to repurchase an additional 30.0
million shares of its common stock through mid-August 1998 on the open market or
in privately negotiated or other transactions.
In addition to making scheduled repayments thereon, during 1994 and 1995,
Wheelabrator refinanced at lower interest rates or repaid prior to maturity
certain of its existing project debt. Private placement debt of $11.3 million
associated with the Saugus, Massachusetts, trash-to-energy plant was retired in
1994. The remaining $113.0 million of project debt associated with the
Westchester County facility was refinanced the same year. Half of the interest
savings of approximately 4.7 percentage points is being
32
<PAGE>
shared with Westchester County in exchange for certain agreements covering the
County's involvement in the retrofit of the facility to meet CAAA requirements
and a five-year extension of the solid waste disposal agreement with the County.
In December 1995, Wheelabrator refinanced the remaining $28.6 million of bank
debt connected with its Frackville, Pennsylvania, independent power facility.
This refinancing lowered the interest rate on this floating rate debt by
slightly under 1.2 percentage points and included a Wheelabrator guarantee of
the project's debt obligations. Net of refinancing proceeds, $47.4 million and
$31.8 million of cash was used to retire long-term debt in 1994 and 1995. The
Company issued $58.6 million of tax-exempt project debt in June 1996 to provide
long-term financing for the Baltimore I and II pelletizers. An additional $71.9
million of long-term, tax-exempt project debt was issued in December 1996 to
finance upcoming CAAA-related retrofits at the Westchester facility. The
proceeds of both issues are held by trustees until needed by the projects.
The Company currently expects its major uses of capital during 1997 to include
capital spending on CAAA-related facility retrofits, continued acquisitions of
inside-the-fence industrial cogeneration facilities, project investments, and
stock repurchases in addition to dividends, scheduled debt repayments, and
nonproject capital expenditures. Planned project investments, which include
completion of the Baltimore II pelletizer, are expected to require approximately
$12 million of cash, and retrofit spending, which will be partially funded by
debt proceeds held by trustees, is expected to total approximately $30 million.
Nonproject capital spending is expected to require approximately $20 million of
cash, consistent with prior years. The Company completed a $13.9 million
refinancing of the tax-exempt project debt on its Claremont, New Hampshire,
facility in January 1997 and intends to secure approximately $25 million of
limited-recourse financing associated with the Lassen facility in the first half
of 1997.
Wheelabrator had net working capital of $186.5 million as of December 31, 1996,
compared with $32.3 million at the previous year-end. Included in year-end 1996
working capital was $306.1 million of 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
borrowing 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. In addition to using available internally-generated cash,
the proceeds of the 1997 Lassen project financing and the after-tax proceeds
from liquidation of the U.S. Filter stock received in connection with the
second-stage Water Business divestiture transaction, expected share repurchase
and acquisition activities may also be funded by external, long-term financing
of certain unleveraged projects. Wheelabrator's ratio of total debt to total
capital was approximately 42% at the end of 1996, which the Company believes to
be indicative of additional unused borrowing capacity given its historically
strong ability to generate cash from operations.
33
<PAGE>
Derivatives: From time to time, the Company has used foreign currency
derivatives to attempt to mitigate the impact of currency fluctuations on its
equity income from WM International and on certain specifically identified
transactions. Derivatives used are confined to simple instruments that do not
involve multipliers or leverage. 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 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 non-regulatory means by
which municipalities may effectively control the flow of municipal solid waste.
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 solid waste regulatory flow control system, which was held to be
unconstitutional, but stayed the injunction for as long as its ruling is on
appeal plus an additional period of two years to enable the State to devise an
alternative nondiscriminatory approach. The State has indicated that it will
continue to enforce flow control during the two-year transition period and has
filed an appeal of the Federal District Court's ruling. The New Jersey
legislature is now considering a bill to authorize counties and authorities,
including the Gloucester County Improvement Authority, to implement a
constitutionally permissible system of "economic flow control" designed to
recover waste disposal costs incurred in reliance on the State's franchise
system. In addition, plaintiffs have asked the Third Circuit Court of Appeals to
shorten the stay period. A decision by the appeals court is expected during the
second quarter of 1997.
The Supreme Court's 1994 ruling and subsequent court decisions have not to date
had a material adverse effect on any of the Company's trash-to-energy
operations. Federal legislation has been proposed, but not yet enacted, to
effectively grandfather existing flow control mandates. In the event that such
legislation is not adopted, the Company believes that affected municipalities
will endeavor to implement alternative lawful means to continue controlling 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 would be successful or
what impact, if any, this matter might have on its 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 (the "MACT Standards") adopted by the EPA in December 1995 for
Municipal Waste Combusters ("MWCs"). The compliance dates will vary by facility,
but subject to the final decision in the case of Davis County vs. EPA, all
affected facilities most likely will be required to be in compliance with the
new rules by the end of the year 2000. The Davis County vs. EPA case involves
the methodology EPA used to set the MACT Standards, and
34
<PAGE>
its outcome could delay implementation deadlines by an estimated six to eighteen
months. 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 $190-$230 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
allow the Company to generally 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 25 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. While the Company believes that federal law
offers strong protections to its PURPA contracts, there is a risk that future
court decisions and/or legislative initiatives in this area will have a material
and adverse effect on the business of the Company.
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, the New York Organic Fertilizer Company biosolids
pelletizer project ("NYOFCO") will reach the end of its initial five-year
contract with New York City the same year. The Company has been awarded a 15-
year renewal of this contract, which is subject to final negotiation. 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 initial five-
year contract. 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.
Based on present growth prospects for its existing businesses and its
anticipated share repurchase activities, the Company expects 1997 earnings per
share from continuing operations to be between $1.20-$1.25 per share. After
35
<PAGE>
factoring in the impact of the NYOFCO and Shasta contract issues, and assuming
completion of its authorized share repurchases, Wheelabrator's earnings per
share goals are $1.20-$1.25 per share for 1998 and $1.15-$1.20 for 1999. The
above earnings per share figures are based on assumed average outstanding common
shares of approximately 144 million in 1997 and 134 million in 1998 and 1999.
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, adverse flow control
developments, and the cost and timing of the Company's stock repurchase
programs. 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.
Item 8 -- Financial Statements and Supplementary Data
(a) The Consolidated Balance Sheets as of December 31, 1995 and 1996,
Consolidated Statements of Income, Cash Flows and Changes in Stockholders'
Equity for each of the years in the three-year period ended December 31, 1996
and the Notes to Consolidated Financial Statements are set forth below.
36
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - RESTATED
--------------------------------------
(000s omitted, except share amounts)
<TABLE>
<CAPTION>
December 31, 1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 54,003 $ 306,072
Receivables, net of allowance of $7,754 in
1995 and $5,094 in 1996 120,819 123,164
Costs and earnings in excess of billings 25,429 10,632
Other current assets 51,865 72,148
---------- ----------
Total current assets 252,116 512,016
Property, plant, and equipment, net 1,566,754 1,561,925
Cost in excess of net assets of acquired
businesses, net 71,683 63,707
Investments in affiliates 599,790 479,505
Net assets of discontinued operations 286,387 54,776
Other assets 291,199 374,854
---------- ----------
Total assets $3,067,929 $3,046,783
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 31,999 $ 35,832
Accounts payable 38,636 37,084
Accrued liabilities 136,145 236,426
Advance payments on contracts 13,050 16,194
---------- ----------
Total current liabilities 219,830 325,536
Long-term debt 703,855 800,153
Deferred income taxes 400,889 445,582
Deferred income 77,513 67,678
Other long-term liabilities 217,555 261,954
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $1.00 per share;
50,000,000 authorized; none issued or outstanding - -
Common stock, par value $0.01 per share;
500,000,000 authorized; 189,545,407 shares
issued in 1995 and 1996 1,895 1,895
Capital in excess of par value 876,595 875,584
Cumulative translation adjustment (9,986) (4,721)
Treasury stock at cost; 10,112,610 shares in 1995,
28,094,425 shares in 1996 (146,494) (436,306)
Retained earnings 726,277 709,428
---------- ----------
Total stockholders' equity 1,448,287 1,145,880
---------- ----------
Total liabilities and stockholders' equity $3,067,929 $3,046,783
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
37
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - RESTATED
--------------------------------------------
(000s omitted, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1995 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $926,879 $956,088 $ 952,312
Operating expenses 608,911 619,403 618,779
Selling and administrative expenses 49,917 55,794 43,949
Interest expense 51,839 59,916 57,514
Interest income (13,456) (9,761) (6,054)
Equity in (earnings) loss of affiliates (23,036) 13,815 24,318
Other (income) expense, net (104) (3,541) 1,357
-------- -------- ---------
Income from continuing operations before
income taxes 252,808 220,462 212,449
Income tax provision 93,765 91,078 101,948
-------- -------- ---------
Income from continuing operations 159,043 129,384 110,501
Discontinued operations:
Income from discontinued operations
less applicable income taxes of $8.8 million
in 1994, $10.2 million in 1995 and $9.2
million in 1996 (Note 3) 14,548 13,797 8,039
Equity income from Rust discontinued
operations (Note 3) 12,405 9,368 2,854
Equity in loss on disposal
of Rust discontinued operations - (14,728) (117,554)
-------- -------- ---------
Net income $185,996 $137,821 $ 3,840
======== ======== =========
Weighted average common shares outstanding 189,100 184,400 168,900
======== ======== =========
Basic earnings (loss) per common share:
Continuing operations $ 0.84 $ 0.70 $ 0.65
Income from discontinued operations 0.08 0.07 0.05
Equity income (loss) from Rust discontinued
operations 0.06 (0.02) (0.68)
-------- -------- ---------
Net income $ 0.98 $ 0.75 $ 0.02
======== ======== =========
Diluted earnings (loss) per common share:
Continuing operations $ 0.84 $ 0.70 $ 0.65
Income from discontinued operations 0.08 0.07 0.05
Equity income (loss) from Rust discontinued
operations 0.06 (0.03) (0.68)
-------- -------- ---------
Net income $ 0.98 $ 0.74 $ 0.02
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - RESTATED
------------------------------------------------
(000s omitted)
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1995 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 185,996 $ 137,821 $ 3,840
Adjustments to reconcile net income
to cash flows from operating activities:
Depreciation and amortization 95,254 107,814 103,537
Deferred income taxes 48,909 59,295 60,713
Undistributed (earnings) loss of affiliates (23,036) 13,815 24,318
Equity in discontinued operations of Rust (12,405) 5,360 114,700
Deferred lease expense (7,530) (10,523) (12,660)
Changes in assets and liabilities, net of effects
of acquisitions and dispositions:
Receivables, net (29,258) (11,195) (7,696)
Costs and earnings in excess of billings (2,097) (7,664) 14,592
Other current assets (12,343) 17,310 (2,903)
Accounts payable 10,525 (542) (7,263)
Accrued liabilities (19,400) (933) (5,132)
Advance payments on contracts (2,594) (27,637) (4,067)
Other long-term liabilities (46,534) (36,713) (13,952)
Other, net (6,624) (8,884) (1,747)
--------- --------- ---------
Net cash provided by operating activities 178,863 237,324 266,280
--------- --------- ---------
Investing Activities
Capital expenditures (105,459) (37,805) (70,602)
Proceeds from sale of investments 583 12,821 1,587
Cash paid for investment - - (15,415)
Proceeds from discontinued operations, net of cash
relinquished - - 348,899
Sale of property, plant and equipment 8,374 12,498 1,954
Investments held by trustees 5,936 36,810 (62,425)
Cash paid for acquisitions, net of acquired cash (25,754) (12,571) (35,983)
Other, net (21,257) (6,928) 30,475
--------- --------- ---------
Net cash provided by (used for) investing
activities (137,577) 4,825 198,490
--------- --------- ---------
Financing Activities
Additions to long-term debt 112,985 29,388 130,495
Repayments of long-term debt (160,335) (61,181) (29,609)
Net borrowings from Waste Management, Inc. 53,163 (53,163) -
Proceeds from exercise of stock options 5,739 3,665 13,444
Dividends paid (18,954) (20,301) (20,689)
Stock repurchase program (47,550) (102,368) (306,011)
Other, net (1,971) 3,154 (331)
--------- --------- ---------
Net cash used for financing activities (56,923) (200,806) (212,701)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (15,637) 41,343 252,069
Cash and cash equivalents at beginning of period 28,297 12,660 54,003
--------- --------- ---------
Cash and cash equivalents at end of period $ 12,660 $ 54,003 $ 306,072
========= ========= =========
Supplemental disclosure:
Interest paid, net of amounts capitalized $ 56,015 $ 59,812 $ 57,102
========= ========= =========
Income taxes paid $ 73,790 $ 44,099 $ 44,495
========= ========= =========
Significant noncash investing activities:
Common stock issued for acquisitions $ 2,900 $ - $ -
========= ========= =========
Liabilities assumed in acquisitions $ 74,938 $ 8,232 $ 4,211
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
WHEELABRATOR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - RESTATED
---------------------------------------------------------------------
(000s omitted, except share amounts)
<TABLE>
<CAPTION>
Capital in Cumulative
Common Excess of Translation Treasury Retained
Stock Par Value Adjustment Stock Earnings Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $1,888 $874,580 $(33,670) $ (717) $441,715 $1,283,796
Net income - - - - 185,996 185,996
Dividends declared ($0.10 per share) - - - - (18,954) (18,954)
Foreign currency translation - - 16,020 - - 16,020
Exercise of stock options 5 4,457 - 1,277 - 5,739
Tax benefit from stock options - 2,134 - - - 2,134
Stock issued for acquisitions 2 2,898 - - - 2,900
Treasury shares from acquisition adjustments - - - (499) - (499)
Stock repurchases (3,273,800 shares) - - - (47,550) - (47,550)
Investment in Rust International Inc. - (6,641) - - - (6,641)
------ -------- -------- --------- -------- ----------
Balance, December 31, 1994 1,895 877,428 (17,650) (47,489) 608,757 1,422,941
Net income - - - - 137,821 137,821
Dividends declared ($0.11 per share) - - - - (20,301) (20,301)
Foreign currency translation - - 7,664 - - 7,664
Exercise of stock options - (1,488) - 5,153 - 3,665
Tax benefit from stock options - 655 - - - 655
Stock repurchases (7,194,600 shares) - - - (104,154) - (104,154)
Treasury shares from acquisition adjustments - - - (4) - (4)
------ -------- -------- --------- -------- ----------
Balance, December 31, 1995 1,895 876,595 (9,986) (146,494) 726,277 1,448,287
Net income - - - - 3,840 3,840
Dividends declared ($0.12 per share) - - - - (20,689) (20,689)
Foreign currency translation - - 4,045 - - 4,045
Amount transferred to operations resulting
from sale of Water Business - - 1,220 - - 1,220
Exercise of stock options - (2,849) - 16,590 - 13,741
Tax benefit from
stock options - 1,838 - - - 1,838
Common stock received in connection with
exercise of stock options (18,623 shares) - - - (297) - (297)
Stock repurchases (19,117,200 shares) - - - (306,011) - (306,011)
Treasury shares from acquisition adjustments - - - (94) - (94)
------ -------- -------- --------- -------- ----------
Balance, December 31, 1996 $1,895 $875,584 $ (4,721) $(436,306) $709,428 $1,145,880
====== ======== ======== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
Wheelabrator Technologies Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(000s omitted in all tables except per share amounts)
NOTE 1 - BUSINESS DESCRIPTION
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 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").
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation The Company's financial statements are prepared on
a consolidated basis and include the Company and its majority-owned
subsidiaries. All significant intercompany transactions and balances are
eliminated. Investments in affiliates the Company does not control are
accounted for using the equity method after elimination of material
interaffiliate transactions.
Use of Estimates 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.
Concentrations Wheelabrator's businesses offer a range of services to a diverse
customer base. As of December 31, 1996, the Company believes it has no
significant customer, supplier, product line, credit risk, geographic, or other
concentrations that could expose the Company to adverse, near-term severe
financial impacts.
Revenue Recognition The Company recognizes revenue from certain long-term
engineering, equipment supply, and construction contracts on the percentage-of-
completion basis, with estimated losses recognized in full when identified. All
other revenue is recognized when services are rendered or products are shipped.
41
<PAGE>
Foreign Currency Certain foreign subsidiaries' income statement accounts are
translated at the average exchange rates in effect during the period, while
assets and liabilities are translated at the rates of exchange at the balance
sheet date. The resulting balance sheet translation adjustments are charged or
credited directly to stockholders' equity. Foreign exchange transaction gains
and losses realized during 1994, 1995, and 1996 were not significant.
Consolidated Statements of Cash Flows For purposes of the Consolidated
Statements of Cash Flows, all highly liquid instruments purchased with an
original maturity of three months or less, and investments with Waste
Management, are considered to be cash equivalents.
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. This agreement automatically renews
annually unless either party provides 90-day notice of termination. Under the
agreement's terms, in the event Wheelabrator 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. In
addition, a right of set-off exists for amounts owed by either Wheelabrator or
Waste Management. As such, net amounts invested with Waste Management pursuant
to this agreement are considered to be highly liquid cash equivalents and are
included in cash and cash equivalents on the Consolidated Balance Sheets. The
Company had investments with Waste Management of $37.3 million and $280.2
million as of December 31, 1995, and 1996, respectively.
Derivative Financial Instruments From time to time, the Company has used
foreign currency derivatives to attempt to mitigate the impact of currency
fluctuations on its equity income from WM International and on certain
specifically identified transactions. Derivatives used are confined to simple
instruments that do not involve multipliers or leverage. Wheelabrator's use of
derivatives has not been and is not expected to be material to the Company's
financial statements.
Fair Value of Financial Instruments The Company's financial instruments consist
primarily of cash and cash equivalents, receivables, investments held by
trustees, accounts payable, and debt instruments. The book values of cash
42
<PAGE>
and cash equivalents, receivables, investments held by trustees, and accounts
payable are considered to be representative of their respective fair values. The
aggregate fair market value of Wheelabrator's long-term debt was approximately
$880.8 million and $899.0 million on December 31, 1995 and 1996, respectively.
The fair value of the Company's long-term debt was determined by discounting
future cash flows at the quoted or estimated current rate applicable to each
type of debt. See Note 6 for the terms and carrying values of the Company's
various debt instruments.
Property, Plant, and Equipment Property, plant, and equipment (including major
improvements) are capitalized and stated at cost. Items of an ordinary
maintenance or repair nature are charged directly to operating expense. The
cost less estimated salvage value of property, plant, and equipment (except for
land and unutilized land options) is generally depreciated on a straight-line
basis over estimated useful lives that range from 3 to 35 years.
Under a land option agreement with a Waste Management subsidiary, the Company
has the exclusive right to purchase or lease sites for trash-to-energy or other
facilities at existing or future landfills owned by the subsidiary. These land
options are classified as property, plant, and equipment. The option cost
attributable to each utilized site will be allocated to a facility and amortized
on a straight-line basis over the estimated useful life of the facility upon
commencement of operations. During 1994, amortization began on $29.6 million
worth of exercised land options as two facilities located on such sites
commenced operations.
During 1995, the Company paid $15.0 million to Waste Management in conjunction
with a land option agreement amendment that included, among other things, a
guarantee of value for Wheelabrator and an extension through 2020.
Capitalized Interest The Company capitalizes interest on significant projects
under construction in accordance with Statement of Financial Accounting
Standards ("FAS") No. 34. Amounts capitalized and netted against interest
expense in the Consolidated Statements of Income were $12.1 million in 1994,
$0.1 million in 1995, and $1.5 million in 1996.
Cost in Excess of Net Assets of Acquired Businesses The excess of cost over
fair value of the net assets of acquired businesses ("goodwill") is amortized
43
<PAGE>
on a straight-line basis over a maximum of 40 years. The accumulated
amortization balances as of December 31, 1995 and 1996, were $9.9 million and
$11.4 million, respectively. On an ongoing basis, the Company measures
realizability of goodwill by the ability of the acquired businesses to generate
current and undiscounted expected future cash flow in excess of unamortized
goodwill. If such realizability is in doubt, an adjustment is made to reduce the
carrying value of the goodwill.
Restructuring During the fourth quarter of 1996, the Company restructured its
biosolids land application business. Part of the restructuring plan involved
exiting low-margin projects and territories, which resulted in goodwill write-
offs of approximately $5.7 million and an immaterial amount of severance and
other restructuring accruals.
Disposal Credits The Company classifies disposal credits as other assets until
applied against the cost of disposing of materials at Waste Management
landfills. These materials include ash residue from trash-to-energy facilities
and biosolids. Disposal credits are charged to expense as utilized. During
1995 and 1996, the Company utilized $3.0 million and $2.5 million of disposal
credits, respectively. There were approximately $28.7 million of disposal
credits remaining at December 31, 1996.
Facility Maintenance Accrual In order to match more consistently expenditures
for major repair and overhaul activities with revenue, the Company follows a
policy of accruing for major maintenance expenditures at its trash-to-energy and
independent power facilities. Such accruals are based upon planned maintenance
expenditures and are classified as current or noncurrent liabilities based on
the expected timing of the expenditures.
Income Taxes Income taxes are provided based on earnings reported for financial
statement purposes. The provision for income taxes differs from the amounts
currently payable because of timing differences in the recognition of certain
income and expense items for financial reporting and tax reporting purposes. In
accordance with FAS No. 109, the Company accounts for income taxes using an
asset and liability method. The asset and liability method requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between tax bases and financial reporting
bases of assets and liabilities, measured using the
44
<PAGE>
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Deferred income taxes are not provided on undistributed
earnings of affiliates because these earnings are considered to be permanently
reinvested. If the reinvested earnings were to be remitted, the U.S. income
taxes due under current tax law would not be material. Investment credits have
been deferred and are included in income as a reduction of income tax expense
over the estimated useful lives of the assets that gave rise to the credits. See
Note 4.
Environmental Costs and Liabilities 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 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.
45
<PAGE>
The Company has recorded liabilities for closure and postclosure monitoring and
environmental remediation costs as follows:
<TABLE>
<CAPTION>
December 31, 1995 1996
-------------------------------------------------------------------------------------------
<S> <C> <C>
Current portion, included in
accrued liabilities $11,357 $ 1,764
Noncurrent portion, included in
other long-term liabilities 6,677 30,766
------- -------
Total environmental liabilities $18,034 $32,530
======= =======
</TABLE>
During the remaining life of the active sites, the Company anticipates providing
an additional $1.2 million of closure and postclosure costs.
Contracts in Process Information with respect to contracts in process at
December 31, 1995 and 1996, is as follows:
<TABLE>
<CAPTION>
December 31, 1995 1996
-------------------------------------------------------------------------------------------
<S> <C> <C>
Costs and estimated earnings
on uncompleted contracts $ 284,748 $ 182,075
Less: billings on
uncompleted contracts (272,369) (187,637)
--------- ---------
Total contracts in process $ 12,379 $ (5,562)
========= =========
</TABLE>
Contracts in process are included in the Consolidated Balance Sheets under the
following captions:
<TABLE>
<CAPTION>
December 31, 1995 1996
-------------------------------------------------------------------------------------------
<S> <C> <C>
Costs and earnings in excess of billings $ 25,429 $ 10,632
Advance payments on contracts (13,050) (16,194)
--------- ---------
Total contracts in process $ 12,379 $ (5,562)
========= =========
</TABLE>
46
<PAGE>
All contracts in process are expected to be billed and collected within four
years. Accounts receivable includes retainage that has been billed but is not
due pursuant to contract provisions until completion. Such retainage at December
31, 1996, is $5.3 million, including $1.3 million that is expected to be
collected after one year. At December 31, 1995, retainage was $10.4 million.
Earnings per Share In February 1997, the Financial Accounting Standards Board
issued 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>
Years Ended December 31, 1994 1995 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations as reported $159,043 $129,384 $110,501
Add or (deduct) -
Dilution from potential common shares of:
WM International - - -
-------- -------- --------
Adjusted income from continuing operations $159,043 $129,384 $110,501
======== ======== ========
Weighted average common shares outstanding as
reported 189,100 184,400 168,900
Add -
Effect of stock options after applying
the "treasury stock" method 900 700 600
-------- -------- --------
Adjusted average common shares outstanding 190,000 185,100 169,500
======== ======== ========
Diluted EPS from continuing operations $0.84 $0.70 $ 0.65
======== ======== ========
</TABLE>
47
<PAGE>
An aggregate of 3.1 million common shares potentially issuable upon exercise of
stock options have been excluded from the calculation of Diluted EPS at December
31, 1996, because their effect is antidilutive. During 1996, the Company issued
1.2 million shares upon exercise of stock options.
Accounting Pronouncements Effective January 1, 1996, the Company adopted FAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The adoption of FAS 121 did not have a material
impact on its financial statements since Wheelabrator's accounting was
substantially in compliance with the new standard.
Also during 1996, FAS No. 123, "Accounting for Stock-Based Compensation," became
effective. FAS 123 provides an optional new method of accounting for employee
stock options and expands required disclosure about stock options. If the
optional method of determining compensation cost is not adopted, disclosure is
to be made, if material, of pro forma net income and earnings per share as if it
were. The impact on net income and earnings per share of applying the optional
new method was immaterial, and the Company has elected not to adopt the optional
new accounting methodology.
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 is effective beginning 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 when environmental remediation liabilities should be
recognized. The SOP provides that an accrual for environmental liabilities
should include costs of compensation and benefits for employees expected to
devote a significant amount of time directly to the remediation effort.
Wheelabrator does not believe the adoption of SOP 96-1 will have a material
impact on its financial statements since its current accounting is in
substantial compliance with the new standard.
In 1997, the Company was required to begin presenting earnings per share in
accordance with FAS No. 128 as discussed above.
Reclassification Certain prior period amounts have been reclassified to conform
with the current year presentation.
48
<PAGE>
NOTE 3 - Capital Transactions, Acquisitions, and Divestitures
WM International Wheelabrator owns approximately 12 percent of WM
International, a Waste Management subsidiary that owns substantially all of
Waste Management's waste management services operations outside of North
America. The investment is accounted for using the equity method due to the
significance, through Waste Management, of Wheelabrator's influence over WM
International. As of December 31, 1996, WM International was owned approximately
12 percent by Wheelabrator, 12 percent by Rust, 56 percent by Waste Management,
and 20 percent by the public.
During 1994, 1995, and 1996, respectively, Wheelabrator recorded equity in net
income (loss) of WM International of $15.2 million, $(5.1) million, and $(15.5)
million. The Company's equity income was reduced by $25.6 million during the
fourth quarter of 1995 for its share of a largely noncash special charge
recorded by WM International related to actions taken to sell or otherwise
dispose of noncore businesses and investments, as well as core businesses and
investments in low potential markets, to abandon certain hazardous waste
treatment and processing facilities, and to streamline its country management
organization. During the fourth quarter of 1996, as a further refinement of its
core business focus that began in 1995, WM International announced plans to sell
its investment in Wessex Water Plc and recognized a provision for loss on the
sale. In addition, WM International recorded a charge to revalue its investments
in several European countries. Wheelabrator's share of these charges, including
the Company's equity in the portion recognized by Rust, totaled $43.3 million.
In addition, the Company recorded a $4.6 million deferred tax liability related
to passive foreign income associated with the Wessex sale. Wheelabrator's
investment in WM International totaled approximately $228.7 million and $216.8
million as of December 31, 1995 and 1996, respectively. As of December 31, 1996,
the book value of the Company's WM International investment exceeded its market
value by approximately $40 million, which management believes is a temporary
situation.
49
<PAGE>
A summary of certain financial information for WM International follows:
<TABLE>
<CAPTION>
December 31, 1995 1996
-------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 859,591 $ 924,975
Noncurrent assets 3,375,998 3,200,235
Current liabilities 1,077,746 1,061,048
Noncurrent liabilities 893,717 838,012
Minority interest 357,934 418,596
Years ended December 31, 1994 1995 1996
---------------------------------------------------------------------------
Revenue $1,710,862 $1,865,081 $1,913,793
Gross profit 466,265 260,206 272,248
Net income (loss) 126,753 (42,112) (128,771)
</TABLE>
Rust Wheelabrator owns approximately 40 percent of Rust, a provider of
environmental and infrastructure consulting services and other on-site
industrial services. The remaining 60 percent of Rust is owned
directly or indirectly by Waste Management.
The Company has restated its financial statements for the years ended December
31, 1994, 1995 and 1996. This action was taken 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.
A summary of certain unaudited financial information for Rust follows:
<TABLE>
<CAPTION>
December 31, 1995 1996
-----------------------------------------------------------------------------
As reported As restated As reported As restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current assets $ 57,405 $ 57,405 $249,487 $249,487
Noncurrent assets(1) 1,288,823 1,265,352 986,780 951,075
Current liabilities 41,167 41,167 262,659 262,659
Noncurrent liabilities 360,087 353,792 302,836 319,594
</TABLE>
(1) 1995 and 1996 noncurrent assets include approximately $400.0 million and
$99.8 million, respectively, of net assets held for sale.
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1995 1996
- ------------------------------------------------------------------------------------------
As As As As As As
reported restated reported restated reported restated
-------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue $527,683 $527,683 $378,069 $378,069 $ 262,479 $ 262,479
Gross profit 75,489 74,896 61,179 60,830 32,856 28,245
Income (loss) from
continuing operations 6,530 19,562 (9,658) (21,906) (31,500) (22,738)
Net income (loss) 55,587 50,575 (35,213) (35,306) (308,938) (309,487)
</TABLE>
50
<PAGE>
During 1994, 1995, and 1996, Wheelabrator recorded equity in income (loss) from
continuing operations of Rust of $7.8 million, $(8.8) million, and $(9.1)
million, respectively. Rust's 1994 and 1996 results included impairment charges
to write-down the value of an equity investee, and 1996 also included the loss
on the sale of a small subsidiary. Wheelabrator's share of these charges was
$2.0 million in 1994 and $2.2 million in 1996. Wheelabrator's investment in
Rust totaled approximately $371.1 million and $247.3 million as of December 31,
1995 and 1996.
The impact of the Rust restatements on the Company's financial results as
originally reported is summarized below:
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1995 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in earnings (loss) of affiliates:
As reported $ 14,717 $ (8,916) $ (27,803)
As restated 23,036 (13,815) (24,318)
Income from continuing operations:
As reported $150,724 $134,283 $ 109,454
As restated 159,043 129,384 110,501
Equity income (loss) from Rust discontinued operations:
As reported $ 19,623 $(10,222) $(110,995)
As restated 12,405 (5,360) (114,700)
Net income:
As reported $184,895 $137,858 $ 6,498
As restated 185,996 137,821 3,840
Diluted earnings (loss) per common share:
Continuing operations:
As reported $ 0.79 $ 0.73 $ 0.65
As restated 0.84 0.70 0.65
Equity income (loss) from Rust discontinued operations:
As reported $ 0.10 $ (0.06) $ (0.66)
As restated 0.06 (0.03) (0.68)
Net income:
As reported $ 0.97 $ 0.74 $ 0.04
As restated 0.98 0.74 0.02
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 1996
- -----------------------------------------------------
<S> <C> <C>
Investments in affiliates:
As reported $ 601,768 $ 484,141
As restated 599,790 479,505
Total assets:
As reported $3,069,907 $3,051,419
As restated 3,067,929 3,046,783
Retained earnings:
As reported $ 728,255 $ 714,064
As restated 726,277 709,428
Total stockholders' equity:
As reported $1,450,265 $1,150,516
As restated 1,448,287 1,145,880
</TABLE>
51
<PAGE>
Discontinued Operations 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. 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 these 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 reclassified and are now included in the Company's
results from continuing operations.
The provision for loss on disposal of the businesses discontinued in the fourth
quarter of 1996 includes management's best estimates of the amounts expected to
be realized on the sale of these businesses. The amounts Rust will ultimately
realize could differ materially in the near-term from the amounts estimated in
arriving at the provision for loss.
During 1996, Wheelabrator undertook a review of its strategic options for its
water businesses. The study concluded that, given the multiples being paid for
water companies in the marketplace, the best strategy was to sell the
businesses. Consequently, negotiations were begun that led to the November sale
of Wheelabrator's 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. These negotiations 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 for $77.4 million
worth of U.S. Filter common stock. The second and final stage of the Water
Business divestiture is expected to close in the second quarter of 1997. The
discontinued businesses have been segregated and the accompanying consolidated
balance sheets, statements of income and related footnote information have been
restated. Wheelabrator expects to realize a modest gain on the water divestiture
that will be recognized upon its completion.
In connection with these transactions, Wheelabrator has accrued $25.0 million
pursuant to a Business Development Agreement between Wheelabrator and U.S.
Filter. In accordance with the agreement, Wheelabrator will pay U.S. Filter $5.0
million each year through 2001. In return, U.S. Filter will promote
52
<PAGE>
municipal biosolids, energy plant services and waste-to-energy development
opportunities for Wheelabrator at the facilities of U.S. Filter's customers and
to U.S. Filter's customer base.
Revenues of the discontinued businesses were $397.7 million in 1994, $495.6
million in 1995, and $447.4 million in 1996. Following is a summary of the
assets and liabilities as of December 31, 1995 and 1996, which are reflected in
the Consolidated Balance Sheets as net assets of discontinued operations.
<TABLE>
<CAPTION>
December 31, 1995 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 206,143 $21,161
Noncurrent assets 230,530 40,176
Current liabilities (140,264) (6,367)
Noncurrent liabilities (10,022) (194)
--------- -------
Net assets of discontinued operations $ 286,387 $54,776
========= =======
</TABLE>
53
<PAGE>
At December 31, 1995, current assets consisted primarily of accounts receivable,
costs and earnings in excess of billings, and inventories. Noncurrent assets
consisted of property, plant, and equipment and goodwill. Liabilities consisted
primarily of accounts payable, accrued liabilities and advance payments on
contracts. At December 31, 1996, current assets consisted primarily of accounts
receivable. Noncurrent assets consisted primarily of property, plant, and
equipment. Liabilities consisted primarily of accounts payable and accrued
liabilities.
The Company has 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, have been integrated into the Company's energy plant operating
organization. In light of this reorganization and the sale of the Water
Business, the Company will now report its operating results in one industry
segment. Wheelabrator's biosolids land application and air pollution control
businesses, which are not significant, will also be included in this segment.
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.
Acquisitions In 1994, in exchange for approximately 156 thousand shares of
Wheelabrator common stock and $25.8 million of cash, the Company acquired
wastewater treatment operating contracts and nine businesses engaged in
providing air and water quality-related environmental products and services and
in manufacturing surface finishing equipment. In 1995, Wheelabrator completed
the privatization of the Miami Conservancy District wastewater treatment plant
located in Franklin, Ohio, and also acquired a Taiwanese company engaged in the
design and engineering of water treatment equipment. The total cost of these
1995 acquisitions was $12.6 million, net of cash acquired. During 1996,
Wheelabrator acquired wastewater treatment operating contracts and two
industrial cogeneration facilities in California for approximately $36.0 million
in cash and the assumption of $2.5 million in debt. The Company utilizes the
purchase method of accounting, and the purchase price of the foregoing
acquisitions has been allocated to their respective net assets based upon
estimated fair market values. The results of operations of acquired entities
have been included in Wheelabrator's financial statements from their respective
dates of acquisition. 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 acquisitions made during 1994, 1995, and 1996 is not
material.
54
<PAGE>
NOTE 4 - INCOME TAXES
A summary of the Company's income tax provisions from continuing operations is
given below.
<TABLE>
<CAPTION>
Income Tax Provision (Benefit)
Years Ended December 31, 1994 1995 1996
--------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
U.S. Federal $35,448 $22,457 $ 17,785
State and local 13,168 9,254 13,574
------- ------- --------
Total current 48,616 31,711 31,359
------- ------- --------
Deferred tax expense:
U.S. Federal 41,487 50,037 64,840
State and local 4,441 10,109 6,528
------- ------- --------
Total deferred 45,928 60,146 71,368
------- ------- --------
U.S. Federal benefit from amortization
of deferred investment credit (779) (779) (779)
------- ------- --------
Total provision $93,765 $91,078 $101,948
======= ======= ========
</TABLE>
The principal items accounting for the difference in income taxes computed at
the U.S. statutory rates and as recorded are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1995 1996
--------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes after federal
income tax benefit 4.5 5.7 6.2
Equity income (3.2) 2.2 4.0
U.S. tax on foreign income 0.9 - 2.2
Other, net (0.1) (1.6) 0.6
---- ---- ----
Effective tax rate 37.1% 41.3% 48.0%
==== ==== ====
</TABLE>
The principal items that comprise the 1995 and 1996 deferred tax (assets) and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1995 1996
--------------------------------------------------------------------------
<S> <C> <C>
Reserves not deductible until paid $ (91,984) $ (91,074)
Deferred income (22,859) (14,907)
Basis difference in investments and capital
loss carryforwards (8,579) (6,000)
Alternative minimum tax credit carryforwards (24,581) -
State net operating loss carryforwards (13,435) (13,061)
Other - (3,024)
Less: valuation allowance 10,952 7,584
--------- ---------
Subtotal (150,486) (120,482)
Property, plant, and equipment 503,306 506,650
Deferred expenses 20,554 29,881
Nondeductible prepaid expenses 11,817 10,305
Other 15,698 19,228
--------- ---------
Subtotal 551,375 566,064
--------- ---------
Net deferred tax liability $ 400,889 $ 445,582
========= =========
</TABLE>
55
<PAGE>
During 1996, the Company recognized the benefit of all the alternative minimum
tax credit carryforwards available. The Company has capital loss carryforwards
of approximately $13.7 million with an expiration date of 1998. Also, various
subsidiaries have state operating loss carryforwards of approximately $316
million with expiration dates through the year 2011. Valuation allowances have
been established due to the uncertainty of ultimately realizing the tax benefit
of certain state net operating loss carryforwards and the tax benefits
attributed to basis differences in certain investments. While the Company
expects to realize the deferred tax assets in excess of the valuation
allowances, changes in estimates of future taxable income or tax laws could
alter this expectation. During 1995 and 1996, the valuation allowance decreased
$5.0 million and $3.4 million, respectively, due primarily to the realization of
capital loss carryforwards.
NOTE 5 - COMMON STOCK
As of December 31, 1996, 104.6 million shares of the Company's common stock were
held by Waste Management or its subsidiaries. Under certain circumstances, Waste
Management has options to purchase at fair market value newly issued shares of
Wheelabrator common stock. Waste Management also has certain registration rights
until August 24, 1999, with respect to certain of the Wheelabrator common stock
it holds.
During 1995 and 1996, the Company repurchased 7.2 million and 19.1 million
shares of its common stock for an aggregate cost of $104.2 million and $306.0
million, respectively. The Company is authorized to repurchase an additional
30.0 million shares of its common stock through mid-August, 1998 on the open
market or in privately negotiated or other transactions. The Company declared
and paid cash dividends totaling $0.10, $0.11, and $0.12 per common share during
1994, 1995, and 1996, respectively.
56
<PAGE>
<TABLE>
<CAPTION>
NOTE 6 - LONG-TERM DEBT AND LEASE COMMITMENTS
Long-term debt is as follows:
December 31, 1995 1996
---------------------------------------------------------------------
<S> <C> <C>
Industrial development revenue bonds due 1997
to 2016 at rates of 3.95%-9.25% $666,678 $775,146
Private placement bonds due 2008 at a rate
of 10.64% 20,000 20,000
Project financing from commercial bank
due 1997 to 2000 at a rate of 0.325%
above LIBOR (an aggregate of 5.855%
at December 31, 1996) 28,641 23,347
Secured notes payable related to coal-handling
facilities due 1997 to 1999 at rates of
9.0%-9.875% 20,327 15,247
Other nonproject debt due 1997 to 2008 at rates
of 9.5%-10.0% 208 2,245
-------- --------
735,854 835,985
Less: current portion 31,999 35,832
-------- --------
Total long-term debt $703,855 $800,153
======== ========
</TABLE>
At December 31, 1996, the Company's long-term project debt was collateralized by
property, plant, and equipment with a net book value of $766.7 million and
$108.0 million of investments held by trustees. Investments held by trustees
typically represent proceeds of long-term debt related to trash-to-energy and
independent power projects. These amounts generally consist of reserve funds
maintained pursuant to project financing agreement requirements. The
investments, which are included in other assets in the Consolidated Balance
Sheets, are held in trust and use by the Company is restricted. Also included
within other assets are deferred financing costs, which are amortized over the
term of the related debt using a straight-line method that approximates the
interest method.
Financing for certain trash-to-energy facilities currently operated by the
Company has been provided through sale and leaseback transactions arranged in
previous years. The leases are classified as operating leases, with lease
expense recognized on a straight-line basis over the base and bargain renewal
periods of each agreement. Timing differences between lease payments and
financial statement lease expense are included in other assets in the
Consolidated Balance Sheets. Gains realized on the sale transactions are
included in deferred income in the Consolidated Balance Sheets and are amortized
on a straight-line basis over the terms of the respective leases.
57
<PAGE>
Principal payments on long-term debt and noncancelable operating lease payments
for operating and office facilities at December 31, 1996, are due as follows:
<TABLE>
<CAPTION>
Long-term Operating
Debt Leases
--------- ---------
<S> <C> <C>
1997 $ 35,832 $ 86,618
1998 45,736 86,812
1999 45,902 89,437
2000 45,046 89,801
2001 46,466 85,362
Thereafter 617,003 561,120
-------- --------
Total $835,985 $999,150
======== ========
</TABLE>
Total rent expense of continuing operations was $74.1 million, $72.0 million,
and $74.3 million for the years ended December 31, 1994, 1995 and 1996,
respectively.
The Company has directly or indirectly guaranteed the payment of debt
obligations at certain of its leased or owned facilities (see Note 9). These
guarantees contain various covenants, the most restrictive of which require the
maintenance of specified levels of tangible net worth. The Company is in
compliance with these covenants as of December 31, 1996.
Resco Holdings Inc. ("Resco"), a wholly-owned subsidiary of Wheelabrator, and
AlliedSignal Inc. ("AlliedSignal") are parties to an agreement that provides for
specific credit support by AlliedSignal for certain of Resco's trash-to-energy
project subsidiaries. Under the agreement, AlliedSignal may require Resco to
refinance, without AlliedSignal credit support, indebtedness of supported trash-
to-energy projects if it is economical (as defined in the agreement) to do so.
Resco and certain of its subsidiaries have agreed to reimburse AlliedSignal for
all amounts that may be paid by it under the agreement or various related credit
support obligations. No support payments have been made by AlliedSignal as of
December 31, 1996.
Resco owns substantially all of the net operating assets of the Company except
certain net assets consisting principally of cash and investments, and is
required to maintain a minimum level of tangible net worth ($549.8 million as of
December 31, 1996). As of December 31, 1996, Resco was in compliance with this
provision. Resco has agreed not to declare or pay any cash dividends to the
Company at any time Resco's tangible net worth is less than the required amount.
The Company has the ability to pay cash dividends using assets other than those
restricted within Resco.
58
<PAGE>
NOTE 7 - STOCK AND BENEFIT PLANS
Stock Option Plans Wheelabrator's stock option plans provide for the grant to
key employees of nonqualified options to purchase shares of the Company's common
stock at a price equal to the fair market value at the time of grant.
Outstanding options generally have a term of seven years from the date of the
grant and expire at various dates through April 1, 2003. Stock options granted
generally vest over a three-year period in equal annual installments beginning
one year after the grant date. The Company applies APB Opinion 25 and related
accounting interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its plans. However, when
nonqualified options are exercised, the Company receives a federal income tax
deduction equal to the market value of the shares at exercise less the exercise
price. The associated tax savings are credited to capital in excess of par
value. Had compensation cost for these plans been determined based on the fair
value at the grant date under the optional method prescribed by FAS 123, the
impact on the Company's net income and earnings per share would have been
immaterial. Based on current and anticipated use of stock options, it is
expected that the impact of the pro forma provisions of FAS 123 will be
immaterial in future years.
A summary of the status of the Company's stock option plans as of December 31,
1994, 1995, and 1996, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 5,046 $12.43 5,147 $13.65 5,871 $13.67
Granted 815 19.13 1,283 13.63 1,157 16.50
Exercised (593) 9.78 (341) 10.57 (1,156) 11.85
Canceled:
Predecessor plans (23) 11.90 (6) 11.90 (16) 11.90
Current plans (98) 16.52 (212) 18.34 (268) 16.64
----- ----- ------
Outstanding at end
of year 5,147 13.65 5,871 13.67 5,588 14.48
===== ===== ======
Options exercisable at
year-end 3,474 11.27 3,915 12.65 3,784 13.72
===== ===== ======
Options available for
future grant 4,370 3,299 2,410
===== ===== ======
</TABLE>
59
<PAGE>
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life (in Years) Price Shares Price
- ----------- ----------------- --------------- -------- ------ ---------
<S> <C> <C> <C> <C> <C>
$3.87 31 0.9 $ 3.87 31 $ 3.87
$6.58-$ 9.24 1,274 2.8 8.30 1,274 8.29
$11.90-$17.69 3,079 4.5 15.08 1,494 14.47
$18.33-$20.65 1,204 3.9 19.76 985 19.91
----- -----
$3.87-$20.65 5,588 4.0 14.48 3,784 13.72
===== =====
</TABLE>
Savings and Retirement Plan Substantially all employees are participants in the
Wheelabrator-Rust Savings and Retirement Plan, which is a qualified defined
contribution plan consisting of a savings account component (the "Savings
Account") and a retirement account component (the "Retirement Account"). Under
the terms of the Savings Account, eligible employees of the Company may elect to
contribute a portion of their annual compensation not to exceed 16 percent. The
Company is required to match a minimum of 30 percent of the first six percent of
eligible compensation contributed by an employee. Under the terms of the
Retirement Account, eligible employees of the Company receive an annual
contribution equal to a minimum of three percent of their eligible earnings.
Employees vest in Company contributions and the associated earnings in the
Savings Account at 20 percent per year and in the Retirement Account after five
years. Wheelabrator's contributions to such plans during 1994, 1995, and 1996
amounted to approximately $5.1 million, $5.3 million, and $5.6 million,
respectively.
Postretirement Benefits Other Than Pensions The Company provides certain
postretirement benefits other than pensions, which are primarily health care
benefits offered to a limited number of former employees of the manufacturing
businesses sold to U.S. Filter. Pursuant to the purchase and sale agreement, the
Company retained the liability for these benefits. The majority of the Company's
active employees will not receive postretirement benefits other than pensions.
During the fourth quarter of 1995, the Company settled litigation with a group
of retirees regarding their level of future benefits. As a result, the
accumulated postretirement benefit obligation for retiree health care plans was
reduced by approximately $3.6 million.
60
<PAGE>
Details of the plans' expense recognized in the Consolidated Statements of
Income are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1994 1995 1996
---------------------------------------------------
<S> <C> <C> <C>
Service cost $ 59 $ 64 $ 83
Interest cost 2,590 3,155 2,777
Net amortization (43) (55) (51)
------ ------ ------
Total expense $2,606 $3,164 $2,809
====== ====== ======
</TABLE>
The following sets forth the plans' funded status reconciled with amounts
reported in the Company's Consolidated Balance Sheets:
<TABLE>
<CAPTION>
December 31, 1995 1996
------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit
obligation (APBO):
Retirees $36,794 $36,155
Fully eligible active plan participants 467 1,224
Other active plan participants 432 -
------- -------
Total APBO 37,693 37,379
Unrecognized:
Prior service cost 566 239
Gain 1,844 2,783
------- -------
Accrued postretirement benefit liability $40,103 $40,401
======= =======
</TABLE>
For measurement purposes, a 7.5 percent annual rate of increase in the per
capita cost of covered health care claims was assumed for 1997, decreasing by
0.5 percent annually to 6.0 percent in 2000 and remaining at that level
thereafter. Increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1996, by approximately $3.4 million and
increase the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for 1996 by $0.3 million. The weighted
average discount rate used in determining the accumulated postretirement benefit
obligation was 7.75 percent in 1995 and 1996 based on expected payout patterns.
NOTE 8 - ADDITIONAL FINANCIAL INFORMATION
Activity relating to the allowance for doubtful accounts follows:
<TABLE>
<CAPTION>
December 31, 1994 1995 1996
--------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 4,053 $ 5,682 $ 7,754
Provision 1,441 3,971 1,531
Less: write-offs (1,078) (350) (3,973)
Other, net 1,266 (1,549) (218)
------- ------- -------
Balance at end of year $ 5,682 $ 7,754 $ 5,094
======= ======= =======
</TABLE>
Included in other current assets are spare parts and supplies of $29.9 million
and $31.0 million as of December 31, 1995 and 1996, respectively.
61
<PAGE>
The following is a summary of property, plant, and equipment:
<TABLE>
<CAPTION>
December 31, 1995 1996
-------------------------------------------------------------
<S> <C> <C>
Land $ 116,629 $ 116,784
Land options 261,703 261,703
Machinery and equipment 1,249,253 1,293,896
Buildings and improvements 278,958 282,158
Construction-in-progress 6,699 32,414
Less: accumulated depreciation (346,488) (425,030)
---------- ----------
Net property, plant, and equipment $1,566,754 $1,561,925
========== ==========
</TABLE>
Depreciation of property, plant, and equipment included in continuing operations
for the years ended December 31, 1994, 1995, and 1996 was $76.4 million, $83.1
million, and $81.3 million, respectively.
The following is a summary of accrued liabilities:
<TABLE>
<CAPTION>
December 31, 1995 1996
--------------------------------------------------------------
<S> <C> <C>
Wages, salaries, and benefits $ 17,015 $ 23,465
Interest and lease expense 44,534 42,573
Warranties and contract reserves 6,890 14,742
Income taxes payable /(1)/ - 73,030
Accrued property and other taxes payable 10,112 18,089
Other 57,594 64,527
-------- --------
Total accrued liabilities $136,145 $236,426
======== ========
--------------------------
</TABLE>
(1) The increase in income taxes payable at December 31, 1996, is
primarily attributable to the Water Business sale.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company has issued or is a party to 290 bank letters of credit, performance
bonds, and other guarantees. Such financial instruments (averaging $2.1 million
each) are given in the ordinary course of business.
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 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. The Company's Gloucester
County, New Jersey, facility relies on a disposal franchise for
62
<PAGE>
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 solid waste regulatory flow control system, which was held to be
unconstitutional, but stayed the injunction for as long as its ruling is on
appeal plus an additional period of two years to enable the State to devise an
alternative nondiscriminatory approach. The State has indicated that it will
continue to enforce flow control during the two-year transition period and has
filed an appeal of the Federal District Court's ruling. The New Jersey
legislature is now considering a bill to authorize counties and authorities,
including the Gloucester County Improvement Authority, to implement a
constitutionally permissible system of "economic flow control" designed to
recover waste disposal costs incurred in reliance on the State's franchise
system. In addition, plaintiffs have asked the Third Circuit Court of Appeals to
shorten the stay period. A decision by the appeals court is expected during the
second quarter of 1997.
The Supreme Court's 1994 ruling and subsequent court decisions have not to date
had a material adverse effect on any of the Company's trash-to-energy
operations. Federal legislation has been proposed, but not yet enacted, to
effectively grandfather existing flow control mandates. In the event that such
legislation is not adopted, the Company believes that affected municipalities
will endeavor to implement alternative lawful means to continue controlling 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 would be successful or
what impact, if any, this matter might have on its 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 (the "MACT Standards") adopted by the EPA in December 1995 for
Municipal Waste Combusters ("MWCs"). The compliance dates will vary by facility,
but subject to the final decision in the case of Davis County vs. EPA, all
affected facilities most likely will be required to be in compliance with the
new rules by the end of the year 2000. The Davis County vs. EPA case involves
the methodology EPA used to set the MACT Standards, and its outcome could delay
implementation deadlines by an estimated six to eighteen months. 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
$190-$230 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 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
63
<PAGE>
assets." The Company's 25 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. While the Company
believes that federal law offers strong protections to its PURPA contracts,
there is a risk that future court decisions and/or legislative initiatives 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.
The Company is self-insured for general liability claims up to $2.0 million per
occurrence. Liability insurance in effect during the last several years provides
coverage for environmental matters only to a limited extent.
64
<PAGE>
NOTE 10 - SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)(1)
<TABLE>
<CAPTION>
First Second Third Fourth Full Year
----- ------ ----- ------ ---------
<S> <C> <C> <C> <C> <C>
1995
- ----
Revenue $258,482 $238,021 $232,747 $226,838 $956,088
Operating expenses 174,271 153,544 147,987 143,601 619,403
Income (loss) from continuing
operations(2) 39,148 46,943 45,156 (1,863) 129,384
Net income (loss) 43,667 52,959 51,593 (10,398) 137,821
Weighted average common shares
outstanding 185,800 184,600 184,800 181,800 184,400
Basic earnings (loss) per common
share(3):
Income from continuing
operations $ 0.21 $ 0.25 $ 0.24 $ (0.01) $ 0.70
Net income (loss) $ 0.24 $ 0.29 $ 0.28 $ (0.06) $ 0.75
Diluted earnings (loss) per
common share(3):
Income (loss) from
continuing operations $ 0.21 $ 0.25 $ 0.24 $ (0.01) $ 0.70
Net income (loss) 0.23 0.29 0.28 (0.06) 0.74
Market price:
High 17 1/2 15 3/4 17 16 3/4 17 1/2
Low 12 1/2 13 5/8 14 1/4 14 12 1/2
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
1996 First Second Third Fourth Full Year
- ---- ----- ------ ----- ------- ---------
<S> <C> <C> <C> <C> <C>
Revenue $219,470 $244,436 $242,683 $ 245,723 $952,312
Operating expenses 141,469 157,426 155,745 164,139 618,779
Income (loss) from
continuing operations(2) 37,021 44,718 49,529 (20,767) 110,501
Net income (loss) 40,728 56,090 18,825 (111,803) 3,840
Weighted average common shares
outstanding 178,900 171,800 161,600 161,500 168,900
Basic earnings (loss) per
common share(3):
Income (loss) from
continuing operations $ 0.21 $ 0.26 $ 0.31 $ (0.13) $ 0.65
Net income (loss) $ 0.23 $ 0.33 $ 0.12 $ (0.69) $ 0.02
Diluted earnings (loss) per
common share(3):
Income (loss) from
continuing operations $ 0.21 $ 0.26 $ 0.31 $ (0.13) $ 0.65
Net income (loss) 0.23 0.33 0.12 (0.69) 0.02
Market price:
High 17 1/2 17 1/8 15 1/2 16 3/4 17 1/2
Low 14 3/4 14 3/4 13 7/8 14 3/4 13 7/8
</TABLE>
(1) Previously reported numbers have been restated for the discontinued
operations.
(2) Fourth quarters of 1995 and 1996 reduced by $25.6 million and $44.1
million, respectively, related to special charges recorded by the Company's
equity investees.
(3) The sum of earnings per common and common equivalent share for the four
quarters may not equal the full year number due to the impact of the
weighted shares outstanding.
66
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
of Wheelabrator Technologies Inc.:
We have audited the accompanying consolidated balance sheets of Wheelabrator
Technologies, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of income, cash flows,
and changes in stockholders' equity for each of the three years in the period
ended December 31, 1996. These financial statements (as restated -- see Note 3
as it relates to Rust) are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wheelabrator Technologies Inc.
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- ------------------------
ARTHUR ANDERSEN LLP
New York, New York
January 31, 1997 (except with
respect to the matter discussed
in Note 3 as it relates to Rust, as
to which the date is February 25, 1998)
<PAGE>
(b) Selected Quarterly Financial Data (Unaudited) is set forth in Note 11 of the
Notes to Consolidated Financial Statements referred to in Item 8(a) above.
Item 9 -- Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10 -- Directors and Executive Officers of the Registrant
Directors. The information appearing under the caption "Election of Directors"
on pages 2 through 4 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held April 30, 1997 (the "Proxy Statement"), is incorporated
herein by reference.
Executive Officers. Information with respect to executive officers of the
Company is set forth under the caption "Executive Officers of the Registrant" in
Item 1 of this report.
Item 11 -- Executive Compensation
Information appearing under the caption "Compensation" on pages 7 through 11 of
the Proxy Statement is incorporated herein by reference.
Item 12 -- Security Ownership of Certain Beneficial Owners and Management
Information appearing under the caption "Principal Stockholders" on pages 1 and
2 of the Proxy Statement and under the caption "Securities Ownership of
Management" on pages 4 through 6 of the Proxy Statement is incorporated herein
by reference.
Item 13 -- Certain Relationships and Related Transactions
Information appearing under the caption "Certain Transactions and Other Matters"
on pages 17 through 24 of the Proxy Statement is incorporated herein by
reference.
PART IV
Item 14 -- Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
The following financial statements and supplementary data of the Company
are included in this report:
(i) Consolidated Statements of Income for the years ended December
31, 1994, 1995 and 1996.
(ii) Consolidated Balance Sheets as of December 31, 1995 and 1996.
(iii) Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996.
(iv) Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1994, 1995 and 1996.
(v) Notes to Consolidated Financial Statements.
(vi) Report of Independent Public Accountants - Arthur Andersen LLP.
68
<PAGE>
(2) Schedules:
All schedules have been omitted since they are not applicable, not
required, or the information is included in the above-referenced financial
statements or notes thereto.
(3) Exhibits:
The exhibits to this report are listed in the Exhibit Index contained
elsewhere herein. Included in the exhibits listed therein are the following
exhibits which constitute management contracts or compensatory plans or
arrangements:*
(i) Restricted Unit Plan for Non-Employee Directors of the registrant
as amended through June 10, 1991 (incorporated by reference to
Exhibit 19.03 to the registrant's quarterly report on Form 10-Q for
the quarter ended June 30, 1991).
(ii) Amendment, dated as of December 6, 1991, to the Restricted Unit
Plan for Non-Employee Directors of the registrant (incorporated by
reference to Exhibit 19.05 to registrant's 1991 annual report on
Form 10-K).
(iii) Deferred Director's Fee Plan adopted June 10, 1991 (incorporated by
reference to Exhibit 19.02 to the registrant's quarterly report on
Form 10-Q for the quarter ended June 30, 1991).
(iv) 1988 Stock Plan for Executive Employees of Old WTI and its
subsidiaries ("1988 Stock Plan") (incorporated by reference to
Exhibit 28.1 to Amendment No. 1 to the registrant's registration
statement on Form S-8, Reg. No. 33-31523).
(v) Amendments, dated as of September 7, 1990, to the 1988 Stock Plan
(incorporated by reference to Exhibit 19.02 to the registrant's
1990 annual report on Form 10-K).
(vi) Amendment, dated as of November 1, 1990, to the 1988 Stock Plan
(incorporated by reference to Exhibit 19.04 to the registrant's
1990 annual report on Form 10-K).
(vii) Amendment, dated as of December 6, 1991, to the 1988 Stock Plan
(incorporated by reference to Exhibit 19.02 to the registrant's
1990 annual report on Form 10-K).
(viii) 1986 Stock Plan for Executive Employees of the registrant and its
subsidiaries ("1986 Stock Plan") (incorporated by reference to
Exhibit 28.2 to Amendment No. 1 to the registrant's registration
statement on Form S-8, Reg. No. 33-13720).
(ix) Amendment, dated as of November 1, 1990, to the 1986 Stock Plan
(incorporated by reference to Exhibit 19.03 to the registrant's
1990 annual report on Form 10-K).
(x) Amendment, dated as of December 6, 1991, to the 1986 Stock Plan
(incorporated by reference to Exhibit 19.01 to the registrant's
1991 annual report on Form 10-K).
(xi) Wheelabrator Technologies Inc. Corporate Incentive Bonus Plan (as
amended and restated as of March 13, 1995) (incorporated by
reference to Exhibit 10.38 to the registrant's 1994 annual report
on Form 10-K).
- -------------
*In case of incorporation by reference to documents filed under the
Securities Exchange Act of 1934, the registrant's file number under that Act is
0-14246.
69
<PAGE>
(xii) Wheelabrator Technologies Inc. Long Term Incentive Plan (as
amended and restated as of March 14, 1994) (incorporated by
reference to Exhibit 10.40 to the registrant's 1993 annual
report on Form 10-K).
(xiii) Retirement Plan for Non-Employee Directors of the registrant
(incorporated by reference to Exhibit 10.32 to the registrant's
1988 annual report on Form 10-K).
(xiv) Amendment, dated as of September 7, 1990, to the Retirement
Plan for Non-Employee Directors of the registrant (incorporated
by reference to Exhibit 19.01 to the registrant's 1990 annual
report on Form 10-K).
(xv) Amendment, dated June 10, 1991, to the Retirement Plan for Non-
Employee Directors of the registrant (incorporated by reference
to Exhibit 19.01 to the registrant's quarterly report on Form
10-Q for the quarter ended June 30, 1991).
(xvi) 1991 Stock Option Plan for Non-Employee Directors ("1991
Directors Plan") of the registrant adopted June 10, 1991
(incorporated by reference to Exhibit 19.04 to the registrant's
quarterly report on Form 10-Q for the quarter ended June 30,
1991).
(xvii) Amendment to 1991 Directors Plan dated as of December 22, 1993
(incorporated by reference to Exhibit 10.46 to the registrant's
1993 annual report on Form 10-K).
(xviii)Amendment to 1991 Directors Plan dated as of August 29, 1994
(incorporated by reference to Exhibit 10 to the registrant's
quarterly report on Form 10-Q for the quarter ended September
30, 1994).
(xix) 1992 Stock Option Plan of the registrant (incorporated by
reference to Exhibit 10.45 to the registrant's 1991 annual
report on Form 10-K).
(xx) Wheelabrator Technologies Inc./Rust International Inc.
Supplemental Benefit Plan (as amended and restated effective
January 1, 1995) (incorporated by reference to Exhibit 4.15 to
the registrant's registration statement on Form S-8, Reg. No.
33-64431).
(xxi) First Amendment effective as of May 20, 1996 to the
Wheelabrator Technologies Inc./Rust International Inc.
Supplemental Benefit Plan (incorporated by reference to Exhibit
10.52 to the registrant's 1996 annual report on Form 10-K).
(xxii) Second Amendment effective December 2, 1996 to the Wheelabrator
Technologies Inc./Rust International Inc. Supplemental Benefit
Plan (incorporated by reference to Exhibit 10.53 to the
registrant's 1996 annual report on Form 10-K).
(b) Reports on Form 8-K:
During the fiscal quarter ended December 31, 1996 the Company filed a
report dated December 2, 1996, on Form 8-K reporting under Item 2 that the
Company (i) had completed its disposition to United States Filter
Corporation ("U.S. Filter") of its industrial water process, manufacturing
and custom-engineered businesses for $369,600,000 in cash and (ii) had
centered into a Business Development Agreement with U.S. Filter. As a part
of the Report, the Company filed the following pro forma financial
information:
(i) Wheelabrator Technologies Inc. and Subsidiaries Condensed Consolidated
Balance Sheet and associated notes as of September 30, 1996 (Unaudited).
70
<PAGE>
(ii) Wheelabrator Technologies Inc. and Subsidiaries Condensed Consolidated
Statement of Income and associated notes for the nine months ended
September 30, 1996 (Unaudited).
(iii) Wheelabrator Technologies Inc. and Subsidiaries Condensed
Consolidated Statement of Income and associated notes for the year ended
December 31, 1995 (Unaudited).
In addition, during the fiscal quarter ended December 31, 1996, the
Company filed a Report dated December 18, 1996, on Form 8-K reporting under
Item 2 that the Company had issued a press release announcing that WM
International had reached an agreement to sell its equity investment in
Wessex Water Plc. No financial statements were filed with the report.
71
<PAGE>
SIGNATURES
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.
By /s/ ROBERT J. GAGALIS
---------------------
Robert J. Gagalis,
Vice President, Chief Financial Officer
and Treasurer
72
March 1, 1998
<PAGE>
WHEELABRATOR TECHNOLOGIES INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number and Description of Exhibit*
- ----------------------------------
<S> <C>
1. Inapplicable.
2.01 Agreement and Plan of Merger, dated March 30, 1990 and amended as of
July 24, 1990, among the registrant, WMX Technologies, Inc. ("WMX")
and WM Sub, Inc. (incorporated by reference to Exhibit 2.01 to the
registrant's statement on Form S-4, Reg. No. 33-36118).
2.02 Rust International Inc. Organizational Agreement, dated as of
December 31, 1992 ("Organizational Agreement"), by and among the
registrant, The Brand Companies, Inc. ("Brand") and Chemical Waste
Management, Inc. ("CWM") (incorporated by reference to Exhibit 7 to
Amendment No. 6 to Statement on Schedule 13D filed on January 5,
1993 by WMX, the registrant and CWM relating to securities of Brand,
Commission File No. 1-7327).
2.03 Amended and Restated Purchase and Sale Agreement between the Company
and United States Filter Corporation, dated as of September 14, 1996
(incorporated by reference to Exhibit 2.1 to the registrant's report
on Form 8-K dated December 2, 1996).
2.04 Agreement and Amendment between the Company and United States Filter
Corporation, dated as of December 2, 1996 (incorporated by reference
to Exhibit 2.2 to the registrant's report on Form 8-K dated December
2, 1996).
3.01 Restated Certificate of Incorporation of the registrant (incorporated
by reference to Exhibit 3.01 to registrant's 1989 annual report on Form
10-K).
3.02 Certificate of Amendment to the registrant's Restated Certificate of
Incorporation dated May 6, 1993 (incorporated by reference to Exhibit
19 to the registrant's report on Form 10-Q for the quarter ended March
31, 1993).
3.03 By-Laws of the registrant as amended through January 30, 1997
(incorporated by reference to Exhibit 3.03 to the registrant's report
on Form 10-K for the year ended December 31, 1996).
4. None.
5. Inapplicable.
6. Inapplicable.
7. Inapplicable.
8. Inapplicable.
</TABLE>
*In the case of incorporation by reference of documents filed under the
Securities Exchange Act of 1934, the registrant's file number under that Act is
0-14246.
1
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
9. None.
10.01 Master Support Agreement, dated as of February 26, 1986, among
AlliedSignal Inc. ("AlliedSignal"), the registrant and Signal Capital
Corporation, as amended and restated as of January 27, 1987, and as
further amended and restated as of December 7, 1988, among
AlliedSignal, Wheelabrator Technologies Inc. ("Old WTI"), the
Guaranteeing Subsidiaries referred to therein, the Non-Company Resco
Subsidiaries referred to therein, the registrant and Koll Real Estate
Group, Inc. ("KREG") (incorporated by reference to Exhibit 10.22 to
Amendment No. 3 on Form 8 to KREG's registration statement on Form 10,
Commission File No. 0-17189).
10.02 Assignment, Assumption and Release Agreement, dated as of December 7,
1988, among the registrant, Old WTI, the Old Guaranteeing Subsidiaries
(as defined therein) and AlliedSignal (incorporated by reference to
Exhibit 10.22B to Amendment No. 3 on Form 8 to KREG's registration
statement on Form 10, Commission File No. 0-17189).
10.03 Assignment and Assumption Agreement, dated as of December 7, 1988,
among the registrant, Old WTI and KREG (incorporated by reference to
Exhibit 10.18B to KREG's 1988 annual report on Form 10-K, Commission
File No. 0-17189).
10.04 Land Option Agreement ("Land Option Agreement"), dated as of August 12,
1988, between Old WTI and Waste Management, Inc. ("WMI") (incorporated
by reference to Exhibit 10.15 to the registrant's 1988 annual report on
Form 10-K).
10.05 Amendment No. 1, dated as of June 1, 1992, to Land Option Agreement
between Resco Holdings Inc. ("Resco"), as successor by merger to Old
WTI, and WMI (incorporated by reference to Exhibit 19.01 to the
registrant's 1992 annual report on Form 10-K ).
10.06 Amendment No. 2 dated as of November 15, 1995 to Land Option Agreement
(incorporated by reference to Exhibit 10.06 to the registrant's report
on Form 10-K for the year ended December 31, 1996).
10.07 Second Amended and Restated Airspace Dedication Agreement, dated as of
December 13, 1992, between Resco and WMI (incorporated by reference to
Exhibit 19.02 to the registrant's 1992 annual report on Form 10-K).
10.08 Disposal Agreement, dated as of March 1, 1989, between Waste Management
Inc. of Florida and Broward Waste Energy (incorporated by reference to
Exhibit 10.17A to the registrant's 1988 annual report on Form 10-K).
10.09 Guaranty, dated August 2, 1988, from WMX to the registrant and
Wheelabrator Technologies of North America Inc., formerly known as
Wheelabrator Technologies Inc. ("WTNA") (incorporated by reference to
Exhibit 10.19 to the registrant's 1988 annual report on Form 10-K).
10.10 Restricted Unit Plan for Non-Employee Directors of the registrant, as
amended through June 10, 1991 (incorporated by reference to Exhibit
19.03 to the registrant's quarterly report on Form 10-Q for the quarter
ended June 30, 1991).
10.11 Amendment, dated as of December 6, 1991, to the Restricted Unit Plan
for Non-Employee Directors of the registrant (incorporated by reference
to Exhibit 19.05 to
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
the registrant's 1991 annual report on Form 10-K).
10.12 Deferred Director's Fee Plan adopted June 10, 1991 (incorporated by
reference to Exhibit 19.02 to the registrant's quarterly report on Form
10-Q for the quarter ended June 30, 1991).
10.13 Lease Agreement, dated as of September 15, 1987, between Wilmington
Trust Company, as Owner Trustee, lessor, and Wheelabrator Millbury
Inc., lessee (incorporated by reference to Exhibit 10.51 to the
registrant's 1988 annual report on Form 10-K).
10.14 Lease Agreement, dated as of December 30, 1987, as amended and restated
as of April 1, 1988, between Wilmington Trust Company, as Corporate
Owner Trustee, and Donald E. Smith, as Individual Owner Trustee,
lessor, and Signal Shasta Energy Company Inc., lessee (incorporated by
reference to Exhibit 10.52 to the registrant's 1988 annual report on
Form 10-K).
10.15 Lease Agreement, dated as of September 15, 1988, between State Street
Bank and Trust Company of Connecticut, N.A., lessor, and Baltimore
Refuse Energy Systems Company, Limited Partnership, lessee
(incorporated by reference to Exhibit 10.40 to registrant's
registration statement on Form S-4, Reg. No. 33-36118).
10.16 Second Amendment and Restatement of Lease Agreement, dated as of May 1,
1988, between the First National Bank of Boston, as Corporate Owner
Trustee, James E. Mogavero, as Individual Owner Trustee, lessor, and
Bridgeport Resco, lessee (incorporated by reference to Exhibit 10.41 to
registrant's registration statement on Form S-4, Reg. No. 33-36118).
10.17 Modification Agreement, dated as of August 24, 1989, among the
registrant, Old WTI, WMI, KREG and Resco (incorporated by reference to
Exhibit 28.01 to the registrant's Form 8-K dated August 24, 1989).
10.18 Assignment, Assumption and Release Agreement, dated December 18, 1989,
among KREG, Henley Holdings, Inc., Henley, Henley Support Co. Two, the
registrant and Resco amending the Modification Agreement (incorporated
by reference to Exhibit 10.69 to the registrant's registration
statement on Form S-4, Reg. No. 33-36118).
10.19 Letter Agreement, dated October 25, 1990, among the registrant, WMI,
Resco, Henley and Henley Support Co. Two amending the Modification
Agreement (incorporated by reference to Exhibit 10.46 to the
registrant's 1990 annual report on Form 10-K).
10.20 Letter Agreement, dated November 8, 1991, among the registrant, Henley,
KREG, WMX, WMI, New Henley Holdings Inc. and WTNA, amending the
Modification Agreement (incorporated by reference to Exhibit 10.23 to
the registrant's 1991 annual report on Form 10-K).
10.21 1988 Stock Plan for Executive Employees of Old WTI and its subsidiaries
("1988 Stock Plan") (incorporated by reference to Exhibit 28.1 to
Amendment No. 1 to the registrant's registration statement on Form S-8,
Reg. No. 33-31523).
10.22 Amendments, dated as of September 7, 1990, to the 1988 Stock Plan
(incorporated
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
by reference to Exhibit 19.02 to the registrant's 1990 annual report on
Form 10-K).
10.23 Amendment, dated as of November 1, 1990, to the 1988 Stock Plan
(incorporated by reference to Exhibit 19.04 to the registrant's 1990
annual report on Form 10-K).
10.24 Amendment, dated as of December 6, 1991, to the 1988 Stock Plan
(incorporated by reference to Exhibit 19.02 to the registrant's 1991
annual report on Form 10-K).
10.25 1986 Stock Plan for Executive Employees of the registrant and its
subsidiaries ("1986 Stock Plan") (incorporated by reference to Exhibit
28.2 to Amendment No. 1 to the registrant's registration statement on
Form S-8, Reg. No. 33-31523).
10.26 Amendment, dated as of November 1, 1990, to the 1986 Stock Plan
(incorporated by reference to Exhibit 19.03 to the registrant's 1990
annual report on Form 10-K).
10.27 Amendment, dated as of December 6, 1991, to the 1986 Stock Plan
(incorporated by reference to Exhibit 19.01 to the registrant's 1991
annual report on Form 10-K).
10.28 Restated Funding Agreement, dated as of September 7, 1990, among Resco,
the registrant and WMX (incorporated by reference to Exhibit 10.34 to
the registrant's 1990 annual report on Form 10-K).
10.29 Intellectual Property Licensing Agreement, dated as of September 7,
1990, by and among Waste Management International, Inc. ("WMII"), WMI
and the registrant (incorporated by reference to Exhibit 10.37 to the
registrant's 1990 annual report on Form 10-K).
10.30 Amended and Restated Master Intercorporate Agreement, dated as of
November 1, 1993, by and among WMX, CWM and the registrant
(incorporated by reference to Exhibit 10.36 to the registrant's 1993
annual report on Form 10-K).
10.31 Wheelabrator Technologies Inc. Corporate Incentive Bonus Plan (as
amended and restated as of March 13, 1995) (incorporated by reference
to Exhibit 10.38 to the registrant's 1994 annual report on Form 10-K).
10.32 Wheelabrator Technologies Inc. Long Term Incentive Plan (as amended and
restated as of March 23, 1994) (incorporated by reference to Exhibit
10.40 to the registrant's 1993 annual report on Form 10-K).
10.33 Retirement Plan for Non-Employee Directors of the registrant
(incorporated by reference to Exhibit 10.32 to the registrant's 1988
annual report on Form 10-K).
10.34 Amendment, dated as of September 7, 1990, to the Retirement Plan for
Non-Employee Directors of the registrant (incorporated by reference to
Exhibit 19.01 to the registrant's 1990 annual report on Form 10-K).
10.35 Amendment, dated June 10, 1991, to the Retirement Plan for Non-Employee
Directors of the registrant (incorporated by reference to Exhibit 19.01
to the registrant's quarterly report on Form 10-Q for the quarter ended
June 30, 1991).
10.36 1991 Stock Option Plan for Non-Employee Directors of the registrant
("1991 Directors Plan") adopted June 10, 1991 (incorporated by
reference to Exhibit 19.04 to the registrant's quarterly report on Form
10-Q for the quarter ended June 30, 1991).
</TABLE>
4
<PAGE>
10.37 Amendment to 1991 Directors Plan dated as of December 22, 1993
(incorporated by reference to Exhibit 10.46 to the registrant's 1993
annual report on Form 10-K).
10.38 Amendment to 1991 Directors Plan adopted on August 29, 1994 (incorporated
by reference to Exhibit 10.46 to the registrant's quarterly report on
Form 10-Q for the quarter ended September 30, 1994).
10.39 1992 Stock Option Plan of the registrant (incorporated by reference to
Exhibit 10.45 to the registrant's 1991 annual report on Form 10-K).
10.40 Rust Intercorporate Services Agreement ("Rust Intercorporate Services
Agreement"), dated as of January 1, 1993, by and among the registrant,
Rust International Inc. ("Rust"), WMX and CWM (incorporated by reference
to Exhibit 10.42 to the registrant's 1992 annual report on Form 10-K).
10.41 Amendment No. 1 dated as of August 10, 1993 to Rust Intercorporate
Services Agreement (incorporated by reference to Exhibit 10.49 to the
registrant's 1993 annual report on Form 10-K).
10.42 Amendment No. 2 dated as of August 25, 1995 to Rust Intercorporate
Services Agreement (incorporated by reference to Exhibit 10.42 to the
registrant's 1995 annual report on Form 10-K).
10.43 Amendment No. 3 dated as of December 31, 1995 to Rust Intercorporate
Services Agreement (incorporated by reference to Exhibit 10.43 to the
registrant's 1995 annual report on Form 10-K).
10.44 Organizational Agreement (see Item 2.02 hereof).
10.45 Third Amended and Restated International Development Agreement, dated as
of January 1, 1993, among the registrant, WMX, CWM, WMII, Waste
Management International B.V. ("WMIBV"), Waste Management International
plc ("WM International"), Rust, WTI International Holdings Inc. ("WTI
International") and RIH Inc. ("RIH") (incorporated by reference to
Exhibit 19.05 to the registrant's 1992 annual report on Form 10-K).
10.46 First Amended and Restated International Business Opportunities Agreement
("IBOA"), dated as of January 1, 1993, by and among the registrant, WMX,
CWM, WM International, WMII and Rust (incorporated by reference to
Exhibit 28 to the registrant's registration statement on Form S-3, Reg.
No. 33-59606).
10.47 Amendment Agreement, dated as of January 28, 1994, by and among the
registrant, WMX, CWM, WM International, WMII and Rust amending the IBOA
(incorporated by reference to Exhibit 10.53 to the registrant's 1993
annual report on Form 10-K).
10.48 Amendment Agreement, dated as of July 10, 1995, by and among the
registrant, WMX, CWM, WM International, WMII and Rust amending the IBOA
(incorporated by reference to Exhibit 10 to the registrant's quarterly
report on Form 10-Q for the quarter ended September 30, 1995).
10.49 Amended and Restated Master Dividend Deed, dated December 30, 1992, by
and among the registrant, CWM, WMII, WMX's foreign nominee, WM
International,
5
<PAGE>
WMIBV, RIH and WTI International (incorporated by reference to Exhibit
19.07 to the registrant's 1992 annual report on Form 10-K).
10.50 Reimbursement Agreement, dated March 10, 1993, between WMX and the
registrant (incorporated by reference to Exhibit 10.51 to the
registrant's registration statement on Form S-1, Reg. No. 33-47575).
10.51 Wheelabrator Technologies Inc./Rust International Inc. Supplemental
Benefit Plan (as amended and restated effective January 1, 1995)
(incorporated by reference to Exhibit 4.15 to the registrant's
registration statement on Form S-8, Reg. No. 33-64431).
10.52 First Amendment effective as of May 20, 1996 to the Wheelabrator
Technologies Inc./Rust International Inc. Supplemental Benefit Plan
(incorporated by reference to Exhibit 10.52 to the registrant's 1996
annual report on Form 10-K).
10.53 Second Amendment effective December 2, 1996 to the Wheelabrator
Technologies Inc./Rust International Inc. Supplemental Benefit Plan
(incorporated by reference to Exhibit 10.53 to the registrant's 1996
annual report on Form 10-K).
11. None.
12. None.
13. Inapplicable
14. Inapplicable.
15. Inapplicable.
16. None.
17. Inapplicable.
18. None.
19. Inapplicable.
20. Inapplicable.
21. List of subsidiaries of the registrant (incorporated by reference to
Exhibit 21 to the registrant's 1996 annual report on Form 10-K).
22. None.
23. Consent of Arthur Andersen LLP.
24. None.
25. Inapplicable.
26. Inapplicable.
27. Financial Data Schedule.
6
<PAGE>
28. None.
99. None.
7
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports to the Stockholders of Wheelabrator Technologies Inc., incorporated by
reference in this Form 10-K/A and into the registrant's previously filed
Registration Statements on Form S-8 (registration nos. 33-31523, 33-13720, 33-
47989, 33-48837, 33-62281 and 33-64431) and into the registrant's previously
filed Registration Statement on Form S-4 (registration no. 33-36118) and into
the registrant's previously filed Registration Statement on Form S-3
(registration no. 33-59606).
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
New York, New York
February 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1996, CONSOLIDATED BALANCE SHEET -RESTATED AND THE CONSOLIDATED
STATEMENT OF INCOME - RESTATED FOR THE TWELVE-MONTH PERIOD ENDED DECEMBER 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
AND THE FOOTNOTES.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 306,072
<SECURITIES> 0
<RECEIVABLES> 128,258
<ALLOWANCES> 5,094
<INVENTORY> 0
<CURRENT-ASSETS> 512,016
<PP&E> 1,986,955
<DEPRECIATION> 425,030
<TOTAL-ASSETS> 3,046,783
<CURRENT-LIABILITIES> 325,536
<BONDS> 800,153
0
0
<COMMON> 1,895
<OTHER-SE> 1,143,985
<TOTAL-LIABILITY-AND-EQUITY> 3,046,783
<SALES> 0
<TOTAL-REVENUES> 952,312
<CGS> 0
<TOTAL-COSTS> 618,779
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,531
<INTEREST-EXPENSE> 57,514
<INCOME-PRETAX> 212,449
<INCOME-TAX> 101,948
<INCOME-CONTINUING> 110,501
<DISCONTINUED> (106,661)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,840
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
