UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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:
Resource Recovery 401(k) 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
RESOURCE RECOVERY 401(K) PLAN
Independent Auditors' Report
Financial Statements
As of December 31, 2002 and 2001
and for the Year Ended December 31, 2002
Supplemental Schedule
December 31, 2002
RESOURCE RECOVERY 401(k) PLAN
TABLE OF CONTENTS
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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 4-8
SUPPLEMENTAL SCHEDULE-
Form 5500, Schedule H, Part IV, Line 4 (i) - Schedule of Assets
(Held at End of Year) December 31, 2002 9
INDEPENDENT AUDITORS' REPORT
Resource Recovery 401(k) Plan
We have audited the accompanying statements of net assets available for benefits
of the Resource Recovery 401(k) 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 at 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.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in the
Table of Contents is presented for the purpose of additional analysis and is not
a required part of the basic financial statements, but is supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. This schedule is the responsibility of the Plan's management. Such
schedule has been subjected to the auditing procedures applied in our audit of
the basic 2002 financial statements and, in our opinion, is fairly stated in all
material respects when considered in relation to the basic financial statements
taken as a whole.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
June 27, 2003
RESOURCE RECOVERY 401(k) PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 2002 AND 2001
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2002 2001
ASSETS -
Investments (Note 3) $ 32,051,254 $ 43,559,086
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Receivables:
Employer contributions - 22,328
Participant contributions - 77,930
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Total receivables - 100,258
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NET ASSETS AVAILABLE FOR BENEFITS $ 32,051,254 $ 43,659,344
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See notes to financial statements.
RESOURCE RECOVERY 401(k) PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
YEAR ENDED DECEMBER 31, 2002
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ADDITIONS:
Additions to net assets attributed to-
Interest and dividends $ 1,005,401
Contributions:
Participant 223,524
Employer 95,705
Rollovers 21,990
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Total additions 1,346,620
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DEDUCTIONS:
Deductions from net assets attributed to:
Net depreciation in fair value of investments (Note 3) (9,556,707)
Benefits paid to participants (3,331,150)
Administrative expenses (66,853)
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Total deductions (12,954,710)
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NET DECREASE IN NET ASSETS AVAILABLE (11,608,090)
FOR BENEFITS
NET ASSETS AVAILABLE FOR BENEFITS:
BEGINNING OF YEAR 43,659,344
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END OF YEAR $ 32,051,254
=============
See notes to financial statements.
RESOURCE RECOVERY 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
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1. DESCRIPTION OF THE PLAN
The following is a description of the Resource Recovery 401(k) 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 participant contributions. Prior to
adoption of the Plan on January 1, 1999, Covanta Energy Services, Inc.
(the "Company,") was included in the Ogden 401(k) Plan (the "Prior Plan").
It was determined that it was in the best interest of the Company and its
employees to adopt the Plan, such plan being substantially similar to, and
a continuation of the Prior Plan. Accordingly, effective January 1, 1999
the Prior Plan assets pertaining to the Company were transferred to the
Plan. All service credited to an individual as a participant under the
Prior Plan was credited to such individual under the Plan; provided, that
such individual became a participant of the Plan on or after January 1,
1999. The Plan is subject to the provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA").
Administration of the Plan - Administrative and Investment Committees are
appointed by the Board of Directors (the "Board") of Covanta Energy Group,
Inc. ("CEG") and serve as fiduciaries of the Plan. The Administrative
Committee has responsibility for administering the Plan and interpretation
of the Plan.
The Company's Investment Committee (the "Investment Committee") has
responsibility for reviewing the performance of the Plan's investments.
Costs related to the administration of the Plan may be paid out of Plan
assets if the Company does not pay such expenses directly.
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 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.
The Investment Committee decided it was in the best interest of the Plan
and its participants to terminate the Covanta Stock Fund effective as of
the close of business on June 27, 2003. Participants are permitted to sell
any or all of the Covanta Stock Fund held prior to that date. If a
participant does not choose to sell their Covanta Stock Fund held prior to
the close of business on June 27, 2003, all Covanta Stock Funds held in
the participant's account will be sold and the proceeds will be deposited
in the T. Rowe Price Stable Value Fund on the participants' behalf.
Participation/Contributions - 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 is eligible to participate
in the Savings Plan is permitted to make an employee contribution or
rollover contribution to the Plan and no employer contribution can be made
with respect to participants who are eligible to participate in the
Savings Plan. The Company intends to move existing account balances into
the Savings Plan.
Loans to Participants - Loans are made to participants at a minimum of
$500 and up to the lesser of 50 percent of the participant's total vested
account balance (including outstanding loans, if any,) minus the current
loan balance or $50,000 reduced by the excess if any, of the highest
outstanding balance of loans during the preceding 12 months, even if
repaid over the outstanding balance of loans from Plan to the participant
on the date on which such loan is made, not to exceed the limitations of
the Tax Reform Act of 1986. The terms of the loans are a minimum of one
year and a maximum of 5 years or 60 months (10 year maximum on loans for a
primary residence). Participants were prohibited from borrowing funds
accumulated in the Covanta Stock Fund. The maximum number of loans
outstanding at one time for an employee is two loans with only one of the
outstanding loans being a residential loan. The loan interest rate is
based on the prime rate plus 1% on the first business day of each month.
Loans to participants, which comprise the Loan Fund, are reported at cost,
which approximates 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 as follows:
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.
Retirement Dates - A participant's normal retirement date is the
participant's sixty-fifth birthday. A participant may elect early
retirement at age 55 with 5 years of credited service. A participant may
also receive an earlier distribution from the Plan following a termination
of employment. Any account with a balance of less than $5,000 will be
automatically distributed following the participants termination of
employment.
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.
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 T. Rowe Price 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 represent
estimated fair value. The approximate value of the Covanta Stock Fund is
the quoted market price of Covanta's 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 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, 2002 and 2001 that represented 5% or more of the Plan's
net assets:
2002 2001
Investments at fair value:
*Covanta Stock Fund $ 8,850 $ 2,189,425
*Stable Value Fund 6,589,909 5,865,195
Fidelity Magellan Fund 5,725,723 8,821,348
*T. Rowe Price Balanced Fund 2,473,098 3,136,425
*T. Rowe Price Blue Chip Growth Fund 1,452,329 2,466,226
*T. Rowe Price Equity Index 500 Fund 4,341,701 7,682,187
*T. Rowe Price Spectrum Income Fund 2,953,646 2,609,572
*Loan Fund 3,308,080 4,121,772
*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 $9,556,707 as follows:
*T. Rowe Price Equity Income Fund $ (150,566)
*T. Rowe Price International Stock Fund (283,170)
*T. Rowe Price Balanced Fund (345,912)
*T. Rowe Price Spectrum Income Fund 48,682
*T. Rowe Price Blue Chip Growth Fund (533,855)
*T. Rowe Price Equity Index 500 Fund (1,553,898)
*T. Rowe Price Small-Cap Value Fund (78,189)
*T. Rowe Price New Horizons Fund (266,635)
*T. Rowe Price Science & Technology Fund (653,947)
*T. Rowe Price Mid-Cap Growth Fund (123,107)
*Covanta Stock Fund (3,601,271)
Fidelity Magellan Fund (2,014,839)
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$ (9,556,707)
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*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.
All 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 rates 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 percent to 7.83 percent. The
average yield of the Stable Value Fund for the year ended December 31,
2002 was 5.16 percent.
5. PLAN TERMINATION
On November 21, 2002, the Administrative Committee approved the merger of
the Plan into the Savings Plan.
The Plan has currently submitted a request under the IRS Voluntary
Compliance Program (VCP). Upon approval, all participant account balances
will be transferred to the Savings Plan. In absence of any assets, the
Plan will cease to exist.
6. FEDERAL INCOME TAX STATUS
The Plan is currently being considered in a determination letter
application submitted to the IRS of February 20, 2002. For the Plan years
ended December 31, 1999, 2000 and 2001, the Company discovered operational
compliance errors, which may impact the qualified status of the Plan. On
August 26, 2002, the Company submitted a request for compliance statement
with regards to the operations errors under the IRS's Voluntary Compliance
Program available under Revenue Procedure 2002-47. The financial
statements do not reflect any adjustment that may result from the
resolution of the operational compliance errors with the IRS under the
correction program.
7. PARTY-IN-INTEREST TRANSACTIONS
The Covanta Stock Fund invested in Covanta common stock which was traded
on the New York Stock Exchange (the "Exchange") 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.
******
RESOURCE RECOVERY 401(k) PLAN EIN 13-3560729
Plan No. 001
FORM 5500, SCHEDULE H, PART IV, LINE 4 (i) -
SCHEDULE OF ASSETS (HELD AT END OF YEAR)
DECEMBER 31, 2002
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Description Number of Market
Identity of Issue of Investment Share / Units Value
MUTUAL FUNDS AND GUARANTEED
INVESTMENT CONTRACTS ("GIC")
*T. Rowe Price Equity Income Fund Mutual Fund 34,774 $ 688,187
*Stable Value Fund GIC 6,589,908 6,589,909
Fidelity Magellan Fund Mutual Fund 72,514 5,725,723
*T. Rowe Price International Stock Fund Mutual Fund 123,762 1,099,005
*T. Rowe Price Balanced Fund Mutual Fund 159,453 2,473,098
*T. Rowe Price Spectrum Income Fund Mutual Fund 274,503 2,953,646
*T. Rowe Price Blue Chip Growth Fund Mutual Fund 66,165 1,452,329
*T. Rowe Price Equity Index 500 Fund Mutual Fund 183,426 4,341,701
*T. Rowe Price Small-Cap Value Fund Mutual Fund 49,004 1,075,146
*T. Rowe Price New Horizons Fund Mutual Fund 35,539 590,305
*T. Rowe Price Science & Technology Fund Mutual Fund 70,925 881,593
*T. Rowe Price Mid-Cap Growth Fund Mutual Fund 16,068 498,747
MONEY FUNDS-
*T. Rowe Price U.S. Treasury Money Fund Money Fund 364,935 364,935
COMMON STOCKS -
*Covanta Stock Fund Common Stock 1,106,155 8,850
PARTICIPANT LOANS -
*Notes receivable from participants (with
interest rates from 5.25% to 10.5%; maturity
from 2003 to 2012) Loans 3,308,080
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TOTAL
$32,051,254
============
*Permitted party-in-interest.
Cost information is not required for participants-directed investments and,
therefore, is not included.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the trustees (or other persons who administer the Resource Recovery 401(k)
Plan) have duly caused this annual report to be signed on its behalf by the
undersigned hereunto duly authorized.
Resource Recovery 401(k) Plan
Date: June 27, 2003 By: /s/ Stephen M. Gansler
---------------------------------- --------------------------
Stephen M. Gansler
Plan Administrator
EXHIBIT INDEX
Exhibit Number Description of Exhibit
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23.1 Consent of Independent Auditors
99.0 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002