FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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 1-3122
Covanta Energy Corporation (Debtor in Possession)
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(Exact name of registrant as specified in its charter)
Delaware 13-5549268
- --------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
40 Lane Road, Fairfield, NJ 07004
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(Address or principal executive office) (Zip code)
(973) 882-9000
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(Registrant's telephone number including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by checkmark 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 |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of the registrant's Common Stock outstanding as of August
30, 2002 was 49,827,651 shares. The number of shares of the registrant's $1.875
Cumulative Convertible Preferred Stock (Series A) outstanding as of August 30,
2002 was 33,049 shares.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------
2002 2001
--------------------------------
(In Thousands of Dollars,
Except Per Share Amounts)
Service revenues $ 130,578 $ 139,648
Electricity and steam sales 89,507 83,891
Equity in income from unconsolidated subsidiaries 3,855 4,482
Construction revenues 12,394 9,423
Other sales-net 11,478
Other - net 7
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Total revenues 236,341 248,922
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Plant operating expenses 133,433 134,193
Construction costs 12,648 6,757
Depreciation and amortization 25,436 23,777
Debt service charges-net 22,026 20,735
Other operating costs and expenses 13,800 11,910
Net loss (gain) on sale of businesses 24,150 (1,855)
Costs of goods sold 10,930
Selling,administrative and general expenses 19,034 17,087
Project development expenses 1,213 1,726
Other-net 33,890 750
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Total costs and expenses 285,630 226,010
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Consolidated operating income (loss) (49,289) 22,912
Interest expense-net of interest income of $650 and $3,843, respectively (7,899) (7,440)
------------- -------------
Income (loss) from operations before
income taxes and minority interests (57,188) 15,472
Income tax (provision) benefit 7,578 (4,658)
Minority interests (1,342) (1,399)
------------- -------------
Net Income (Loss) (50,952) 9,415
------------- -------------
Other Comprenhensive Income (Loss), Net of Tax:
Foreign currency translation adjustments (net of income taxes of
($415) and $127, respectively) (1,133) (724)
Less reclassification adjustment for translation adjustment included in
loss from operations 1,233
Unrealized holding losses on marketable securities arising during period (4)
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Other comprehensive income (loss) 96 (724)
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Comprenhensive Income (Loss) $ (50,856) $ 8,691
============= =============
Basic Earnings (Loss) Per Share $ (1.02) $ 0.19
============= =============
Diluted Earnings (Loss) Per Share $ (1.02) $ 0.19
============= =============
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
(In Thousands of Dollars,
Assets Except Per Share Amounts)
Current Assets:
Cash and cash equivalents $ 91,048 $ 86,773
Restricted funds held in trust 110,778 93,219
Receivables (less allowances of $14,138 and
$16,444, respectively) 253,302 306,712
Deferred income taxes 27,500 27,500
Prepaid expenses and other current assets 85,453 102,470
Assets held for sale 63,125 67,948
------------ ------------
Total current assets 631,206 684,622
Property, plant and equipment-net 1,799,704 1,901,311
Restricted funds held in trust 161,515 167,009
Unbilled service and other receivables 150,866 150,825
Unamortized contract acquisition costs-net 66,395 82,325
Goodwill and other intangible assets-net 15,744 18,317
Investments in and advances to investees and joint ventures 163,361 183,231
Other assets 57,017 59,512
------------ ------------
Total Assets $ 3,045,808 $ 3,247,152
============ ============
Liabilities and Shareholders' Equity (Deficit)
Liabilities:
Current liabilities:
Current portion of long-term debt $ 12,524 $ 13,089
Current portion of project debt 114,249 113,112
Convertible subordinated debentures 148,650 148,650
Accounts payable 37,936 37,142
Federal and foreign income taxes payable 5,956 5,955
Liabilities related to assets held for sale 212,956 217,206
Accrued expenses 345,845 362,388
Deferred income 42,363 42,694
------------ ------------
Total current liabilities 920,479 940,236
Long-term debt 294,590 298,602
Project debt 1,210,538 1,302,381
Deferred income taxes 316,816 323,669
Deferred income 159,018 161,525
Other liabilities 156,735 174,345
Minority interests 32,170 40,150
------------ ------------
Total liabilities 3,090,346 3,240,908
------------ ------------
Shareholders' Equity (Deficit):
Serial cumulative convertible preferred stock, par value $1.00 per share;
authorized, 4,000,000 shares; shares outstanding : 33,049 and
33,480, both net of treasury shares of 29,820 33 34
Common stock,par value $.50 per share;authorized, 80,000,000 shares;
shares outstanding: 49,827,651 and 49,835,076, net of
treasury shares of 4,121,950 and 4,111,950, respectively 24,914 24,918
Capital surplus 188,214 188,371
Notes receivable from key employees for common stock issuance (870) (870)
Unearned restricted stock compensation (412) (664)
Earned deficit (256,230) (205,262)
Accumulated other comprehensive loss (187) (283)
------------ ------------
Total Shareholders' Equity (Deficit) (44,538) 6,244
------------ ------------
Total Liabilities and Shareholders' Equity (Deficit) $ 3,045,808 $ 3,247,152
============ ============
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Three months ended Year ended
March 31, 2002 December 31, 2001
Shares Amounts Shares Amounts
--------------------------- ---------------------------
(In thousands of dollars, except share and per share amounts)
Serial cumulative convertible preferred
Stock, par value $1.00 per share;
authorized, 4,000,000 shares:
Balance at beginning of period 63,300 $ 64 65,402 $ 66
Shares converted into common stock (431) (1) (2,102) (2)
------------------------- --------------------------
Total 62,869 63 63,300 64
Treasury shares (29,820) (30) (29,820) (30)
------------------------- --------------------------
Balance at end of period(aggregate involuntary
liquidation value-2002,$660) 33,049 33 33,480 34
------------------------- --------------------------
Common stock, par value $.50 per share;
authorized, 80,000,000 shares:
Balance at beginning of year 53,947,026 26,974 53,910,574 26,956
Exercise of stock options 23,898 12
Conversion of preferred shares 2,575 1 12,554 6
------------------------- --------------------------
Total 53,949,601 26,975 53,947,026 26,974
------------------------- --------------------------
Treasury shares at beginning of year 4,111,950 2,056 4,265,115 2,133
Issuance (cancellation) of restricted stock 10,000 5 (114,199) (57)
Exercise of stock options (38,966) (20)
------------------------- --------------------------
Treasury shares at end of period 4,121,950 2,061 4,111,950 2,056
------------------------- --------------------------
Balance at end of period 49,827,651 24,914 49,835,076 24,918
------------------------- --------------------------
Capital surplus:
Balance at beginning of period 188,371 185,681
Exercise of stock options 776
Issuance (cancellation) of restricted stock (157) 1,918
Conversion of preferred shares (4)
---------- ---------
Balance at end of period 188,214 188,371
---------- ---------
Notes receivable from key employees for common stock issuance (870) (870)
---------- ---------
Unearned Restricted Stock Compensation:
Balance at beginning of period (664)
(Issuance) cancellation of restricted common stock 162 (1,567)
Amortization of unearned restricted stock compensation 90 903
---------- ---------
Balance at end of period (412) (664)
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Earned Surplus (Deficit):
Balance at beginning of period (205,262) 25,829
Net income (loss) (50,952) (231,027)
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Total (256,214) (205,198)
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Preferred dividends per share $.46875 and $1.875, respectively 16 64
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Balance at end of period (256,230) (205,262)
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Cumulative Translation Adjustment-Net (183) (283)
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Net Unrealized Loss on Securities Available for Sale (4)
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TOTAL SHAREHOLDERS' EQUITY (DEFICIT) $ (44,538) $ 6,244
========== =========
See notes to condensed consolidated financial statements.
COVANTA ENERGY CORPORATION (DEBTOR IN POSSESSION) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
2002 2001
------------ ------------
(In Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (50,952) $ 9,415
Adjustments to Reconcile Net Income (Loss) to Net Cash
provided by Operating Activities:
Depreciation and amortization 25,436 23,777
Deferred income taxes (9,053) 1,669
Provision for doubtful accounts 4,855 10,028
Bank fees 11,492
Other 16,912 4,257
Management of Assets and Liabilities:
Decrease (Increase) in Assets:
Receivables 45,343 (18,097)
Other assets (1,928) (8,861)
Increase (Decrease) in Liabilities:
Accounts payable 4,980 (7,124)
Accrued expenses (5,274) 3,897
Deferred income (4,964) 2,342
Other liabilities (25,918) (9,550)
------------ ----------
Net cash provided by operating activities 10,929 11,753
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses 36,164 9,947
Proceeds from sale of property, plant and equipment 54
Investments in facilities (2,808) (4,329)
Other capital expenditures (3,912)
Increase (decrease) in other receivables (142) 23
Distributions from investees and joint ventures 11,186 5,050
Investment in and advances to
investees and joint ventures (574) (13,923)
------------ ----------
Net cash provided by (used in) investing activities 43,880 (7,144)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New debt 2,987 3,415
Restricted cash 194,118
Funds held in trust (19,813) (7,104)
Payment of debt (33,455) (184,046)
Dividends paid (16) (17)
Proceeds from exercise of stock options 200
Other-net (237) (671)
------------ ----------
Net cash provided by (used in) financing activities (50,534) 5,895
------------ ----------
Net Increase in Cash and Cash Equivalents 4,275 10,504
Cash and Cash Equivalents at Beginning of Period 86,773 80,643
------------ ----------
Cash and Cash Equivalents at End of Period $ 91,048 $ 91,147
=========== ==========
See notes to condensed consolidated financial statements.
ITEM 1 - NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation and Bankruptcy Filing:
The accompanying unaudited Condensed Consolidated Financial Statements (the
"Financial Statements") have been prepared in accordance with the instructions
to Form 10-Q and, therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations,
and cash flows in conformity with accounting principles generally accepted in
the United States of America ("GAAP"). However, in the opinion of management,
all adjustments consisting of normal recurring accruals necessary for a fair
presentation of the operating results have been included in the Financial
Statements.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include management's estimate of the carrying values of its assets
held for sale and related liabilities, estimated useful lives of long-lived
assets, allowances for doubtful accounts receivable, and liabilities for workers
compensation, severance, restructuring and certain litigation.
The Financial Statements include the accounts of Covanta Energy Corporation
(Debtor in Possession) and its Subsidiaries ("Covanta" or "the Company"). In
March 2001, the Company changed its name from Ogden Corporation to Covanta
Energy Corporation. Covanta is engaged in developing, owning and operating
international power generation projects and provides related infrastructure
services. The Company also offers single source design, build and operate
capabilities for water and wastewater treatment infrastructures. Companies in
which Covanta has equity investments of 20% to 50% are accounted for using the
equity method since Covanta has the ability to exercise significant influence
over their operating and financial policies. Those companies in which Covanta
owns less than 20% are accounted for using the cost method, except for two
companies in which Covanta owns less than 20% but has significant influence over
the operations of these companies through representation on the Boards of
Directors, shareholder rights, and ownership in the operators of the energy
facilities owned. All intercompany transactions and balances have been
eliminated.
On April 1, 2002 (the "Petition Date"), Covanta Energy Corporation and 123 of
its domestic subsidiaries (collectively the "Debtors") filed voluntary petitions
for reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"). The pending Chapter 11 Cases (the
"Chapter 11 Cases") are being jointly administered for procedural purposes only.
International operations and other subsidiaries and joint venture partnerships
were not included in the filing. See Subsequent Events below for a more detailed
discussion of the Chapter 11 Cases.
The Financial Statements have been prepared on a "going concern" basis in
accordance with GAAP. The "going concern" basis of presentation assumes that the
Company will continue in operation for the foreseeable future and will be able
to realize its assets and discharge its liabilities in the normal course of
business. Because of the Chapter 11 Cases and the circumstances leading to the
filing thereof, the Company's ability to continue as a "going concern" is
subject to substantial doubt and is dependent upon, among other things,
confirmation of a plan of reorganization, the Company's ability to comply with
the terms of, and if necessary renew, the Debtor in Possession Credit Facility
(see Liquidity/Cash Flow below), and the Company's ability to generate
sufficient cash flows from operations, asset sales and financing arrangements to
meet its obligations. There can be no assurances this can be accomplished and if
it were not, the Company's ability to realize the carrying value of its assets
and discharge its liabilities would be subject to substantial uncertainty.
Therefore, if the "going concern" basis were not used for the Financial
Statements, then significant adjustments could be necessary to the carrying
value of assets and liabilities, the revenues and expenses reported, and the
balance sheet classifications used.
The Financial Statements do not reflect adjustments that may occur in accordance
with the American Institute of Certified Public Accountant's Statement of
Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"), which the Company will adopt for its financial
reporting in periods ending after April 1, 2002 assuming that the Company will
continue as a "going concern". In the Chapter 11 Cases, all or substantially all
of the liabilities of the Debtors as of the Petition Date are subject to
compromise or other treatment under a plan of reorganization which must be
confirmed by the Bankruptcy Court after submission to all required parties for
approval pursuant to the relevant provisions of the Bankruptcy Code. For
financial reporting purposes, those liabilities and obligations whose treatment
and satisfaction is dependent on the outcome of the Chapter 11 Cases will be
segregated and classified as Liabilities Subject to Compromise in the
Consolidated Balance Sheets under SOP 90-7. Included in such liabilities will be
an estimate of the expected amount of allowed claims under Chapter 11 of the
Bankruptcy Court, including damages resulting from the rejection of executory
contracts and leases.
Generally, the filing of the Chapter 11 Cases imposed an automatic stay on
actions to enforce or otherwise effect payment of liabilities arising prior to
the Petition Date, including pending litigation against the Debtors. Although
the Bankruptcy Court has the power to lift the stay, the Company expects the
ultimate amount of, and settlement terms for, such liabilities to be subject to
a confirmed plan of reorganization and, accordingly, are not presently
determinable. Pursuant to SOP 90-7, professional fees associated with the
Chapter 11 Cases will be expensed as incurred and reported as reorganization
costs. Also, interest expense will be reported only to the extent that it will
be paid during the Chapter 11 Cases or that it is probable that it will be an
allowed claim.
Under the applicable provisions of the Bankruptcy Code, the Debtors may elect to
assume or reject real estate leases, employment contracts, personal property
leases, service contracts and other unexpired pre-petition executory contracts,
subject to Bankruptcy Court approval. The Debtors are continuing to review all
unexpired leases and executory contracts to determine, in their business
judgement, whether to seek the assumption or rejection of such leases and
contracts. Assumption of such leases and contracts would generally require the
Debtors to cure existing defaults, and rejection of such leases or contracts
could result in additional liabilities subject to compromise.
On September 17, 1999, the Company announced that it intended to sell its
Aviation and Entertainment businesses and on September 29, 1999, the Board of
Directors of the Company formally adopted a plan to sell the operations of its
Aviation and Entertainment units which were previously reported as separate
business segments. As a result of the adoption of this plan, these operations
were presented as discontinued operations until December 31, 2000.
At December 31, 2000, the Company had substantially completed its sales of the
discontinued operations and classified the remaining unsold Aviation and
Entertainment businesses as assets held for sale in its December 31, 2000
consolidated financial statements. These non-core businesses are reported in the
Other segment at December 31, 2000 and for the year ended December 31, 2001. In
addition at December 31, 2000, the Company classified its other non-core
subsidiaries, Datacom, Inc. ("Datacom"), a contract manufacturing company
located in Mexico, and Compania General de Sondeos, S.A. ("CGS"), an
environmental and infrastructure company in Spain, as an asset held for sale.
Datacom and CGS are reported in the Other segment and the Energy segment,
respectively. In November 2000, the Company sold other non-core businesses
including Applied Data Technology, Inc. ("ADTI") and its environmental
consulting subsidiary. In November 2001, the Company sold Datacom.
In 1999, in transactions accounted for as purchases, Covanta acquired the shares
of a Philippine diesel-fired power plant, a 74% interest in a Thailand gas-fired
facility, a 90% interest in a Thailand company that operates and maintains
several power plant facilities, the unowned 50% partnership interests in the
Heber Geothermal Company, which owns a geothermal power plant in California, and
Heber Field Company in California for a total cost of $58.5 million. The
operations of these companies have been included in the Company's Consolidated
Financial Statements from the dates of acquisition. In March 2002, the Company
sold its entire interest in the two Thai companies (see Liquidity/Cash Flow).
In accordance with Statement of Financial Accounting Standards No. 144 (see
below), prior period amounts related to assets held for sale and related
liabilities have been reclassified in the 2001 condensed consolidated balance
sheet.
Change in Accounting Principle:
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133, as amended and interpreted, establishes accounting
and reporting standards for derivative instruments, including certain
derivatives embedded in other contracts, and for hedging activities. All
derivatives are required to be recorded in the balance sheet as either an asset
or liability measured at fair value, with changes in fair value recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows derivative gains and losses to offset
related results on the hedged items in the Statements of Consolidated Operations
and Comprehensive Income (Loss), and requires that a company must formally
document, designate, and assess the effectiveness of derivatives that receive
hedge accounting.
The Company's policy is to enter into derivatives to protect the Company against
fluctuations in interest rates and foreign currency exchange rates as they
relate to specific assets and liabilities. The Company's policy is to not enter
into derivative instruments for speculative purposes.
The Company identified all derivatives within the scope of SFAS No. 133. The
adoption of SFAS No. 133 did not have a material impact on the results of
operations of the Company and increased both assets and liabilities recorded on
the balance sheet by approximately $12.3 million on January 1, 2001. The $12.3
million relates to the Company's interest rate swap agreement that economically
fixes the interest rate on certain adjustable rate revenue bonds reported in the
Project Debt category "Revenue Bonds Issued by and Prime Responsibility of
Municipalities." The asset and liability recorded on January 1, 2001 were
increased by $0.9 million during the year ended December 31, 2001 to adjust for
an increase in the swap's fair value to $13.2 million at December 31, 2001. The
carrying value of this asset and liability decreased to $12.5 million at March
31, 2002 and was $13.8 million at March 31, 2001.
The Company implemented SFAS No. 133 based on the current rules and guidance in
place as of January 1, 2001 and has applied the guidance issued since then by
the Financial Accounting Standards Board ("the FASB").
New Accounting Pronouncements:
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires the use of the purchase method of accounting for business
combinations initiated after June 30, 2001 and prohibits the use of the
pooling-of-interests method. The adoption of SFAS No. 141 had no impact on the
Company's financial position or results of operations.
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets." The Company adopted SFAS No. 142 on January 1, 2002. SFAS No. 142
requires upon adoption the discontinuance of goodwill amortization, which the
Company estimates would have been $0.2 million for the three months ending March
31, 2002. In addition, the standard includes provisions for the reclassification
of certain existing recognized intangibles as goodwill, reassessment of the
useful lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. SFAS No. 142 also requires the Company to complete a transitional
goodwill impairment test within six months of the date of adoption and to
evaluate for impairment the carrying value of goodwill on an annual basis
thereafter. The Company is in the process of performing that test and has not
yet determined the effect of that requirement upon adoption of SFAS No. 142 on
its financial position and results of operations. Identifiable intangible assets
with finite lives will continue to be amortized over their useful lives and
reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," discussed below.
Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirements Obligations," which is effective for the Company on January 1, 2003.
SFAS No. 143 requires that a liability for asset retirement obligations be
recognized in the period in which it is incurred if it can be reasonably
estimated. It also requires such costs to be capitalized as part of the related
asset and amortized over such asset's remaining useful life. The Company is
currently assessing, but has not yet determined, the effect of adoption of SFAS
No. 143 on its financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144. The Company adopted SFAS No. 144
on January 1, 2002. SFAS No. 144 replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and establishes accounting and reporting standards for long-lived assets to be
disposed of by sale. SFAS No. 144 applies to all long-lived assets, including
assets held for sale. SFAS No. 144 requires that those assets be measured at the
lower of carrying amount or fair value less costs to sell. It also broadens this
reporting to include all components of an entity with operations that can be
distinguished from the rest of the entity that will be eliminated from the
ongoing operations of the entity in a disposal transaction. The adoption of SFAS
No. 144 did not have a material effect on the Company's financial position and
results of operations but has required certain balance sheet reclassifications
of these assets and liabilities at March 31, 2002 and December 31, 2001.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4
("Reporting Gains and Losses from Extinguishment of Debt"), No. 44 ("Accounting
for Intangible Assets of Motor Carriers") and No. 64 ("Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements"), Amendment of SFAS No. 13
("Accounting for Leases") and Technical Corrections." The provisions of SFAS No.
145 related to the rescission of SFAS No. 4 require application in fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the current criteria for classification as an extraordinary item shall be
reclassified. The provisions of this Statement related to SFAS No. 13 and the
technical corrections are effective for transactions occurring after May 15,
2002. All other provisions of SFAS No. 145 shall be effective for financial
statements issued on or after May 15, 2002. Early application of the provisions
of SFAS No. 145 is encouraged and may be as of the beginning of the fiscal year
or as of the beginning of the interim period in which SFAS No. 145 was issued.
The Company has adopted the currently required provisions of SFAS No. 145 noted
above without impact on its financial position or results of operations. The
Company is accessing, but has not yet determined, the impact of the remaining
required provisions.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The provisions
of SFAS No. 146 are effective for exit or disposal activities initiated after
December 31, 2002. Early application is encouraged. Previously issued financial
statements shall not be restated. The provisions of EITF Issue No. 94-3 shall
continue to apply for an exit activity initiated under an exit plan that met the
criteria of that issue prior to the initial application of SFAS No. 146. The
Company is currently assessing, but has not yet determined, the effect of
adoption of SFAS No. 146 on its financial position and results of operations.
Assets Held for Sale and Related Liabilities:
All non-core businesses, including remaining Entertainment and Aviation
businesses, are classified as assets held for sale in the Condensed Consolidated
Balance Sheets. Those businesses held at December 31, 2001 and March 31, 2002
include: the Company's interest in certain entertainment assets in Argentina,
Anaheim, California and Ottawa, Canada; and the Port Authority of New York and
New Jersey related component of its aviation fueling business. The other
non-core businesses classified as assets held for sale at December 31, 2001 were
its Metropolitan Entertainment subsidiary - a concert promotion business
("Metropolitan") and CGS. Generally, a sale of net assets held for sale requires
Bankruptcy Court approval and is subject to the notice and hearing requirements
of the Bankruptcy Code.
The Company sold CGS in January 2002, but received no proceeds. In March 2002,
the sale of substantially all of the assets of Metropolitan closed and the
Company received gross cash proceeds of $3.1 million. On September 5, 2002 the
Company sold Casino Iguazu (one of the entertainment assets in Argentina) for
$3.5 million in cash. The proceeds from those sales, after estimated sale costs,
approximated the December 31, 2001 carrying value.
The prior period amounts of net loss (gain) on sale of business have been
reclassified in the 2001 condensed consolidated financial statements to conform
with the current period presentation.
Subject to obtaining Bankruptcy Court approval, the Company expects to dispose
of the remaining businesses as part of our plan of reorganization before our
emergence from the Chapter 11 process. The successful completion of the
disposition processes for remaining non-core assets and the financial impact may
be affected by general economic conditions in the markets in which these assets
must be sold and necessary regulatory and third party consents.
Assets held for sale and related liabilities at March 31, 2002 and December 31,
2001 were as follows (expressed in thousands of dollars):
March 31, December 31,
2002 2001
---- ----
Current Assets $ 58,604 $ 57,556
Property, Plant and Equipment - Net 1,279 4,044
Other Assets 3,242 6,348
--------- ---------
Assets Held for Sale $ 63,125 $ 67,948
========= =========
Current Liabilities $(212,240) $(216,859)
Other Liabilities (716) (347)
--------- ---------
Liabilities Related to Assets Held for Sale $(212,956) $(217,206)
========= =========
In accordance with the provisions of SFAS No. 121, assets held for sale have not
been depreciated commencing January 1, 2001, which had the effect of decreasing
the loss before income taxes in 2001 by approximately $4.6 million and the loss
before income taxes in the first quarter of 2002 by $0.2 million.
During the first quarter of 2001, the Company sold its Rome, Italy Aviation
Ground Operations for gross proceeds of $9.9 million resulting in a realized
gain of $1.9 million. In the remainder of 2001, the Company sold several other
of aviation assets including its ground businesses in Spain and Colombia and the
portion of its fueling business that does not serve airports operated by the
Port Authority of New York and New Jersey ("Port Authority"). Gross cash
proceeds in 2001 from the sales of businesses that were classified as assets
held for sale were approximately $28.9 million.
During 2001, the Company had reached a definitive agreement to sell the portion
of its fueling business that is related to airports operated by the Port
Authority. However, given the impact of the events of September 11, 2001 on the
aviation industry and the Port Authority, no closing date was set for that Port
Authority component pending Port Authority approval of the sale. The Company is
reviewing this contract in light of its Chapter 11 filing.
The carrying value of the Company's assets relating to the Arrowhead Pond, the
Centre and the Team (all as defined below) have been materially adversely
affected by events occurring at the end of 2001 and in 2002 to date. On December
21, 2001 the Company announced that its inability to access the capital markets,
the continuing delays in payment of remaining California energy receivables and
delays in the sale of aviation and entertainment assets had adversely impacted
Covanta's ability to meet cash flows covenants under its Master Credit Facility
(see below). The Company also stated that the banks had provided a waiver for
the covenants through January of 2002 only, had not agreed to provide the
additional short term liquidity the Company had sought and that the Company was
conducting a comprehensive review of its strategic alternatives.
On December 27, 2001 and January 16, 2002 the Company's credit rating was
reduced by Moody's Investment Services Inc. and Standard & Poor's Rating
Services. These downgrades triggered requirements to post in excess of $100
million in performance and other letters of credit for Energy projects for which
the Company did not have available commitments under its Master Credit Facility.
Subsequently, the Company's credit ratings were further reduced.
The Company required further waivers from its cash flow covenants under its
Master Credit Facility for the period after January 2002. On January 31, 2002
the Company announced that it had obtained waivers through the end of March
2002, subject, however, to its meeting stringent cash balance requirements set
by its banks.
Among other things, to meet the cash balance requirements the Company availed
itself of the 30 day grace period with respect to interest due on March 1, 2002
on its 9.25% Debentures. In addition, the restrictions prevented contributions
to the working capital needs of the Ottawa Senators Hockey Club Corporation (the
"Team") of the National Hockey League (the "NHL"), the prime tenant of the Corel
Centre near Ottawa, Canada (the "Centre").
These events resulted in draws during March 2002 of the letters of credit for
the $19.0 million and $86.2 million guarantees discussed below with respect to
the Team and the Centre, respectively. In return for drawing on the letters of
credit, the Company obtained an interest in the loans that had been secured by
the letters of credit that had been drawn.
On April 1, 2002, the Company filed for relief under Chapter 11 of the
Bankruptcy Code.
The events leading up to the bankruptcy filing and the filing itself have
materially adversely affected the Company's ability to manage the timing and
terms on which to dispose of its interests and related obligations with respect
to the Centre, the Team and the Arrowhead Pond, as described below.
With respect to the Centre and the Team, these events led to the termination, in
2002, of a pending sale of limited partnership interests and related
recapitalization of the Team that, if completed as contemplated, would have been
expected to stabilize the finances of the Team and the Centre for a considerable
period of time. Given the Company's inability to fund short-term working capital
needs of the Team, and given the events described above, the Company is not in a
position to determine the timing and terms of disposition of the Team and the
Centre in a manner most advantageous to the Company. Currently, a process is
underway to dispose of both in conjunction with the NHL and the senior secured
lenders to the Team.
Based upon all currently available information, including an initial offer to
purchase dated June 20, 2002 and certain assumptions as to the future use, and
considering the factors listed above, the Company recorded a pre-tax impairment
charge as of December 31, 2001 of $140.0 million related to the Centre and the
Team.
The $140.0 million charge, which was included in write-down of and liabilities
related to assets held for sale in the 2001 Statement of Consolidated Operations
and Comprehensive Loss, represents the Company's estimate of the net cost,
before the deferred tax benefit of $21.2 million, to sell its interests in the
Centre and Team and to be discharged of all related obligations and guarantees.
However, in view of the proposed sales of these interests, and the need for
approval by the Bankruptcy Court, DIP lenders and the NHL of such transactions,
uncertainty remains as to the actual amount of the impairment and the deferred
tax benefit.
The Company's guarantees at December 31, 2001 comprised a: (1) $19.0 million
guarantee of the Team's subordinated loan payable; (2) $86.2 million guarantee
of the senior term debt of the Centre; (3) $45.3 million guarantee of the senior
subordinated debt of the Centre for which $6.3 million in cash collateral has
been posted by the Company; (4) $3.1 million guarantee of senior secured term
debt of the Team; (5) guarantee of the interest payments on $37.7 million of
senior secured term debt of the Team; (6) guarantee to make working capital
advances to the Centre from time to time in amounts necessary to cover any
shortfall between certain operating cash flows, operating expenses and debt
service of the Centre; and (7) $17.5 million cost for terminated foreign
exchange currency swap agreements. The swap agreements had a notional amount of
$130.6 million and were entered into by the Centre related to the $86.2 million
senior term and $45.3 million senior subordinated debt. These swap agreements
would have expired December 23, 2002 but were terminated by the counter-parties
in May 2002.
The Company's guarantees at March 31, 2002 comprised all those at December 31,
2001, except for the guarantees of $19.0 million and $86.2 million which, as
discussed below, resulted, in March 2002, in draws of letters of credit
supporting the guarantees.
The Company's guarantees arose during 1994, when a subsidiary of Covanta entered
into a 30-year facility management contract at the Centre pursuant to which it
agreed to advance funds to the Team, and if necessary, to assist the Centre's
refinancing of senior secured debt incurred in connection with the construction
of the Centre. In compliance with these guarantees, the Company entered into
agreements pursuant to which it was required to purchase the $19.0 million and
$86.2 million series of debt referred to above if such debt was not timely
refinanced or upon the occurrences of certain defaults.
In March 2002, the holders of the subordinated debt of the Team required the
Company to purchase such debt in the total amount (together with accrued and
unpaid dividends) of $19.0 million and were paid that amount under a letter of
credit for which the Company was the reimbursement party. In addition, in March,
as the result of defaults occurring in 2002, the holders of the senior debt
relating to the Centre required the Company to purchase such debt in the total
amount (together with accrued and unpaid dividends) of $86.2 million and were
paid that amount under a letter of credit for which the Company was the
reimbursement party. The remaining series of subordinated debt of the Centre in
the amount of $45.3 million is also subject to a put right pursuant to the terms
of the underlying agreements. This amount has not been put to the Company,
although the holder has the right to do so. However, the holders of this debt
demanded payment of approximately $25.0 million of this amount from the
Company's other lenders pursuant to certain loss sharing arrangements under the
Intercreditor Agreement among the Company's Master Credit Facility lenders. Of
this $25.0 million amount, on June 3, 2002, $9.2 million was paid to the holders
of this debt. The remaining balance is a matter pending in the Bankruptcy Court.
This $9.2 million, and any additional amount ultimately paid to the holders of
this debt, is deemed to be pre-petition secured obligation of the Company.
The events set forth above have also materially adversely affected the Company's
ability to manage the timing and terms on which to dispose of its interest and
related obligations in the Arrowhead Pond in Anaheim, California (the "Arrowhead
Pond"). The Company's limited ability to fund short term working capital needs
at the Arrowhead Pond under the DIP Credit Facility (see below) and the need to
resolve the bankruptcy case may create the need to dispose of the Arrowhead Pond
presently when the concert business, a prime driver of revenues, is in
substantial decline and attendance at the building is not at levels consistent
with past experience. Based upon all currently available information, including
a recently received valuation and certain assumptions as to the future use, and
considering the effects of the events set forth above, the Company recorded an
impairment charge as of December 31, 2001 of $74.4 million related to the
Company's interest in the Arrowhead Pond.
The $74.4 million charge, which was included in write-down of and liabilities
related to assets held for sale in the 2001 Consolidated Statement of
Consolidated Operations and Comprehensive Loss, represents the write-off of the
$16.4 million previous carrying amount at that date and the Company's $58.0
million estimate of the net cost to sell its interests in the long-term
management agreement discussed in the following paragraph, before the deferred
tax benefit of $20.9 million. However, in view of the proposed sales of this
interest, and the need for approval by the Bankruptcy Court and DIP Lenders of
such transactions, uncertainty remains as to the actual amount of the impairment
and the deferred tax benefit.
A subsidiary of the Company is the manager of the Arrowhead Pond under a
long-term management agreement. The Company and the City of Anaheim are parties
to a reimbursement agreement to the financial institution which issued a letter
of credit in the amount of approximately $117.2 million which provides credit
support for Certificates of Participation issued to finance the Arrowhead Pond
project. As part of its management agreement, the manager is responsible for
providing working capital to pay operating expenses and debt service (including
swap exposure and reimbursement of the lender for draws under the letter of
credit including draws related to an acceleration by the lender of all amounts
payable under the reimbursement agreement) if the revenues of the Arrowhead Pond
are insufficient to cover these costs. The Company has guaranteed the
obligations of the manager. The City of Anaheim has given the manager notice of
default under the management agreement. In such notice, the City of Anaheim
indicated that it did not propose to exercise its remedies at such time.
The Company is also the reimbursement party on a $26.0 million letter of credit
and a $1.5 million letter of credit relating to a lease transaction for the
Arrowhead Pond. The $26.0 million letter of credit, which is security for the
lease investor, can be drawn upon the occurrence of an event of default. The
$1.5 million letter of credit is security for certain indemnification payments
under the lease transaction documents. The lease transaction documents require
the Company to provide additional letter of credit coverage from time to time.
The additional amount required for 2002 is estimated to be approximately $11.5
million, which the Company has not provided. Notices of default have been
delivered in 2002 under the lease transaction documents. As a result of the
default, parties may exercise remedies, including drawing on letters of credit
and recovering fees to which the manager may be entitled for managing the
Arrowhead Pond.
The Company's exposure upon the occurrence of an event of default under the
lease transaction is estimated to be approximately $37.5 million, which is
secured by the $26.0 million letter of credit among other things. The Company is
also obligated to fulfill its indemnification obligations under the lease
transaction documents, the amount of which cannot be determined at this time.
Such indemnification obligations are secured in part by the $1.5 million letter
of credit. The parties to the lease transaction have agreed to delay the
exercise of remedies for the existing defaults until October 21, 2002. The
Company is exploring alternatives and no additional impairment charge related to
the lease transaction for the Arrowhead Pond was considered necessary at
December 31, 2001 or March 31, 2002.
Earnings (Loss) Per Share:
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
(In thousands, except share and per share amounts)
Net income (loss) $ (50,952) $ 9,415
Less: preferred stock dividend 16 17
----------- -----------
Basic Earnings (Loss) Per Share (50,968) 49,773 $ (1.02) 9,398 49,609 $ 0.19
--------- -------
Effect of Dilutive Securities:
Stock options (A) 207
Restricted stock (A) 89
Convertible preferred stock (A) 17 212
6% convertible debentures (A) (A)
5 3/4% convertible debentures (A) (A)
-------------------------- --------------------------
Diluted Earnings (Loss) Per Share $ (50,968) 49,773 $ (1.02) $ 9,415 50,117 $ 0.19
------------------------------------------- -------------------------------------------
(A) Antidilutive
Basic earnings per common share was computed by dividing net income (loss),
reduced by preferred stock dividend requirements, by the weighted average of the
number of shares of common stock outstanding during each period.
Diluted earnings per common share was computed on the assumption that all
convertible debentures, convertible preferred stock, restricted stock and stock
options converted or exercised during each period, or outstanding at the end of
each period were converted at the beginning of each period or the date of
issuance or grant, if dilutive. This computation provides for the elimination of
related convertible debenture interest and preferred dividends.
Outstanding stock options to purchase common stock with an exercise price
greater than the average market price of common stock were not included in the
computation of diluted earnings per share. The balance of such options was
3,805,000 in the first quarter of 2002 and 2,945,000 in the first quarter of
2001. Shares of common stock to be issued, assuming conversion of convertible
preferred stock, the 6% convertible debentures, the 5 3/4% convertible
debentures, stock options and unvested restricted stock issued to employees and
directors were not included in computation of diluted earnings per share if to
do so would have been antidilutive.
The common stock excluded from the calculation were 2,175,000 in the first
quarter of 2002 and the first quarter of 2001 for the 6% convertible debentures;
1,524,000 in the first quarter of 2002 and the first quarter of 2001 for the 5
3/4% convertible debentures; 0 and 207,000 in the first quarter of 2002 and the
first quarter of 2001, respectively for stock options, 198,000 and 212,000 in
the first quarter of 2002 and the first quarter of 2001, respectively for
convertible preferred stock; and 57,000 and 89,000 in the first quarter of 2002
and the first quarter of 2001 for unvested restricted issued to employees.
Special Charges:
As a result of the Company's Board of Directors' plan to dispose of its aviation
and entertainment businesses, close its New York City headquarters, and its plan
to exit other non-core energy businesses, the Company incurred various expenses
in 1999 and future periods. These expenses have been recognized in its
continuing and discontinued operations. In addition, the Company incurred
various expenses in 2000 relating to its decisions to reorganize its development
office in Hong Kong and its Energy headquarters in New Jersey. Certain of those
charges related to severance costs for its New York City employees and Energy
employees, contract termination costs of its former Chairman and Chief Executive
Officer, office closure costs, and professional services related to the Energy
reorganization.
The following is a summary of those costs and related payments made during the
three months ended March 31, 2002 (expressed in thousands of dollars):
Adjustments During Payments During
Balance at the Three Months Ended the Three Months Ended Balance at
Dec. 31, 2001 March 31, 2002 March 31, 2002 March 31, 2002
------------- -------------- --------------- --------------
Severance for approximately
216 New York City employees $ 17,500 $ (1,700) $ (800) $ 15,000
Severance for approximately
80 Energy employees 3,800 (1,100) 2,700
Contract termination settlement 400 400
Bank fees 11,000 24,000 (1,000) 34,000
Office closure costs 600 600
---------- ---------- --------- ----------
$ 33,300 $ 22,300 $ (2,900) $ 52,700
========== ========== ========= ==========
All 80 of the Energy employees were terminated during 2001. At March 31, 2002
only 11 New York employees remained employed by the Company. The unpaid balances
due on or after April 1, 2002 for severance and other payments are subject to
approval by the DIP lenders and Bankruptcy Court.
The bank fees for the first quarter of 2002 relate to the Company's Master
Credit Facility (see Liquidity/Cash Flow). These fees were payable in March 2002
but remain unpaid and therefore will be resolved through the Company's
bankruptcy proceedings.
Subsequent Events:
The Debtor and certain of its domestic subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the Bankruptcy Code on April 1, 2002. In
the Chapter 11 Cases, the Debtors obtained several orders from the Bankruptcy
Court which were intended to enable the Debtors to operate in the normal course
of business during the Chapter 11 Cases. Among other things, these orders (i)
permit the Debtors to operate their consolidated cash management system during
the Chapter 11 Cases in substantially the same manner as it was operated prior
to the commencement of the Chapter 11 Cases, (ii) authorize payment of certain
prepetition employee salaries, wages, health and welfare benefits, retirement
benefits and other employee obligations, (iii) authorize payment of prepetition
obligations to certain critical vendors to aid the Debtors in maintaining the
operation of their businesses, (iv) authorize the use of cash collateral and
grant adequate protection in connection with such use, and (v) authorize
post-petition financing.
Specifically with respect to post-petition financing, on April 5, 2002, the
Bankruptcy Court also entered an interim order and on May 15, 2002 a final order
authorizing the Debtors to enter into a debtor in possession financing facility
(the "DIP Credit Facility") with the lenders who had participated in the Master
Credit Facility (the "DIP Lenders"), and to grant first priority mortgages,
security interests, liens and superiority claims on substantially all of the
domestic assets of the Debtors, other than most assets related to its power
production and waste-to-energy facilities which are subject to the liens of
others in connection with such facilities. On July 26, 2002, the Bankruptcy
Court overruled certain objections by holders of minority interests in two
limited partnerships who disputed the inclusion of limited partnerships in the
DIP Credit Facility. The Bankruptcy Court overruled these objections by an order
dated August 2, 2002, although one of the objectors has appealed the order.
The Debtors are currently operating their businesses as debtors in possession
pursuant to the Bankruptcy Code. Pursuant to the Bankruptcy Code, prepetition
obligation of the Debtors, including obligations under debt instruments,
generally may not be enforced against the Debtors, and any actions to collect
prepetition indebtedness are automatically stayed, unless the stay is lifted by
the Bankruptcy Court. The rights of, and the ultimate payments by, the Company
under prepetition obligations may be substantially altered. This could result in
claims being liquidated in Chapter 11 Cases at less than their face value.
However, the Company has continued to pay debt service as it matures on the
Company's Project Debt.
In addition, as debtors in possession, the Debtors have the right, subject to
Bankruptcy Court approval and certain other limitations, to assume or reject
executory contracts and unexpired leases. In this context, "assume" means that
the Debtors agree to perform their obligations and cure all existing defaults
under the contract or lease, and "reject" means that the Debtors are relieved
from their obligations to perform further under the contract or lease, but are
subject to a potential claim for damages for the resulting breach thereof. In
general, damages resulting from rejection of executory contracts and unexpired
leases will be treated as general unsecured claims in the Chapter 11 Cases
unless such claims had been secured on a prepetition basis prior to the Petition
Date. The Debtors are in the process of reviewing their executory contracts and
unexpired leases to determine which, if any, they will assume or reject. The
Debtors cannot presently determine or reasonably estimate the ultimate liability
that may result from rejecting contracts or leases or from the filing of claims
for any rejected contracts or leases, and no provision have yet been made for
these items. The amount of the claims to be filed by the creditors could be
significantly different than the amount of the liabilities recorded by the
Debtors.
The United States Trustee for the Southern District of New York has appointed an
Official Committee of Unsecured Creditors in accordance with the applicable
provisions of the Bankruptcy Code. The Bankruptcy Code provides that the Debtors
have an exclusive period during which they may file a plan of reorganization.
The Debtors, however, have requested and obtained an extension of the
exclusivity period and may further request that the Bankruptcy Court extend such
exclusivity period and may seek further extensions in the future. The
exclusivity period currently expires on November 27, 2002.
If the Debtors fail to file a plan of reorganization during the exclusivity
period or, after such plan has been filed, if the Debtors fail to obtain
acceptance of such plan from the requisite number and amount of voting classes
before the expiration of the applicable period or if any party in interest
successfully moves for the termination of exclusivity, any party in interest,
including a creditor, an equity holder, a committee of creditors or equity
holders, or an indenture trustee, may file a plan of reorganization. After a
plan of reorganization has been filed with the Bankruptcy Court, the plan, along
with a disclosure statement approved by the Bankruptcy Court, will be sent to
all creditors and equity holders belonging to impaired classes who are entitled
to vote. Following the solicitation period, the Bankruptcy Court will hold a
hearing to consider whether to confirm the plan in accordance with the
applicable provisions of the Bankruptcy Code. In order to confirm a plan of
reorganization, the Bankruptcy Court, among other things, is required to find
that (i) with respect to each impaired class of creditors and equity holders,
each holder in such class has accepted the plan or will, pursuant to the plan,
receive at least as much as such holder would receive in a liquidation, (ii)
each impaired class of creditors and equity holders has accepted the plan by the
requisite vote (except as otherwise provided under the Bankruptcy Code), and
(iii) confirmation of the plan is not likely to be followed by a liquidation or
a need for further financial reorganization of the Debtors or any successors to
the Debtors unless the plan proposes such liquidation or reorganization. If any
impaired class of creditors or equity holders does not accept the plan and,
assuming that all of the other requirements of the Bankruptcy Code are met, the
proponent of the plan may invoke the "cram down" provisions of the Bankruptcy
Code. Under those provisions, the Bankruptcy Court may confirm a plan
notwithstanding the non-acceptance of the plan by one or more impaired classes
of creditors or equity holders if certain requirements of the Bankruptcy Code
are met. As a result of the amount of prepetition indebtedness and the
availability of the "cram down" provisions, the holders of the Company's capital
stock are likely to receive no distributions on account of their equity
interests under the plan of reorganization. Because of such possibility, the
holders of the Company's capital stock are not expected to receive any value for
their shares following the Chapter 11 process.
Since the Petition Date, the Debtors have been conducting businesses in the
ordinary course. Management is evaluating their operations as part of the
development of a plan of reorganization. The Company is currently beginning the
initial stages of developing that plan of reorganization. In connection with a
plan of reorganization, the Debtors are considering, among other things, (i) a
strategic restructuring program to focus on the U.S. energy and water market,
(ii) expediting the dispositions of non-core assets, (iii) as a result, reduce
overhead costs and (iv) a non-binding letter of intent with the investment firm
of Kohlberg Kravis Roberts & Co. ("KKR") for a $225.0 million equity investment
under which a KKR affiliate would acquire the Company upon emergence from
Chapter 11 reorganization. During the Chapter 11 Cases, the Debtors may, subject
to any necessary Bankruptcy Court and lender approvals, sell assets and settle
liabilities for amounts other than those reflected in the financial statements.
The Debtors are in the process of reviewing their operations and identifying
those assets for disposition. The administrative and reorganization expenses
resulting from Chapter 11 Cases will unfavorably affect the Debtors' results of
operations. Future results of operations may also be adversely affected by other
factors related to the Chapter 11 Cases.
The Company is having active discussions with KKR regarding their proposed
acquisition of the Company's business generally along the lines of the
previously executed non-binding letter of intent. The Company is also analyzing
its other alternatives, including continuing as a stand-alone entity. Any
proposal for the acquisition of the Company would be subject to agreement on the
price and terms of such transaction between the Company and the prospective
purchaser. Were an agreement reached, it would be subject to Bankruptcy Court
review, in which creditors and other claimants would have an opportunity to
oppose such transaction, and procedures intended to confirm the fairness of the
transaction. Therefore, whether any acquisition will occur, the price and terms
at which such transaction would be accomplished and its impact on various
claimants in the Chapter 11 proceedings is uncertain.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Operations:
Revenues and income (loss) from operations by segment for the three months ended
March 31, 2002 and 2001 (expressed in thousands of dollars) were as follows:
Information Concerning Three Months Ended March 31,
Business Segments 2002 2001
- ------------------------------------------------------------------------------------------------
Revenues:
Energy $ 228,611 $ 223,887
Other 7,730 25,035
----------- -----------
Total Revenues $ 236,341 $ 248,922
=========== ===========
Income (loss) from Operations:
Energy, other than net gain (loss) on sale of businesses $ 24,436 $ 27,887
Other, other than net gain (loss) on sale of businesses (11,487) (3,080)
Net gain (loss) on sale of businesses (24,150) 1,855
----------- -----------
Total Income (Loss) from Operations (11,201) 26,662
Corporate unallocated income
and expenses-net (38,088) (3,750)
Interest-net (7,899) (7,440)
----------- -----------
Income (loss) from operations
before income taxes and
minority interests $ (57,188) $ 15,472
=========== ===========
As discussed below, total revenues for the first three months of 2002 were $12.6
million lower than the comparable period of 2001 reflecting a decrease in Other
segment revenues of $17.3 million offset by an increase in Energy revenue of
$4.7 million. Corporate unallocated income and expenses - net increased by $34.3
million in the first quarter of 2002 compared to the same period in 2001 due to
the increases in selling, administrative and general and other expenses
discussed below.
Service revenues in the first quarter of 2002 decreased $9.1 million compared to
the first quarter of 2001. Energy service revenues in 2002 decreased $2.2
million primarily due to a decrease of $1.3 million related to the sale of CGS
in January 2002. The Other segment's service revenues decreased $6.9 million due
to the wind-down of many non-core businesses.
Electricity and steam sales revenue increased $5.6 million compared to the same
period in 2001, attributable mainly to a $22.9 million increase due to the
consolidation of Energy facilities in India in April 2001 offset by a $15.3
million decrease at California facilities due to scheduled maintenance outages
and energy price decreases in the first quarter of 2002.
Construction revenues for the three months ended March 31, 2002 increased $3.0
million from the comparable period in 2001. The increase is mainly attributable
to the Company's desalination project in Tampa, Florida, partially offset by the
substantial completion of other projects.
Other sales - net for the first quarter of 2002 decreased $11.5 million compared
to the first quarter of 2001 due mainly to the sale of the Datacom business in
November 2001.
As discussed below, total costs and expenses in the first quarter of 2002
increased by $59.6 million compared to the first quarter of 2001.
Costs and expenses, other than construction costs, costs of goods sold, and
selling, administrative and general expenses and other expenses, net, but
including net interest expense, were essentially unchanged in the three months
ended March 31, 2002 compared to the same period of 2001.
Construction costs increased by $5.9 million for the three months ended March
31, 2002 compared to the comparable period of 2001. The increase is mainly
attributable to the Company's desalination project in Tampa, Florida, partially
offset by the substantial completion of other projects.
Net loss on sale of businesses for the three months ended March 31, 2002 of
$24.2 million primarily related to the sale of Energy assets in Thailand (see
Liquidity/Cash Flow below) and a realized foreign currency loss related to the
sale of CGS, also previously part of the Energy segment. Net gain on sale of
business for the three months ended March 31, 2001 of $1.9 million related to
the sale of the Company's aviation ground handling operations at the Rome, Italy
airport, previously part of the Other segment.
Costs of goods sold for the first quarter of 2002 decreased by $10.9 million
compared to the first quarter of 2001 due to the sale of the Datacom business in
November 2001.
Other expenses - net for the three months ended March 31, 2002 compared to the
same period in 2001 increased by $33.1 million due to fees related to the Master
Credit Facility (see Special Charges) and bankruptcy costs.
The effective tax rate for the three months ended March 31, 2002 was 13.3%
compared to 30.1% for the same period of 2001. This decrease in the effective
rate is primarily due to deductions and foreign losses included in the GAAP loss
in the current year period for which certain tax benefits were not recognized
compared to pretax earnings in the prior period for which certain tax provisions
were recorded.
Property, plant and equipment - net decreased $101.6 million during the first
three months of 2002 due mainly to the sale of $82.5 million of Thailand fixed
assets in March 2002 and depreciation expense of $22.3 million for the period.
See Basis of Presentation and Bankruptcy Filing and Assets Held for Sale and
Related Liabilities for a discussion of the changes since December 31, 2001 in
Assets Held for Sale and Liabilities Related to Assets Held for Sale.
Capital Investments and Commitments:
For the three months ended March 31, 2002, capital investments amounted to $2.8
million, virtually all of which related to Energy.
At March 31, 2002, capital commitments amounted to $7.8 million for normal
replacement and growth in Energy. Other capital commitments for Energy as of
March 31, 2002 amounted to approximately $12.9 million. This amount includes a
commitment to pay, in 2008, $10.6 million for a service contract extension at an
energy facility. In addition, this amount includes $2.3 million for an oil-fired
project in India, which commenced operations in September 2001.
Covanta and certain of its subsidiaries have issued or are party to performance
bonds and guarantees and related contractual obligations undertaken mainly
pursuant to agreements to construct and operate certain energy, entertainment
and other facilities. In the normal course of business, they also are involved
in legal proceedings in which damages and other remedies are sought.
An Energy client community and the Company have several commercial disputes
between them. Among these is a January 16, 2002 demand by the client community
to provide a credit enhancement to a service agreement in the form of a $50
million letter of credit or a guarantee, following rating downgrades of the
Company's unsecured corporate debt. On February 22, 2002, the client community
issued a notice purporting to terminate its contract with the Company effective
May 30, 2002 if such a credit enhancement was not provided, and also demanded an
immediate payment of $2.0 million under the terms of the agreement. The Company
believes such notice was improper and has commenced a lawsuit in state court
with respect to such disputes, as well as the client community's right to
terminate. This matter was removed to Federal court where the client community
successfully moved to have the case remanded back to State Court rather than to
the Bankruptcy Court as requested by the Company. It is likely that the client
community will next seek summary judgement on this matter. Were this matter to
be determined adversely to the Company, the contract could be terminated and the
operating subsidiary and the Company, as guarantor, could incur substantial,
pre-petition termination obligations. The Company continues to believe that
further proceedings in this matter are stayed by the bankruptcy filing and that
it has substantial defenses to the client community's claim that the contract
has been properly terminated.
The Company's agreement with another energy client also provides that following
these rating downgrades of the Company's unsecured corporate debt, the client
may, if it does not receive from the Company a $50.0 million letter of credit by
January 31, 2003, either terminate the agreement or receive a $1.0 million
reduction of its annual service fee obligation. The bankruptcy proceeding
described above stays the client's right to terminate under the agreement.
In addition at March 31, 2002, other than the commitments discussed above and
those related to the Arrowhead Pond and the Centre and Team (discussed in Assets
Held for Sale and Related Liabilities above), the letters of credit discussed
above and in Liquidity/Cash Flow below, and the liabilities included in the
Condensed Consolidated Balance Sheet, the Company has other recourse
commitments, of approximately $165.0 million related to surety performance
bonds, $130.0 million for operating leases and $65.0 million for other
guarantees, all mainly related to Energy.
The Company is also engaged in ongoing investigation and remediation actions
with respect to three airports where it provides aviation fueling services on a
cost-plus basis pursuant to contracts with individual airlines, consortia of
airlines and operators of airports. The Company currently estimates the costs of
those ongoing actions will be approximately $1.0 million (over several years),
and that airlines, airports and others should reimburse it for substantially all
these costs. To date, the Company's right to reimbursement for remedial costs
has been challenged successfully in one prior case in which the court found that
the cost-plus contract in question did not provide for recovery of costs
resulting from the Company's own negligence. That case did not relate to any of
the airports described above. Except in that instance and one other, the Company
has not been alleged to have acted with negligence. The Company has also agreed
to indemnify various transferees of its divested airport operations with respect
to certain known and potential liabilities that may arise out of such operations
and in certain instances has agreed to remain liable for certain potential
liabilities that were not assumed by the transferee. Accordingly, the Company
may in the future incur liability arising out of investigation and remediation
actions with respect to airports served by such divested operations to the
extent the purchaser of these operations is unable to obtain reimbursement of
such costs from airlines, airports or others. To date such indemnification has
been sought with respect to one airport. Because the Company did not provide
fueling services at that airport, it does not believe it will have significant
obligations with respect to this matter. The Company is currently reviewing the
potential impact of its filing under Chapter 11 on its exposure for these
liabilities.
Liquidity/Cash Flow:
At March 31, 2002, the Company had approximately $91.6 million in cash and cash
equivalents, of which $0.6 million related to assets held for sale and $20.0
million related to cash held in foreign bank accounts. On April 8, 2002 the
Company paid approximately $4.0 million in fees related to its DIP Credit
Facility discussed below.
Net cash provided by operating activities for the first quarter ended March 31,
2002 was consistent with the first quarter of 2001.
Net cash provided by investing activities was $51.0 million higher than the
comparable period of 2001 due to increased gross proceeds from the sale of
businesses of $26.2 million (see below), an increase in distributions from
investees and joint ventures of $6.1 million and decreased investments and
capital expenditures of $18.7 million.
Net cash used in financing activities for the first quarter of 2002 was $50.5
million compared to cash provided by financing activities of $5.9 million in the
first quarter of 2001. This increase in cash used of $56.4 million is due
primarily to decreased receipts of restricted cash of $194.1 million, offset by
increased debt payments of $150.6 million.
As previously reported, the Company entered into a Revolving Credit and
Participation Agreement (the "Master Credit Facility") on March 14, 2001. The
Master Credit Facility is secured by substantially all of the Company's assets
and matured on May 31, 2002 without being fully discharged by the DIP Credit
Facility discussed below. This, along with non-compliance with certain required
financial ratios also discussed below and possible other items, has caused the
Company to be in default of its Master Credit Facility. However, on April 1,
2002, the Company and 123 of its subsidiaries each filed a voluntary petition
for relief under Chapter 11 of the Bankruptcy Code that, among other things,
acts as a stay of enforcement of any remedies under the Master Credit Facility
against any debtor company.
In connection with the bankruptcy petition, Covanta Energy Corporation and most
of its subsidiaries have entered into a Debtor In Possession Credit Agreement
(as amended, the "DIP Credit Facility") with the lenders who provided the
revolving credit facility under the Master Credit Facility. On April 5, 2002,
the Bankruptcy Court issued its interim order approving the DIP Credit Facility,
and on May 15, 2002 a final order approving the DIP Credit Facility. On July 26,
2002, the Bankruptcy Court overruled certain objections by holders of minority
interests in two limited partnerships who disputed the inclusion of limited
partnerships in the DIP Credit Facility. The Bankruptcy Court overruled these
objections by an order dated August 2, 2002, although the holders of such
interests at one of the limited partnerships have appealed the order. The DIP
Credit Facility terms are described below.
The DIP Credit Facility, which provides for the continuation of approximately
$240.0 million of letters of credit previously provided under the Master Credit
Facility and a $48.2 million liquidity facility, is secured by all of the
Company's domestic assets not subject to liens of others and generally 65% of
the stock of certain of its foreign subsidiaries. Obligations under the DIP
Credit Facility will have senior status to other prepetition secured claims and
the DIP Credit Facility is now the operative debt agreement with the Company's
banks. The Master Credit Facility remains in effect to determine the rights of
the lenders who are a party to it with respect to obligations not continued
under the DIP Credit Facility.
As of March 31, 2002, letters of credit had been issued in the ordinary course
of business under the Master Credit Facility for the Company's benefit using up
most of the available line under the facility. The Master Credit Facility also
provided for the coordinated administration of certain letters of credit issued
in the normal course of business to secure performance under certain energy
contracts (totaling $203 million), letters of credit issued to secure
obligations relating to the Entertainment and Aviation businesses (totaling $153
million) largely with respect to the Anaheim and Corel projects described above
under "Capital Investments and Commitments," letters of credit issued in
connection with the Company's insurance program (totaling approximately $39
million), and letters of credit used for credit support of the Company's equity
bonds (totaling $127 million). Of these letters of credit, approximately $247
million secure indebtedness included in the Company's balance sheet and $87
million relate to other obligations. These letters of credit are generally
available for drawing upon if the Company defaults on the obligations secured by
the letters of credit or fails to provide replacement letters of credit as the
current ones expire. The balance of $188 million relates principally to letters
of credit securing the Company's obligation under Energy contracts to pay
damages. Letters of credit supporting liabilities with respect to the Centre and
the Team were drawn for a total amount of approximately $105.2 in March 2002.
Beginning in April 2002 as a result of the Company's failure to renew letters of
credit securing the Company's adjustable rate revenue bonds, the trustees for
those bonds declared the principal and accrued interest on such bonds due and
payable immediately. Accordingly, letters of credit supporting these bonds have
been drawn in the amount of $125.1 million, the bonds were redeemed and the
Company is presently not able to reissue these bonds.
The financial covenants of the Master Credit Facility provide limits on: (i) the
ratio of (a) the sum of Consolidated Operating Income (as shown in the
Consolidated Statements of Operations), plus LOC Fees (defined in the Master
Credit Facility as letter of credit fees, commitment fees, and amortization of
agency and termination fees) to the extent included in Operating Income, and
Minority Interest (as shown on the Consolidated Statement of Operations and
Comprehensive Loss) to (b) the total interest expense on the Company's
indebtedness, plus LOC Fees, less interest income; (ii) the ratio of the
Company's net indebtedness to adjusted Earnings Before Interest and Taxes as
defined, for the four quarters ended December 31, 2001; and (iii) the sum of
capital stock, capital surplus and earned surplus as shown on the Company's
Consolidated Balance Sheets. The Master Credit Facility provided that for the
first quarter of 2001, consolidated net worth must exceed the amount of
consolidated net worth shown on the Company's Consolidated Balance Sheet as of
December 31, 2000. For each succeeding quarter, the permitted minimum net worth
is increased by 75% of the Company's consolidated net income (but not net loss)
for such quarter.
At the time the Master Credit Facility was executed, the Company had believed
that it would be able to meet the liquidity covenants in the Master Credit
Facility, timely discharge its obligations on maturity of the Master Credit
Facility and repay or refinance its convertible subordinated debentures from
cash generated by operations, the proceeds from the sale of its non-core
businesses and access to the capital markets. However, a number of factors in
2001 and 2002 affected these plans, including:
(1) The sale of non-core assets took longer and yielded substantially
less proceeds than anticipated;
(2) The power crisis in California substantially reduced the Company's
liquidity in 2001 as a result of California utilities' failures to
pay timely for power purchased from the Company; and
(3) A general economic downturn during 2001 and a tightening of credit
and capital markets, particularly for energy companies which were
substantially exacerbated by the bankruptcy of Enron Corporation.
As a result of a combination of these factors in 2001 and early 2002, the
Company was forced to obtain seven amendments to the Master Credit Facility.
Also, because of the California energy crisis, analyses raising doubt about the
financial viability of the independent power industry, the Enron crisis, the
decline in financial markets as a result of the events of September 11, 2001 and
the drop in the demand for securities of independent power companies, the
Company was unable to access capital markets.
In 2001, the Company also began a wide-ranging review of strategic alternatives
given the very substantial maturities in 2002, which far exceed the Company's
cash resources. In this connection, throughout the last six months of 2001 and
the first quarter of 2002, the Company sought potential minority equity
investors, conducted a broad-based solicitation for indications of interest in
acquiring the Company among potential strategic and financial buyers and
investigated a combined private and public placement of equity securities. On
December 21, 2001, in connection with a further amendment to the Master Credit
Facility, the Company issued a press release stating its need for further
covenant waivers and for access to short term liquidity. Following this release,
the Company's debt rating by Moody's and Standard & Poor's was reduced below
investment grade on December 27, 2001 and January 16, 2002, respectively. These
downgrades further adversely impacted the Company's access to capital markets
and triggered the Company's commitments to provide $100 million in additional
letters of credit in connection with two waste-to-energy projects and the draws
during March of 2002 of approximately $105.2 million in letters of credit
related to the Centre and the Team. Despite the Company's wide-ranging search
for alternatives, ultimately the Company was unable to identify any option which
satisfied its obligations outside the Chapter 11 process. On March 1, 2002, the
Company availed itself of the 30-day grace period provided under the terms of
its 9.25% debentures due March 2022, and did not make the interest payment due
March 1, 2002 at that time.
On April 1, 2002 the Company publicly announced that as a result of the review
the Company:
(1) Determined that reorganization under the Bankruptcy Code
represents the only viable avenue to reorganize the Company's
capital structure, complete the disposition of its remaining
non-core entertainment and aviation assets, and protect the value
of the energy and water franchise;
(2) Entered into a non-binding Letter of Intent with the investment
firm of KKR for a $225 million equity investment under which a KKR
affiliate would acquire the Company upon emergence from Chapter
11; and
(3) Announced a strategic restructuring program to focus on the U.S.
energy and water market, expedite the disposition of non-core
assets and, as a result, reduce overhead costs.
On April 1, 2002, Covanta Energy Corporation and 123 of its subsidiaries, each a
debtor in possession (collectively, the "Debtors"), filed for protection under
the Bankruptcy Code and accordingly did not make the interest payment on the
9.25% debentures due at that time.
The rights of Covanta's creditors will be determined as part of the Chapter 11
process. Existing common equity and preferred shareholders are not expected to
participate in the new capital structure or realize any value.
In connection with its bankruptcy filing, the Company entered into the DIP
Credit Facility, as amended. The DIP Credit Facility comprises two tranches. The
Tranche A Facility provides the Company with a credit line of approximately
$48.2 million, divided into $34 million commitments for cash borrowings under a
revolving credit line and $14.2 million commitments for the issuance of new
letters of credit. The Tranche B Facility consists of approximately $240.0
million commitments solely for the extension or issuance of, letters of credit
to replace certain existing letters of credit.
Borrowings under the Tranche A Facility are subject to compliance with monthly
and budget limits. The Company may utilize the amount available for cash
borrowings under the Tranche A Facility to reimburse the issuers of letters of
credit issued under the Tranche A Facility if and when such letters of credits
are drawn, to fund working capital requirements and general corporate purposes
of the Company relating to the Company's post-petition operations and other
expenditures in accordance with a monthly budget and applicable restrictions
typical for a Chapter 11 debtor in possession financing.
On April 8, 2002, under its DIP Credit Facility, the Company paid a one-time
facility fee of approximately $1.0 million equal to 2% of the amount of Tranche
A commitments, $2.5 million of agent fees and $0.5 million of lender advisor
fees.
In addition, the Company will pay a commitment fee varying depending on
utilization, between .50% and 1% of the unused Tranche A commitments. The
Company will also pay a fronting fee for each Tranche A and Tranche B letter of
credit equal to the greater of $500 and 0.25% of the daily amount available to
be drawn under such letter of credit, as well as letter of credit fees of 3.25%
on Tranche A letters of credit and 2.50% on Tranche B letters of credit,
calculated over the daily amount available for drawings thereunder.
Outstanding loans under the Tranche A Facility and the Tranche B Facility bear
interest at the Company's option at either the prime rate plus 2.50% or the
Eurodollar rate plus 3.50%.
The DIP Credit Facility contains covenants which restrict (1) the incurrence of
additional debt, (2) the creation of liens, (3) investments and acquisitions,
(4) contingent obligations and performance guarantees and (5) disposition of
assets. Currently, the Company is in compliance with these covenants.
In addition, the DIP Credit Facility includes the following reporting covenants:
1. Cash flow; (a) biweekly operating and variance reports and monthly
compliance reports, and (b) monthly budget and 13 week forecast updates;
2. Financial statements; (a) deliver Form 10K and Forms 10Q within 120 days and
60 days, respectively of the end of the reporting periods, (b) provide
projected financial statements prepared in accordance with GAAP for the year
ending December 31, 2002 and the first quarter of 2003 and (c) deliver a
schedule setting forth the quarterly minimum cumulative consolidated
operating income for April 1, 2002 through March 31, 2003. To then remain in
compliance, quarterly operating income cannot be less than the amount
provided.
3. Other; (a) deliver, when available, the Chapter 11 restructuring plan, and
(b) provide other information as reasonably requested by the DIP Lenders.
Currently the Company is not in compliance with the reporting covenants
described in 2 (a) and (b) above, but shortly expects to provide the required
information to the DIP Lenders.
The Company has also received notices of default related to certain indebtedness
of the Company (see Part II - Item 3 - Default Under Senior Securities).
The DIP Credit Facility matures on April 1, 2003, but may, with the consent of
DIP Lenders holding more than 66-2/3% of the Tranche A Facility, be extended for
two additional periods of six months each. There are no assurances that the DIP
Lenders will agree to an extension. At maturity, all outstanding loans under the
DIP Credit Facility must be repaid, outstanding letters of credit must be
discharged or cash-collateralized, and all other obligations must be satisfied
or released.
The Company believes that the DIP Credit Facility, when taken together with the
Company's own funds, provide it sufficient liquidity to continue to operate its
core businesses during the Chapter 11 proceeding. Moreover, the legal provisions
relating to Chapter 11 proceedings are expected to provide a legal basis for
maintaining the Company's business intact while it is being reorganized.
However, the outcome of the Chapter 11 proceedings and renewal of the DIP Credit
Facility, if necessary, are not within the Company's control and no assurances
can be made with respect to the outcome of these efforts.
In the Chapter 11 Cases, the Debtors obtained several orders from the Bankruptcy
Court which were intended to enable the Debtors to operate in the normal course
of business during the Chapter 11 Cases. Among other things, these orders (i)
permit the Debtors to operate their consolidated cash management system during
the Chapter 11 Cases in substantially the same manner as it was operated prior
to the commencement of the Chapter 11 Cases, (ii) authorize payment of certain
pre-petition employee salaries, wages, health and welfare benefits, retirement
benefits and other employee obligations, (iii) authorize payment of pre-petition
obligations to certain critical vendors to aid the Debtors in maintaining the
operation of their businesses, (iv) authorize the use of cash collateral and
grant adequate protection in connection with such use, and (v) authorize
post-petition financing.
On March 28, 2002, following approval from the Master Credit Facility lenders,
three of the Company's subsidiaries sold their interests in two power plants and
an operating and maintenance contractor based in Thailand. The total sale price
for all three interests of approximately $35.0 million was less than the net
carrying value of the interests of approximately $57.7 million at December 31,
2001. In the three months ending March 31, 2002, the Company, therefore,
realized a net loss of approximately $23.6 million on this sale, after deducting
costs relating to the sale.
At March 31, 2002 and December 31, 2001, the Company had no intention of selling
any other Asian Energy assets. The Company may consider a variety of different
strategies as the bankruptcy process proceeds. If the Company were to adopt a
formal plan to sell its remaining Asian portfolio in the current market
environment, there would be an impairment charge, currently not determinable,
for a significant portion of the approximate $258.5 million net book value at
March 31, 2002. The ultimate sale of these assets, if any, would be subject to
approval by the DIP Credit Facility lenders and may be subject to approval by
the Bankruptcy Court.
The Company is having active discussions with KKR regarding their proposed
acquisition of the Company's business generally along the lines of the
previously executed non-binding letter of intent. The Company is also analyzing
its other alternatives, including continuing as a stand-alone entity. Any
proposal for the acquisition of the Company would be subject to agreement on the
price and terms of such transaction between the Company and the prospective
purchaser. Were an agreement reached, it would be subject to Bankruptcy Court
review, in which creditors and other claimants would have an opportunity to
oppose such transaction, and procedures intended to confirm the fairness of the
transaction. Therefore, whether any acquisition will occur, the price and terms
at which such transaction would be accomplished and its impact on various
claimants in the Chapter 11 proceedings is uncertain.
Receivables from California Utilities:
Events in the California energy markets affected the state's two largest
utilities and resulted in delayed payments for energy delivered by the Company's
facilities in late 2000 and early 2001. Pacific Gas & Electric Company ("PG&E")
and Southern California Edison Company ("SCE") both suspended payments under
long term power purchase agreements in the beginning of 2001.
On March 26, 2001 the California Public Utilities Commission (the "CPUC")
approved a substantial rate increase and directed the utilities to make payments
to suppliers for current energy deliveries. SCE has made payments for energy
delivered since March 26, 2001. On April 6, 2001, PG&E filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. Since that time PG&E is also in
compliance with the CPUC order and is making payments for current energy
deliveries.
In mid-June the CPUC issued an order declaring as reasonable and prudent any
power purchase amendment at a certain fixed-price for a five-year term. On June
18, 2001 and July 31, 2001 the Company entered into several agreements and
amendments to power purchase agreements with SCE which contained the CPUC
approved pricing for a term of five years, to commence upon the occurrence of
events relating to improvements in SCE's financial condition. In addition, in
June 2001, SCE paid 10% of the outstanding receivables and agreed to a timetable
by which the remaining 90% would be paid, which outstanding amount will earn
interest.
The agreements with SCE contemplated the passage of legislation by the
California state legislature or other actions that would trigger payment to the
Company. In late October 2001, SCE reached a settlement of a lawsuit brought
against the CPUC concerning the CPUC's failure to allow SCE to pass cost
increases through to its ratepayers. The settlement achieved the same goals as
the proposed legislation, which was to provide a path for SCE to achieve
creditworthiness.
In July 2001, the Company also entered into agreements with similar terms with
PG&E. These agreements also contain the CPUC approved price and term, both of
which were effective immediately. Unlike SCE, PG&E made no cash payments but did
agree that the amount owed to the Company will earn interest at a rate to be
determined by the Bankruptcy Court. PG&E agreed to assume the Company's power
purchase agreements and elevate the outstanding payables to priority
administrative claim status. The Bankruptcy Court approved the agreements, the
power purchase agreements and the assumption of the contracts on July 13, 2001.
On October 30, 2001, the Company transferred $14.9 million of the outstanding
PG&E receivables for $13.4 million to a financial institution. Of this amount,
$8.5 million (which related to receivables not subject to pricing disputes with
PG&E) was paid in cash immediately. The balance, $4.9 million (which related to
receivables to which there are pricing disputes) was placed in escrow until the
resolution of those disputes, the payment of the receivables by PG&E, or the
conclusion of the PG&E bankruptcy. The remaining $1.5 million represents the 10%
discount charged by the financial institution.
On December 6, 2001, the Company transferred $30.9 million of outstanding SCE
receivables for $28.8 million to a financial institution. Of this amount $21.7
million (which related to receivables not subject to pricing disputes with SCE)
was paid in immediate cash. The balance (which related to receivables to which
there are pricing disputes) was placed in escrow until the earlier of the
resolution of the pricing disputes or the achievement by SCE of credit
worthiness. The remaining $2.1 million represents the 6.75% discount charged by
the financial institution. On March 1, 2002, after securing certain financing,
SCE paid all outstanding receivables due to the Company. The $7.1 million in
escrow was also released to the Company on March 1, 2002. All Company litigation
pending against SCE in connection with past due receivables has been withdrawn.
On January 31, 2002, all but one of the Company's facilities in the PG&E service
territory entered into Supplemental Agreements with PG&E whereby PG&E agreed to
the amount of the prepetition payable owed to each facility, the rate of
interest borne by the payable and a payment schedule. PG&E agreed to make twelve
monthly installments commencing on February 28, 2002. The Bankruptcy Court
approved the Supplemental Agreements and the first five installments have been
received by the Company between February 28, 2002 and June 28, 2002. The
escrowed amount of $4.9 million will remain in escrow until the financial
institution is paid in full.
SCE paid 100% of their past due receivables on March 1, 2002, and PG&E has paid
five-twelfths of their past due receivables through June 28, 2002, in accordance
with an agreed-upon twelve-month payment schedule. The Company believes it will
ultimately receive payment of all these outstanding receivables. Therefore, at
December 31, 2001, the Company reversed approximately $15.8 million of the
reserves leaving $3.6 million. That remaining reserve applies to the discount
incurred by the Company in transferring the receivables since that amount of the
receivables will not be collected. Upon receipt of those payments from SCE and
PG&E, the Company also reversed $27.9 million of the liabilities recorded upon
the transfer of the receivables, leaving a liability balance of $2.3 million on
June 30, 2002. As of March 31, 2002 and December 31, 2001, the Company had
outstanding gross receivables (including the Company's 50% interest in several
partnerships) from these two utilities of approximately $29.7 million and $71.6
million, respectively. The Company believes it will ultimately receive payments
in full of the net amount of these receivables, subject to the discounting
previously incurred.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as discussed in the following paragraphs, there have been no significant
changes in the Company's market risk sensitive assets and liabilities for the
quarter ended March 31, 2002 from the amounts reported at December 31, 2001.
However, the sensitivity analyses reported at December 31, 2001 do not reflect
any changes due to the deterioration in the Company's credit rating, and
therefore, the interest rate spreads and discount rates used to determine the
cash flows and fair values of the Company's debt at December 31, 2001 may differ
significantly from those that would be used based on current information.
See Assets Held for Sale and Related Liabilities and Liquidity/Cash Flow for a
discussion of the changes affecting the Company's credit rating, funding of
obligations related to the Centre and Team, sale of Thai assets and debt
repayment defaults.
ANY STATEMENTS IN THIS COMMUNICATION WHICH MAY BE CONSIDERED TO BE
"FORWARD-LOOKING STATEMENTS," AS THAT TERM IS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, ARE SUBJECT TO CERTAIN RISK AND UNCERTAINTIES.
THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
SUGGESTED BY ANY SUCH STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED OR IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S PUBLIC FILINGS WITH
THE SECURITIES AND EXCHANGE COMMISSION AND MORE GENERALLY, GENERAL ECONOMIC
CONDITIONS, INCLUDING CHANGES IN INTEREST RATES AND THE PERFORMANCE OF THE
FINANCIAL MARKETS; CHANGES IN DOMESTIC AND FOREIGN LAWS, REGULATIONS, AND TAXES,
CHANGES IN COMPETITION AND PRICING ENVIRONMENTS; AND REGIONAL OR GENERAL CHANGES
IN ASSET VALUATIONS.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On April 1, 2002, the Debtors filed their respective petitions for protection
under Chapter 11 of the Bankruptcy Code. The petitions were filed in the U.S.
Bankruptcy Court for the Southern District of New York, and are being jointly
administered under the lead case, In re Ogden New York Services, Inc., No.
02-40826 (CB). (Generally, all actions against the Debtors are stayed during the
pendency of the Chapter 11 proceedings).
The Company is party to a number of other claims, lawsuits and pending actions,
most of which are routine and all of which are incidental to its business. The
Company assesses the likelihood of potential losses on an ongoing basis and when
they are considered probable and reasonably estimable, records an estimate of
the ultimate outcome. If there is no single point estimate of loss that is
considered more likely than others, an amount representing the low end of the
range of possible outcome is recorded. The final consequences of these
proceedings are not presently determinable, however, all such claims, lawsuits
and pending actions arising prior to April 1, 2002 must be resolved through
confirmation of the Company's plan of reorganization as such plan may be
approved by the Bankruptcy Court.
The Company's operations are subject to various Federal, state and local
environmental laws and regulations, including the Clean Air Act, the Clean Water
Act, CERCLA and the Resource Conservation and Recovery Act (the "RCRA").
Although the Company's operations are occasionally subject to proceedings and
orders pertaining to emissions into the environment and other environmental
violations, the Company believes that it is in substantial compliance with
existing environmental laws and regulations.
The Company may be identified, along with other entities, as being among
potentially responsible parties responsible for contribution for costs
associated with the correction and remediation of environmental conditions at
disposal sites subject to CERCLA and/or analogous state laws. In certain
instances the Company may be exposed to joint and several liability for remedial
action or damages. The Company's ultimate liability in connection with such
environmental claims will depend on many factors, including its volumetric share
of waste, the total cost of remediation, the financial viability of other
companies that also sent waste to a given site and, in the case of divested
operations, its contractual arrangement with the purchaser of such operations.
The Company is engaged in ongoing investigation and remediation actions with
respect to three airports where it provides aviation fueling services on a
cost-plus basis pursuant to contracts with individual airlines, consortia of
airlines and operators of airports. The Company currently estimates the costs of
those ongoing actions (determined as of March 2002) will be approximately $1.0
million (over several years), and that airlines, airports and others should
reimburse it for substantially all these costs. To date, the Company's right to
reimbursement for remedial costs has been challenged successfully in one prior
case in which the court found that the cost-plus contract in question did not
provide for recovery of costs resulting from the Company's own negligence. That
case did not relate to any of the airports described above. Except in that
instance, and in the American/United litigation noted below, the Company has not
been alleged to have acted with negligence. The Company has also agreed to
indemnify various transferees of its divested airport operations with respect to
certain known and potential liabilities that may arise out of such operations
and in certain instances has agreed to remain liable for certain potential
liabilities that were not assumed by the transferee. Accordingly, the Company
may in the future incur liability arising out of investigation and remediation
actions with respect to airports served by such divested operations to the
extent the purchaser of these operations is unable to obtain reimbursement of
such costs from airlines, airports or others. To date such indemnification has
been sought with respect to one airport. Because the Company did not provide
fueling services at that airport, it does not believe it will have significant
obligations with respect to this matter. The Company is currently reviewing the
potential impact of its filing under Chapter 11 on its exposure for these
liabilities.
The potential costs related to all of the foregoing matters and the possible
impact on future operations are uncertain due in part to the complexity of
governmental laws and regulations and their interpretations, the varying costs
and effectiveness of cleanup technologies, the uncertain level of insurance or
other types of recovery and the questionable level of the Company's
responsibility. Although the ultimate outcome and expense of any litigation,
including environmental remediation, is uncertain, the Company believes that the
following proceedings will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
(a) Environmental Matters
(i) On June 8, 2001, the Environmental Protection Agency ("EPA")
named Ogden Martin Systems of Haverhill, Inc. as one of 2000
Potentially Responsible Parties ("PRPs") at the Beede Waste Oil
Superfund Site, Plaistow, New Hampshire (the "Site"). The EPA
alleges that the Haverhill facility disposed approximately 45,000
gallons of waste oil at the Site, a former recycling facility.
The total volume of waste allegedly disposed by all PRPs at the
Site is estimated by the EPA as approximately 14,519,232 gallons.
The EPA alleges that the costs of response actions completed or
underway at the Site total approximately $14.9 million, exclusive
of interest, and estimates that the total cost of cleanup of this
site will be an additional $70.0 million. A PRP group has formed
and the Company is participating in PRP group discussions towards
settlement of the EPA's claims. As a result of uncertainties
regarding the source and scope of contamination, the large number
of PRPs and the varying degrees of responsibility among various
classes of potentially responsible parties, the Company's share
of liability, if any, cannot be determined at this time.
(ii) On April 9, 2001, Ogden Ground Services, Inc. and Ogden Aviation,
Inc. (collectively "Ogden"), together with approximately 250
other parties, were named by Metropolitan Dade County, Florida
(the "County") as PRPs, pursuant to CERCLA, RCRA and state law,
with respect to an environmental cleanup at Miami International
Airport (the "Airport"). The County alleges that, as a result of
releases of hazardous substances, petroleum, and other wastes to
soil, surface water, and groundwater at the Airport, it has
expended over $200.0 million in response and investigation costs
and expects to spend an additional $250.0 million to complete
necessary response actions. An Interim Joint Defense Group has
been formed among PRPs and discovery of the County's document
archive is underway. A tolling agreement has been executed
between PRPs and the County in order to allow for settlement
discussions to proceed without the need for litigation. As a
result of uncertainties regarding the source and scope of the
contamination, the large number of PRPs and the varying degrees
of responsibility among various classes of potentially
responsible parties, the Company's share of liability, if any,
cannot be determined at this time. The Company is currently
reviewing the potential impact of its filing under Chapter 11 on
its exposure for these liabilities, which arise from divested
operations.
(iii) On May 25, 2000 the California Regional Water Quality Control
Board, Central Valley Region (the "Board"), issued a cleanup and
abatement order to Pacific-Ultrapower Chinese Station ("Chinese
Station"), a general partnership in which one of the Company's
subsidiaries owns 50% and which operates a wood-burning power
plant located in Jamestown, California. This order arises from
the use as fill material, by Chinese Station's neighboring
property owner, of boiler bottom ash generated by Chinese
Station. The order was issued jointly to Chinese Station and to
the neighboring property owner as co-respondents. Chinese Station
completed the cleanup during the summer of 2001 and submitted its
Clean Closure Report to the Board on November 2, 2001. This
matter remains under investigation by the Board and other state
agencies with respect to alleged civil and criminal violations
associated with the management of the material. Chinese Station
believes it has valid defenses, and has pending a petition for
review of the order. Settlement discussions in this matter are
underway.
(iv) On January 4, 2000 and January 21, 2000, United Air Lines, Inc.
("United") and American Airlines, Inc. ("American"),
respectively, named Ogden New York Services, Inc. ("Ogden New
York"), in two separate lawsuits filed in the Supreme Court of
the State of New York. The lawsuits seek judgment declaring that
Ogden New York is responsible for petroleum contamination at
airport terminals formerly or currently leased by United and
American at New York's Kennedy International Airport. These cases
have been consolidated for joint trial. Both United and American
allege that Ogden negligently caused discharges of petroleum at
the airport and that Ogden New York is obligated to indemnify the
airlines pursuant to the Fuel Services Agreements between Ogden
New York and the respective airlines. United and American further
allege that Ogden New York is liable under New York's Navigation
Law, which imposes liability on persons responsible for
discharges of petroleum, and under common law theories of
indemnity and contribution.
The United complaint is asserted against Ogden New York,
American, Delta Air Lines, Inc., Northwest Airlines Corporation
and American Eagle Airlines, Inc. United is seeking $1.5 million
in technical contractor costs and $432,000 in legal expenses
related to the investigation and remediation of contamination at
the airport, as well as a declaration that Ogden and the airline
defendants are responsible for all or a portion of future costs
that United may incur.
The American complaint, which is asserted against both Ogden New
York and United, sets forth essentially the same legal basis for
liability as the United complaint. American is seeking
reimbursement of all or a portion of $4.6 million allegedly
expended in cleanup costs and legal fees it expects to incur to
complete an investigation and cleanup that it is conducting under
an administrative order with the New York State Department of
Environmental Conservation. The estimate of those sums alleged in
the complaint is $70.0 million.
The Company disputes the allegations and believes that the
damages sought are overstated in view of the airlines'
responsibility for the alleged contamination and that the Company
has other defenses under its respective leases and permits with
the Port Authority. The matter has been stayed as a result of the
Company's Chapter 11 filing.
(v) On December 23, 1999 Allied Services, Inc. ("Allied") was named
as a third party defendant in an action filed in the Superior
Court of the State of New Jersey. The third-party complaint
alleges that Allied generated hazardous substances to a
reclamation facility known as the Swope Oil and Chemical Company
Site, and that contamination migrated from the Swope Oil Site.
Third-party plaintiffs seek contribution and indemnification from
Allied and over 90 other third-party defendants for costs
incurred and to be incurred to cleanup. This action was stayed,
pending the outcome of first- and second-party claims. The
Company has received no further notices in this matter since the
stay was entered. As a result of uncertainties regarding the
source and scope of contamination, the large number of
potentially responsible parties and the varying degrees of
responsibility among various classes of potentially responsible
parties, the Company's share of liability, if any, cannot be
determined at this time.
On January 12, 1998, the Province of Newfoundland filed an
Information Against Airconsol Aviation Services Limited
("Airconsol") alleging that Airconsol violated provincial
environmental laws in connection with a fuel spill on or about
January 14, 1997 at Airconsol's fuel facility at the Deer Lake,
Canada Airport. This previously reported matter was resolved
satisfactorily to the Company.
(b) Other Matters
(i) In 1985, the Company sold all of its interests in several
manufacturing subsidiaries, some of which used asbestos in their
manufacturing processes and one of which was Avondale Shipyards,
now operated as a subsidiary of Northrop Grumman Corporation.
Some of these sold subsidiaries have been and continue to be
parties to litigation relating to asbestos primarily from
workplace exposure. The Company has been named as a party to one
such case filed in 2001 in which there are 45 other defendants.
The case, which is in its early stages and is stayed against the
Company by the Chapter 11 proceding, appears to assert that the
Company is liable on theories of successor liability. Before the
Company's bankruptcy filing, the Company had filed for its
dismissal from the case on the basis that it is not a successor
to the subsidiary that allegedly caused the plaintiffs' asbestos
exposure. The Company does not believe it is liable to persons
who may assert claims for asbestos related injuries relating to
the operations of its former subsidiaries.
(ii) As previously disclosed, the Company commenced litigation
challenging the Client Communities' notice purporting to
terminate its contract with the Company for the Onondaga County,
New York, waste to energy facility. On August 13, 2002 the
federal court in which such matter was pending granted the Client
Communities motion to remand the matter to state court and denied
the Company's motion to transfer the matter to the Bankruptcy
Court. Were the case to continue in state court, it is likely
that the Client Community would seek a summary judgment on this
matter. Were this matter to be determined adversely to the
Company, the contract could be terminated and the operating
subsidiary and the Company, as guarantor, could incur
substantial, pre-petition termination obligations. The Company
continues to believe that further proceedings in this matter are
stayed by the bankruptcy filing and that it has substantial
defenses to the Client's Communities that the contract has been
properly terminated.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
(a) Indebtedness
As previously disclosed, on April 1, 2002, Covanta Energy Corporation
and certain of its domestic subsidiaries filed for reorganization under Chapter
11 of the United States Bankruptcy Code. With respect to the following
indebtedness, and in connection with its Chapter 11 filing, the Company has
ceased to pay principal and interest as they accrued. Enforcement of remedies
under these items of indebtedness as a result of defaults (including payment
defaults and any default purporting to occur as a result of the filing) is
stayed under the Bankruptcy Code and orders entered into by the Bankruptcy
Court.
- --------------------------------------------------------------------------------
Indebtedness Amount of Default and Total Arrearage
as of August 2002
- --------------------------------------------------------------------------------
9.25% Debentures $100 million of principal as of April 1,
2002 plus interest from September 1, 2001.
- --------------------------------------------------------------------------------
6% Convertible Debentures $85 million of principal as of April 1,
2002 plus interest from June 1, 2001.
- --------------------------------------------------------------------------------
5.75% Convertible Debentures $63.6 million of principal as of April 1,
2002 plus interest accruing from
October 20, 2001.
- --------------------------------------------------------------------------------
Master Credit Facility Approximately $230 million of principal
plus interest of funded obligations and
$397 million of unfunded obligations with
respect to letters of credit.
- --------------------------------------------------------------------------------
The Company continues to pay on a timely basis principal and interest
on indebtedness relating to its waste to energy facilities and classified on its
balance sheet as project debt. The project debt associated with the financing of
waste-to-energy facilities is generally arranged by municipalities through the
issuance by governmental entities of tax-exempt and taxable revenue bonds.
Payment obligations for the project debt associated with waste to energy
facilities are limited recourse to the revenues and property, plant and
equipment of the operating subsidiary and non-recourse to the Company, subject
to operating performance guarantees and commitments by the Company. The
automatic stay provided under the Bankruptcy Code and orders entered into by the
Bankruptcy Court would prevent the obligees from exercising remedies under any
of the project debt that might otherwise be deemed to be in default by reason of
the Chapter 11 filing.
In respect to the City of Anaheim, California $126,500,000 Certificates
of Participation (1993 Arena Financing Project), the City of Anaheim sent a
notice of default under the Management Agreement for the Arrowhead Pond of
Anaheim which could constitute a default under a letter of credit reimbursement
agreement with Credit Suisse First Boston. The outstanding principal amount of
the named securities is $115.8 million as of the date of this filing (supported
by a letter of credit that is included in the unfunded letters of credit
referred to above under "Master Credit Facility").
(b) Dividends on Preferred Stock
As disclosed in Note 16 to the Annual Report filed on Form 10-K, in
connection with its Chapter 11 filing, the Company suspended the declaration and
payment of dividends on its Series A $1.875 Cumulative Convertible Preferred
Stock. Under the terms governing the Series A $1.875 Cumulative Convertible
Preferred Stock, the dividends due for the second quarter of 2002 accumulate
without interest or penalty in the amount of $1.875 per share, currently
totaling $15,491.72 per quarter. Despite this accumulation of dividend, the
holders of the preferred shares are not expected to receive any future dividends
on or any value for these shares following the Chapter 11 process.
(c) Other Matters
The Company has also not made any distributions to its partners under
the agreements governing the Covanta Huntington Limited Partnership and the
Covanta Onondaga Limited Partnership. The amounts that would have been
distributed to the Company's partners in these two partnerships have been set
aside in segregated accounts pursuant to the Bankruptcy Court's order, and
distributions will not be paid to such partners until further order of the
Court.
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.
Date: September 13, 2002 COVANTA ENERGY CORPORATION
(Registrant)
By: /s/ Scott G. Mackin
--------------------------------
Scott G. Mackin
President and Chief Executive
Officer
By: /s/ William J. Keneally
--------------------------------
William J. Keneally
Senior Vice President
and Chief Accounting Officer
Certification Required
by Rules 13a-14 and l5d-14 under the Securities Exchange Act of 1934
I, Scott G. Mackin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Covanta Energy
Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
Date: September 13, 2002
------------------
/s/ Scott G. Mackin
--------------------------------------
Scott G. Mackin
President and Chief Executive Officer
Certification Required
by Rules 13a-14 and l5d-14 under the Securities Exchange Act of 1934
I, William J. Keneally, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Covanta Energy
Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
Date: September 13, 2002
------------------
/s/ William J. Keneally
--------------------------------------
William J. Keneally
Senior Vice President
and Chief Accounting Officer
Certification Required
by Rules 13a-14 and l5d-14 under the Securities Exchange Act of 1934
I, Louis M. Walters, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Covanta Energy
Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
Date: September 13, 2002
------------------
/s/ Louis M. Walters
-------------------------------------
Louis M. Walters
Vice President and Treasurer