UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 11-K
ANNUAL REPORT
PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
/x/ ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 2002.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from __________ to __________.
Commission file number 1-3122
A. Full title of the plan and the address of the plan, if different
from that of the issuer named below:
Covanta Energy Group Profit Sharing Plan
B. Name of issuer of the securities held pursuant to the plan and the
address of its principal executive office:
Covanta Energy Corporation
40 Lane Road
Fairfield, NJ 07007
COVANTA ENERGY GROUP PROFIT SHARING PLAN
Independent Auditors' Report
Financial Statements
As of December 31, 2002 and 2001
and for the Year Ended December 31, 2002
COVANTA ENERGY GROUP PROFIT SHARING PLAN
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Statements of Net Assets Available for Benefits as of
December 31, 2002 and 2001 2
Statement of Changes in Net Assets Available for Benefits
for the Year Ended December 31, 2002 3
Notes to Financial Statements 4-9
INDEPENDENT AUDITORS' REPORT
Covanta Energy Group Profit Sharing Plan
We have audited the accompanying statements of net assets available for benefits
of the Covanta Energy Group Profit Sharing Plan (the "Plan") as of December 31,
2002 and 2001, and the related statement of changes in net assets available for
benefits for the year ended December 31, 2002. These financial statements are
the responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the net assets available for benefits of the Plan as of December 31,
2002 and 2001, and the changes in net assets available for benefits for the year
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
June 27, 2003
COVANTA ENERGY GROUP PROFIT SHARING PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 2002 AND 2001
- ---------------------------------------------------------------------------
2002 2001
ASSETS -
Investments (Note 3) $ - $ 47,815,720
------- ------------
Receivables:
Employer contributions 13,245
Participant contributions - 44,438
------- ------------
Total receivables - 57,683
------- ------------
NET ASSETS AVAILABLE FOR BENEFITS $ - $ 47,873,403
======= ============
See notes to financial statements.
COVANTA ENERGY GROUP PROFIT SHARING PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
YEAR ENDED DECEMBER 31, 2002
- --------------------------------------------------------------------------------
ADDITIONS:
Additions to net assets attributed to-
Interest and dividends $ 1,073,533
Contributions:
Participant 48,253
Employer 1,466,669
Rollover 7,854
-------------
Total additions 2,596,309
-------------
DEDUCTIONS:
Deductions from net assets attributed to:
Net depreciation in fair value of investments (Note 3) (7,878,450)
Benefits paid to participants (59,392)
Administrative expenses (30,512)
Net transfer to other plans (Note 5) (42,501,358)
-------------
Total deductions (50,469,712)
-------------
NET DECREASE IN NET ASSETS AVAILABLE
FOR BENEFITS (47,873,403)
NET ASSETS AVAILABLE FOR BENEFITS:
BEGINNING OF YEAR 47,873,403
-------------
END OF YEAR $ -
=============
See notes to financial statements.
COVANTA ENERGY GROUP PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE PLAN
The following is a brief description of the Covanta Energy Group Profit
Sharing Plan (the "Plan"). Participants should refer to the Plan document
for more complete information.
General Information - The Plan is a defined contribution employee savings
plan providing for both employer and employee contributions. The Plan
includes a pre-tax savings feature which is intended to qualify under
Sections 401(k) and 401(a) of the Internal Revenue Code (the "Code"). Prior
to January 1, 1998, the Plan included an after-tax savings feature which
was intended to qualify under Section 401(a) of the Code. The after-tax
feature of the Plan was discontinued effective December 31, 1997. The Plan
is subject to the provisions of the Employee Retirement Income Security Act
of 1974 ("ERISA").
Administration of the Plan - The Administrative and Investment Committees,
which are appointed by the Board of Directors (the "Board") of Covanta
Energy Group, Inc. ("CEG" or the "Company"), serves as a fiduciary of the
Plan. The Administrative Committee has general responsibility for the
administration and interpretation of the Plan.
The Company's Investment Committee (the "Investment Committee") is
responsible for the appointment of investment advisors and for reviewing
the performance of the investment portfolio. Costs related to the
administration of the Plan are paid by the participants out of Plan assets.
On April 1, 2002, Covanta Energy Corporation ("Covanta") and 123 of its
domestic subsidiaries, which include the Company, filed voluntary petitions
for reorganization under Chapter 11 of the United States Bankruptcy Code
(the "Bankruptcy Code") with the United States Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court"). Since April 1,
2002, thirty-one additional subsidiaries of Covanta filed for
reorganization under Chapter 11 of the Bankruptcy Code. In addition, four
subsidiaries, which had filed petitions on April 1, 2002, have been sold as
part of the bankruptcy proceeding. It is possible that additional
subsidiaries will file petitions for reorganization under Chapter 11 and be
included as part of Covanta's plan of reorganization.
Covanta and these subsidiaries, (collectively the "Debtors"), are currently
operating their businesses as debtors in possession pursuant to the
Bankruptcy Code. The Debtors dependence upon, among other things,
confirmation of a plan of reorganization, their ability to comply with, and
if necessary renew the terms of the Debtor in Possession Credit Facility,
and their ability to generate sufficient cash flows from operations, asset
sales and financing arrangements to meet their obligations, raise
substantial doubt about their ability to continue as going concerns. The
Debtors' Debtor in Possession Credit Facility includes provisions enabling
Covanta and its subsidiaries, including the Company, to obtain funding for
making employer matching contributions to the Plan.
As a result of publicly disclosed information concerning Covanta and
uncertainty of future rules and regulations which may apply to the Plan's
investment in Covanta's common stock, the Investment Committee determined
that it was in the best interest of the Plan and its participants to
discontinue the Covanta Stock Fund (see Note 7) as an investment option
under the Plan effective March 18, 2002. Additionally, the Plan was amended
to allow Plan participants to maintain their investment in the Covanta
Stock Fund or, at their discretion, redirect their investment to another
investment fund offered under the Plan. Also, on May 16, 2002, the
Securities and Exchange Commission granted the application of the New York
Stock Exchange, Inc. (the "NYSE") for removal of Covanta's common stock
from listing and registration on the NYSE. The removal of such stock became
effective at the opening of the trading session on May 17, 2002.
Participation - The Plan was amended, effective January 1, 2002, to exclude
from participation any employee who is eligible to participate in the newly
adopted Covanta Energy Savings Plan (the "Savings Plan") at that time, all
active participants became participants of the Savings Plan. In addition,
no participant who was eligible to participate in the Savings Plan was
permitted to make an employee contribution or rollover contribution to the
Plan and no employer contribution can be made with respect to participants
who were eligible to participate in the Savings Plan. The Company moved
existing account balances into the Savings Plan.
Participants Accounts - Shares in group trust funds were determined on the
basis of the initial asset contribution to the trust by each participating
plan, adjusted for subsequent contributions, distributions and allocated
income and realized and unrealized gains and losses. Allocation of income,
realized and unrealized gains and losses, and administrative expenses were
determined monthly on the basis of each plan's proportionate share in the
plan assets stated at fair value.
Vesting - On January 1, 2002, employer contributions became 100% vested for
all active employees. Prior to January 1, 2002, the vesting of employer
contributions was based on the following schedule:
Percent
Years of Vesting Service in the Plan Vested
Less than one year of vesting service 0%
One but less than two years of vesting service 20
Two but less than three years of vesting service 40
Three but less than four years of vesting service 60
Four but less than five years of vesting service 80
Five or more years of vesting service 100
Participant contributions are immediately 100% vested.
Contributions - Contributions paid by CEG are determined by the
Compensation Committee of the Board of Directors of Covanta Energy
Corporation. The Board's determination may be expressed in terms of a
stated percentage of CEG's annual net profit, as a fixed dollar amount or
as a percentage of total compensation paid to each participant. The
contribution may not exceed the amount deductible by CEG for Federal income
tax purposes and may be made only out of its current or accumulated
earnings and profits. During 2002, the Compensation Committee of the Board
approved a discretionary contribution for 2001, which was paid in August
2002. The allocation of the contributions to individual participants is
based on the relationship of compensation paid to each participant to the
compensation paid to all participants. Participants could contribute one to
ten percent of their annual compensation on a pre-tax basis. Participants
direct the investment of their contributions into various investment
options offered by the Plan. For 2002 and 2001, participants pre-tax
contributions could not exceed $11,000 and $10,500, respectively, in
accordance with Internal Revenue Services ("IRS") Regulations.
Distribution from the Plan because of Hardship - Withdrawals are permitted
if a participant establishes, to the satisfaction of the Administrative
Committee, a financial need for funds for which there is no other money
available such as: (i) to purchase a primary residence; (ii) to pay
uninsured medical expenses for the participant or immediate family; (iii)
to prevent mortgage foreclosure on, or eviction from their primary
residence; or (iv) to pay post-secondary educational expenses for the
participant, spouse, children or dependents.
Payments from the Plan's Trust - The value of a participant's interest in
the Plan is payable upon retirement, disability, death, or termination of
employment, as follows:
(i) Upon termination of service of a participant on or after retirement
date or by reason of death or disability, an amount equal to the value
of the participant's account as of the valuation date next following the
date of termination of service, whether or not such participant has a
vested interest in such account, is paid from the trust. Participants
may elect to receive the distribution valued as of any month after the
date of termination of service but not later than the April 1st of the
year following the year the participant attains age 70-1/2.
(ii) Upon the termination of service of any participant, the participant
may be paid in a lump sum amount equal to the value as of the valuation
date coincident with or following the date of termination of service, of
the vested interest, if any, in the account. Such payment is made to the
participant as soon as practicable after termination of service if the
value of the account is less than $5,000. If the value of the
Participant's account is greater than $5,000, the Participant may elect
to receive the distribution valued as of any month after the date of
termination of service but not later than April 1st of the year
following the year the participant attains age 70-1/2.
Any benefit payable under the Plan pursuant to (i) above is paid as one
lump sum payment from the trust, with a supplemental payment to be made
as promptly as possible in respect to any contribution allocated to the
participant's account for the Plan year.
Loans - In accordance with Plan policy, participants can borrow against the
vested portion of their account balance. Borrowings are limited to the
lesser of $50,000 or 50% of the participant's vested balance (not to exceed
certain limitations). While such loans do not represent a reduction of the
participant's account balance, participants are prohibited from receiving
allocations (earnings) based on the loan amounts, although when the loans
are repaid, the interest expense incurred by the participant is added to
the participant's account balance. The interest rate on such loans is the
prime lending rate plus 1%. Loans to participants, which comprise the Loan
Fund, are reported at cost, which approximates fair value.
Forfeitures - The plan was amended to discontinue reallocation of
forfeitures to participants' account. Any subsequent forfeitures are to be
used to offset plan expenses. At December 31, 2002 and 2001 forfeitures on
non-vested accounts totaled $32,294 and $32,832, respectively.
Transfers - Net transfers to other plans represent amounts transferred to
other plans sponsored by Covanta affiliates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting - The accounting and reporting policies followed in the
preparation of the financial statements of the Plan are in conformity with
accounting principles generally accepted in the United States of America.
Investment Funds - Plan assets are held by T. Rowe Price Trust Company (the
"Trustee"). All investments are participant-directed.
Investment Valuation and Income Recognition - The Plan's investments are
stated at fair value. Shares of mutual funds are valued at quoted market
prices, which represent the net asset value of shares held by the Plan at
year-end. Investments in the U.S. Treasury Money Fund are stated at cost
plus investment income, which approximates fair value. Participant loans
are valued at outstanding principle balance due for loans taken from
individual accounts, which approximates fair value. Purchase and sales of
securities are recorded on a trade date basis. Dividends are recorded on
the ex-dividend date.
Amounts for securities that have no quoted market prices represents
estimated fair value. The approximate value of the Covanta Stock Fund is
the quoted market price of Covanta's common stock.
The T. Rowe Price Stable Value Common Trust Fund ("Stable Value Fund")
which invests in benefit-responsive investments and is valued at contract
value (cost plus accrued interest), which approximates fair value.
Distributions to Participants - Benefit payments to participants are
recorded when paid.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of net assets available for benefits and changes
therein. Actual results could differ from the estimates and assumptions
used.
Risks and Uncertainties - The Plan provides for various investment options
(Note 3). Investment securities, in general, are exposed to various risks,
such as interest rate, credit and overall market volatility. Due to the
level of risk associated with certain investment securities, it is
reasonably possible that changes in value of investment securities will
occur in the near term and that such changes would materially affect
participants' account balances and the amounts reported in the statements
of net assets available for plan benefits.
Expenses - Administrative expenses of the Plan are paid by either the Plan
or the Plan's sponsor as provided in the Plan document.
3. INVESTMENTS
The following is a summary of the Plan's investments held by the Trustee at
December 31, 2001 that represented 5% or more of the Plan's net assets:
Investments at fair value:
Fidelity Magellan Fund $ 8,868,676
*T. Rowe Price International Stock Fund 2,430,359
*T. Rowe Price Equity Income Fund 11,313,355
*Covanta StockFund 749,634
*Stable Value Fund 8,133,996
*T. Rowe Price Blue Chip Growth Fund 3,727,623
*T. Rowe Price Equity Index 500 Fund 2,548,986
*T. Rowe Price U.S. Treasury Money Fund 2,616,398
*Permitted party-in-interest
During 2002, the Plan's investments (including gains and losses on
investments bought and sold as well as held during the year) depreciated in
value by $7,878,450 as follows:
*T. Rowe Price Equity Income Fund $ (1,853,562)
*T. Rowe Price International Stock Fund (453,234)
*T. Rowe Price Balanced Fund (93,814)
*T. Rowe Price Spectrum Income Fund 8,246
*T. Rowe Price Blue Chip Growth Fund (885,168)
*T. Rowe Price Equity Index 500 Fund (533,772)
*T. Rowe Price Small-Cap Value Fund (64,466)
*T. Rowe Price New Horizons Fund (412,264)
*T. Rowe Price Science & Technology Fund (464,530)
*T. Rowe Price Mid-Cap Growth Fund (257,692)
*Covanta Stock Fund (865,518)
Fidelity Magellan Fund (2,002,676)
--------------
$ (7,878,450)
==============
*Permitted party-in-interest
4. INVESTMENT CONTRACTS
The Stable Value Fund primarily invests in investment contracts providing a
guaranteed return on principal invested over a specified time period.
Investment contracts in the Stable Value Fund are fully benefit-responsive
and are recorded at their fair values. Generally, fair value approximates
contract value (contributions made plus interest accrued at the contract
rate, less withdrawals and fees). If, however, an event has occurred that
may impair the ability of the contract issuer to perform in accordance with
the contract terms, fair value may be less than the contract value. The
crediting interest rates at December 31, 2002 for the various investment
contracts ranged from 3.34% to 7.83%. The average yield of the Stable Value
Fund for the year ended December 31, 2002 was 5.16%.
5. PLAN TERMINATION
On November 21, 2002, the Administrative Committee approved the merger of
the Plan into the Covanta Energy Savings Plan. On December 31, 2002, the
Plan was merged into the Savings Plan. All participants account balances
were transferred into the Savings Plan. The Plan ceased to exist in the
absence of any assets.
6. FEDERAL INCOME TAX STATUS
The IRS has determined and informed the Company by letter dated June 16,
1995 that the Plan and related trust are designed in accordance with
applicable sections of the Code. The Plan has been amended since receiving
the determination letter. However, the plan administrator believes that the
Plan is designed and is currently being operated in compliance with the
applicable requirements of the Code. Therefore, no provision for income
taxes has been included in the Plan's financial statements.
7. PARTY-IN-INTEREST TRANSACTIONS
The Covanta Stock Fund invested in Covanta common stock which was traded on
the NYSE for 2001 and the first quarter of 2002, and on the National
Quotation Bureau's Pink Sheets for the last three quarters of 2002.
The Plan invests in certain mutual funds managed by the Trustee.
Certain officers and employees of the Company (who may also be participants
in the Plan) perform administrative services related to the operation,
record keeping and financial reporting of the Plan. The Company pays these
individuals salaries and also pays other administrative expenses on behalf
of the Plan. Certain fees, including fees for the investment management
services, to the extent not paid by the Company, are paid by the Plan.
These transactions are not deemed prohibited party-in-interest
transactions, because they are covered by statutory administrative
exemptions from the Code's and ERISA's rules on prohibited transactions.
******
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the trustees (or other persons who administer the Covanta Energy Group
Profit Sharing Plan) have duly caused this annual report to be signed on its
behalf by the undersigned hereunto duly authorized.
Covanta Energy Group Profit Sharing Plan
Date: June 27, 2003 By: /s/ Stephen M. Gansler
----------------------- ------------------------------------------
Stephen M. Gansler
Plan Administrator
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
23.1 Consent of Independent Auditors
99.0 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002