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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 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 001-31305
FOSTER WHEELER LTD.
(Exact name of registrant as specified in its charter)
BERMUDA 22-3802649
- -------------------------------- --------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
PERRYVILLE CORPORATE PARK, CLINTON, NJ 08809-4000
- -------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 730-4000
---------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 40,771,560 shares of the
Company's common stock ($1.00 par value) were outstanding as of September 27,
2002.
FOSTER WHEELER LTD.
INDEX
Part I Financial Information
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheet at September 27, 2002
(Unaudited) and December 28, 2001
Condensed Consolidated Statement of Operations and
Comprehensive Income/(Loss) for the Three and
Nine Months Ended September 27, 2002 and
September 28, 2001 (Unaudited, Restated)
Condensed Consolidated Statement of Cash Flows for the
Nine Months Ended September 27, 2002 and September 28, 2001
(Unaudited, Restated)
Notes to Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
Item 4 - Controls and Procedures
Part II Other Information
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
Signatures
The September 28, 2001 financial statements and the December 28, 2001 balance
sheet have been restated to properly reflect assets, liabilities and related
impact on results of operations associated with a postemployment benefit plan.
See Note 16 to the condensed consolidated financial statements for further
discussion of this matter.
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FOSTER WHEELER LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
SEPTEMBER 27, 2002 DECEMBER 28, 2001
------------------- -----------------
(Unaudited) (Restated)
(See Note 1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 442,726 $ 224,020
Short-term investments ..................................................... 282 271
Accounts and notes receivable, net ......................................... 699,318 946,344
Contracts in process and inventories ....................................... 364,731 504,128
Prepaid, deferred and refundable income taxes .............................. 50,476 52,084
Prepaid expenses ........................................................... 33,525 27,529
----------- -----------
Total current assets ................................................... 1,591,058 1,754,376
----------- -----------
Land, buildings and equipment .................................................... 762,338 728,012
Less accumulated depreciation .................................................... 364,084 328,814
----------- -----------
Net book value ......................................................... 398,254 399,198
----------- -----------
Restricted cash .................................................................. 78,719 --
Notes and accounts receivable - long-term ........................................ 51,711 65,373
Investment and advances .......................................................... 87,455 84,514
Goodwill, net .................................................................... 127,089 200,152
Other intangible assets, net ..................................................... 72,844 74,391
Prepaid pension cost and related benefit assets .................................. 137,510 131,865
Asbestos-related insurance recovery receivable ................................... 473,209 437,834
Other assets ..................................................................... 161,690 173,279
Deferred income taxes ............................................................ 4,870 4,855
----------- -----------
TOTAL ASSETS ........................................................... $ 3,184,409 $ 3,325,837
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments on long-term debt ..................................... $ 42,961 $ 12,759
Bank loans ................................................................. 29,266 20,244
Corporate and other debt ................................................... -- 297,627
Special-purpose project debt ............................................... -- 75,442
Subordinated Robbins exit funding obligations .............................. -- 110,340
Convertible subordinated notes ............................................. -- 210,000
Mandatory redeemable preferred securities of subsidiary trust holding solely
junior subordinated deferrable interest debentures ..................... -- 175,000
Accounts payable and accrued expenses ...................................... 694,529 777,768
Estimated costs to complete long-term contracts ............................ 718,119 580,766
Advance payments by customers .............................................. 77,579 65,417
Income taxes ............................................................... 60,324 63,257
----------- -----------
Total current liabilities .............................................. 1,622,778 2,388,620
----------- -----------
Corporate and other debt less current installment ................................ 391,158 --
Special-purpose project debt less current installments ........................... 197,525 137,855
Deferred income taxes ............................................................ 42,837 40,486
Postretirement and other employee benefits other than pensions ................... 168,635 168,149
Asbestos-related liability ....................................................... 438,947 445,370
Other long-term liabilities and minority interest ................................ 185,501 174,901
Subordinated Robbins exit funding obligations less current installment ........... 108,865 --
Convertible subordinated notes ................................................... 210,000 --
Mandatory redeemable preferred securities of subsidiary trust holding solely
junior subordinated deferrable interest debentures ......................... 175,000 --
----------- -----------
TOTAL LIABILITIES ..................................................... 3,541,246 3,355,381
----------- -----------
SHAREHOLDERS' EQUITY:
Common Stock ..................................................................... 40,772 40,772
Paid-in capital .................................................................. 201,595 201,390
Retained earnings (deficit) ...................................................... (444,788) (109,872)
Accumulated other comprehensive loss ............................................. (154,416) (161,834)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ............................................ (356,837) (29,544)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................. $ 3,184,409 $ 3,325,837
=========== ===========
See notes to condensed consolidated financial statements
-1-
FOSTER WHEELER LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME/(LOSS) (In Thousands of
Dollars, Except Per Share Amounts)
(Unaudited, Restated)
(See Note 1)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
---- ---- ---- ----
(Restated) (Restated)
(See Note 1) (See Note 1)
Revenues:
Operating revenues ........................................ $ 799,069 $ 808,798 $ 2,538,812 $ 2,318,323
Other income .............................................. 15,118 10,354 40,305 39,247
----------- ----------- ----------- -----------
Total revenues ............................................ 814,187 819,152 2,579,117 2,357,570
----------- ----------- ----------- -----------
Costs and expenses:
Cost of operating revenues ................................ 857,927 740,408 2,465,406 2,090,554
Selling, general and administrative expenses .............. 53,844 46,226 165,808 158,697
Other deductions/minority interest ........................ 23,623 10,202 129,264 31,218
Interest expense .......................................... 16,904 18,720 48,861 50,982
Dividends on preferred security of subsidiary trust ....... 4,199 3,937 12,315 11,812
----------- ----------- ----------- -----------
Total costs and expenses .................................. 956,497 819,493 2,821,654 2,343,263
----------- ----------- ----------- -----------
(Loss)/earnings before income taxes ........................... (142,310) (341) (242,537) 14,307
Provision for income taxes .................................... 8,300 (1,118) 18,879 5,565
----------- ----------- ----------- -----------
Net (loss)/earnings prior to cumulative effect of a change in
accounting principle ...................................... (150,610) 777 (261,416) 8,742
Cumulative effect on prior years (to December 28, 2001) of a
change in accounting principle for goodwill, net of $0 tax -- -- (73,500) --
----------- ----------- ----------- -----------
Net (loss)/earnings ........................................... (150,610) 777 (334,916) 8,742
Other comprehensive (loss)/income:
Foreign currency translation adjustment ................... 1,846 14,570 11,252 (8,273)
Reclassification of unrealized gain on derivative
instruments to earnings ................................... -- -- (1,679) --
Change in unrealized losses on derivative instruments,
net of tax ............................................ -- 9,481 (2,155) (1,304)
Cumulative effect on prior years (To December 29, 2000)
of a change in accounting principle in derivatives .... -- -- -- 6,300
----------- ----------- ----------- -----------
Comprehensive (loss)/income ................................... $ (148,764) $ 24,828 $ (327,498) $ 5,465
=========== =========== =========== ===========
-2-
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
---- ---- ---- ----
(Loss)/earnings per share:
Basic:
Net (loss)/earnings prior to cumulative effect of a
change in accounting principle ................ $ (3.68) $ 0.02 $ (6.39) $ 0.21
Cumulative effect on prior years (to December 28,
2001) of a change in accounting principle for
goodwill ..................................... -- -- (1.79) --
---------- ---------- ---------- ----------
Net (loss)/earnings ............................... $ (3.68) $ 0.02 $ (8.18) $ 0.21
========== ========== ========== ==========
Diluted:
Net (loss)/earnings prior to cumulative effect of a
change in accounting principle ............... $ (3.68) $ 0.02 $ (6.39) $ 0.21
Cumulative effect on prior years (to December 28,
2001) of a change in accounting principle for
goodwill ..................................... -- -- (1.79) --
---------- ---------- ---------- ----------
Net (loss)/earnings ............................... $ (3.68) $ 0.02 $ (8.18) $ 0.21
========== ========== ========== ==========
Shares outstanding (in thousands):
Basic: weighted average number of shares outstanding .. 40,963 40,884 40,943 40,870
Diluted: effect of share options ...................... -- 87 -- 253
---------- ---------- ---------- ----------
Total diluted ......................................... 40,963 40,971 40,943 41,123
========== ========== ========== ==========
Cash dividends paid per common share ...................... $ -- $ -- $ -- $ 0.12
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
-3-
FOSTER WHEELER LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
(See Note 1)
NINE MONTHS ENDED
-----------------
SEPTEMBER 27, SEPTEMBER 28,
2002 2001
---- ----
(Restated)
(See Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)/earnings ........................................ $(334,916) $ 8,742
Adjustments to reconcile net earnings to cash flows from
operating activities:
Cumulative effect of a change in accounting principle .. 73,500 --
Provision for impairment loss .......................... 13,400 --
Depreciation and amortization .......................... 33,035 41,565
Deferred tax ........................................... 1,588 897
Provision for loss on sale of two waste-to-energy plants 50,800 --
Claims write downs and related contract provisions ..... 85,600 --
Contract reserves and receivable provisions ............ 51,800 --
Deferred dividends on Preferred Trust Securities ....... 12,315 --
Equity loss/(earnings), net of dividends ............... (309) (2,508)
Other .................................................. 3,499 4,398
Changes in assets and liabilities:
Receivables ............................................ 174,639 (47,990)
Contracts in process and inventories ................... 15,426 (41,677)
Accounts payable and accrued expenses .................. (107,811) (52,543)
Estimated costs to complete long-term contracts ........ 126,768 (77,653)
Advance payments by customers .......................... 9,231 8,891
Income taxes ........................................... 2,052 (10,351)
Other assets and liabilities ........................... 7,509 (7,638)
--------- ---------
NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES ........... 218,126 (175,867)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in restricted cash .................................. (78,719) --
Capital expenditures ....................................... (46,377) (23,812)
Proceeds from sale of properties ........................... 2,071 52,131
Decrease/(increase) in investments and advances ............ (3,462) 9,140
Decrease in short-term investments ......................... 5 544
--------- ---------
NET CASH (USED)/PROVIDED BY INVESTING ACTIVITIES ........... (126,482) 38,003
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividend to shareholders ................................... -- (4,888)
Partnership distributions .................................. (2,061) (1,367)
Repurchase of common stock ................................. -- (37)
Proceeds from exercise of stock options .................... -- 627
Proceeds from convertible subordinated notes, net .......... -- 202,912
Increase/(decrease) in short-term debt ..................... 8,706 (83,135)
Proceeds from long-term debt ............................... 69,244 141,391
Proceeds from lease financing obligation ................... 44,900 --
Repayment of long-term debt ................................ (8,715) (135,810)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 112,074 119,693
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 14,988 (6,087)
--------- ---------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS ........... 218,706 (24,258)
Cash and cash equivalents at beginning of year ............. 224,020 191,893
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 442,726 $ 167,635
========= =========
Cash paid during period:
Interest (net of amount capitalized) ....................... $ 27,190 $ 40,510
--------- ---------
Income taxes ............................................... $ 11,291 $ 11,337
--------- ---------
See notes to condensed consolidated financial statements.
-4-
FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. The condensed consolidated balance sheet as of September 27, 2002,
and the related condensed consolidated statements of earnings and
comprehensive income for the three and nine month periods ended
September 27, 2002 and September 28, 2001 and condensed consolidated
statement of cash flows for the nine months ended September 27, 2002
and September 28, 2001 are unaudited. In the opinion of management,
all adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments only consisted of
normal recurring items. Interim results are not necessarily
indicative of results for a full year.
Subsequent to the filing of the Company's second quarter 2002 Form
10-Q, management determined that the assets, liabilities and related
impact on results of operations associated with one of the Company's
benefit plans were not properly accounted for in accordance with SFAS
112, "Employers' Accounting for Postemployment Benefits." The Company
has adjusted its results for 2001 and 2002 in accordance with SFAS
112 and will amend its 2001 Form 10-K, as well as its Form 10-Q for
each of the first two quarters of 2002. A summary of the effect of
the restatement on the Company's condensed consolidated balance sheet
and the condensed consolidated statement of operations and
comprehensive income/(loss) as of and for the year ended December 28,
2001 and for the three and nine month periods ended September 28,
2001 is presented in Note 16.
The financial statements and notes are presented in accordance with
the requirements of Form 10-Q and do not contain certain information
included in Foster Wheeler Ltd.'s Annual Report on Form 10-K/A for
the fiscal year ended December 28, 2001 filed with the Securities and
Exchange Commission on November 12, 2002 (hereinafter referred to as
the "2001 Form 10-K"). The condensed consolidated balance sheet as of
December 28, 2001 has been derived from the audited consolidated
balance sheet included in the 2001 Form 10-K, but does not include
all disclosure required by accounting principles generally accepted
in the United States of America. A summary of the significant
accounting policies of Foster Wheeler Ltd. (hereinafter referred to
as "Foster Wheeler" or the "Company") include the following:
PRINCIPLES OF CONSOLIDATION - The condensed consolidated financial
statements include the accounts of Foster Wheeler and all significant
domestic and foreign subsidiary companies. All significant
intercompany transactions and balances have been eliminated.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and revenues and expenses during the period reported.
Actual results could differ from those estimates. Changes in
estimates are reflected in the periods in which they become known.
Significant estimates relate to accounting for long-term contracts
including customer and vendor claims, depreciation, employee benefit
plans, taxes, asbestos litigation and expected recoveries and
contingencies, among others. As of September 27, 2002 and December
28, 2001, costs of approximately $65,000 and $135,000, respectively,
were included in assets, primarily in accounts receivables and
contracts in process, representing amounts expected to be realized
from claims to customers. As of September 27, 2002 and December 28,
2001, receivables of approximately $39,000 and $50,000, respectively,
are being withheld by customers until the related claims discussed
above are resolved. During the third quarter of 2002, the Company
wrote down three claims against customers for a total of $10,000 and
settled claims for a total of $11,000. The write-downs of the claims
reflect a reassessment of recovery based on new facts during the
quarter and management's strategy to realize cash by attempting to
resolve claims. For the nine months ended 2002, the Company wrote
-5-
down claims for a total of $57,900.
Claims are amounts in excess of the agreed contract price (or amounts
not included in the original contract price) that a contractor seeks
to collect from customers or others for delays, errors in
specifications and designs, contract terminations, change orders in
dispute or unapproved as to both scope and price, or other causes of
unanticipated additional costs. The Company records claims in
accordance with paragraph 65 of the American Institute of Certified
Public Accountants Statement of Position 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type
Contracts". This statement of position states that recognition of
amounts as additional contract revenue related to claims is
appropriate only if it is probable that the claims will result in
additional contract revenue and if the amount can be reliably
estimated. Those two requirements are satisfied by the existence of
all of the following conditions: the contract or other evidence
provides a legal basis for the claim; additional costs are caused by
circumstances that were unforeseen at the contract date and are not
the result of deficiencies in the contractor's performance; costs
associated with the claim are identifiable or otherwise determinable
and are reasonable in view of the work performed; and the evidence
supporting the claim is objective and verifiable. If such
requirements are met, revenue from a claim is recorded only to the
extent that contract costs relating to the claim have been incurred.
The Company is also evaluating whether the provisions of paragraph 66
of SOP 81-1 would more accurately reflect the substance of its claims
activity, which requires recognizing claims revenue on a cash basis.
If the Company decides to implement paragraph 66 of SOP 81-1, in
accordance with APB 20, it will reflect the cumulative effect of the
change as of December 29, 2001.
Costs attributable to claims are treated as costs of contract
performance as incurred. Such claims are currently in various stages
of negotiation, arbitration and other legal proceedings.
REVENUE RECOGNITION ON LONG-TERM CONTRACTS - The Engineering and
Construction Group ("E&C Group") records profits on long-term
contracts on a percentage-of-completion basis on the cost-to-cost
method and other methods which approximate the cost-to-cost method.
Contracts in process are valued at cost plus accrued profits less
earned revenues and progress payments on uncompleted contracts.
Contracts of the E&C Group are generally considered substantially
complete when engineering is completed and/or field construction is
completed. The Company includes pass-through revenue and costs on
cost-plus contracts, which are customer-reimbursable materials,
equipment and subcontractor costs when the Company determines that it
is responsible for the engineering specification, procurement and
management of such cost components on behalf of the customer.
The Energy Group primarily records profits on long-term contracts on
a percentage-of-completion basis determined on a variation of the
efforts-expended and the cost-to-cost methods, which include
multiyear contracts that require significant engineering efforts and
multiple delivery units. These methods are periodically subject to
physical verification of the actual progress towards completion.
Contracts of the Energy Group are generally considered substantially
complete when manufacturing and/or field erection is completed.
The Company has numerous contracts that are in various stages of
completion. Such contracts require estimates to determine the
appropriate cost and revenue recognition. Current estimates may be
revised as additional information becomes available. If estimates of
costs to complete long-term contracts indicate a loss, provision is
made currently for the total loss anticipated. The elapsed time from
award of a contract to completion of performance may be up to four
years.
Certain special-purpose subsidiaries in the Energy Group are
reimbursed by customers for their costs, including amounts related to
principal repayments of non-recourse project debt, for building and
operating certain facilities over the lives of the non-cancelable
service contracts. The Company records revenues relating to debt
repayment obligations on these contracts on a straight-line basis
over the lives of the service contracts, and records depreciation of
the facilities on a straight-line basis over the estimated useful
lives of the facilities, after consideration of the estimated
residual value.
-6-
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include highly
liquid short-term investments purchased with original maturities of
three months or less. Cash and cash equivalents of approximately
$244,000 are maintained by foreign subsidiaries as of September 27,
2002. These subsidiaries require a substantial portion of these funds
to support their liquidity and working capital needs.
RESTRICTED CASH - Restricted cash consists of approximately $16,000
that the Company was required to deposit into escrow in connection
with the Todak litigation discussed in Note 8 and approximately
$62,000 that was required to collateralize letters of credit and bank
guarantees. The $16,000 related to the litigation is domestic
restricted cash while the $62,000 related to the letters of credit
and bank guarantees is foreign restricted cash.
SHORT-TERM INVESTMENTS - Short-term investments consist primarily of
bonds of foreign governments and are classified as available for sale
under Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities".
Realized gains and losses from sales are based on the specific
identification method.
TRADE ACCOUNTS RECEIVABLE - In accordance with terms of long-term
contracts, certain percentages of billings are withheld by customers
until completion and acceptance of the contracts. Final payments of
all such withheld amounts might not be received within a one-year
period. In conformity with industry practice, however, the full
amount of accounts receivable, including such amounts withheld, are
included in current assets.
In accordance with industry practices for accounting for long-term
contracts, provisions for non-payment of customer balances is
addressed within the overall profit calculations of the contract and
not specifically covered by allowances for bad debts. As a result,
the amount considered to be in the receivable qualifying account
(allowance for bad debts) is insignificant.
ACCOUNTS AND NOTES RECEIVABLE OTHER - Non-trade accounts and notes
receivable consist primarily of foreign refundable value-added tax
and at year-end 2001, amounts receivable due to the cancellation of
the company-owned life insurance plan.
LAND, BUILDINGS AND EQUIPMENT - Depreciation is computed on a
straight-line basis using composite estimated lives ranging from 10
to 50 years for buildings and from 3 to 35 years for equipment.
Expenditures for maintenance and repairs are charged to operations.
Renewals and betterments are capitalized. Upon retirement or other
disposition of fixed assets, the cost and related accumulated
depreciation are removed from the accounts and the resulting gains or
losses are reflected in earnings.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The
Company is currently assessing the impact of the adoption of this new
statement.
Effective December 29, 2001, the Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets".
This statement addresses the accounting for long-lived assets to be
disposed of by sale and resolves significant implementation issues
relating to SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The
provisions of this statement are effective for financial statements
issued for the fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. The Company's results of
operations and financial position were not affected by the initial
adoption of this statement.
During the third quarter, management of the Energy Group approved a
plan to convert the use of its domestic manufacturing facility to
focus on the after-market service business and wind down the
facility's fabrication of new power generation equipment due to cost
competitive considerations. In accordance with SFAS 144, the facility
was tested for impairment using
-7-
estimated future cash flows based on the revised use of the facility.
The review indicated impairment in the facility's carrying value of
$13,400. The Company recorded the impairment loss in the third
quarter and the impairment is reflected in the cost of operating
revenues in the accompanying condensed consolidated statement of
operations and comprehensive income/(loss). The Company continues to
evaluate the viability of the facility. During the fourth quarter of
2002, the Company has determined to take the necessary steps to close
or mothball the facility, subject to labor negotiations. At the
appropriate time, additional charges of approximately $6,000 could be
recorded.
INVESTMENTS AND ADVANCES - The Company uses the equity method of
accounting for investment ownership of between 20% and 50% in
affiliates unless significant economic considerations indicate that
the cost method is appropriate. The equity method is also used for
investments in which ownership is greater than 50% when the Company
does not have a controlling financial interest. Investment ownership
of less than 20% in affiliates is carried at cost. Currently, all of
the Company's significant investments in affiliates are recorded
using the equity method.
INCOME TAXES - Deferred income taxes are provided on a liability
method whereby deferred tax assets/liabilities are established for
the difference between the financial reporting and income tax basis
of assets and liabilities, as well as operating loss and tax credit
carry forwards. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Investment tax credits are accounted for by the flow-through method
whereby they reduce income taxes currently payable and the provision
for income taxes in the period the assets giving rise to such credits
are placed in service. To the extent such credits are not currently
utilized on the Company's tax return, deferred tax assets, subject to
considerations about the need for a valuation allowance, are
recognized for the carry forward amounts.
Provision is made for Federal income taxes which may be payable on
foreign subsidiary earnings to the extent that the Company
anticipates they will be remitted.
FOREIGN CURRENCY TRANSLATION - Assets and liabilities of foreign
subsidiaries are translated into U.S. dollars at quarter-end and
year-end exchange rates and income and expenses and cash flows at
monthly weighted average rates. The Company enters into foreign
exchange contracts in its management of foreign currency exposures
related to commercial contracts. Changes in the fair value of
derivative contracts that qualify as designated cash flow hedges are
deferred until the hedged forecasted transaction affects earnings.
Amounts receivable (gains) or payable (losses) under foreign exchange
hedges are recognized as deferred gains or losses and are included in
either contracts in process or estimated costs to complete long-term
contracts. The Company utilizes foreign exchange contracts solely for
hedging purposes, whether or not they qualify for hedge accounting
under SFAS 133. At September 27, 2002, the Company did not meet the
requirements for deferral under SFAS 133 and recorded in the three
months ended September 27, 2002 approximately $1,400 of losses on
derivative instruments.
INVENTORIES - Inventories, principally materials and supplies, are
stated at the lower of cost or market, determined primarily on the
average cost method.
INTANGIBLE ASSETS - Intangible assets consist principally of the
excess of cost over the fair value of net assets acquired (goodwill),
trademarks and patents.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets"
-8-
("SFAS 142"), which supersedes APB Opinion No. 17, "Intangible
Assets". SFAS 142 addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired
in a business combination) should be accounted for in financial
statements upon their acquisition. SFAS 142 also addresses how
goodwill and other intangible assets should be accounted for after
they have been initially recognized in the financial statements. SFAS
142 stipulates that goodwill should no longer be amortized and
instead should be subject to impairment assessment.
The provisions of SFAS 142 are required to be applied effective
December 29, 2001. The Company is utilizing the two-step method
described in SFAS 142 for purposes of determining the amount of
goodwill impairment. See Note 7 for further information. Goodwill
amortization for 2001 was approximately $8,000.
OTHER INCOME - Other income for the three and nine months ended
September 27, 2002, respectively, consists primarily of interest
income ($2,772 and $7,495), equity gain, ($5,279 and $16,739), gain
on sale of investments ($2,940 and $3,283), and other income ($4,127
and $12,788). Other income for the three and nine months ended
September 28, 2001, respectively, consists primarily of interest
income ($2,039 and $8,312), equity gain, ($4,242 and $16,028), and
other income ($4,073 and $14,907).
EARNINGS PER SHARE - Basic per share data has been computed based on
the weighted average number of shares of common stock outstanding.
Options to purchase 2,876,202 and 3,426,202 shares of common stock
were not included in the computation of diluted earnings per share
for the three and nine-month periods ended September 27, 2002 due to
their antidilutive effect. The 13,085,751 shares related to the
convertible subordinated notes were not included in the computation
for the three and nine-month periods ended September 27, 2002 or
September 28, 2001, as restated, due to their antidilutive effect.
Users of financial information produced for interim periods are
encouraged to refer to the footnotes contained in the 2001 Form 10-K
when reviewing interim financial results. There has been no material
change in the accounting policies followed by Foster Wheeler during
2002 except for the adoption of SFAS Nos. 142 and 144.
Certain prior period amounts have been reclassified to conform to
current financial statement presentation. In particular, the
Engineering, Procurement and Construction business for the Power
industry in the United States was reclassified from the E&C Group to
the Energy Group. This allows for United States domestic power
projects to be controlled by one group and better aligns the
presentation with the current management reporting as well as the
customer base.
2. The accompanying condensed consolidated financial statements are
prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business. Realization of assets and the satisfaction of liabilities
in the normal course of business are dependent on the Company
maintaining credit facilities adequate to conduct its business. To
date, the Company has been able to obtain sufficient financing to
support its ongoing operations. The Company has also initiated a
liquidity action plan, which focuses on accelerating the collection
of receivables, claims recoveries and asset sales.
The Company has initiated a comprehensive plan to enhance cash
generation and to improve profitability. The operating performance
portion of the plan concentrates on the quality and quantity of
backlog, the execution of projects in order to achieve or exceed the
profit and cash targets and the optimization of all non-project
related cash sources and uses. In connection with this plan, a group
of outside consultants was hired for the purpose of carrying out a
performance improvement intervention. The tactical portion of the
performance improvement
-9-
intervention concentrates on booking current projects, executing 22
"high leverage projects" and generating incremental cash from high
leverage opportunities such as overhead reductions, procurement and
accounts receivable. The systemic portion of the performance
improvement intervention concentrates on sales effectiveness,
estimating, bidding and project execution procedures.
In the third quarter of 2002, the Company finalized a Senior Credit
Facility with its bank group. This facility includes a $71,000 term
loan, a revolving credit agreement for $69,000 and a letter of credit
facility for $149,900 that expire on April 30, 2005. This facility is
secured by the assets of the domestic subsidiaries, the stock of the
domestic subsidiaries and 66% of the stock of the first-tier foreign
subsidiaries. The facility has no scheduled repayments prior to its
April 30, 2005 maturity. The facility requires prepayments from
proceeds of asset sales and the issuance of debt or equity and from
excess cash flow. The Company retains the first $77,000 of such asset
sales or issuance of debt or equity in order to maintain liquidity
and the Company also retains a 50% share of the balance. The
financial covenants in the facility start at the end of the first
quarter 2003. These include a senior leverage ratio and a minimum
earnings before interest, taxes, depreciation, and amortization
("EBITDA") level.
The term loan and revolving loans bear interest at the Company's
option of (a) LIBOR plus 3.50% or (b) the Base Rate plus 2.50%. The
"Base Rate" means the higher of (i) the Bank of America prime rate
and (ii) the Federal Funds rate plus .5%.
Amendment No. 1 to the Credit Agreement, obtained on November 8,
2002, provides covenant relief of up to $180,000 of gross pre-tax
charges recorded by the Company in the third quarter of 2002. The
amendment further provides that up to an additional $63,000 pretax
charges related to specific contingencies may be excluded from the
covenant calculation, if incurred, through December 31, 2003.
The Company has also finalized a sale/leaseback arrangement with a
third party for its corporate headquarters. This capital lease
arrangement leases the facility to the Company for an initial
non-cancelable period of 20 years. The capital lease obligation of
$44,100 at September 27, 2002 is included in corporate and other debt
less current installments in the accompanying condensed consolidated
balance sheet.
In the third quarter of 2002, the Company has also completed a
receivables sale arrangement for $40,000. This arrangement is
accounted for as a financing and expires in August 2005. The facility
is subject to covenant compliance. The financial covenants commence
at the end of the first quarter of 2003 and include a senior leverage
ratio and a minimum EBITDA level. Noncompliance with the financial
covenants allows the receivable purchaser to terminate the
arrangement and accelerate any amounts then outstanding. Refer to
note 3 for further information regarding this receivable arrangement.
As a result of finalizing the Senior Credit Facility in the third
quarter, the sale/leaseback arrangement and the receivables sale
arrangement, the Company has reclassified $831,000 of it debts as
long term as of September 27, 2002 that had been classified as
current liabilities as of December 28, 2001.
In addition to the Company's debt restructuring initiatives,
management has initiated a comprehensive plan to address domestic
liquidity issues. As previously announced, management's plan to
address the Company's domestic liquidity issues included generating
approximately $150,000 from asset sales, collection of receivables
and resolving disputed claims through the end of February 2003, and
an additional $40,000 over the following six months. As of the close
of the third quarter, the Company generated approximately $46,000
through these efforts. The current plan is to generate an additional
$100,000 in the next six months and an additional $40,000 in the
subsequent three months. To the extent these initiatives are not
successful, the Company will explore other options including the
repatriation
-10-
of funds from foreign operations subject to their working capital
needs and liquidity requirements, further cost reductions, and cash
conservation measures. Management believes that these actions,
together with cash on hand and cash from operations will be
sufficient to fund the Company's working capital needs over the next
year. Failure by the Company to achieve a significant portion of
these proceeds could have a material adverse effect on the Company's
financial condition. The above factors raise substantial doubts about
the Company's ability to continue as a going concern. The condensed
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
3. The Company entered into a receivables securitization facility that
matures on August 15, 2005 and is secured by a portion of the
Company's domestic trade receivables. The facility operates through
the use of a wholly owned, special purpose subsidiary, Foster Wheeler
Funding LLC ("FW Funding") as described below. Foster Wheeler Funding
is included in the condensed consolidated financial statements of the
Company.
FW Funding entered a Purchase, Sale and Contribution Agreement
("PSCA") on August 15, 2002 with six of the Company's wholly owned
domestic subsidiaries. Pursuant to the PSCA, FW Funding is obligated
to purchase eligible trade receivables, as defined in the PSCA, from
these companies and these companies are obligated to contribute as
capital their ineligible trade accounts receivable as defined in the
PSCA. On August 15, 2002, FW Funding also entered into a Loan and
Security Agreement with Foothill Capital Corporation and Ableco
Finance Corporation LLC. Under this agreement, FW Funding has the
ability to borrow up to a maximum of $40,000 using eligible trade
accounts receivable as security. FW Funding pays 10% interest on all
outstanding borrowings. In addition, FW Funding pays a monthly unused
line fee equal to .5% per annum of the maximum available amount less
the average daily amount of borrowings during the preceding month.
The facility is subject to covenant compliance. The financial
covenants commence at the end of the first quarter of 2003 and
include a senior leverage ratio and a minimum EBITDA level.
Noncompliance with the financial covenants allows the receivable
purchaser to terminate the arrangement and accelerate any amounts
then outstanding.
The balance outstanding under this facility was $12,900 as of
September 27, 2002 and is included in bank loans on the condensed
consolidated balance sheet. FW Funding may increase or decrease, at
its discretion, its use of the facility on a weekly basis subject to
the availability of sufficient eligible trade accounts receivable and
the facility's maximum amount of $40,000. As of September 27, 2002,
FW Funding held $194,179 of trade accounts receivable which are
included in the condensed consolidated balance sheet and had $11,581
of excess availability under the facility.
4. On January 13, 1999 FW Preferred Capital Trust I, a Delaware Business
Trust which is a 100% owned finance subsidiary of the Company, issued
$175,000 in Preferred Trust Securities. The Preferred Trust
Securities are fully and unconditionally guaranteed by the Company.
These Preferred Trust Securities are entitled to receive cumulative
cash distributions at an annual rate of 9.0%. Distributions are paid
quarterly in arrears on April 15, July 15, October 15 and January 15
of each year. Such distributions may be deferred for periods up to
five years. The Company elected to defer the distributions in 2002
and the new Senior Credit Facility requires the Company to continue
to defer dividends on the Preferred Trust Securities through the term
of the Senior Credit Facility. The maturity date of the Preferred
Trust Securities is January 15, 2029.
5. At September 27, 2002, a total of 8,744,168 shares of common stock
were reserved for issuance under various stock option plans; of this
total, 732,478 were not under option.
6. Interest income and cost for the following periods are:
-11-
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 27, 2002 SEPTEMBER 28, 2001 SEPTEMBER 27, 2002 SEPTEMBER 28,
------------------ ------------------ ------------------ -------------
2001
Interest Income $ 2,772 $ 2,040 $ 7,495 $ 8,312
============== ================ ======== ==============
Interest Cost $ 21,488 $ 22,860 $ 62,105 $ 63,312
============== ================ ======== ==============
Included in the interest cost is interest capitalized on
self-constructed assets, for the three and nine months ended
September 27, 2002 of $385 and $929, respectively, compared to the
$202 and $517 for the same periods in 2001. Interest costs also
included dividends on Preferred Trust Securities, which amounted to
$4,199 and $12,315 for the three and nine months ended September 27,
2002, respectively, compared to $3,937 and $11,812 for the same
periods in 2001.
7. Effective December 29, 2001, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142") which
supercedes APB Opinion No. 17, "Intangible Assets". The statement
requires that goodwill and intangible assets with indefinite lives no
longer be amortized, but instead be tested for impairment at least
annually. The Company tests for impairment at the reporting unit
level as defined in SFAS No. 142. This test is a two-step process.
The first step of the goodwill impairment test, used to identify
potential impairment, compares the fair value of the reporting unit
with its carrying amount, including goodwill. If the fair value
exceeds the carrying amount, goodwill is not considered impaired. If
the carrying amount exceeds the fair value, the second step must be
performed to measure the amount of the impairment loss, if any. The
second step compares the implied fair value of the reporting unit's
goodwill with the carrying amount of that goodwill. An impairment
loss would be recognized in an amount equal to the excess of the
carrying amount of the goodwill over the implied fair value of the
goodwill. Impairment losses have been measured as of December 29,
2001 and recognized as the cumulative effect of a change in
accounting principle in 2002. SFAS No. 142 also requires that
intangible assets with determinable useful lives be amortized over
their respective estimated useful lives and reviewed annually for
impairment in accordance with SFAS No. 144.
As of September 27, 2002 and December 28, 2001, the Company had
unamortized goodwill of $127,089 and $200,152, respectively. The
reduction in goodwill is due to the $73,500 of impairment losses
discussed below, offset by foreign currency translation adjustments
of $437. In accordance with SFAS No. 142, the Company is no longer
amortizing goodwill. The Company recognized $73,500 of impairment
losses during the nine-month period ended September 27, 2002 related
to the goodwill as a cumulative effect of a change in accounting
principle. Of this total, $24,800 was associated with a
waste-to-energy facility included in the operations of the Energy
Group. The fair value of the facility was estimated using the
expected present value of future cash flows. The remaining $48,700
relates to a reporting unit in the Engineering and Construction
Group. An impairment of the goodwill on this subsidiary was initially
determined based upon its market value. Based upon the market value
of this reporting unit, it was determined under step one that a
potential impairment existed. The Company then completed step two and
determined that a full write down of the goodwill was required. All
of the other reporting units were also subjected to the first step of
the goodwill impairment test. One further reporting unit in the
Energy Group has been determined to have potential goodwill
impairment as a result of the calculations performed under step one.
A write-down has not been taken on this reporting unit since the step
two valuation has not yet been finalized. The Company anticipates
finalizing the step two calculations in the fourth quarter of 2002
and will record any impairment at that time. The amount of goodwill
related to this reporting unit amounts to approximately $77,000.
As of December 29, 2001, the Company had unamortized identifiable
intangible assets of $74,391. The following table details amounts
relating to those assets as of September 27, 2002.
-12-
As of September As of December 28,
27, 2002 2001
---------------------------------- ---------------------- ---------------------------------
Gross Carrying Amount Accumulated Gross Carrying Accumulated
Amortization Amount Amortization
------------------------ ---------------------- --------------------- ---------------------
Patents $ 35,416 $ (11,524) $ 34,994 $ (10,197)
Trademarks 59,937 (10,985) 59,266 ( 9,672)
-------------- ---------------- ---------------- ---------------
Total $ 95,353 $ (22,509) $ 94,260 $ (19,869)
-------------- ---------------- ---------------- ---------------
Amortization expense related to patents and trademarks for the
three-month and nine-month periods ended September 27, 2002 was $890
and $2,640, respectively. Amortization expense is expected to
approximate $3,500 each year in the next five years.
The following table presents the current and prior years reported
amounts adjusted to eliminate the effect of goodwill amortization in
accordance with SFAS No. 142.
Three Months Ended Nine Months Ended
SEPTEMBER 27, 2002 SEPTEMBER 28, 2001 SEPTEMBER 27, 2002 SEPTEMBER 28, 2001
------------------ ------------------ ------------------ ------------------
(Restated) (Restated)
Reported net (loss)/earnings $ (150,610) $ 777 $ (334,916) $ 8,742
Add back:goodwill amortization 1,342 4,027
------------- ------------- -------------- ----------
Adjusted net (loss)/earnings $ (150,610) $ 2,119 $ (334,916) $ 12,769
-------------- ------------- --------------- ----------
BASIC EARNINGS PER SHARE:
Reported Net Income $ (3.68) $ .02 $ (8.18) $ .21
Goodwill Amortization - $ .03 - $ .10
--------------- ------------- --------------- -----------
Adjusted Net Income $ (3.68) $ .05 $ (8.18) $ .31
--------------- ------------- --------------- -----------
DILUTED EARNINGS PER SHARE:
Reported Net Income $ (3.68) $ .02 $ (8.18) $ .21
Goodwill Amortization - $ .03 - $ .10
--------------- ------------- --------------- -----------
Adjusted Net income $ (3.68) $ .05 $ (8.18) $ .31
--------------- -------------- --------------- -----------
8. In the ordinary course of business, the Company and its subsidiaries
enter into contracts providing for assessment of damages for
nonperformance or delays in completion. Suits and claims have been or
may be brought against the Company by customers alleging deficiencies
in either equipment design or plant construction. Based on its
knowledge of the facts and circumstances surrounding such claims and
of its insurance coverage for such claims, if any, management of the
Company believes that the disposition of such suits will not result
in charges against assets or earnings materially in excess of amounts
previously provided for in the accounts.
Some of the Company's subsidiaries, along with many other companies,
are codefendants in numerous lawsuits pending in the United States.
Plaintiffs claim damages for personal injury alleged to have arisen
from exposure to or use of asbestos in connection with work performed
by the Company's subsidiaries during the 1970s and prior. As of
September 27, 2002, there were approximately 132,400 claims pending
in the United States. During the third quarter of 2002, approximately
12,400 new claims were filed and approximately 1,900 were either
settled or dismissed without payment. The amount spent on asbestos
litigation defense and case resolution, substantially all of which
was reimbursed or will be reimbursed from insurance coverage, was
$9,100 in the third quarter of 2002. As of September 28, 2001, there
were approximately 118,400 claims pending. During the third quarter
of 2001, approximately 20,700 new claims were filed and approximately
5,700 were either settled or dismissed without payment. The amount
spent on asbestos litigation defense and case resolution,
substantially all of which was reimbursed or will be reimbursed from
insurance coverage, was $17,700 in the third quarter of 2001.
-13-
The Company's subsidiaries continue to actively manage claims and to
negotiate with certain insurance carriers concerning the limits of
coverage provided during different time periods. An agreement which
one of the Company's subsidiaries has had with a number of insurers
to allow for efficient and thorough handling of claims was terminated
by one of the participant insurers with respect to claims filed after
June 12, 2001. As a result, in the first quarter of 2001, proceedings
commenced among the Company's subsidiaries and certain of the
insurers to determine the respective rights and responsibilities
under the policies going forward. The Company's subsidiaries are
currently in negotiations with the insurers, and the Company believes
that they will enter into a similar replacement arrangement to govern
the management of, and allocation of payments on, asbestos related
claims filed after June 12, 2001. The Company anticipates that the
existing insurance policies are adequate whether or not its
subsidiaries can agree on a new arrangement. Although the expiration
of the previous arrangement may delay the ability of the Company's
subsidiaries to get reimbursed on a timely basis by the insurers for
claims filed after June 12, 2001, insurance policies will continue to
cover asbestos related claims brought against the Company's
subsidiaries after June 12, 2001 and it is anticipated that the
Company's subsidiaries can continue to manage the resolution of such
claims without a material adverse impact on the Company's financial
condition.
As of September 27, 2002, the Company has recorded a liability
related to probable losses on asbestos-related insurance claims of
approximately $474,000, of which approximately $35,000 is considered
short-term and recorded in accounts payable and accrued expenses. The
Company has recorded an asset of $513,000 relating to probable
insurance recoveries of which the Company has funded approximately
$60,000 as of September 27, 2002. In addition to the $473,000 shown
separately in the balance sheet, approximately $40,000 is recorded in
accounts and notes receivables. The asset is an estimate of
recoveries from insurers based upon assumptions relating to cost
allocation and resolution of pending proceedings with certain
insurers, as well as recoveries under a funding arrangement with
other insurers, which has been in place since 1993. The total
liability recorded is comprised of an estimated liability relating to
open (outstanding) claims of approximately $292,000 and an estimated
liability relating to future unasserted claims of approximately
$182,000. These estimates are based upon the following information
and/or assumptions: number of open claims; forecasted number of
future claims; estimated average cost per claim by disease type; and
the breakdown of known and future claims into disease type. The total
estimated liability includes both the estimate of forecasted
indemnity amounts and forecasted defense expenses. The defense costs
and indemnity payments are expected to be incurred over the next
eight years during which period new claims are expected to decline
from year to year. The Company believes that there will be a
substantial reduction in the number of new claims filed after 2008
although there are no assurances this will be correct. Historically,
the Company's defense costs have represented approximately 23% of
total costs. Through September 27, 2002, total indemnity costs paid
were approximately $288,000 and total defense costs paid< prior to
insurance recoveries, were approximately $92,000.
The Company's management after consultation with counsel, has
considered the proceedings with the insurers described above, and the
financial viability and legal obligations of the insurance carriers
and believe that except for those insurers that have become or may
become insolvent, the insurers or their guarantors will continue to
adequately fund claims and defense costs relating to asbestos
litigation. It should be noted that the estimate of the assets and
liabilities related to asbestos claims and recovery is subject to a
number of uncertainties that may result in significant changes in the
current estimates. Among these are uncertainty as to the ultimate
number of claims filed, the amounts of claim costs, the impact of
bankruptcies of other companies with asbestos claims, uncertainties
surrounding the litigation process from jurisdiction to jurisdiction
and from case to case, as well as potential legislative changes.
The Company's subsidiaries have been effective in managing the
asbestos litigation in part because (1) the Company's subsidiaries
have access to historical project documents and other
-14-
business records going back more than 50 years, allowing them to
defend themselves by determining if they were present at the location
that is the cause of the alleged asbestos claim and, if so, the
timing and extent of their presence, (2) the Company's subsidiaries
maintain good records on insurance policies and have identified
policies issued since 1952, and (3) the Company's subsidiaries have
consistently and vigorously defended these claims which has resulted
in dismissal of claims that are without merit or settlement of claims
at amounts that are considered reasonable.
A subsidiary of the Company in the United Kingdom has also received a
limited number of claims alleging personal injury arising from
exposure to asbestos. None of these claims have resulted in material
costs to the Company.
A San Francisco, California jury returned a verdict on March 26, 2002
finding Foster Wheeler liable for $10,600 in the case of TODAK VS.
FOSTER WHEELER CORPORATION. The case was brought against Foster
Wheeler, the U.S. Navy, and several other companies by a 59-year-old
man suffering from mesothelioma which allegedly resulted from
exposure to asbestos. The Company believes there was no credible
evidence presented by the plaintiff that he was exposed to asbestos
contained in a Foster Wheeler product. In addition, the Company
believes that the verdict was clearly excessive and should be set
aside or reduced on appeal. The Company has filed an appeal of the
verdict. Management of the Company believes the financial obligation
that may ultimately result from entry of a judgment in this case will
be paid by insurance.
On April 3, 2002 the United States District Court for the Northern
District of Texas entered an amended final judgment in the matter of
KOCH ENGINEERING COMPANY, INC. ET AL VS. GLITSCH, INC. ET al.
Glitsch, Inc. (now known as Tray, Inc.) is an indirect subsidiary of
the Company. This lawsuit claimed damages for patent infringement and
trade secret misappropriations and has been pending for over 18
years. A judgment was entered in this case on November 29, 1999
awarding plaintiffs compensatory and punitive damages plus
prejudgment interest in an amount yet to be calculated. This amended
final judgment in the amount of $54,283 includes such interest for
the period beginning in 1983 when the lawsuit was filed through entry
of judgment. Post-judgment interest will accrue at a rate of 5.471
percent per annum from November 29, 1999. The management of Tray,
Inc. believes that the Court's decision contains numerous factual and
legal errors subject to reversal on appeal. An appeal is pending with
the United States Court of Appeals for the D.C. District. Briefs have
been filed by both sides.
In 1997, the United States Supreme Court effectively invalidated New
Jersey's long-standing municipal solid waste flow rules and
regulations. The immediate effect was to eliminate the guaranteed
supply of municipal solid waste to the Camden County Waste-to-Energy
Project (the "Project") with its corresponding tipping fee revenue.
As a result, tipping fees have been reduced to market rate in order
to provide a steady supply of fuel to the Project. Those market-based
revenues have not been, and are not expected to be, sufficient to
service the debt on outstanding bonds which were issued to construct
the Project and to acquire a landfill for Camden County's use.
The Company's project subsidiary, Camden Country Energy Recovery
Associates, LP ("CCERA"), has filed suit against the involved
parties, including the State of New Jersey, seeking among other
things to void the applicable contracts and agreements governing the
Project. (CAMDEN COUNTY ENERGY RECOVERY ASSOC. V. N.J. DEPARTMENT OF
ENVIRONMENTAL PROTECTION, ET AL., Superior Court of New Jersey,
Mercer County, L-268-98). Since 1999, the State of New Jersey has
provided subsidies sufficient to ensure the payment of each of the
Project's debt service payments as it became due. In January 2002,
the State of New Jersey enacted legislation providing a mechanism for
state-supported refinancing of bond debt on solid waste facilities
located within the state, which legislation expires on December 31,
2002. There have been discussions about attempting to use this
mechanism to refinance the bonds
-15-
related to the Project. Such a refinancing would likely involve
restructuring CCERA's contracts related to the Project, including its
service agreement.
The bonds outstanding on the Camden Project are public debt, not debt
of either the Company or CCERA, and the bonds are not guaranteed by
the Company. If the State were to fail to subsidize the debt service,
and there were to be a default on a debt service payment, the
bondholders might proceed to attempt to exercise their remedies.
At this time, management cannot determine the ultimate outcome of the
foregoing and their potential effects on CCERA and the Project.
However, management believes that pending the conclusion of the
foregoing litigation and/or discussions, the Project will continue to
operate at full capacity receiving market rates for waste disposal
and generating sufficient revenues to pay CCERA its service fee.
Because the debt outstanding on the Camden Project is not CCERA's,
and is not secured by CCERA's plant, the Company's management does
not believe that an attempt by the bondholders to exercise their
remedies would have a material adverse effect on CCERA or the
Company.
In 1996, the Company completed the construction of a recycling and
waste-to-energy project located in the Village of Robbins, Illinois
(the "Robbins Facility"). By virtue of the Robbins Facility
qualifying under the Illinois Retail Rate Law as a qualified solid
waste-to-energy facility, it was to receive electricity revenues
projected to be substantially higher than the utility's "avoided
cost". Under the Retail Rate Law, the utility was entitled to a tax
credit against a state tax on utility gross receipts and invested
capital. The State of Illinois (the "State") was to be reimbursed by
the Robbins Facility for the tax credit beginning after the 20th year
following the initial sale of electricity to the utility. The State
repealed the Retail Rate Law insofar as it applied to the Robbins
Facility. In October 1999, the Company reached an agreement (the
"Robbins Agreement") with the holders of bonds issued by the Village
of Robbins to finance the construction of the Robbins Facility (the
"Bondholders"). As part of the Robbins Agreement, the Company agreed
to continue to contest this repeal through litigation. Pursuant to
the Robbins Agreement, the Company has also agreed that any proceeds
of such litigation will be allocated in a certain order of priority.
Pursuant to an agreement reached with the debtor project companies
and the Bondholders and approved by the bankruptcy court on March 5,
2002 (IN RE: ROBBINS RESOURCE RECOVERY PARTNERS, L.P., N.D. Illinois,
Case No. 00B 25018), the foregoing allocation was modified so that
any proceeds will now be allocated in the following order of
priority: (1) to any attorneys entitled to a contingency fee, up to
15%; (2) up to the next $10,000, 50% to the Company, 50% to redeem
outstanding 1999D Bonds; (3) to redeem all of the outstanding 1999D
Bonds; (4) to reimburse the Company for any amounts paid by it in
respect of the 1999D Bonds; (5) to reimburse the Company for any
costs incurred by it in connection with prosecuting the Retail Rate
litigation; (6) to redeem all of the outstanding 1999C Bonds; and (7)
10.6% interest on the foregoing items 4 and 5 to the Company. Then,
to the extent there are further proceeds, 80% of any such proceeds
shall be paid to the Indenture Trustee of Non-Recourse Robbins Bonds
until an amount sufficient to repay such Bonds in full has been paid
over, with the remaining 20% being paid over to the Company. After
the foregoing payments shall have been made, any remaining proceeds
shall be paid over to the Company.
On December 1, 1999, three special purpose subsidiaries of the
Company commenced reorganization proceedings under Chapter 11 of the
U.S. Bankruptcy Code in order to effectuate the terms of the Robbins
Agreement. On January 21, 2000, these subsidiaries' plan of
reorganization was confirmed, and the plan was consummated on
February 3, 2000.
On August 8, 2000, the Company initiated the final phase of its exit
from the Robbins Facility. As part of the Robbins Agreement, the
Company agreed to operate the Robbins Facility subject to being
reimbursed for all costs of operation. Such reimbursement did not
occur and, therefore, pursuant to the Robbins Agreement, the Company
on October 10, 2000, completed the final phase of its exit from the
project. The Company had been administering the project
-16-
companies through a Delaware business trust, which owned the project
on behalf of the Bondholders. As a result of its exit from the
project, the Company is no longer administering the project
companies, which project companies again commenced reorganization
proceedings under Chapter 11 of the U.S. Bankruptcy Code in August
and October 2000. A subsidiary of the Company reached an agreement
with the debtor project companies and the requisite holders of the
bonds, which was approved by the bankruptcy court on March 5, 2002
(IN RE: ROBBINS RESOURCE RECOVERY PARTNERS, L.P., N.D. Illinois, Case
No. 00B 25018). In June 2002, the Plan of Reorganization
incorporating the agreement, among other things, was confirmed and
became effective. The foregoing agreement is expected to favorably
resolve any issues related to the exit from the project.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA") and similar state laws, the current
owner or operator of real property and the past owners or operators
of real property (if disposal took place during such past ownership
or operation) may be jointly and severally liable for the costs of
removal or remediation of toxic or hazardous substances on or under
their property, regardless of whether such materials were released in
violation of law or whether the owner or operator knew of, or was
responsible for, the presence of such substances. Moreover, under
CERCLA and similar state laws, persons who arrange for the disposal
or treatment of hazardous or toxic substances may also be jointly and
severally liable for the costs of the removal or remediation of such
substances at a disposal or treatment site, whether or not such site
was owned or operated by such person ("off-site facility"). Liability
at such off-site facilities is typically allocated among all of the
viable responsible parties based on such factors as the relative
amount of waste contributed to a site, toxicity of such waste,
relationship of the waste contributed by a party to the remedy chosen
for the site, and other factors.
The Company currently owns and operates industrial facilities and has
also transferred its interests in industrial facilities that it
formerly owned or operated. It is likely that as a result of its
current or former operations, such facilities have been impacted by
hazardous substances. The Company is not aware of any conditions at
its currently owned facilities in the United States that it expects
will cause the Company to incur significant costs.
The Company also may receive claims, pursuant to indemnity
obligations, from owners of recently sold facilities that may require
the Company to incur costs for investigation and/or remediation.
Based on the available information, the Company does not believe that
such costs will be material. No assurance can be provided that the
Company will not discover environmental conditions at its currently
owned or operated properties, or that additional claims will not be
made with respect to formerly owned properties, requiring the Company
to incur material expenditures to investigate and/or remediate such
conditions.
The Company had been notified that it was a potentially responsible
party ("PRP") under CERCLA or similar state laws at four off-site
facilities, excluding sites as to which the Company has resolved its
liability. At each of these sites, the Company's liability should be
substantially less than the total site remediation costs because the
percentage of waste attributable to the Company compared to that
attributable to all other PRPs is low. The Company does not believe
that its share of cleanup obligations at any of the off-site
facilities as to which it has received a notice of potential
liability will exceed $500 in the aggregate.
The Company's project claims have increased as a result of the
increase in lump-sum contracts between 1992 and 1999. Project claims
are claims brought by the Company against project owners for
additional costs exceeding the contract price or amounts not included
in the original contract price, typically arising from changes in the
initial scope of work or from owner-caused delays. These claims are
often subject to lengthy arbitration or litigation proceedings. The
costs associated with these changes or owner-caused delays include
additional direct costs, such as increased labor and material costs
associated with the performance of the additional works, as well as
indirect costs that may arise due to delays in the completion of the
project, such as
-17-
increased labor costs resulting from changes in labor markets. The
Company has used significant additional working capital in projects
with costs overruns pending the resolution of the relevant project
claims. The Company cannot assure that project claims will not
increase.
In the ordinary course of business, the Company enters into contracts
providing for assessment of damages for nonperformance or delays in
completion. Suits and claims have been or may be brought against the
Company by customers alleging deficiencies in either equipment or
plant construction. Based on the Company's knowledge of the current
facts and circumstances relating to the liabilities, if any, and to
the insurance coverage, management believes that the disposition of
those suits will not result in charges against assets or earnings
materially in excess of amounts previously provided in the accounts.
The ultimate legal and financial liability in respect to all claims,
lawsuits and proceedings cannot be estimated with certainty. As
additional information concerning the estimates used becomes known,
the Company reassesses its position both with respect to gain
contingencies and accrued liabilities and other potential exposures.
Estimates that are particularly sensitive to future change relate to
claims and legal matters, which are subject to change as events
evolve and as additional information becomes available during the
administration and litigation process.
-18-
9. Changes in equity for the nine months ended September 27, 2002 were
as follows:
ACCUMULATED
OTHER TOTAL
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS EQUITY
------ ------ ------- -------- ---- ------
Balance December 28, 2001,
Restated ..................... 40,771,560 $ 40,772 $ 201,390 $ (109,872) $ (161,834) $ (29,544)
Net loss ..................... (334,916) (334,916)
Shares issued under incentive
plan and other plans ......... 205 205
Foreign currency translation
adjustment ................... 11,252 11,252
Reclassification of unrealized
gain of derivative instruments
to earnings .................. (3,834) (3,834)
----------- ----------- ----------- ----------- ----------- -----------
Balance September 27, 2002 ... 40,771,560 $ 40,772 $ 201,595 $ (444,788) $ (154,416) $ (356,837)
=========== =========== =========== =========== =========== ===========
-19-
10. Major Business Groups
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
------------- ------------- ------------- -------------
2002 2001 (6) 2002 2001 (6)
---- -------- ---- --------
(Restated and (Restated and
Reclassified) Reclassified)
ENGINEERING & CONSTRUCTION (E&C)
Revenues .................................. $ 462,531 $ 466,939 $ 1,443,833 $ 1,361,443
Gross earnings from operations ............ (9,990) 42,064 36,244 127,175
Interest expense .......................... (985) (153) (1,554) 787
(Loss)/earnings before income taxes and
cumulative effect of a change in
accounting principle for goodwill (1) ..... (28,636) 17,668 (21,371) 54,103
ENERGY
Revenues .................................. $ 355,766 $ 399,464 $ 1,155,102 $ 1,066,286
Gross earnings from operations ............ (38,271) 26,221 48,994 99,749
Interest expense .......................... 5,009 6,804 16,747 19,358
(Loss)/earnings before income taxes and
cumulative effect of a change in accounting
principle for goodwill (1) (2) (3) ........ (53,662) 5,717 (73,633) 26,178
CORPORATE AND FINANCIAL SERVICES (C&F) (1) (3) (4)
Revenues/Intercompany Eliminations ........ $ (4,110) $ (47,251) $ (19,818) $ (70,159)
Gross earnings from operations ............ (10,597) 104 (11,832) 844
Interest expense (5) ...................... 17,079 16,006 45,983 42,649
Loss before income taxes and cumulative
effect of a change in accounting
principle for goodwill .................... (60,012) (23,726) (147,533) (65,974)
TOTAL
Revenues .................................. $ 814,187 $ 819,152 $ 2,579,117 $ 2,357,570
Gross earnings from operations ............ (58,858) 68,389 73,406 227,768
Interest expense (5) ...................... 21,103 22,657 61,176 62,794
(Loss)/earnings before income taxes
and accounting change ................. (142,310) (341) (242,537) 14,307
Provision (benefit) for income taxes ...... 8,300 (1,118) 18,879 5,565
Net (loss)/earnings prior to
cumulative effect of a change in
accounting principle ...................... (150,610) 777 (261,416) 8,742
Cumulative effect on prior years of a
change in accounting principle for
goodwill (7) .............................. -- -- (73,500) --
----------- ----------- ----------- -----------
Net (loss)/earnings ....................... $ (150,610) $ 777 $ (334,916) $ 8,742
=========== =========== =========== ===========
(1) Includes in the three and nine months ended 2002, claim write-downs
for E&C ($21,700 and $48,900, respectively) Energy ($7,400 and
$28,100, respectively) and C&F ($8,600 and $8,600, respectively);
contract reserves, receivable provisions and foreign exchange
contract gains/losses for E&C ($22,700 and $23,000, respectively) and
Energy ($43,200 and $28,800, respectively) and a provision for the
impairment of a domestic manufacturing facility in Energy ($13,400).
Includes in the three and nine months ended 2002, primarily in C&F,
$29,300 and $68,100, respectively, for severance, performance
intervention activities, debt restructuring efforts, increased
pension costs and accrual for legal settlements and provisions.
(2) Includes in the nine months ended 2002, anticipated loss on sale of
assets for Energy ($50,800).
(3) Includes in the nine months ended 2001 for Energy, $5,000 loss on
sale of a hydrogen plant. Includes in the three and nine months ended
2001 in C&F, $1,600 and $6,100, respectively, for severance and
increased pension costs.
(4) Includes intersegment eliminations.
(5) Includes dividends on preferred security of subsidiary trust.
(6) Reflects the reclassification of the Engineering, Procurement and
Construction Power ("EPC" Power) business in the United States from
the E&C business group to the Energy business group to conform to
2002 presentation.
(7) Includes a provision for goodwill impairment of $48,700 for E&C and
$24,800 for Energy.
-20-
Operating revenues by industry segment for the periods ending
September 27, 2002 and September 28, 2001 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 27, 2002 SEPTEMBER 28, 2001 SEPTEMBER 27, 2002 SEPTEMBER 28, 2001
------------------ ------------------ ------------------ ------------------
(Reclassified) (Reclassified)
Power $ 385,607 $ 371,936 $ 1,197,910 $ 1,045,814
Oil and gas/refinery 210,514 194,494 615,682 559,726
Pharmaceutical 113,087 130,772 294,239 322,868
Chemical 38,382 51,055 114,953 157,105
Environmental 77,788 82,944 251,412 251,079
Power production 34,297 41,877 104,183 134,822
Eliminations and other (60,606) (64,280) (39,567) (153,091)
-------------- ---------------- ---------------- ---------------
Total Operating Revenues $ 799,069 $ 808,798 $ 2,538,812 $ 2,318,323
============== ================ ================ ===============
11. Condensed Consolidating Financial Information
The following represents summarized condensed consolidating financial
information as of September 27, 2002 and December 28, 2001, as restated, with
respect to the financial position, and for the three and nine months ended
September 27, 2002 and September 28, 2001, as restated, for results of
operations and for the nine months ended September 27, 2002 and September 28,
2001, as restated, cash flows of the Company and its 100% owned and
majority-owned subsidiaries. As a result of the reorganization on May 25, 2001,
Foster Wheeler LLC, as successor to Foster Wheeler Corporation, became obligor
for the Company's 6.75% notes due November 15, 2005 (the "Notes"). In connection
with the Company's finalizing the Senior Credit Facility, the following
companies issued guarantees in favor of the holders of the Notes or otherwise
assumed the obligations under the indenture governing the Notes: Equipment
Consultants, Inc., Foreign Holdings Ltd., Foster Wheeler Asia Limited, Foster
Wheeler Capital & Finance Corporation, Foster Wheeler Constructors, Inc., Foster
Wheeler Development Corporation, Foster Wheeler Energy Corporation, Foster
Wheeler Energy Manufacturing, Inc., Foster Wheeler Energy Services, Inc., Foster
Wheeler Enviresponse, Inc., Foster Wheeler Environmental Corporation, Foster
Wheeler Facilities Management, Inc., Foster Wheeler Inc., Foster Wheeler
International Corporation, Foster Wheeler International Holdings, Inc., Foster
Wheeler Ltd., Foster Wheeler Power Group, Inc., Foster Wheeler Power Systems,
Inc., Foster Wheeler Pyropower, Inc., Foster Wheeler Real Estate Development
Corporation, Foster Wheeler Realty Services, Inc., Foster Wheeler USA
Corporation, Foster Wheeler Virgin Islands, Inc., Foster Wheeler Zack, Inc., FW
Mortshal, Inc., FW Technologies Holdings LLC, HFM International, Inc., Process
Consultants, Inc., Pyropower Operating Services Company, Inc., and Perryville
III Trust. Each of the guarantees is full and unconditional and joint and
several. In May and June 2001, the Company issued 6.5% Convertible Subordinated
Notes ("Convertible Notes") due in 2007. The Convertible Notes are fully and
unconditionally guaranteed by Foster Wheeler LLC. The summarized consolidating
financial information is presented in lieu of separate financial statements and
other related disclosures of the wholly owned subsidiary guarantors because
management does not believe that such separate financial statements and related
disclosures would be material to investors. None of the subsidiary guarantors
are restricted from making distributions to the Company.
The comparative statements for December 28, 2001, as restated, and September 28,
2001, as restated with respect to the financial position, results of operations,
and cash flows, were revised to conform to the current financial presentation of
guarantors. The guarantor subsidiaries include the results of Foreign Holdings
Ltd., the parent of Foster Wheeler, LLC. Foster Wheeler LLC owns, directly or
indirectly, the other guarantor subsidiaries, and non-guarantor subsidiaries.
-21-
CONDENSED CONSOLIDATING BALANCE SHEET
September 27, 2002
(In Thousands of Dollars)
FOSTER FOSTER NON-
WHEELER WHEELER GUARANTOR GUARANTOR
ASSETS LTD. LLC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---- --- ------------ ------------ ------------ ------------
Current assets .......................... $ -- $ 205,303 $ 622,384 $ 1,524,252 $ (760,881) $ 1,591,058
Investment in subsidiaries .............. (354,203) (425,174) 703,096 84,239 79,497 87,455
Land, buildings & equipment (net) ....... -- -- 108,121 290,133 -- 398,254
Notes and accounts receivable - long-term -- 595,656 295,639 507,891 (1,347,475) 51,711
Intangible assets (net) ................. -- -- 157,879 448,705 (406,651) 199,933
Other non-current assets ................ -- 19,493 581,356 255,149 -- 855,998
----------- ----------- ----------- ----------- ----------- -----------
TOTAL ASSETS ............................ $ (354,203) $ 395,278 $ 2,468,475 $ 3,110,369 $(2,435,510) $ 3,184,409
=========== =========== =========== =========== =========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities ..................... $ 2,634 $ 27,115 $ 1,278,390 $ 1,075,520 $ (760,881) $ 1,622,778
Long-term debt .......................... -- 340,000 514,034 1,082,124 (1,347,475) 588,683
Other non-current liabilities ........... -- -- 924,023 162,431 (250,534) 835,920
Subordinated Robbins Obligations ........ -- -- 108,865 -- -- 108,865
Convertible debt ........................ -- 210,000 -- -- -- 210,000
Preferred trust securities .............. -- 175,000 -- -- -- 175,000
----------- ----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES ....................... 2,634 752,115 2,825,312 2,320,075 (2,358,890) 3,541,246
TOTAL SHAREHOLDERS' EQUITY .............. (356,837) (356,837) (356,837) 790,294 (76,620) (356,837)
----------- ----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ................. $ (354,203) $ 395,278 $ 2,468,475 $ 3,110,369 $(2,435,510) $ 3,184,409
========================================= =========== =========== =========== =========== =========== ===========
FOSTER WHEELER LTD
CONDENSED CONSOLIDATING BALANCE SHEET
December 28, 2001
(In Thousands of Dollars)
(Revised and Restated)
FOSTER FOSTER NON-
WHEELER WHEELER GUARANTOR GUARANTOR
ASSETS LTD. LLC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---- --- ------------ ------------ ------------ ------------
Current assets .......................... $ -- $ 121,298 $ 1,046,908 $ 1,136,494 $ (550,324) $ 1,754,376
Investment in subsidiaries .............. (26,989) (94,938) 496,250 82,367 (372,176) 84,514
Land, buildings & equipment (net) ....... -- -- 100,891 298,307 -- 399,198
Notes and accounts receivable - long-term -- 595,656 294,252 511,601 (1,336,136) 65,373
Intangible assets (net) ................. -- -- 204,485 476,708 (406,650) 274,543
Other non-current assets ................ -- 15,962 534,349 197,522 -- 747,833
----------- ----------- ----------- ----------- ----------- -----------
TOTAL ASSETS ............................ $ (26,989) $ 637,978 $ 2,677,135 $ 2,702,999 $(2,665,286) $ 3,325,837
=========== =========== =========== =========== =========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities ..................... $ 2,555 $ 667,522 $ 1,320,602 $ 948,265 $ (550,324) $ 2,388,620
Long-term debt .......................... -- -- 459,869 1,014,122 (1,336,136) 137,855
Other non-current liabilities ........... -- -- 926,208 153,313 (250,615) 828,906
Subordinated Robbins Obligations (1) .... -- -- -- -- -- --
Convertible debt (1) .................... -- -- -- -- -- --
Preferred trust securities (1) .......... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES ....................... 2,555 667,522 2,706,679 2,115,700 (2,137,075) 3,355,381
TOTAL SHAREHOLDERS' EQUITY .............. (29,544) (29,544) (29,544) 587,299 (528,211) (29,544)
----------- ----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ................. $ (26,989) $ 637,978 $ 2,677,135 $ 2,702,999 $(2,665,286) $ 3,325,837
=========== =========== =========== =========== =========== ===========
(1) These amounts were reclassified to current liabilities due to the covenant
violations under the Company's Revolving Credit Agreement and the potential for
debt acceleration under the agreements. See 2001 10K Note 1.
-22-
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended September 27, 2002
(In Thousands of Dollars)
FOSTER FOSTER NON-
WHEELER WHEELER GUARANTOR GUARANTOR
LTD. LLC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---- --- ------------ ------------ ------------ ------------
Operating revenues ................... $ -- $ -- $ 995,231 $ 1,614,491 $ (70,910) $ 2,538,812
Other income ......................... -- 42,235 29,938 71,260 (103,128) 40,305
----------- ----------- ----------- ----------- ----------- -----------
Revenues .......................... -- 42,235 1,025,169 1,685,751 (174,038) 2,579,117
Cost of operating revenues ........... -- -- 1,027,283 1,509,145 (71,022) 2,465,406
Selling, general and administrative
expenses .......................... -- -- 97,589 68,219 -- 165,808
Other deductions and minority
interest* ......................... 80 42,701 92,105 158,570 (103,016) 190,440
Equity in net losses of
subsidiaries .................... (334,836) (334,497) (66,541) -- 735,874 --
----------- ----------- ----------- ----------- ----------- -----------
Loss before income
taxes ........................... (334,916) (334,963) (258,349) (50,183) 735,874 (242,537)
Provision/(benefit) for income
taxes ........................... -- (163) 27,787 (8,745) -- 18,879
----------- ----------- ----------- ----------- ----------- -----------
Net loss prior to cumulative effect of
a change in accounting principle .. (334,916) (334,800) (286,136) (41,438) 735,874 (261,416)
Cumulative effect on prior years of a
change in accounting principle
for goodwill, net of $0 tax ....... -- -- (48,700) (24,800) -- (73,500)
----------- ----------- ----------- ----------- ----------- -----------
Net loss** ........................... (334,916) (334,800) (334,836) (66,238) 735,874 (334,916)
Other comprehensive (loss)/income:
Foreign currency translation
adjustment ........................ 11,252 11,252 11,252 11,252 (33,756) 11,252
Net (loss)/gain on derivative
instruments........................ (3,834) (3,834) (3,834) 284 7,384 (3,834)
----------- ----------- ----------- ----------- ----------- -----------
Comprehensive loss ................... $ (327,498) $ (327,382) $ (327,418) $ (54,702) $ 709,502 $ (327,498)
=========== =========== =========== =========== =========== ===========
* Includes interest expense and dividends on preferred securities of $61,176.
** Includes the following pre-tax special charges 1) goodwill impairment of
$73,500; 2) claims write downs of $85,600; 3) contracts reserves, receivable
provisions and foreign exchange of $51,800; 4) provision for the impairment
of a domestic manufacturing facility of $13,400; 5) anticipated loss on sale
of assets of $50,800; and 6) performance intervention activities, debt
restructuring efforts, asset write offs, severance costs and increased
pension cost of $68,100.
-23-
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 27, 2002
(In Thousands of Dollars)
FOSTER FOSTER NON-
WHEELER WHEELER GUARANTOR GUARANTOR
LTD. LLC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---- --- ------------ ------------ ------------ ------------
Operating revenues ................... $ -- $ -- $ 289,351 $ 528,400 $ (18,682) $ 799,069
Other income ......................... -- 14,779 10,970 25,089 (35,720) 15,118
--------- --------- --------- --------- --------- ---------
Revenues .......................... -- 14,779 300,321 553,489 (54,402) 814,187
Cost of operating revenues ........... -- -- 349,029 527,692 (18,794) 857,927
Selling, general and administrative
expenses .......................... -- -- 30,372 23,472 -- 53,844
Other deductions and minority
interest* ......................... 26 14,001 27,300 39,007 (35,608) 44,726
Equity in net losses of
subsidiaries .................... (150,565) (151,058) (38,958) -- 340,581 --
--------- --------- --------- --------- --------- ---------
Loss before income
taxes ........................... (150,591) (150,280) (145,338) (36,682) 340,581 (142,310)
(Benefit)/provision for income
taxes ........................... 19 272 3,987 4,022 -- 8,300
--------- --------- --------- --------- --------- ---------
Net loss prior to cumulative effect of
a change in accounting principle .. (150,610) (150,552) (149,325) (40,704) 340,581 (150,610)
Cumulative effect on prior years of a
change in accounting principle
for goodwill, net of $0 tax ....... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net loss** ........................... (150,610) (150,552) (149,325) (40,704) 340,581 (150,610)
Other comprehensive (loss)/income:
Foreign currency translation
adjustment ........................ 1,846 1,846 1,846 (2,263) (1,429) 1,846
Net (loss)/gain on derivative
instruments ....................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Comprehensive (loss)/earnings ........ $(148,764) $(148,706) $(147,479) $ (42,967) $ 339,152 $(148,764)
========= ========= ========= ========= ========= =========
* Includes interest expense and dividends on preferred securities of $21,103.
** Includes the following pre-tax special charges 1) claims write downs of
$37,700; 2) contracts reserves, receivable provisions and foreign exchange of
$65,900; 3) provision for the impairment of a domestic manufacturing facility
of $13,400; and 4) performance intervention activities, debt restructuring
efforts, asset write offs, severance costs and increased pension cost of
$29,300.
-24-
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended September 28, 2001
(In Thousands of Dollars)
(Restated)
FOSTER FOSTER NON-
WHEELER WHEELER GUARANTOR GUARANTOR
LTD. LLC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---- --- ------------ ------------ ------------ ------------
Operating revenues .................... $ 1,040,463 $ 1,370,184 $ (92,324) $ 2,318,323
Other income .......................... -- 250,485 167,010 44,284 (422,532) 39,247
----------- ----------- ----------- ----------- ----------- -----------
Revenues .............................. -- 250,485 1,207,473 1,414,468 (514,856) 2,357,570
Cost of operating revenues ............ -- -- 974,970 1,207,909 (92,325) 2,090,554
Selling, general and administrative
expenses .............................. -- 7,895 85,725 65,077 -- 158,697
Other deductions and minority
interests(*) .......................... 114 42,327 167,501 60,758 (176,688) 94,012
Equity in net earnings of subsidiaries 8,816 (201,128) 16,280 -- 176,032 --
----------- ----------- ----------- ----------- ----------- -----------
Earnings before income taxes .......... 8,702 (865) (4,443) 80,724 (69,811) 14,307
(Benefit)/provision for income taxes .. (40) (9,692) (11,863) 27,160 -- 5,565
----------- ----------- ----------- ----------- ----------- -----------
Net earnings(**) ...................... 8,742 8,827 7,420 53,564 (69,811) 8,742
Other comprehensive (loss)/income:
Foreign currency translation
adjustment .......................... (8,273) (8,273) (8,273) (9,757) 26,303 (8,273)
Net gain on derivative instruments
4,996 4,996 4,996 1,157 (11,149) 4,996
----------- ----------- ----------- ----------- ----------- -----------
Comprehensive earnings ................ $ 5,465 $ 5,550 $ 4,143 $ 44,964 $ (54,657) $ 5,465
=========== =========== =========== =========== =========== ===========
(*) Includes interest expense and dividends on preferred securities of $62,794.
(**) Includes the pre-tax loss on sale of a hydrogen plant of $5,000.
-25-
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 28, 2001
(In Thousands of Dollars)
(Restated)
FOSTER FOSTER NON-
WHEELER WHEELER GUARANTOR GUARANTOR
LTD. LLC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---- --- ------------ ------------ ------------ ------------
Operating revenues .................... $ 352,182 $ 480,694 $ (24,078) $ 808,798
Other income .......................... -- 8,980 7,361 15,698 (21,685) 10,354
--------- --------- --------- --------- --------- ---------
Revenues .............................. -- 8,980 359,543 496,392 (45,763) 819,152
Cost of operating revenues ............ -- -- 337,125 427,363 (24,080) 740,408
Selling, general and administrative
expenses ............................ -- -- 25,113 21,113 -- 46,226
Other deductions and minority
interests(*) ........................ 48 13,001 26,674 14,291 (21,155) 32,859
Equity in net earnings of subsidiaries 808 (71,296) 94,112 -- (23,624) --
--------- --------- --------- --------- --------- ---------
Earnings before income taxes .......... 760 (75,317) 64,743 33,625 (24,152) (341)
(Benefit)/provision for income taxes .. (17) (76,127) 64,402 10,624 -- (1,118)
--------- --------- --------- --------- --------- ---------
Net earnings .......................... 777 810 341 23,001 (24,152) 777
Other comprehensive income:
Foreign currency translation
adjustment ....................... 14,570 14,570 14,570 17,739 (46,879) 14,570
Net gain on derivative instruments .. 9,481 9,481 9,481 11,351 (30,313) 9,481
--------- --------- --------- --------- --------- ---------
Comprehensive earnings ................ $ 24,828 $ 24,861 $ 24,392 $ 52,091 $(101,344) $ 24,828
========= ========= ========= ========= ========= =========
(*) Includes interest expense and dividends on preferred securities of $22,657.
-26-
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
Nine Months Ended September 27, 2002
(In Thousands of Dollars)
FOSTER FOSTER
WHEELER WHEELER GUARANTOR NON-GUARANTOR
LTD. LLC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---- --- ------------ ------------ -------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET CASH (USED)/PROVIDED BY
OPERATING ACTIVITIES .............. $ (80) $ (4,987) $ 223,730 $ (2,736) $ 2,199 $ 218,126
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in restricted cash ............ -- -- (15,900) (62,819) -- (78,719)
Capital expenditures ................. -- -- (39,282) (7,095) -- (46,377)
Proceeds from sale of properties ..... -- -- 1,204 867 -- 2,071
(Increase)/decrease in investment and
advances .......................... -- (350) (428) (263) (2,421) (3,462)
Decrease in short-term investments ... -- -- -- 5 -- 5
Other ................................ -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
NET CASH (USED)/PROVIDED BY
INVESTING ACTIVITIES .............. -- (350) (54,406) (69,305) (2,421) (126,482)
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to Common Shareholders ..... -- 3,390 13,643 (17,033) -- --
Increase/(decrease) in short-term debt -- -- -- 8,706 -- 8,706
Proceeds from long-term debt ......... -- 70,000 44,900 (756) -- 114,144
Repayment of long-term debt .......... -- -- (829) (7,886) -- (8,715)
Other ................................ 80 (68,053) (121,907) 187,597 222 (2,061)
--------- --------- --------- --------- --------- ---------
NET CASH PROVIDED/(USED) BY
FINANCING ACTIVITIES .............. 80 5,337 (64,193) 170,628 222 112,074
--------- --------- --------- --------- --------- ---------
Effect of exchange rate changes on
cash and cash equivalents ......... -- -- 38 14,950 -- 14,988
--------- --------- --------- --------- --------- ---------
INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS ....................... -- -- 105,169 113,537 -- 218,706
Cash and cash equivalents, beginning
of period ............................ -- -- 40,961 183,059 -- 224,020
--------- --------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF
YEAR .............................. $ -- $ -- $ 146,130 $ 296,596 $ -- $ 442,726
========= ========= ========= ========= ========= =========
-27-
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
Nine Months Ended September 28, 2001
(In Thousands of Dollars)
(Restated)
FOSTER FOSTER
WHEELER WHEELER GUARANTOR NON-GUARANTOR
LTD. LLC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---- --- ------------ ------------ -------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided/ (used) by
Operating Activities ............... $ 2,446 $(206,413) $(114,875) $ (29,236) $ 172,211 $(175,867)
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures .................. -- (2,346) (11,191) (12,621) 2,346 (23,812)
Proceeds from sale of properties ...... -- -- 119 52,012 -- 52,131
Decrease in investment and advances ... -- -- 100,702 (30,938) (60,624) 9,140
Decrease in short-term investments .... -- -- 544 -- 544
Other.................................. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
NET CASH (USED)/PROVIDED BY INVESTING
ACTIVITIES ............................ -- (2,346) 89,630 8,997 (58,278) 38,003
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to Shareholders ............. (2,446) (2,442) (4,888)
Decrease in short-term debt ........... -- -- (76,250) (6,885) (83,135)
Proceeds from convertible bonds, net .. -- 202,912 -- 202,912
Proceeds from long-term debt .......... -- 134,361 -- 7,030 141,391
Repayment of long-term debt ........... -- (126,662) (126) (9,022) (135,810)
Other ................................. -- 590 84,381 28,185 (113,933) (777)
--------- --------- --------- --------- --------- ---------
NET CASH (USED)/ PROVIDED BY
FINANCING ACTIVITIES ................ (2,446) 208,759 8,005 19,308 (113,933) 119,693
--------- --------- --------- --------- --------- ---------
Effect of exchange rate changes on
cash and cash equivalents .......... -- -- (300) (5,787) -- (6,087)
--------- --------- --------- --------- --------- ---------
Decrease in cash and cash equivalents .
-- -- (17,540) (6,718) -- (24,258)
Cash and cash equivalents, beginning of
year ............................... -- -- 39,623 152,270 -- 191,893
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents, end of
period ............................. $ -- $ -- $ 22,083 $ 145,552 $ -- $ 167,635
========= ========= ========= ========= ========= =========
-28-
12. The Company owns a non-controlling equity interest in three
cogeneration projects and one waste-to-energy project; one
cogeneration plant is located in Chile and the remaining plants are
located in Italy. Two of the projects in Italy are each 42% owned
while the third is 49% owned by the Company. The project in Chile is
85% owned by the Company but the Company does not maintain a
controlling financial interest in the project. Following is
summarized financial information for the Company's equity affiliates
combined, as well as the Company's interest in the affiliates.
SEPTEMBER 27, 2002 DECEMBER 28, 2001
------------------ -----------------
ITALIAN CHILEAN ITALIAN CHILEAN
PROJECTS PROJECT PROJECTS PROJECT
---------- -------- --------- ---------
BALANCE SHEET DATA:
Current assets $ 85,049 $ 14,536 $ 75,942 $ 23,301
Other assets (primarily buildings
and equipment) 333,363 218,196 311,584 227,019
Current liabilities 14,587 12,006 12,487 14,747
Other liabilities (primarily long-
term debt) 340,833 149,110 329,030 158,124
Net assets 62,992 71,616 46,009 77,449
INCOME STATEMENT DATA FOR NINE MONTHS:
SEPTEMBER 27, 2002 SEPTEMBER 28, 2001
------------------- -----------------------------
ITALIAN CHILEAN ITALIAN CHILEAN VENEZUELA
PROJECTS PROJECT PROJECTS PROJECTS PROJECT
-------- -------- -------- -------- --------
Total revenues $138,121 $ 28,869 $117,631 $ 30,769 $ 4,428
Income before income taxes 21,277 7,461 16,174 8,224 2,684
Net earnings 12,598 6,192 9,023 2,635 2,582
As of September 27, 2002, the Company's share of the net earnings and
investment in the equity affiliates totaled $10,011 and $87,455,
respectively. Dividends of $9,702 were received during the first nine
months of 2002. The Company has guaranteed certain performance
obligations of such projects. The Company's average contingent
obligations under such guarantees are approximately $2,700 per year
for the four projects. The Company has provided a $10,000 debt
service reserve letter of credit providing liquidity should the
performance of the project be insufficient to cover the debt service
payments. No amount has been drawn under the letter of credit.
In April 2001, the Company sold its interest in two hydrogen
production plants in South America. The net proceeds from these
transactions were approximately $40,000. An after tax loss of $5,000,
or approximately $0.12 per share, was recorded in the second quarter
of 2001 relating to these sales.
13. The difference between the statutory and effective tax rate in 2002
is predominately due to a domestic pretax loss for which no income
tax benefit was claimed. The difference between the statutory and
effective tax rate in 2001 is predominantly due to state and local
taxes, certain tax credits and the favorable settlement of a
contested foreign tax liability.
14. During the nine months ended September 27, 2002, the Company recorded
a provision for losses on the potential sale of two waste-to-energy
facilities of $50,800. These provisions brought the carrying value of
the facilities to their net realizable value.
15. In June 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and
-29-
Technical Corrections" and SFAS 146 "Accounting for Costs Associated
with Exit or Disposal Activities".
SFAS No. 145 rescinds previous statements regarding the
extinguishment of debt and amends SFAS No. 13, "Accounting for
Leases" to eliminate an inconsistency between the required accounting
for sale/leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are
similar to sale/leaseback transactions. The provisions of SFAS No.
145 related to the extinguishment of debt are to be applied to fiscal
years beginning after May 15, 2002. The provisions of SFAS No. 145
related to the amendment of SFAS No. 13 are effective for
transactions occurring after May 15, 2002. The Company is currently
assessing the impact of the adoption of this new standard.
SFAS No. 146 requires liabilities associated with an exit or disposal
activity be recognized at fair value when the liability is incurred.
This contrasts with existing accounting requirements, under which
liabilities for exit or disposal activities are recognized at the
date of an entity's commitment to an exit plan. The provisions of
SFAS No. 146 are effective for exit or disposal activities initiated
after December 31, 2002. The Company is currently assessing the
impact of the adoption of this new standard.
16. Subsequent to the filing of the Company's second quarter 2002
financial results, management determined that the assets, liabilities
and the related impact on results of operations associated with one
of the Company's benefit plans were not properly accounted for in
accordance with SFAS 112, "Employers' Accounting for Postemployment
Benefits." The Company has adjusted its results for 2001 and 2002 in
accordance with SFAS 112 and will amend its 2001 Form 10-K, as well
as its Form 10-Q for each of the first two quarters of 2002. The
prepaid pension cost was increased to reflect the updated cash
surrender value of underlying insurance policies, and the post
retirement and other employee benefits other than pensions was
increased to reflect the updated obligation, calculated on a going
concern basis. The cumulative effect on shareholders' equity as of
December 28, 2001 was a decrease of $37,091. A summary of the effects
of the restatement on the Company's condensed consolidated balance
sheet and the condensed consolidated statement of operations and
comprehensive income/(loss) is as follows:
Statement
of 12/28/01 12/28/01
12/28/01 12/28/01 Earnings and Year Year
Balance Sheet As Reported Restated Comprehensive Income As Reported Restated
- ------------------------------- ---------------- --------------- ---------------------- ----------------- -----------------
Selling, general and
Prepaid pension cost $ 122,407 $ 131,865 administrative expenses $ 222,532 $ 225,392
Post retirement and other
employee benefits other than (Loss)/earnings before
pensions $ 121,600 $ 168,149 income taxes $ (206,005) $ (208,865)
Retained earnings (deficit) Provision (benefit) for
$ (72,781) $ (109,872) income taxes $ 103,138 $ 118,215
Total shareholder's equity $ 7,547 $ (29,544) Net (loss)/earnings $ (309,143) $ (327,080)
(Loss)/Earnings per Share,
Basic and Diluted $ (7.56) $ (8.00)
-30-
Nine Months
Statement Three Months Three Months Ended Nine Months
of Ended September Ended September September 28, Ended September
Earnings and Comprehensive 28, 2001 28, 2001 2001 28, 2001
Income As Reported Restated As Reported Restated
------------------------------- ----------------- ----------------- ---------------- -----------------
Selling, general and
administrative expenses $ 45,511 $ 46,226 $ 156,552 $ 158,697
(Loss)/earnings before income
taxes $ 374 $ (341) $ 16,452 $ 14,307
Provision (benefit) for
income taxes $ (868) $ (1,118) $ 6,316 $ 5,565
Net (loss)/earnings $ 1,242 $ 777 $ 10,136 $ 8,742
(Loss)/Earnings per Share,
Basic and Diluted $ 0.03 $ 0.02 $ 0.25 $ 0.21
17. The Company anticipates two charges to shareholders' equity totaling
approximately $140,000 in the fourth quarter of 2002 relating to the
Company's pension plans. The first charge stems from the reversal of
the prepaid pension asset in the United Kingdom of approximately
$100,000. The second charge is due to an increase in the pension
obligation in the United States of approximately $40,000 assuming an
interest rate of 7%, a long-term rate of return on assets of 9%, and
a Dow Jones Industrial Average of 8,500. These charges result from
the poor performance of the equity markets. The Company will finalize
its review of the pension obligations upon the conclusion of the
annual actuarial valuations of the pension plans. Despite these
anticipated charges to shareholders' equity, the funding requirements
for 2002 and 2003 are essentially unchanged.
-31-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The following is Management's Discussion and Analysis of certain significant
factors that have affected the financial condition and results of operations of
the Company for the periods indicated below. This discussion and analysis should
be read in conjunction with the 2001 Form 10-K. As required, the September 28,
2001 financial statements and the December 28, 2001 condensed consolidated
balance sheet were restated as described in Note 16 to the condensed
consolidating financial statements.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 27, 2002 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 28, 2001
CONSOLIDATED DATA
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
(Restated) (Restated)
Revenues $ 814,187 $ 819,152 $ 2,579,117 $ 2,357,570
=========== =========== =========== ===========
(Loss)/earnings before tax and
cumulative effect of a change
in accounting principle $ (142,310) $ (341) $ (242,537) $ 14,307
=========== =========== =========== ===========
Net (loss)/earnings $ (150,610) $ 777 $ (334,916) $ 8,742
=========== =========== =========== ===========
In the three and nine months ended September 27, 2002, the Company recognized
pretax charges of $146,300 ("Third Quarter Charges") and $343,200, ("Nine Month
Charges," which include the "Third Quarter Charges"), respectively. These costs
and charges are separately identified to provide for a better comparison to last
year's results. Shown below is a table that details the various components of
the charges.
------------------------------------- --------------------------------------
Three Months Ended Nine Months Ended
September 27, 2002 September 27, 2002
------------------------------------- --------------------------------------
E&C ENERGY C&F TOTAL E&C ENERGY C&F TOTAL
--- ------ --- ----- --- ------ --- -----
1) Change in accounting
for goodwill $ 48,700 $ 24,800 $ 73,500
2) Losses recognized
in anticipation of sales 50,800 50,800
3) Claims write downs and
related contract
provisions $ 21,700 $ 7,400 $ 8,600 $ 37,700 48,900 28,100 $ 8,600 85,600
4) Contract reserves,
receivables and foreign
exchange contracts 22,700 43,200 65,900 23,000 28,800 51,800
5) Domestic plant
impairment provision 13,400 13,400 13,400 13,400
6) Others 1,500 5,900 21,900 29,300 1,500 12,500 54,100 68,100
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 45,900 $ 69,900 $ 30,500 $146,300 $122,100 $158,400 $ 62,700 $343,200
======== ======== ======== ======== ======== ======== ======== ========
1) The Company's implementation of SFAS 142 resulted in the impairment
of goodwill on the Camden waste to energy ("WTE") facility that is
part of the Energy Group for $24,800, and $48,700 for a reporting
unit in the Engineering and Construction Group.
2) These losses were recognized in anticipation of sales of the
Charleston WTE Facility ($19,000) and the Hudson Falls WTE Facility
($31,800). The amounts were recorded in other deductions. The sale of
the Charleston WTE Facility was completed in October 2002.
3) These charges were reflected in the cost of operating revenues based
on the current expectation for settlement and the results of a recent
arbitration. These charges include claims write-downs and the
establishment of a provision for probable liquidated damages.
4) The net charge for the three month's ended September 27, 2002 of
$65,900 include additional cost of operating revenues of $74,200,
offset by a reduction in the Energy group's other deductions of
$8,300. The net charge for the nine month's ended September 27, 2002
of $51,800 include additional cost of operating revenues of $53,500,
offset by a reduction in the Energy group's other deductions of
$1,700.
5) A provision for impairment was recorded in cost of operating revenues
for a domestic manufacturing facility under the provisions of SFAS
144.
6) These charges for the three and nine months ended September 27, 2002
primarily represent costs of severance ($3,100 and $7,700),
performance intervention activities ($5,200 and $11,800), debt
restructuring efforts ($3,400 and $15,700), accrual for legal
settlements and provisions ($15,400 and $24,400), and increased
pension and other costs ($2,200 and $8,500). The amounts were
recorded as follows for the three and nine months ended September 27,
2002, respectively. E&C group cost of operating revenues $1,500 and
$1,500; Energy group in selling, general and administrative expenses
of $0 and $1,400 and other deductions of $5,900 and $11,100; and
corporate and finance in selling, general and administrative expenses
of $1,400 and $3,900 and other deductions of $20,500 and $50,200.
Management recognizes that the Engineering and Construction and Energy
industries are subject to charges due to contract disputes as described above.
In order to mitigate these charges in the future the company has taken the
following actions to date:
o Undertook a series of management actions including leadership
changes and performance interventions,
o Established a Project Risk Management Group that provides for
corporate oversight,
o Strengthened the financial controls relating to project execution
and cash management,
o Supplemented the financial expertise in critical areas,
o Expanded the scope of the audit activities, both internally and
externally, and
o Strengthened the expertise in contract audits by outsourcing the
internal audit function to Deloitte & Touche LLP.
The Company's valuation allowance for deferred tax assets was increased by
$40,700 and $109,300 for the three and nine-month period ended September 2002,
respectively.
-32-
Comparable charges for the three and nine months ended September 28, 2001 are
shown below.
------------------------------- -----------------------------------
Three Months Ended Nine Months Ended
September 28, 2001 September 28, 2001
------------------------------- -----------------------------------
E&C ENERGY C&F TOTAL E&C ENERGY C&F TOTAL
--- ------ --- ----- --- ------ --- -----
1) Losses recognized
on asset sales 5,000 5,000
2) Others 1,600 1,600 6,100 6,100
-- ------- ------- ------- ------- ------- ------- -------
Total $0 $ 0 $ 1,600 $ 1,600 $ 0 $ 5,000 $ 6,100 $11,100
== ======= ======= ======= ======= ======= ======= =======
1) The loss on the sale of a hydrogen plant was recorded in other
deductions.
2) These charges consist of severance costs ($2,700 for the nine month
period) and increased pension costs ($1,600 and $3,400 for the three
and nine month periods, respectively).
OPERATING REVENUES
----------------------------------------
Three Months Ended
----------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Operating Revenues $ 799,069 $ 808,798 $ (9,729) (1.2)%
--------------------------------
Nine Months Ended
--------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Operating Revenues $ 2,538,812 $ 2,318,323 $ 220,489 9.5%
The nine-month increase is attributed to the E&C Group's activities in
Continental Europe ($157,000) and the Energy Group's activities in Finland
($134,000).
GROSS EARNINGS FROM OPERATIONS
----------------------------------------
Three Months Ended
----------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Gross Earnings $(58,858) $ 68,390 $(127,248) (186.1)%
-------------------------------------------
Nine Months Ended
-------------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Gross Earnings $73,406 $ 227,769 $(154,363) (67.8)%
Gross earnings are equal to operating revenues minus the cost of operating
revenues. The decrease in gross earnings for the quarter was primarily due to
claim write-downs discussed above of $37,700, contract reserves, receivable
provisions and foreign exchange contract losses of $74,200, provision for
impairment of a domestic manufacturing facility of $13,400, and other of $1,500
in the third quarter of 2002. There were additional claims and related contract
reserves of $47,900 offset by $20,700 of gains on foreign exchange contracts
during the first six months of 2002.
-33-
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
-------------------------------------
Three Months Ended
-------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
------- ------- ------- -------
(Restated)
Selling, general and
Administrative expenses $ 53,844 $ 46,226 $ 7,618 16.5%
------------------------------------
Nine Months Ended
------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
------- ------- ------- -------
(Restated)
Selling, general and
Administrative expenses $ 165,808 $158,697 $7,111 4.5%
The variance for the three and nine month periods is primarily due to severance
cost of $1,400 and $5,300 respectively, and the impact of reversing a management
incentive accrual in the third quarter of 2001. Domestic selling, general and
administrative costs are the focus of the current intervention process as
discussed in Note 2 to the condensed consolidated financial statements. Due to
the timing of the changes made in this area, the total impact of the reductions
was not realized in the nine months ended September 27, 2002.
OTHER INCOME
-----------------------------------------
Three Months Ended
-----------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Other Income $ 15,118 $ 10,354 $ 4,764 46.0%
--------------------------------------------
Nine Months Ended
--------------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Other Income $ 40,305 $ 39,247 $ 1,058 2.7%
The increases for the nine-month period were primarily related to gains on sale
on investments in Italy ($3,300), offset by reduced interest income ($800), and
lower foreign transaction gains ($400). The increase for the three-month period
is due to the gain on the sale of investments in Italy ($2,900), increased
equity earnings ($1,300), and increased interest income ($700).
OTHER DEDUCTIONS
--------------------------------------------
Three Months Ended
--------------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Other deductions
and minority interest $ 23,623 $ 10,202 $ 13,421 131.6%
-------------------------------------------
Nine Months Ended
-------------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Other deductions
and minority interest $ 129,264 $ 31,218 $ 98,046 314.1%
The increase in the three and nine months ended September 27, 2002 was due to
refinancing efforts, performance intervention activities, and employee severance
and pension costs totaling $18,100 and $59,600, respectively, and also in the
nine months ended 2002, a provision for anticipated loss on sale of assets of
$50,800.
-34-
TAX PROVISION
---------------------------------------
Three Months Ended
---------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Tax provision/(benefit) $ 8,300 $(1,118) $ 9,418 842.4%
------------------------------------
Nine Months Ended
------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Tax provision/(benefit) $ 18,879 $ 5,565 $ 13,314 239.2%
The tax provision for the nine months ended September 27, 2002 was $18,879 on
losses before tax of $316,037, which includes the $73,500 cumulative effect of
the change in accounting principle for goodwill. The negative effective tax rate
results from domestic pretax losses for which no income tax benefit was claimed
due to the establishment of a valuation allowance.
The net loss in the nine months ended September 27, 2002 was $334,916 or $8.18
per share diluted compared to the net earnings of $8,742 or $0.21 per share
diluted for the nine months ended September 28, 2001, as restated. The primary
reasons for the nine months decline relates to Nine Month Charges totaling
$343,200 as previously discussed. The net loss for the three months ended
September 27, 2002 was $150,610 or $3.68 per share diluted compared to net
earnings of $777 or $0.02 per share diluted for the three months ended September
28, 2001, as restated. The primary reasons for the three months decline relates
to the Third Quarter Charges of $146,300 as previously discussed.
-35-
ENGINEERING AND CONSTRUCTION GROUP
------------------------------------------
Three Months Ended
------------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Operating revenues $ 453,634 $ 463,508 $ (9,874) (2.1)%
=========== ========== ======== =====
Gross earnings from operations $ (9,990) $ 42,065 $(52,055) (123.7)%
=========== ========== ======== =======
------------------------------------------
Nine Months Ended
------------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Operating revenues $1,417,507 $1,344,216 $ 73,291 5.4%
========== ========== ======== ====
Gross earnings from operations $ 36,244 $ 127,175 $(90,931) (71.5)%
========== ========== ========= =====
The increase in operating revenues for the nine-month period is primarily due to
the higher level of operating revenues reported by the Continental Europe
operating unit. This unit received a significant amount of contract awards
during 2001, which were being executed in 2002. The lower revenues for the
three-month period were primarily due to the revenues reported by the U.S. and
the United Kingdom operating units. This decrease was primarily due to a lower
level of activity in the United States and reduced levels of flow through costs
in the United Kingdom.
Gross earnings in the E&C Group were impacted by Third Quarter and Nine Month
Charges totaling $45,900 and $73,400, respectively. The Third Quarter Charges
include claims write-downs and related contract charges of $21,700 and $24,200
primarily for contract reserves and accounts receivable. The major component of
the $21,700 was the result of the Company reevaluating its position due to the
preliminary findings of an arbitration in Europe regarding a contract dispute.
The $24,200 is composed of a provision for receivables of $14,700 and contract
reserves of $9,500. In addition to the Third Quarter Charges, the Nine-Months
Charges includes claims and related contract write-downs of $27,200 and $300 for
foreign exchange contracts. These claims were reassessed during the first six
months of 2002 based on current information and management's strategy to realize
cash by attempting to resolve claims.
ENERGY GROUP
------------------------------------------
Three Months Ended
------------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Operating revenues $ 351,699 $ 393,296 $(41,597) (10.6)%
========= ========= ======== =====
Gross earnings from operations $ (38,271) $ 26,221 $(64,492) (245.9)%
========== ========= ======== ======
-----------------------------------------
Nine Months Ended
-----------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Operating revenues $ 1,141,892 $1,043,183 $ 98,709 9.5%
=========== ========== ======== ====
Gross earnings from operations $ 48,994 $ 99,749 $(50,755) (50.9)%
=========== ========== ======== =====
The decrease in operating revenues for the three-month period is primarily due
to the lower level of operating revenues reported by the North American
operating unit. The North American power market continues to suffer from slow
economic growth levels, over capacity, and financial difficulties of independent
power producers. The higher revenues for the nine-month period were primarily
due to the Finnish operations. This operating unit has the highest level of
backlog in the history of its organization. This unit's operating revenues are
up $134,000 from a year ago and it received a major European boiler contract
award in the third quarter of 2002. Gross earnings in the Energy Group were
impacted by Third Quarter and Nine-Month Charges totaling $72,250 and $71,950,
respectively. The Third Quarter Charges include claims write-downs and related
contract charges of $7,400, contract reserves
-36-
and provisions for accounts receivable of $51,450 and plant impairment costs of
$13,400. The claim write-down was the result of the company reaching final
settlement and receiving a cash payment of approximately $25,000. The $51,450
includes contract reserves of $48,050 and accounts receivable provisions for
$3,400. The $48,050 primarily relates to change in contract estimates for the
impact of currency changes and the reevaluation of the Company's exposure on two
power projects. In addition the nine-month period includes charges for claims
write-downs of $20,700 offset by the recognition of approximately $21,000 on
forward exchange contracts as a result of marking them to market since they did
not qualify for hedge accounting under FAS No. 133 in the second quarter of
2002.
As previously disclosed, the Company has reviewed various methods of monetizing
selected power systems facilities. Based on current economic conditions,
management concluded that it would continue to operate the facilities in the
normal course of business. Management has reviewed these facilities for
impairment on an undiscounted cash flow basis and determined that no adjustment
to the carrying amounts is required. If the Company were able to monetize these
assets, it is possible that the amounts realized could differ materially from
the balances recorded in the financial statements. Based on preliminary sales
agreements entered into with third parties, the Company recognized provisions
for anticipated loss for the potential sale of two waste-to-energy ("WTE")
facilities of $19,000 in the first quarter 2002 and $31,800 in the second
quarter of 2002, for a total year to date charge of $50,800. The sale of the
Charleston WTE Facility, for which the Company recorded the $19,000 provision,
was completed in October 2002.
FINANCIAL CONDITION
Shareholders' equity for the nine months ended September 27, 2002 decreased by
$327,293, due primarily to the loss for the period of $334,916, increase in the
foreign currency translation adjustment of $11,252 and reclassification of
unrealized gain on derivative instruments to earnings of $3,834, and shares
issued under incentive plans of $205.
Cash flows from operations were $218,126 for the nine months ended September 27,
2002 compared to a use of cash from operations of $175,867 for the nine months
ended September 28, 2001, as restated. The increase in cash provided from
operations is primarily due to the collection of two significant receivables
($87,000), cash received from the cancellation of a company-owned life insurance
plan ($22,000), claims recovery ($25,000), and cash flow from contracts.
During the nine months ended September 27, 2002, long-term investments in land,
buildings and equipment were $46,377 as compared with $23,812 for the comparable
period in 2001. The increase is due to the purchase of a corporate office
building of $33,000 which had been previously leased. Funds used to buy out the
lease were generated from the sale/leaseback of a second corporate office
building. These transactions were completed in connection with Senior Credit
Facility and the receivable sale arrangement. This increase was offset by lower
investments in foreign build, own and operate facilities.
Corporate and other debt, special purpose project debt, and bank loans net of
cash and short term investments have decreased by $181,928 compared to December
28, 2001. The improvement in net debt primarily resulted from increased cash
flows from operations, offset by the repayment in the second quarter of 2002 of
$50,000 related to the prior receivable sale arrangement.
Corporate and other debts, including the Revolving Credit Agreement, are as
follows:
SEPTEMBER 27, 2002
Corporate and other debt consisted of the following:
Revolving Credit Agreements (average interest rate 5.37%)......$140,000
6.75% Notes due November 15, 2005.............................. 200,000
Other.......................................................... 27,499
Capitalized Lease Obligations (12.8% interest rate) 44,071
Less, Current Portion............................................. (20,412)
---------
$391,158
========
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Subsequent to the close of the quarter the Company repaid $20,350 of the amount
in current, however, the Company may remarket this debt.
In the third quarter 1998, a subsidiary of the Company entered into a six-year
agreement with a financial institution whereby the subsidiary would sell an
undivided interest in a designated pool of qualified accounts receivable. At
December 28, 2001, $50,000 in receivables were sold under the agreement and are
therefore not reflected in the accounts receivable-trade balance in the
Condensed Consolidated Balance Sheet. The bank that was party to this financing
terminated the agreement on April 30, 2002 in accordance with its terms. The
Company replaced this facility in the third quarter of 2002 with a $40,000
facility as discussed below.
The Company anticipates two charges to shareholders' equity totaling
approximately $140,000 in the fourth quarter of 2002 relating to the Company's
pension plans. The first charge stems from the reversal of the prepaid pension
asset in the United Kingdom of approximately $100,000. The second charge is due
to an increase in the pension obligation in the United States of approximately
$40,000 assuming an interest rate of 7%, a long-term rate of return on assets of
9%, and a Dow Jones Industrial Average of 8,500. These charges result from the
poor performance of the equity markets. The Company will finalize its review of
the pension obligations upon the conclusion of the annual actuarial valuations
of the pension plans. Despite these anticipated charges to shareholders' equity,
the funding requirements for 2002 and 2003 are essentially unchanged.
LIQUIDITY AND CAPITAL RESOURCES
As of September 27, 2002, the Company had cash and cash equivalents on hand,
restricted cash and short-term investments worldwide of $521,727. In August
2002, the Company finalized a Senior Credit Facility with its bank group. This
facility includes a $71,000 term loan, a revolving credit facility for $69,000,
and a letter of credit facility for $149,900 that expires on April 30, 2005.
This facility is secured by the assets of the domestic subsidiaries, the stock
of the domestic subsidiaries as well as 66% of the stock of the first-tier
foreign subsidiaries. The facility has no scheduled repayments prior to maturity
on April 30, 2005. The facility requires prepayments from proceeds of assets
sales, the issuance of debt or equity, and from excess cash flow. The Company
retains the first $77,000 of such amounts and also retains a 50% share of the
balance. The financial covenants in the facility start at the end of the first
quarter 2003. These include a senior leverage ratio and a minimum EBITDA level
as described in the agreement, as amended.
Amendment No. 1 to the Credit Agreement, obtained on November 8, 2002, provides
covenant relief of up to $180,000 of gross pre-tax charges recorded by the
Company in the third quarter of 2002. The amendment further provides that up to
an additional $63,000 in pretax charges related to specific contingencies may be
excluded from the covenant calculation through December 31, 2003, if incurred.
The Company also finalized a sale/leaseback arrangement with an investor for an
office building at its corporate headquarters. This capital lease arrangement
leases the facility to the Company for an initial non-cancelable period of 20
years. The proceeds from the sale/leaseback were sufficient to repay the balance
outstanding under the old financing lease arrangement of $33,000 for another
corporate office building. The capital lease obligation of $44,100 at September
27, 2002 is included in corporate and other debt less current installments in
the accompanying condensed consolidated balance sheet.
During the third quarter, the Company also completed a receivables sale
arrangement for up to $40,000. This arrangement has been accounted for as a
financing and expires in August 2005. The facility is subject to covenant
compliance. The financial covenants commence at the end of the first quarter of
2003 and include a senior leverage ratio and a minimum EBITDA level.
Noncompliance with the
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financial covenants allows the receivable purchaser to terminate the arrangement
and accelerate any amounts then outstanding. As of September 27, 2002, the
Company had borrowings of $12,900 outstanding under this facility. These
borrowings are included in bank loans in the condensed consolidated balance
sheet.
As a result of finalizing the Senior Credit Facility, the sale/leaseback
arrangement and the receivables sale arrangement, the Company has reclassified
the Term Loan and Revolving Credit to long-term. In addition, the other debt
that was subject to potential cross acceleration provisions has also been
classified to long-term.
In addition to the Company's debt restructuring initiatives, management has
initiated a comprehensive plan to address domestic liquidity issues. As
previously announced, management's plan to address the Company's domestic
liquidity issues included generating approximately $150,000 from asset sales,
collection of receivables and resolving disputed claims through the end of
February 2003 and an additional $40,000 over the following six months. As of the
close of the third quarter, the Company generated approximately $46,000 through
these efforts. The current plan is to generate an additional $100,000 in the
next six months and an additional $40,000 in the subsequent three months. To the
extent these initiatives are not successful, the Company will explore other
options including the repatriation of funds from foreign operations subject to
their working capital needs and liquidity requirements, further cost reductions,
and cash conservation measures. Management believes that these actions, together
with cash on hand and cash from operations will be sufficient to fund the
Company's working capital needs over the next year. Failure by the Company to
achieve a significant portion of these proceeds could have a material adverse
effect on the Company's financial condition. The above factors raise substantial
doubts about the Company's ability to continue as a going concern. The condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
A subsidiary of the Company has entered into a long-term contract with a
government agency. This contract is to be completed in four phases. The first
phase was for the design, permitting and licensing of a spent fuel facility.
This phase was completed for a price of $66,700. In addition, the Company has
submitted change requests in excess of $14,000. Based on the review of outside
counsel, management believes that a sufficient amount will be received to avoid
any write-downs. The recently started second phase is billed on a cost plus fee
basis and is expected to last for approximately 24 months. In this phase, the
Company must respond to any questions regarding the initial design included in
phase one. Phase three, which is expected to begin in first quarter of 2004, is
for the construction, start-up and testing of the facility for a fixed price of
$114,000, which is subject to escalation. This phase is expected to last two
years and requires that a subsidiary of the Company fund the construction cost.
In addition, a surety bond for the full contract price is required. The cost of
the facility is expected to be recovered in the first nine months of operations
under phase four, during which a subsidiary of the Company will operate the
facility at fixed rates, subject to escalation, for approximately four years.
In March 2002, the Company initiated a comprehensive plan to enhance cash
generation and to improve profitability. The operating performance portion of
the plan concentrates on the quality and quantity of backlog, the execution of
projects in order to achieve or exceed the profit and cash targets and the
optimization of all non-project related cash sources and uses. In connection
with this plan, a group of outside consultants was hired for the purpose of
carrying out a performance improvement intervention. The tactical portion of the
performance improvement intervention concentrates on booking current projects,
executing twenty-two "high leverage projects" and generating incremental cash
from high leverage opportunities such as overhead reductions, procurement, and
accounts receivable. The systemic portion of the performance improvement
intervention concentrates on sales effectiveness, estimating, bidding, and
project execution procedures.
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Some of the details of the activities to date include the following:
PROCUREMENT
Starting in March 2002, the Company began implementing a plan to reduce the
internal man-hours and cycle time required to purchase items. An integral part
of this plan is to enter into global and regional procurement agreements. Thirty
such agreements are in various stages of negotiations as of September 27, 2002.
Additionally, a management operating system to monitor claims is in process of
being implemented.
ACCOUNTS RECEIVABLE
A company wide management operating system was implemented to identify and track
actions relating to collection of all receivables. A new policy has been
established requiring actions to be taken prior to receivables becoming due as
well as the actions to be taken when collections are past due. One aspect of the
new policy requires the reporting of significant past due amounts to senior
management on a timely basis.
Accounts and notes receivable at September 27, 2002 and September 28, 2001 were
$699,318 and $946,344, respectively. During the nine-month period ending
September 27, 2002, operating revenues increased $220,489 when compared to the
nine months ending September 28, 2001.
OVERHEAD REDUCTIONS
Management has progressed in its evaluation of all domestic corporate overhead.
As of September 27, 2002, 155 people were downsized representing approximately
$21,700 in annualized salaries, benefits, and other non-essential expenses.
Since work force reductions typically include notice periods and severance
payments, the benefits of these actions will not be fully realized until 2003.
SALES
The Company is concentrating on increasing backlog with high quality bookings.
In May 2002 the Company launched an initiative to improve the sales
effectiveness of its North American Energy and E&C Groups. The sales
effectiveness initiatives are aimed at building up the level of sales activities
in each group by strengthening the selling skills of sales personnel. Sales
training was completed and a management operating system was implemented in
North America that provides management with a disciplined system to track sales
opportunities and targets, and actions needed to convert those opportunities
into bookings.
RISK MANAGEMENT
The Company reorganized its project risk management group in the second quarter
of 2002 and appointed a corporate vice president as its head. The purpose of
this group is to help the Company avoid projects with unmanageable risk and
ensure awarded projects are executed without exposing the Company to additional
financial risk. The Project Risk Management Group (i) reviews potential
projects, proposals and contracts, (ii) monitors during the execution phase
projects deemed to present significant risks, (iii) recommends projects for
review by the executive committee, and (iv) reviews risk assessment and
contracting procedures of the Company's business units. As of September 27, 2002
the risk management group evaluated 98 proposals and formally reviewed 46
proposals. The group also reviewed 48 active projects.
-40-
HIGH-LEVERAGE PROJECTS
One of the major initiatives launched approximately 30 weeks ago was focused on
the way the Company plans and executes projects in the field. This initiative is
focused on building a best in class, Foster Wheeler project management system.
This activity takes best practices and integrates them into a company wide
system. The original scope of the initiative was 22 of the company's projects
worldwide.
The initial phase of the initiative identified the best practices for project
execution, and revealed that many of the existing corporate policies and
internal best practices were in fact best-in-class, but were not consistently
applied. As a result, the initiative was refocused on 12 key projects where
behavior change was necessary to ensure compliance to corporate policies and
best practices. Standardized management tools and procedures were developed that
require rigor and discipline in the execution of projects on a daily basis. A
primary result of these new tools and procedures is the identification of
potential execution issues at the earliest possible date. The goal is to
increase the ability of the company to mitigate those execution issues and
prevent profit erosion on projects.
Internal audits were developed based on the corporate policies and best
practices. These audits not only allow management to measure individual projects
on a best in class basis, but complement the policies and procedures in
providing project teams with the specific actions necessary to be best in class.
The audits associated with change order management, a critical component in
project execution, take place on a monthly basis to drive improvements and
ensure compliance to the actions necessary to be best in class. The change
management audits have seen a 34% improvement in the 12 key projects since these
audits began in August. Approximately 78% of the audit points on the 12 key
projects were fully compliant and an additional 17% existed, but were not fully
compliant as of September 27, 2002. Remedial actions continue in this area.
INTERNAL CONTROL REVIEW
The Company has initiated a detailed review of internal controls. Such reviews
include evaluation of the Company's contracting policies and procedures relating
to bidding and estimating practices. Among other things, these reviews will
include evaluation of the Company's reserving practices for bad debts and
uncollectible accounts receivable, warranty costs, change orders and claims.
Management will continue its initiatives begun in early 2002, particularly those
related to management of delinquent accounts receivables. Management is
strengthening the Company's financial controls, supplementing its financial
expertise, and is expanding the scope of the audit function, both internally and
externally.
The Company outsourced its internal audit function to Deloitte & Touche LLP in
the fourth quarter of 2002. Outsourcing internal audit allows access to a
world-class organization with skilled professionals and the latest information
technology audit resources. Key objectives of the revised internal audit
function include:
o Focusing resources on improving operational and financial performance
in areas of highest risk
o Reviewing and strengthening existing internal controls
o Mitigating the risk of internal control failures
o Ensuring best practices are implemented across all business units
CASH FLOWS FROM OPERATIONS
Cash flows from operations were $218,126 for the nine months ended September
27, 2002 compared to a use of cash from operations of $175,867 for the nine
months ended September 28, 2001, as restated.
-41-
The increase in cash flows from operations is primarily due to the collection of
two significant receivables ($87,000), cash received from the cancellation of a
company-owned life insurance plan ($22,000), claims recovery ($25,000), and cash
flow from projects in execution.
Cash flows from operations for the calendar years 1999 - 2001 totaled a use of
cash of approximately $110,000. The primary reason for the negative cash flows
for that period was the increase in cash claims, net of settlements, of
approximately $108,000. Additionally, as noted in the Liquidity and Capital
Resources section of this report, the Company was required to provide the
initial funding on several government contracts. These contracts negatively
impacted cash flows from operations during the same three-year period by
approximately $57,000.
The cash flows from operations from the former Robbins WTE Facility during the
years 1999 - 2001 were a use of approximately $52,500. Since its inception, the
Robbins project resulted in losses to the Company in excess of $360,000. The
impact on the Company's outstanding debt and the related interest cost is
substantial. As discussed in Note 8, the Company reached an agreement with the
debtor project companies on March 5, 2002. In June 2002, the Plan of
Reorganization incorporating this agreement was confirmed and became effective.
As a result, the Robbins Facility will not have a negative impact on future
operating cash flows except for the interest on the outstanding debt.
As noted previously, the Company reorganized its project risk management group
in the second quarter of 2002 and appointed a corporate vice president as its
head. The purpose of this group is to help the Company avoid projects with
unmanageable risk and ensure awarded projects are executed without exposing the
Company to additional financial risk. This group will carefully scrutinize all
contracts for negative cash flow terms. The Company will not take future
contracts with payment terms similar to the government contracts noted
previously.
The Company's liquidity action plan described in the Liquidity and Capital
Resources section of this report, is expected to have a significant positive
impact on future cash flows.
BACKLOG AND NEW ORDERS BOOKED
-----------------------------------------
Three Months Ended
-----------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Backlog $5,842,477 $6,370,161 $(527,684) (8.3)%
========== ========== ========= =====
New orders $1,043,542 $ 894,310 $ 149,232 16.7%
========== ========== ========= =====
--------------------------------------------
Nine Months Ended
--------------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
Backlog $5,842,477 $6,370,161 $(527,684) (8.3%)
========== ========== ========= =====
New orders $2,484,761 $3,007,563 $(522,802) (17.4)%
========== ========== ======== =====
As of September 27, 2002, 43% of the consolidated backlog was from lump-sum work
(versus 44% at September 28, 2001). The balance of backlog consists of
reimbursable work with a fee. 58% of the lump sum work is for the Energy Group.
The elapsed time from the award of a contract to completion of performance may
be up to four years. The dollar amount of backlog is not necessarily indicative
of the future earnings of the Company related to the performance of such work.
The backlog of unfilled orders includes amounts based on signed contracts as
well as agreed letters of intent which management has determined are likely to
be performed. Although backlog represents only business which is considered
firm, cancellations or scope adjustments
-42-
may occur. Due to factors outside the Company's control, such as changes in
project schedules, the Company cannot predict with certainty the portion of
backlog to be performed in a given year. Backlog is adjusted to reflect project
cancellations, deferrals, sale of subsidiaries and revised project scope and
cost. This adjustment for the nine months ended September 27, 2002 was $304,348,
compared with $357,270 for the nine months ended September 28, 2001.
Furthermore, because of the large size and uncertain timing of projects, future
trends are difficult to predict.
Approximately 61% of new orders booked in the nine months ended September 27,
2002 were for projects awarded to the Company's subsidiaries located outside the
United States, compared to 46% of new orders booked in the nine months ended
September 28, 2001. The geographic areas contributing to new orders awarded for
the nine months ended September 27, 2002 were Europe (39%) and North America
(40%). The reduction in year-to-date new orders was primarily due to lower
activity in North America for the Energy Group due to IPPs and over capacity as
described previously.
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ENGINEERING AND CONSTRUCTION GROUP
-----------------------------------------
Three Months Ended
-----------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
------- ------- ------- -------
(Reclassified)
New orders $ 469,852 $ 653,364 $(183,512) (28.1)%
========== ========== ========= =====
Backlog $4,277,347 $4,376,859 $( 99,512) (2.3)%
========== ========== ========= =====
--------------------------------------------
Nine Months Ended
--------------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
------- ------- ------- -------
(Reclassified)
New orders $ 1,365,759 $1,742,905 $(377,146) (21.6)%
=========== =========== ========= ======
Backlog $4,277,347 $4,376,859 $( 99,512) (2.3)%
=========== =========== ========= ======
The decline in new orders booked for the third quarter resulted primarily from
operations in the United States. An engineering, procurement, and construction
delayed coking project exceeding $250 million was booked in the third quarter
2001 that was not repeated in 2002.
The decline in new orders booked for the nine months ended September 27, 2002
resulted, as noted above, from the operations in the United States as well as
from reduced levels of new orders from operations in France. Both offices had
major refinery awards that were not repeated in 2002.
The decline in backlog reflects the work off of the U.S. project noted above.
The markets serviced by the E&C Group remain mixed in terms of levels of
activity. The upstream oil & gas sector continues to be active in Europe, the
western hemisphere, and West Africa. The downstream refinery sector in North
America continues to be focused on relatively low margin clean fuels work. The
pharmaceutical sector remains active, especially in North America, with a trend
towards biotech projects. The chemical and petrochemical sectors remain
generally flat but there are early signs of renewed activity in the Middle East
and South East Asia.
ENERGY GROUP
-----------------------------------------
Three Months Ended
-----------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
------- ------- ------- -------
(Reclassified)
New orders $ 579,515 $ 247,104 $ 332,411 134.5%
========== ========== ========= =====
Backlog $1,576,458 $2,053,368 $(476,910) (23.2)%
========== ========== ========= =====
--------------------------------------------
Nine Months Ended
--------------------------------------------
9/27/02 9/28/01 $CHANGE %CHANGE
------- ------- ------- -------
(Reclassified)
New orders $1,131,483 $ 1,274,405 $(142,922) (11.2)%
========== ============ ========= =====
Backlog $1,576,458 $ 2,053,368 $(476,910) (23.2)%
=========== ============ ========= =====
The increase in the third quarter 2002 new orders booked relates primarily to a
major circulating fluidized bed boiler contract awarded to the Finnish
operations. The decline in new orders booked in the nine months of 2002 versus
2001 reflects reduced awards in the North American operations, partially offset
by increased bookings from operations in Finland and Spain. Several large heat
recovery steam generator ("HRSG") contracts that were booked by the North
American operations in 2001 were not repeated in 2002. European operations
recorded strong bookings with award of a major circulating
-44-
fluidized bed boiler contract and increased bookings for industrial heat
recovery boilers.
The decline in backlog reflects the decline in North American bookings noted
above and several cancellations or suspensions of HRSG contracts in North
America, and one project canceled in China in the fourth quarter of 2001. These
reductions were partially offset by the increased bookings in Finland and Spain
noted above.
The North American power market continues to suffer from slow economic growth,
over capacity, and the financial difficulties of independent power producers.
Growth opportunities in the North American power market are expected to shift
toward maintenance and service contracts and away from the supply of new
equipment associated with solid fuel boiler contracts. Internationally, growth
opportunities in the circulating fluidized bed boilers are expected to continue
in selective areas of the European and Asian markets.
NON-AUDIT SERVICES
On October 28, 2002 the Audit Committee of the Board of Directors of the Company
approved non-audit services to be provided by PricewaterhouseCoopers LLP for
$2,898. Approximately $1,898 was for tax related services and the balance was
for statutory and special project audits.
OTHER MATTERS
The ultimate legal and financial liability of the Company in respect to all
claims, lawsuits and proceedings cannot be estimated with certainty. As
additional information concerning the estimates used by the Company becomes
known, the Company reassesses its position both with respect to gain
contingencies and accrued liabilities and other potential exposures. Estimates
that are particularly sensitive to future change related to legal matters
are subject to change as events evolve and as additional information becomes
available during the administration and litigation processes.
In the ordinary course of business, the Company and its subsidiaries enter into
contracts providing for assessment of damages for nonperformance or delays in
completion. Suits and claims have been or may be brought against the Company by
customers alleging deficiencies in either equipment design or plant
construction. Based on its knowledge of the facts and circumstances relating to
the Company's liabilities, if any, and to its insurance coverage, management of
the Company believes that the disposition of such suits will not result in
charges materially in excess of amounts provided in the accounts.
-45-
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(IN THOUSANDS OF DOLLARS)
Management's strategy for managing transaction risks associated with currency
fluctuations is for each operating unit to enter into derivative transactions,
such as forward foreign exchange agreements, to hedge its exposure on contracts
into the operating unit's functional currency. The Company utilizes all such
financial instruments solely for hedging. Corporate policy prohibits the
speculative use of such instruments. The Company is exposed to credit loss in
the event of nonperformance by the counter parties to such financial
instruments. To minimize this risk, the Company enters into these financial
instruments with financial institutions that are primarily rated A or better by
Standard & Poor's or A2 or better by Moody's. Management believes that the
geographical diversity of the Company's operations mitigates the effects of the
currency translation exposure. No significant unhedged assets or liabilities are
maintained outside the functional currency of the operating subsidiaries.
Accordingly, translation exposure is not hedged.
Interest Rate Risk - The Company is exposed to changes in interest rates
primarily as a result of its borrowings under its Revolving Credit Agreement and
its variable rate project debt. If market rates average 1% more in 2002 than in
2001, the Company's interest expense for the next twelve months would increase,
and income before tax would decrease by approximately $1,819. This amount has
been determined by considering the impact of the hypothetical interest rates on
the Company's variable-rate balances as of September 27, 2002. In the event of a
significant change in interest rates, management would likely take action to
further mitigate its exposure to the change. However, due to uncertainty of the
specific actions that would be taken and their possible effects, the sensitivity
analysis assumes no changes in the Company's financial structure.
Foreign Currency Risk - The Company has significant overseas operations.
Generally, all significant activities of the overseas subsidiaries are recorded
in their functional currency, which is generally the currency of the country of
domicile of the subsidiaries. This results in a mitigation of the potential
impact of earnings fluctuations as a result of changes in foreign exchange
rates. In addition, in order to further mitigate risks associated with foreign
currency fluctuations, the subsidiaries of the Company enter into foreign
currency exchange contracts to hedge the exposed contract value back to their
functional currency. As of September 27, 2002, the Company had approximately
$297,467 of foreign exchange contracts outstanding. These contracts mature
between 2002 and 2004. The contracts have been established by various
international subsidiaries to sell a variety of currencies and either receive
their respective functional currency or other currencies for which they have
payment obligations to third parties. The Company does not enter into foreign
currency contracts for speculative purposes.
INFLATION
The effect of inflation on the Company's revenues and earnings is minimal.
Although a majority of the Company's revenues are made under long-term
contracts, the selling prices of such contracts, established for deliveries in
the future, generally reflect estimated costs to complete in these future
periods. In addition, some contracts provide for price adjustments through
escalation clauses.
ITEM 4 CONTROLS AND PROCEDURES
Immediately following the signature page of this report is the Certification
that is required under Section 302 of the Sarbanes-Oxley Act of 2002. This
section of the report contains information concerning the controls evaluation
referred to in the Section 302 Certifications and the information contained
herein should be read in conjunction with the Certification.
Internal controls are designed with the objective of ensuring that assets are
safeguarded, transactions are authorized, and financial reports are prepared on
a timely basis in accordance with generally accepted
-46-
accounting principles in the United States. The disclosure procedures are
designed to comply with the regulations established by the Securities and
Exchange Commission and the New York Stock Exchange.
Internal controls, no matter how designed, have limitations. It is the Company's
intent that the internal controls be conceived to provide adequate, but not
absolute, assurance that the objectives of the controls are met on a consistent
basis. Management plans to continue its review of internal controls and
disclosure procedures on an ongoing basis.
The Company's principal executive officer and principal financial officer, after
supervising and participating in an evaluation of the effectiveness of the
Company's internal and disclosure controls and procedures as of September 27,
2002 (the "Evaluation Date"), have concluded that as of the Evaluation Date, the
Company's internal and disclosure controls and procedures were effective.
There were no significant changes in the Company's internal and disclosure
controls or in other factors that could significantly affect such internal and
disclosure controls subsequent to the date of their evaluation.
SAFE HARBOR STATEMENT
This Management's Discussion and Analysis of Financial Condition and Results of
Operations, other sections of this Report on Form 10-Q and other reports and
oral statements made by representatives of the Company from time to time may
contain forward-looking statements that are based on management's assumptions,
expectations and projections about the Company and the various industries within
which the Company operates. These include statements regarding the Company's
expectation regarding revenues (including as expressed by its backlog), its
liquidity and the ability to generate significant cash from the monetization of
assets in the near term, the outcome of litigation and legal proceedings and
recoveries from customers for claims. Such forward-looking statements by their
nature involve a degree of risk and uncertainty. The Company cautions that a
variety of factors, including but not limited to the following, could cause
business conditions and results to differ materially from what is contained in
forward-looking statements:
o changes in the rate of economic growth in the United States and other
major international economies;
o changes in investment by the power, oil & gas, pharmaceutical,
chemical/petrochemical and environmental industries;
o changes in regulatory environment;
o changes in project schedules;
o changes in estimates made by the Company of costs to complete
projects;
o changes in trade, monetary and fiscal policies worldwide;
o currency fluctuations;
o inability to achieve its plan to enhance cash generation;
o terrorist attacks on facilities either owned or where equipment or
services are or may be provided;
o outcomes of pending and future litigation, including litigation
regarding the Company's liability for damages and insurance coverage
for asbestos exposure;
o protection and validity of patents and other intellectual property
rights;
o increasing competition by foreign and domestic companies;
o monetization of certain business and other assets; and
o recoverability of claims against customers.
Other factors and assumptions not identified above were also involved
in the derivation of these forward-looking statements and the failure of such
other assumptions to be realized as well as other
-47-
factors may also cause actual results to differ materially from those projected.
Most of these factors are difficult to predict accurately and are generally
beyond the control of the Company. The reader should consider the areas of risk
described above in connection with any forward-looking statements that may be
made by the Company.
The Company undertakes no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
The reader is advised, however, to consult any additional disclosures the
Company makes in proxy statements, quarterly reports on Form 10-Q, annual
reports on Form 10-K, particularly the Risk Factors of the Business discussed on
pages 4 through 11 of the Form 10-K, and current reports on Form 8-K filed with
the Securities and Exchange Commission.
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PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Refer to Note 8 to the Condensed Consolidated Financial Statements presented in
Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of legal
proceedings.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
EXHIBIT NO. EXHIBITS
10.1 1995 Stock Option Plan of Foster Wheeler Inc. (as Amended and
Restated as of September 24, 2002).
10.2 Separation Agreement for James E. Schessler dated August 23, 2002.
10.3 Stock Option Agreement for Joseph T. Doyle dated as of July 15, 2002.
10.4 Employment Agreement between Foster Wheeler Ltd. and Bernard H.
Cherry dated as of September 23, 2002.
10.5 Change of Control Employment Agreement between Foster Wheeler Inc.
and Bernard H. Cherry dated as of November 4, 2002.
10.6 Employment Agreement between Foster Wheeler Ltd. and Thomas R.
O'Brien dated as of September 10, 2002.
10.7 Change of Control Employment Agreement between Foster Wheeler Inc.
and Joseph T. Doyle dated July 15, 2002.
10.8 Amendment No. 1 dated as of November 8, 2002 to the Third Amended and
Restated Term Loan and Revolving Credit Agreement dated as of August
2, 2002 among Foster Wheeler LLC, the Borrowing Subsidiaries, the
Guarantors, the Lenders and the Bank of America, N.A. as
Administrative Agent and Collateral Agent and Banc of America
Securities LLC, as Lead Arranger and Book Manager.
12.1 Statement of Computation of Consolidated Ratio of Earnings to Fixed
Charges and Combined Fixed Charges.
99.1 Certification of Raymond J. Milchovich.
99.2 Certification of Joseph T. Doyle.
REPORTS ON FORM 8-K
REPORT DATE DESCRIPTION
July 1, 2002 Foster Wheeler announced that it has received further
extensions of financing facilities and deferred payment on
its trust-preferred securities.
July 15, 2002 Foster Wheeler announced that the company has elected a
new senior vice president and chief financial officer.
July 23, 2002 Foster Wheeler announced that one of its
subsidiaries has preliminarily agreed to sell its interests
in its Hudson Falls, New York waste-to-energy plant.
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July 31, 2002 Foster Wheeler announced that in response to a question
raised during the Company's second quarter earnings
conference call, it was disclosed that under the terms of
its proposed new senior secured credit facility, the
Company will be required to continue to defer the dividend
on the FW Preferred Capital Trust I - 9% Preferred
Securities.
August 16, 2002 Foster Wheeler announced that it had successfully entered
into a new credit facility, entered into a $40 million
receivables sale agreement that matures in August 2005, and
replaced its previous lease financing facility associated
with its Clinton, New Jersey, headquarters complex.
August 19, 2002 Foster Wheeler announced that it had revised its
earnings for three and six months ended June 28, 2002 for
the impact of goodwill accounting.
August 23, 2002 Foster Wheeler announced that its director and
senior vice president-human resources and administration
left the company to pursue other interests.
September 13, 2002 Foster Wheeler announced that it amended the Employment
Agreement with Raymond J. Milchovich, Chairman, President,
and Chief Executive Officer.
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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.
FOSTER WHEELER LTD.
-------------------
(Registrant)
Date: NOVEMBER 12, 2002 /S/ RAYMOND J. MILCHOVICH
--------------------- ------------------------------
Raymond J. Milchovich
Chairman, President and
Chief Executive Officer
Date: NOVEMBER 12, 2002 /S/ JOSEPH T. DOYLE
--------------------- -------------------------------
Joseph T. Doyle
Senior Vice President and
Chief Financial Officer
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CERTIFICATIONS
I, Raymond J. Milchovich, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Foster
Wheeler Ltd.;
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;
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;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/S/ RAYMOND J. MILCHOVICH
-------------------------
Raymond J. Milchovich
Chairman, President and
Chief Executive Officer
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I, Joseph T. Doyle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Foster
Wheeler Ltd.;
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;
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;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/S/ JOSEPH T. DOYLE
-------------------
Joseph T. Doyle
Senior Vice President and
Chief Financial Officer
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