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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 28, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to
---------- ----------
Commission file number 1-286-2
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, NEW JERSEY 08809-4000
(Address of Principal Executive Offices) (Zip Code)
(908) 730-4000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(Name of Each Exchange on which
(Title of Each Class) Registered)
FOSTER WHEELER LTD. NEW YORK STOCK EXCHANGE
COMMON STOCK, $1.00 PAR VALUE
FW PREFERRED CAPITAL TRUST I NEW YORK STOCK EXCHANGE
9.00% PREFERRED SECURITIES, SERIES I (GUARANTEED BY FOSTER WHEELER LLC)
Securities registered pursuant to Section 12(g) of the Act:
NONE
------
(Title of Class)
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.
X Yes No
- --- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 25, 2002, 40,771,560 shares of the Registrant's Common Shares,
were issued and outstanding, and the aggregate market value of such shares held
by nonaffiliates of the Registrant on such date was approximately $125,576,405
(based on the last price on that date of $3.08 per share).
List hereunder the following documents if incorporated by reference, and
the Part of the Form 10-K into which the document is incorporated:
DOCUMENTS INCORPORATED BY REFERENCE
Following is a list of documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated:
(1) Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 22, 2002 are incorporated by reference
in Part III of this report.
FOSTER WHEELER LTD.
2001 Form 10-K Annual Report
Table of Contents
PART I
ITEM PAGE
1. Business 2
2. Properties 12
3. Legal Proceedings 15
4. Submission of Matters to a Vote of Security Holders 17
Executive Officers of Registrant
PART II
5. Market for Registrant's Common Equity and Related
Shareholder Matters 18
6. Selected Financial Data 19
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
7A. Quantitative and Qualitative Disclosures about Market Risk 33
8. Financial Statements and Supplementary Data 34
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 77
PART III
10. Directors and Executive Officers of the Registrant 77
11. Executive Compensation 77
12. Security Ownership of Certain Beneficial Owners and Management 77
13. Certain Relationships and Related Transactions 77
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 78
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth in this
report. See Item 7. "Managements Discussion and Analysis of Financial Condition
and Results of Operations - Safe Harbor Statement" for further information.
1
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS:
Foster Wheeler Ltd. was incorporated under the laws of Bermuda in 2001.
Effective May 25, 2001, Foster Wheeler Corporation, which was originally
incorporated under the laws of the State of New York in 1900, underwent a
reorganization pursuant to which shareholders received one share of Foster
Wheeler Ltd. for each share of Foster Wheeler Corporation they owned. Foster
Wheeler Ltd. is essentially a holding company which owns the stock of various
subsidiary companies. Except as the context otherwise requires, the terms
"Foster Wheeler" or the "Company", as used herein, include Foster Wheeler Ltd.
and its subsidiaries.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS:
See Note 22 to Financial Statements in this Form 10-K.
NARRATIVE DESCRIPTION OF BUSINESS:
(THOUSANDS OF DOLLARS)
The business of the Company falls within two business groups. The ENGINEERING
AND CONSTRUCTION GROUP (the "E&C Group") designs, engineers and constructs
petroleum, chemical, petrochemical and alternative-fuels facilities and related
infrastructure, including power generation and distribution facilities,
production terminals, pollution control equipment, water treatment facilities
and process plants for the production of fine chemicals, pharmaceuticals,
dyestuffs, fragrances, flavors, food additives and vitamins. The E&C Group also
provides a broad range of environmental remediation services, together with
related technical, design and regulatory services. The ENERGY EQUIPMENT GROUP
(the "EE Group") designs, manufactures and erects steam generating and auxiliary
equipment for power stations and industrial markets worldwide. Steam generating
equipment includes a full range of fluidized bed and conventional boilers firing
coal, oil, gas, biomass and other municipal solid waste, waste wood and low-Btu
gases. Auxiliary equipment includes feedwater heaters, steam condensers,
heat-recovery equipment and low-NOx burners. Site services related to these
products encompass plant erection, maintenance engineering, plant upgrading and
life extension and plant repowering. The EE Group also provides research
analysis and experimental work in fluid dynamics, heat transfer, combustion and
fuel technology, materials engineering and solids mechanics. In addition, the EE
Group builds, owns and operates cogeneration, independent power production and
resource recovery facilities, as well as facilities for the process and
petrochemical industries. It generates revenues from construction and operating
activities pursuant to long-term sale of project outputs (i.e., electricity and
steam contracts), operating and maintenance agreements and from returns on its
equity positions. This Group refinances its investment in selected projects from
time to time when such refinancing will result in risk mitigation, a lower
effective financing cost or a potential increased return on investment.
Foster Wheeler markets its services and products through a staff of sales and
marketing personnel and through a network of sales representatives. The
Company's businesses are not seasonal nor are they dependent on a limited group
of customers. No single customer accounted for 10 percent or more of Foster
Wheeler's consolidated revenues in fiscal 2001, 2000 or 1999.
The materials used in Foster Wheeler's manufacturing and construction operations
are obtained from both domestic and foreign sources. Materials, which consist
mainly of steel products and manufactured items, are heavily dependent on
foreign sources, particularly for overseas projects. Generally, lead-time for
delivery of materials does not constitute a problem.
On March 5, 2002, President Bush signed the Steel Products Proclamation which
imposes tariffs on certain imported steel and steel products, effective March
20, 2002. Management does not believe there will be a significant impact to the
Company, but a final determination cannot be made until the new tariffs are
implemented.
Foster Wheeler owns and licenses patents, trademarks and know-how, which are
used in each of its industry groups. Such patents and trademarks are of varying
durations. Neither business group is materially dependent upon any particular or
related patents or trademarks. Foster Wheeler has licensed companies throughout
the world to manufacture marine and
2
stationary steam generators and related equipment and certain of its other
products. Principal licensees are located in Finland, Japan, the Netherlands,
Italy, Spain, Portugal, Norway and the United Kingdom.
For the most part, Foster Wheeler's products are custom designed and
manufactured and are not produced for inventory. Customers often make a down
payment at the time a contract is executed and continue to make progress
payments until the contract is completed and the work has been accepted as
meeting contract guarantees. Generally, contracts are awarded on the basis of
price, delivery schedule, performance and service.
Foster Wheeler had unfilled orders as of December 28, 2001 of $6,004,400 as
compared to unfilled orders as of December 29, 2000 of $6,142,300. The elapsed
time from the award of a contract to completion of performance may be up to four
years. The dollar amount of unfilled orders is not necessarily indicative of the
future earnings of the Company related to the performance of such work. Although
unfilled orders represent only business which is considered firm, there can be
no assurance that cancellations or scope adjustments will not occur. Due to
additional factors outside of the Company's control, such as changes in project
schedules, the Company cannot predict with certainty the portion of unfilled
orders that will not be performed.
The unfilled orders by business group as of December 28, 2001 and December 29,
2000 are as follows:
2001 2000
---- ----
Engineering and Construction Group ...................... $ 4,539,300 $ 4,534,600
Energy Equipment Group .................................. 1,493,100 1,727,400
Corporate and Financial Services (including eliminations) (28,000) (119,700)
----------- -----------
$ 6,004,400 $ 6,142,300
=========== ===========
Unfilled orders of projects at December 28, 2001 and December 29, 2000 consisted
of:
2001 2000
---- ----
Signed contracts ........................................ $ 5,867,200 $ 5,619,300
Letters of intent and contracts awarded but not finalized 137,200 523,000
----------- -----------
$ 6,004,400 $ 6,142,300
=========== ===========
Many companies compete in the engineering and construction segment of Foster
Wheeler's business. Management of the Company estimates, based on industry
publications, that Foster Wheeler is among the ten largest of the many large and
small companies engaged in the design and construction of petroleum refineries
and chemical plants. In the manufacture of refinery and chemical plant
equipment, neither Foster Wheeler nor any other single company contributes a
large percentage of the total volume of such business.
On an international basis, many companies compete in the energy equipment
segment of Foster Wheeler's business. Management of the Company estimates, based
on industry surveys and trade association materials, that it is among the ten
largest suppliers of utility and industrial-sized steam generating and auxiliary
equipment in the world and among the three largest in the United States.
Foster Wheeler is continually engaged in research and development efforts both
in performance and analytical services on current projects and in development of
new products and processes. During 2001, 2000 and 1999, approximately $12,300,
$12,000 and $12,500, respectively, was spent on Foster Wheeler sponsored
research activities. During the same periods, approximately $39,200, $27,600 and
$27,100, respectively, was spent on research activities that were paid for by
customers of Foster Wheeler.
Foster Wheeler and its domestic subsidiaries are subject to certain Federal,
state and local environmental, occupational health and product safety laws.
Foster Wheeler believes all its operations are in material compliance with such
laws and does not anticipate any material capital expenditures or adverse effect
on earnings or cash flows in maintaining compliance with such laws. In addition,
management believes that the Company is in material compliance with similar laws
and regulations in the non-U.S. countries in which it operates.
3
Foster Wheeler had 10,394 full-time employees on December 28, 2001. Following is
a tabulation of the number of full-time employees of Foster Wheeler in each of
its business groups on the dates indicated:
December 28, December 29, December 31,
2001 2000 1999
---- ---- ----
Engineering and Construction ............ 7,216 7,007 7,160
Energy Equipment ........................ 3,156 3,141 3,035
Corporate and Financial Services ........ 22 22 25
------ ------ ------
10,394 10,170 10,220
====== ====== ======
RISK FACTORS OF THE BUSINESS:
- -----------------------------
(Thousands of Dollars)
The following discussion of risks relating to the Company's business should be
read carefully in connection with evaluating the Company's business, prospects
and the forward-looking statements contained in this Report on Form 10-K and
oral statements made by representatives of the Company from time to time. Any of
the following risks could materially adversely affect the Company's business,
operating results, financial condition and the actual outcome of matters as to
which forward-looking statements are made. For additional information regarding
forward-looking statements, see Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Safe Harbor Statement."
The Company's business is subject to a number of risks and uncertainties,
including those described below.
THE COMPANY HAS HIGH LEVELS OF DEBT.
The Company has debt under bank loans, other debt securities that have been sold
to investors and subordinated Robbins Facility exit funding obligations. As of
December 28, 2001, the Company's total debt amounted to $864,267, $226,056 of
which was comprised of limited recourse project debt of special purpose
subsidiaries. The total debt includes $210,000 of convertible subordinated
notes. In addition, the Company has $175,000 of preferred trust securities
outstanding.
Over the last five years, the Company has been required to allocate a greater
portion of its earnings to pay interest on its debt. After paying interest on
its debt, the Company has fewer funds available for working capital, capital
expenditures, acquisitions and other business purposes. This could materially
affect its competitiveness by limiting its ability to respond to changing market
conditions, expand through acquisitions or compete effectively in its markets.
Additionally, certain of its borrowings are at variable rates of interest which
exposes the Company to the risk of a rise in interest rates.
THE COMPANY IS IN VIOLATION OF THE TERMS OF ITS REVOLVING CREDIT AGREEMENT.
The Company has received a series of waivers from the required lenders under its
Revolving Credit Agreement of certain covenant violations under the agreement.
The current waiver expires on April 30, 2002 and is subject to the satisfaction
of certain ongoing conditions. The Company is in negotiations with the lenders
under its Revolving Credit Agreement to replace the current Revolving Credit
Agreement with a new or amended credit facility.
If a new or amended credit facility is not completed, the lenders under the
Revolving Credit Agreement would have the ability to accelerate the payment of
amounts borrowed under the Revolving Credit Agreement ($140,000 as of March 29,
2002) and to require the Company to cash collateralize standby letters of credit
outstanding thereunder ($93,000 as of March 29, 2002).
It is unlikely that the Company would be able to repay amounts borrowed or cash
collateralize standby letters of credit issued under the Revolving Credit
Agreement if the banks were to elect their right to accelerate the payment
dates. Failure by the Company to repay such amounts under the Revolving Credit
Agreement would have a material adverse effect on the Company's financial
condition and operations and result in defaults under the terms of the Company's
following indebtedness: the Senior Notes, the Convertible Subordinated Notes,
the Preferred Trust Securities, the subordinated Robbins Facility exit funding
obligations, and certain of the special-purpose project debt which would allow
such debt to be accelerated. It is unlikely that the Company would be able to
repay such indebtedness.
As a result of the Company's failure to comply with the debt covenants as of
December 28, 2001 and its inability to finalize amended agreements or obtain
waivers for the defaults beyond April 30, 2002, the opinion of the Company's
auditors on the financial statements as of December 28, 2001 notes the
uncertainty of the Company's ability to continue as a going concern.
4
There can be no assurance that the Company will receive further extensions of
the waiver from the required lenders under the Revolving Credit Agreement or
that the Company will be able to enter into a new or amended credit facility.
THE WAIVER GRANTED BY THE REQUIRED LENDERS UNDER THE COMPANY'S REVOLVING CREDIT
AGREEMENT IS SUBJECT TO THE SATISFACTION OF CERTAIN ONGOING CONDITIONS.
The required lenders under the Company's Revolving Credit Agreement waived
certain covenant violations by the Company through April 30, 2002, subject to
the Company's ongoing satisfaction of certain conditions. Failure by the Company
to satisfy the conditions of the waiver would give the required lenders the
right to terminate the waiver and accelerate amounts borrowed under the
Revolving Credit Agreement.
The waiver from the required lenders prohibits the Company from, among other
things, making payments under its $50,000 receivables sale arrangement and its
$33,000 lease financing facility. It also prohibits the Company from making any
additional borrowings thereunder or issuing any letters of credit unless cash
collateralized. The Company has received a waiver from the required lenders
under the receivables sale arrangement through April 29, 2002 and has received
forbearance by the required lenders under the lease financing facility through
April 30, 2002.
There can be no assurance that the Company will be able to negotiate extensions
of the receivables sale arrangement waiver or the lease financing forbearance or
that the Company will be able to enter into replacement facilities for either
the receivables sale arrangement or the lease financing. Failure by the Company
to make the payments required upon expiration of the waiver and forbearance
would have a material adverse effect on the Company's financial condition and
operations.
THE COMPANY MAY BE UNABLE TO GET NEW PERFORMANCE BONDS FROM ITS SURETY ON THE
SAME TERMS AS IT HAS PREVIOUSLY.
It is customary in the industries in which the Company operates to provide
performance bonds in favor of its customers to secure its obligations under
contracts. The Company has traditionally obtained performance bonds from a
surety on an unsecured basis. Due to changes in the surety market as well as
declines in the Company's credit rating, the Company may be required to provide
security to the surety in order to obtain new performance bonds.
If the Company is required to provide letters of credit to secure new
performance bonds, its working capital needs would increase. If it is unable to
provide sufficient collateral to secure the performance bonds, its surety may
not issue performance bonds to support its obligations under certain contracts.
The Company's ability to enter into new contracts would be materially limited if
it were unable to obtain performance bonds. There can be no assurance that the
Company will be able to obtain new performance bonds on either a secured or an
unsecured basis.
LUMP-SUM (FIXED PRICE) CONTRACTS MAY RESULT IN SIGNIFICANT LOSSES IF COSTS ARE
GREATER THAN ANTICIPATED.
Under lump-sum contracts, the Company is required to perform a variety of
services including designing, engineering, procuring, manufacturing and/or
constructing equipment or facilities, for a fixed amount, that is generally not
adjusted to reflect the actual costs incurred by the Company to fulfill its
responsibilities under the contract.
Lump-sum contracts are inherently risky because of the possibility of
underestimating costs and the fact that the Company assumes substantially all of
the risks associated with completing the project and the post-completion
warranty obligations. The Company also assumes the project's technical risk,
meaning that it must tailor its products and systems to satisfy the technical
requirements of a project even though, at the time the project is awarded, the
Company may not have previously produced such a product or system. The revenue,
cost and gross profit realized on such contracts can vary, sometimes
substantially, from the original projections due to changes in a variety of
factors, including but not limited to:
o unanticipated technical problems with the equipment being supplied or
developed by the Company which may require that the Company spend its
own money to remedy the problem;
o changes in the costs of components, materials or labor;
o difficulties in obtaining required governmental permits or approvals;
o the Company announced on April 12, 2002 additional charges for the
fourth quarter of 2001 which will increase the net loss for fiscal
year 2001 announced on January 29, 2002 from $263,100 to $309,100.
o changes in local laws and regulations;
o changes in local labor conditions;
o project modifications creating unanticipated costs;
o delays caused by local weather conditions; and
o suppliers or subcontractors failure to perform.
These risks are exacerbated if the duration of the project is long-term because
there is more time for, and therefore an increased risk that, the circumstances
upon which the Company originally bid and developed a price will change in a
manner that increases its costs. In addition, the Company sometimes bears the
risk of delays caused by unexpected conditions or events. The Company's
long-term, fixed price projects often make the Company subject to penalties if
it cannot complete portions of the project in accordance with agreed-upon time
limits. Therefore, losses can result from
5
performing large, long-term projects on a lump-sum basis. These losses may be
material and could negatively impact the Company's business and results of
operations.
THE COMPANY HAS HIGH WORKING CAPITAL REQUIREMENTS WHICH HAVE A NEGATIVE IMPACT
ON ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The Company's business requires a significant amount of working capital. Among
other things, use of significant amounts of working capital is required to
finance the purchase of materials and performance of engineering, construction
and other work on projects before payment is received from customers.
Working capital requirements may increase when the Company is required to give
its customers more favorable payment terms under contracts to compete
successfully for certain projects. Such terms generally include lower advance
payments and payment schedules that are less favorable to the Company. In
addition, working capital requirements have increased because of delays in
customer payments resulting from challenges to requests for additional payments
under lump-sum contracts which has resulted in the Company financing amounts
required to complete projects while it is involved in lengthy arbitration or
litigation proceedings to recover these amounts. All of these factors may result
or have resulted in increases in the amount of contracts in process and
receivables and short-term borrowings. Continued higher working capital
requirements would materially harm the Company's financial condition and results
of operations.
THERE MIGHT BE POSSIBLE DELAYS OR CANCELLATION OF PROJECTS INCLUDED IN BACKLOG.
The dollar amount of backlog does not necessarily indicate future earnings
related to the performance of that work. Backlog refers to expected future
revenues under signed contracts, contracts awarded but not finalized and 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 may occur. Due to factors outside the Company's control, such
as changes in project schedules, management cannot predict with certainty when
or if backlog will be performed. In addition, even where a project proceeds as
scheduled, it is possible that parties with which the Company has contracted may
default and fail to pay amounts owed. Any delay, cancellation or payment default
could materially harm the Company's cash flow position, revenues and earnings.
THE ESTIMATE OF THE NUMBER OF ASBESTOS-RELATED CLAIMS AND THE LIABILITY FOR
THOSE CLAIMS IS SUBJECT TO A NUMBER OF UNCERTAINTIES.
Some of the Company's subsidiaries are named as defendants in numerous lawsuits
and out-of-court informal claims pending in the United States in which the
plaintiffs claim damages for personal injury arising from exposure to asbestos
in connection with work performed and heat exchange devices assembled, installed
and/or sold by those subsidiaries, and the subsidiaries expect to be named as
defendants in similar suits and claims filed in the future. The Company has made
an estimate that it believes is reliable, however, there can be no assurances
due to the nature and number of variables associated with such claims. The
Company is unable to reliably estimate the ultimate cost of these claims due to
the nature and number of variables associated with such claims. The Company's
estimates of claims-related costs have increased significantly over time. Some
of the factors that may result in increases in the costs of these claims over
current estimates include: the rate at which new claims are filed; the number of
new claimants; the impact of bankruptcies of other companies currently or
historically defending asbestos claims which reduces the number of possible
solvent defendants and may thereby increase the number of claims and the size of
demands against the Company; the uncertainties surrounding the litigation
process from jurisdiction to jurisdiction and from case to case; the impact of
potential changes in legislative or judicial standards, the type and severity of
the disease alleged to be suffered by the claimants, such as the type of cancer,
asbestosis or other illness, and the disease mix of future claims; increases in
defense and/or indemnity payments which have risen in recent years; and the
development of more expensive medical treatments.
The Company's asbestos liability estimates are based only on claims asserted in
the United States. While the Company's subsidiaries have not received any claims
for personal injury damages based on exposure to asbestos relating to work
performed outside of the United States, management does not know what exposure
the subsidiaries would have if such suits develop.
Increases in the number of claims faced or costs to resolve those claims will
cause the Company to increase further the estimates of the costs associated with
asbestos claims and could have a material adverse effect on the business,
financial condition and results of operations.
THE COMPANY'S INSURANCE RECOVERY IN CONNECTION WITH ASBESTOS LITIGATION IS
UNCERTAIN.
6
To date, insurance policies have provided coverage for substantially all of the
costs incurred in connection with resolving asbestos claims. The Company's
ability to continue to recover costs or any portion thereof relating to the
defense and payment of these claims in the future is uncertain and dependent on
a number of factors, including: disputes over coverage issues with insurance
carriers, including current disputes involving allocations of coverage under
certain policies among the insurers and the insureds; the timely reimbursement
of costs by the insurance carriers; insurance policy coverage limits; the timing
and amount of asbestos claims which may be made in the future and whether such
claims are covered by insurance; the financial solvency of the insurers, some of
which are currently insolvent; and the amount which may be paid to resolve those
claims.
These factors are beyond the Company's control and could materially limit
insurance recoveries, which could have a material adverse effect on its
business, financial condition and results of operations.
In the future, the Company may be required to submit claims for reimbursement to
insolvent insurers, including one insurer that has provided policies for a
substantial amount of coverage. Management cannot predict the amount or timing
of such claims.
An agreement with a number of insurers to allow for efficient and thorough
handling of claims against the Company's subsidiaries will not cover claims
filed after June 12, 2001. The Company is currently in negotiations with its
insurers regarding an arrangement for handling asbestos claims filed after June
12, 2001. Failure to agree on a new arrangement may delay the Company's ability
to get reimbursed on a timely basis by the insurers, which could have a material
adverse effect on results of operations and financial condition. In addition,
management cannot predict the effect of the ultimate allocation of coverage
among the insurers and the Company's subsidiaries as to claims filed after June
12, 2001.
CLAIMS MADE BY THE COMPANY AGAINST PROJECT OWNERS FOR PAYMENT HAVE INCREASED
OVER THE LAST FEW YEARS AND FAILURE BY THE COMPANY TO RECOVER ADEQUATELY ON
THESE CLAIMS WOULD HAVE A MATERIAL ADVERSE EFFECT UPON THE COMPANY'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
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 over 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 labor and material costs associated with the performance of the additional
work, as well as indirect costs that may arise due to delays in the completion
of the project, such as increased labor costs resulting from changes in labor
markets. The Company has used significant additional working capital in projects
with cost overruns pending the resolution of the relevant project claims.
Management cannot assure that project claims will not continue to increase.
The portion of project claims that management estimates will be the minimum
amount to be recovered appears on the Company's balance sheet as an asset.
Actual claims the Company has incurred on these projects, however, are
substantially greater than this amount. To the extent that management estimates
recoveries below corresponding estimated costs, a net loss on that portion of
the project is recorded. In addition, if the Company does not recover the
minimum estimated amounts on current project claims, then it will have to
write-down the value of the project claim asset and take a corresponding charge
against earnings. Any such write-down and charge could have a material adverse
effect on the Company's financial condition and results of operations. In the
fourth quarter of 2001, the Company recorded approximately $24,100 in after-tax
contract-related charges as a result of claims reassessment conducted by the
Company's legal staff in conjunction with outside counsel.
The Company also faces a number of counterclaims brought against it by certain
project owners in connection with several of the project claims described above.
If the Company is found liable for any of these counterclaims, such liability
may also result in write-downs and charges against the Company's earnings to the
extent a reserve is not established.
FOSTER WHEELER GUARANTEES CERTAIN OBLIGATIONS OF ITS SUBSIDIARIES.
Foster Wheeler is required by its customers to guarantee the performance of
contracts by its subsidiaries. If its subsidiaries default on these performance
obligations, the Company will be obligated to pay damages to the customer. In
the aggregate, these agreements represent a material contingent liability.
THE COMPANY CONCENTRATES IN PARTICULAR INDUSTRIES.
7
The Company derives a significant amount of its revenues from services provided
to corporations that are concentrated in five industries: power, oil and gas,
pharmaceuticals, environmental and chemical/petrochemical. Unfavorable economic
or other developments in one or more of these industries could adversely affect
these customers and could have a material adverse effect on the Company's
financial condition and results of operations.
THE COMPANY'S INTERNATIONAL OPERATIONS INVOLVE RISKS.
The Company has substantial international operations which are conducted through
foreign and domestic subsidiaries as well as through agreements with foreign
joint venture partners. The Company's international projects accounted for
approximately 60% of its fiscal year 2001 operating revenues. The Company has
international operations around the world including operations in China, Poland
and Thailand. Its foreign operations are subject to risks, including:
o uncertain political, legal and economic environments;
o potential incompatibility with foreign joint venture partners;
o foreign currency controls and fluctuations;
o terrorist attacks against facilities owned or operated by U.S.
companies;
o civil disturbances; and
o labor problems.
Events outside of the Company's control may limit or disrupt operations,
restrict the movement of funds, result in the loss of contract rights, increase
foreign taxation or limit repatriation of earnings. In addition, in some cases,
applicable law and joint venture or other agreements may provide that each joint
venture partner is jointly and severally liable for all liabilities of the
venture. These events and liabilities could have a material adverse effect on
the Company's business and results of operations.
THE COMPANY MAY ENCOUNTER DIFFICULTY IN MANAGING THE BUSINESS DUE TO THE GLOBAL
NATURE OF ITS OPERATIONS.
Foster Wheeler operates in more than 30 countries around the world, with
approximately 6,000, or 60%, of its employees located outside of the United
States. In order to manage its day-to-day operations, the Company must overcome
cultural and language barriers and assimilate different business practices. In
addition, the Company is required to create compensation programs, employment
policies and other administrative programs that comply with the laws of multiple
countries. The Company's failure to successfully manage its geographically
diverse operations could impair its ability to react quickly to changing
business and market conditions and compliance with segment-wide standards and
procedures.
THE COMPANY MAY BE UNABLE TO ACCOMPLISH ITS BUSINESS STRATEGY.
The Company's ability to accomplish its business strategy is subject to many
factors beyond its control. Foster Wheeler cannot give any assurances that it
will be successful in its attempts to increase revenues, introduce new products,
decrease costs, increase its client base, achieve desirable contracts or reduce
its leverage. These goals depend in part on global economic growth, economic
activity within certain markets, regulatory environment, the demand for its
products and the efforts of its competitors. Additionally, one element of its
strategy of reducing leverage depends on its ability to monetize certain
non-core assets. There can be no assurance that efforts to monetize these assets
will be successful. Even if successful, the price received for certain of these
assets may require the Company to report a loss on the sale if the book value is
higher than the price received.
THE COMPANY IS ENGAGED IN HIGHLY COMPETITIVE BUSINESSES AND OFTEN MUST BID
AGAINST COMPETITORS TO OBTAIN ENGINEERING, CONSTRUCTION AND SERVICE CONTRACTS.
The Company is engaged in highly competitive businesses in which customer
contracts are often awarded through bidding processes based on price and the
acceptance of certain risks. The Company competes with other general and
specialty contractors, both foreign and domestic, including large international
contractors and small local contractors. Some competitors have greater financial
and other resources than Foster Wheeler. In some instances this could give them
a competitive advantage.
THE COMPANY'S PUBLICLY AVAILABLE EARNINGS ESTIMATES ARE SUBJECT TO MANY
UNCERTAINTIES.
8
The Company can make no assurances that its publicly available earnings
estimates will be achieved. The Company announced on April 12, 2002 additional
charges for the fourth quarter 2001 which will increase the net loss for fiscal
year 2001 announced on January 29, 2002 from $263,100 to $309,000. Earnings
estimates are subject to change due to many uncertainties including:
o changes in the rate of economic growth in the United States and other
major economies;
o changes in investment by the power, oil and gas, pharmaceutical,
chemical/petrochemical and environmental industries;
o changes in regulatory environment;
o changes in project schedules;
o errors in the estimates made by the Company of costs to complete a
project;
o changes in trade, monetary and fiscal policies worldwide;
o currency fluctuations;
o outcomes of pending and future litigation, including litigation
regarding its liability for damages caused by asbestos exposure;
o the Company's ability to borrow and increases in the cost of
borrowings;
o protection and validity of patents and other intellectual property
rights; and
o increasing competition by foreign and domestic companies.
The Company's earnings estimates were not prepared with a view toward compliance
with published guidelines of the Securities and Exchange Commission, the
American Institute of Certified Public Accountants or generally accepted
accounting principles. No independent accountants have expressed an opinion or
any other form of assurance on these estimates. Earnings estimates are subject
to uncertainty. It can be expected that one or more of the estimates will vary
significantly from actual results, and such variances will be greater with
respect to estimates covering longer periods. Such variances at any time may be
material and adverse.
A FAILURE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD HAVE AN ADVERSE EFFECT
ON THE COMPANY.
The Company's ability to attract and retain qualified engineers, scientists and
other professional personnel, either through direct hiring or acquisition of
other firms employing such professionals, will be an important factor in
determining its future success. The market for these professionals is
competitive, and there can be no assurance that it will be successful in its
efforts to attract and retain such professionals. In addition, the Company's
success depends in part on its ability to attract and retain skilled laborers.
Demand for these workers is currently high and the supply is extremely limited.
The Company's failure to attract or retain such workers could have a material
adverse effect on its business and results of operations.
FOSTER WHEELER IS SUBJECT TO ENVIRONMENTAL LAWS AND REGULATIONS IN THE COUNTRIES
IN WHICH IT OPERATES.
The Company's operations are subject to U.S., European and other laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws include U.S. federal
statutes such as the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), the
Clean Water Act, the Clean Air Act and similar state and local laws, and
European laws and regulations including those promulgated under the Integrated
Pollution Prevention and Control Directive issued by the European Union in 1996
and the 1991 directive dealing with waste and hazardous waste and laws and
regulations similar to those in other countries in which the Company operates.
Both the E&C Group and the EE Group, make use of and produce as byproducts
substances that are considered to be hazardous under the laws and regulations
referred to above. The Company may be subject to liabilities for environmental
contamination if it does not comply with applicable laws regulating such
hazardous substances, and such liabilities can be substantial.
In addition, the Company may be subject to significant fines and penalties if it
does not comply with environmental laws and regulations including those referred
to above. Some environmental laws, including CERCLA, provide for joint and
several strict liability for remediation of releases of hazardous substances
which could result in a liability for environmental damage without regard to
negligence or fault. Such laws and regulations could expose the Company to
liability arising out of the conduct of operations or conditions caused by
others, or for acts which were in compliance with all applicable laws at the
time the acts were performed. Additionally, the Company may be subject to claims
alleging personal injury or property damage as a result of alleged exposure to
hazardous substances. Changes in the environmental
9
laws and regulations, or claims for damages to persons, property, natural
resources or the environment, could result in material costs and liabilities.
ANTI-TAKEOVER PROVISIONS IN THE COMPANY'S BYE-LAWS AND THE COMPANY'S
SHAREHOLDERS' RIGHTS PLAN MAY DISCOURAGE POTENTIAL ACQUISITION BIDS.
Provisions in the Company's bye-laws and its shareholders' rights plan could
discourage unsolicited takeover bids from third parties and make removal of
incumbent management difficult. As a result, it may be less likely that
shareholders will receive a premium price for their shares in an unsolicited
takeover by another party. These provisions include:
o two-thirds of all shareholders must vote in favor of any merger;
o a classified board of directors; and
o a potential acquirer's interest in the Company may be diluted as a
result of the operation of the shareholders' rights plan.
The Company's board of directors may issue preferred shares and determine their
rights and qualifications. The issuance of preferred shares may delay, defer or
prevent a merger, amalgamation, tender offer or proxy contest involving the
Company. This may cause the market price of the Company's common shares to
significantly decrease.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES:
See Note 22 to Financial Statements in this Form 10-K.
10
ITEM 2. PROPERTIES
COMPANY (BUSINESS SEGMENT*) BUILDING LEASE
AND LOCATION USE LAND AREA SQUARE FEET EXPIRES(6)
- ------------ --- --------- ----------- ----------
FOSTER WHEELER REALTY SERVICES, INC. (CF)
Livingston, New Jersey General office & engineering 31.0 acres 288,000 (1)
Union Township, New Jersey Undeveloped 203.8 acres --
General office & engineering 29.4 acres 294,000
General office & engineering 21.0 acres 292,000 2002
Storage and reproduction facilities 10.8 acres 30,400
Livingston, New Jersey Research center 6.7 acres 51,355
Bedminster, New Jersey Office 10.7 acres 135,000(1)(2)
Bridgewater, New Jersey Undeveloped 21.9 acres(5) --
FOSTER WHEELER ENERGY CORPORATION (EE)
Dansville, New York Manufacturing & offices 82.4 acres 513,786
San Diego, California General offices 12,673 2005
FOSTER WHEELER USA CORPORATION (EC)
Houston, Texas General offices -- 107,890 2003
Houston, Texas General offices -- 11,112 2003
FOSTER WHEELER IBERIA, S.A.
Madrid, Spain (EC)/(EE) Office & engineering 5.5 acres 110,000 2015
Tarragona, Spain (EE) Manufacturing & office 25.6 acres 77,794
FOSTER WHEELER FRANCE, S.A. (EC)
Paris, France Office & engineering -- 80,000 2006
Paris, France Archive storage space -- 12,985 2006
FOSTER WHEELER INTERNATIONAL CORP. (THAILAND BRANCH) (EC)
Sriracha, Thailand Office & engineering -- 28,000 2003
FOSTER WHEELER CONSTRUCTORS, INC. (EC)
McGregor, Texas Storage facilities 15.0 acres 24,000
FOSTER WHEELER LIMITED (UNITED KINGDOM) (EC)
Glasgow, Scotland Office & engineering 2.3 acres 28,798
Reading, England Office & engineering -- 84,123(1) 2002/2009
12
COMPANY (BUSINESS SEGMENT*) BUILDING LEASE
AND LOCATION USE LAND AREA SQUARE FEET EXPIRES(6)
- ------------ --- --------- ----------- ----------
Reading, England Office & engineering 14.0 acres 365,521 2024
Reading, England Undeveloped 12.0 acres --
Teeside, England Office & engineering -- 18,100 2002/2014
FOSTER WHEELER LIMITED (CANADA) (EE)
Niagara-On-The-Lake, Ontario Office & engineering -- 39,684 2003
FOSTER WHEELER ANDINA, S.A. (EC)
Bogota, Colombia Office & engineering 2.3 acres 26,000
FOSTER WHEELER POWER MACHINERY COMPANY LIMITED (EE)
Xinhui, Guangdong, China Manufacturing & office 29.2 acres 272,537(3) 2045
FOSTER WHEELER ITALIANA, S.P.A. (EC)
Milan, Italy (via S. Caboto,1) Office & engineering -- 161,400 2007
Milan, Italy (via S. Caboto,7) Office & engineering -- 121,870 2002
FOSTER WHEELER BIRLESIK INSAAT VE MUHENDISLIK A.S. (EC)
Istanbul, Turkey Engineering & office -- 26,000 2002
FOSTER WHEELER EASTERN PRIVATE LIMITED (EC)
Singapore Office & engineering -- 29,196 2002
FOSTER WHEELER ENVIRONMENTAL CORPORATION (EC)
Atlanta, Georgia General offices -- 15,623 2004
Bothell, Washington General offices -- 39,125 2005
Boston, Massachusetts General offices -- 20,875 2005
Lakewood, Colorado General offices -- 19,140 2005
Langhorne, Pennsylvania General offices -- 18,202 2005
Morris Plains, New Jersey General offices -- 59,710 2005
Oak Ridge, Tennessee General offices -- 17,973 2004
Richland, Washington General offices -- 14,577 2002
San Diego, California General offices -- 12,957 2006
San Diego, California General offices -- 20,016 2005
Santa Ana, California General offices -- 19,569 2005
12
COMPANY (BUSINESS SEGMENT*) BUILDING LEASE
AND LOCATION USE LAND AREA SQUARE FEET EXPIRES(6)
- ------------ --- --------- ----------- ----------
FOSTER WHEELER POWER SYSTEMS, INC. (EE)
Martinez, California Cogeneration plant 6.4 acres --
Charleston, South Carolina Waste-to-energy plant 18.0 acres -- 2010
Hudson Falls, New York Waste-to-energy plant 11.2 acres --
Camden, New Jersey Waste-to-energy plant 18.0 acres -- 2011
Talcahuano, Chile Cogeneration plant-facility site 21.0 acres -- 2028
FOSTER WHEELER ENERGIA OY (EE)
Varkhaus, Finland Manufacturing & offices 22.0 acres 366,527
Karhula, Finland Research center 12.8 acres 15,100 2095
Office and laboratory 57,986 2095
Kaarina, Finland Office -- 24,762 2002
Helsinki, Finland Office -- 13,904 2005
Kouvola, Finland Undeveloped 1.9 acres -- --
Office 1.5 acres -- 2032
Norrkoping, Sweden Manufacturing & offices -- 26,000 2002
FOSTER WHEELER ENERGY FAKOP LTD. (EE)
Sosnowiec, Poland Manufacturing & offices 26.6 acres 474,575(4)
*Designation of Business Segments: EC - Engineering and Construction Group
EE - Energy Equipment Group
CF - Corporate & Financial Services
(1) Portion or entire facility leased or subleased to third parties.
(2) 50% ownership interest.
(3) 52% ownership interest.
(4) 51% ownership interest.
(5) 75% ownership interest.
(6) Represents leases in which Foster Wheeler is the lessee.
Locations of less than 10,000 square feet are not listed. Except as noted above,
the properties set forth are owned in fee. All or part of the listed properties
may be leased or subleased to other affiliates. All properties are in good
condition and adequate for their intended use.
13
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries, along with many other companies, are
codefendants in numerous asbestos related 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 allegedly performed by
the Company and its subsidiaries during the 1970's and prior. For additional
information on the asbestos claims and other material litigation affecting the
Company, see Item 7. "Managements Discussion and Analysis of Financial Condition
and Results of Operations - Significant Accounting Policies" and Note 18 to the
Financial Statements in this Form 10-K.
Under 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 (an "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 material costs.
The Company is aware of potential environmental liabilities at facilities that
it acquired in Europe, but the Company has the benefit of an indemnity from the
seller of such facilities with respect to any required remediation or other
environmental violations that it believes will address the costs of any such
remediation or other required environmental measures. The Company also may
receive claims, pursuant to indemnity obligations from owners of recently sold
European facilities that may require the Company to incur costs for
investigation and/or remediation. Based on currently 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, that would
require the Company to incur material expenditures to investigate and/or
remediate such conditions.
The Company has been notified that it was a potentially responsible party (a
"PRP") under CERCLA or similar state laws at three off-site facilities. 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 three off-site
facilities as to which it has received a notice of potential liability will
individually exceed $1.0 million.
Several of the Company's former subsidiaries associated with a waste-to-energy
plant located in the Village of Robbins, Illinois (the "Robbins Facility")
received a Complaint for Injunction and Civil Penalties from the State of
Illinois, dated April 28, 1998 (amended in July 1998) alleging primarily state
air act violations at the Robbins Facility (PEOPLE OF THE STATE OF ILLINOIS V.
FOSTER WHEELER ROBBINS, INC. filed in the Circuit Court of Cook County,
Illinois, County Department, Chancery Division). The United States Environmental
Protection Agency commenced a related enforcement action at approximately the
same time. (EPA-5-98-IL-12 and EPA-5-98-IL-13). Although the actions seek
substantial civil penalties for numerous violations of up to $50,000 for each
violation with additional penalty of $10,000 for each day of each violation, the
maximum allowed under the statute, and an injunction against continuing
violations, the former subsidiaries have reached an agreement in principle with
the government on a Consent Decree that will resolve all violations. The
Company's liability if any, is not expected to be material.
A San Francisco, California jury returned a verdict on March 26, 2002 finding
Foster Wheeler liable for $10.6 million 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
15
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 intends to move to set aside this 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. 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. As previously reported by the Company, 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 $54.3 million 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. Tray Inc. has filed a notice of appeal to the court of appeals.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G (3) of Form 10-K information regarding
executive officers is included in PART I.
The executive officers of Foster Wheeler, with the exceptions of Raymond J.
Milchovich and Gilles A. Renaud, have each held executive positions with Foster
Wheeler or its subsidiaries for more than the past five years.
NAME AGE POSITION
---- --- --------
Raymond J. Milchovich 52 Chairman, President and Chief Executive Officer
Henry E. Bartoli 55 Senior Vice President
Thomas R. O'Brien 63 General Counsel and Senior Vice President
Gilles A. Renaud 55 Senior Vice President and Chief Financial Officer
James E. Schessler 56 Senior Vice President
Lisa Fries Gardner 45 Vice President and Secretary
Robert D. Iseman 53 Vice President and Treasurer
Thomas J. Mazza 48 Vice President and Controller
Mr. Raymond J. Milchovich has been the Chairman, President and Chief Executive
Officer of the Company since October 22, 2001. Formerly, he was the Chairman,
President and Chief Executive Officer of Kaiser Aluminum Corporation, a leading
producer and marketer of alumina, aluminum and aluminum fabricated products, and
Kaiser Aluminum & Chemical Corporation ("KACC") since January 2000. Mr.
Milchovich was President of Kaiser Aluminum Corporation and KACC since July
1997. He also served as Chief Operating Officer of Kaiser Aluminum Corporation
and of KACC from July 1997 through May and June 2000, respectively. Prior to
that time, he held several executive positions with Kaiser Aluminum Corporation
and its subsidiaries.
Mr. Gilles A. Renaud was elected Senior Vice President and Chief Financial
Officer of the Company effective March 27, 2000. Prior to assuming this position
with the Company, Mr. Renaud was Vice President and Treasurer of United
Technologies Corporation from July 1996 to March 2000. From September 1987 to
June 1996, Mr. Renaud was Vice President and Chief Financial Officer of Carrier
Corporation, a subsidiary of United Technologies Corporation.
Each officer holds office for a term running until the Board of Directors
meeting following the Annual Meeting of Shareholders and until his or her
successor is elected and qualified. Mr. Milchovich has a five year employment
agreement with the Company, which expires in November 2006, and all other
executive officers of the Company have a Transitional Executive Severance
Agreement which runs through December 31, 2003, except in case of Mr. Renaud,
where certain provision run through March 26, 2004 in accordance with his
employment agreement. There are no family relationships between the officers
listed above. There are no arrangements or understandings between any of the
listed officers and any other person, pursuant to which he or she was elected as
an officer.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange. The number
of shareholders of record as of December 28, 2001 was 6,207.
THREE MONTHS ENDED
--------------------------------------------
2001 MARCH 30 JUNE 29 SEPT. 28 DEC. 28
- ---- -------- ------- -------- -------
Cash dividends per share .............. $ .06 $ .06 -- --
Stock prices:
High ................................ $ 18.74 $ 17.75 $ 9.50 $ 5.83
Low ................................. $ 5.3125 $ 7.20 $ 4.30 $ 3.93
THREE MONTHS ENDED
--------------------------------------------
2000 MARCH 31 JUNE 30 SEPT. 29 DEC. 29
- ---- -------- ------- -------- -------
Cash dividends per share .............. $ .06 $ .06 $ .06 $ .06
Stock prices:
High ............................... $ 9.50 $ 9.4375 $ 8.8125 $ 8.4375
Low ................................ $5.1875 $ 5.8125 $ 6.25 $ 3.9375
In July 2001, the common stock dividend was discontinued by the Board of
Directors of the Company.
18
ITEM 6. SELECTED FINANCIAL DATA
COMPARATIVE FINANCIAL STATISTICS
(In Thousands, Except per Share Amounts)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues .................................... $ 3,392,474 $ 3,969,355 $ 3,944,074 $ 4,596,992 $ 4,172,015
(Loss)/earnings before income taxes ......... (206,005) 56,023 (190,526) 47,789 19,516
Provision/(benefit) for income taxes ........ 103,138 16,529 (46,891) 79,295 13,892
Net (loss)/earnings ......................... (309,143)(1)(2) 39,494 (143,635)(4) (31,506)(5) 5,624(6)(7)
Loss)/earnings per share:
Basic ..................................... $ (7.56) $ .97 $ (3.53) $ (.77) $ .14
Diluted ................................... $ (7.56) $ .97 $ (3.53) $ (.77) $ .14
Shares outstanding:
Basic:
Weighted average number of shares outstanding 40,876 40,798 40,742 40,729 40,677
Diluted:
Effect of stock options ............... * 7 * * 127
----------- ----------- ----------- ----------- -----------
Total diluted ............................ 40,876 40,805 40,742 40,729 40,804
=========== =========== =========== =========== ===========
Current assets .............................. $ 1,754,376 $ 1,622,976 $ 1,615,096 $ 1,672,842 $ 1,545,271
Current liabilities ......................... 2,388,620 1,454,603 1,471,552 1,491,666 1,412,302
Working capital ............................. (634,244) 168,373 143,544 181,176 132,969
Land, buildings and equipment (net) ......... 399,198 495,034 648,199 676,786 621,336
Total assets ................................ 3,316,379 3,477,528 3,438,109 3,322,301 3,186,731
Bank loans .................................. 20,244 103,479 63,378 107,051 53,748
Long-term borrowings (including current
installments):
Corporate and other debt ................. 297,627(3) 306,188 372,921 541,173 445,836
Project debt ............................. 226,056(3) 274,993 349,501 314,303 281,360
Subordinated Robbins Facility exit funding
obligations ............................... 110,340(3) 111,715 113,000 -- --
Convertible subordinated notes .............. 210,000(3) -- -- -- --
Preferred trust securities .................. 175,000(3) 175,000 175,000 -- --
Cash dividends per share of common stock .... $ .12 $ .24 $ .54 $ .84 $ .835
Other data:
Unfilled orders, end of year ................ $ 6,004,420 $ 6,142,347 $ 6,050,525 $ 7,411,907 $ 7,184,628
New orders booked ........................... 4,109,321 4,480,000 3,623,202 5,269,398 5,063,940
(1) Includes in 2001, contract write-downs of $160,600 ($104,400 after tax);
restructuring cost of $41,600 ($27,000 after tax) and a reserve for
deferred tax assets of $171,900.
(2) Includes in 2001, loss on sale of cogeneration plants of $40,300 ($27,900
after tax) increased pension cost of $5,000 ($3,300 after tax) and a
provision for CEO retirement of $2,700 ($1,800 after tax).
(3) The corporate and other debt, the subordinated Robbins Facility exit
funding obligations, the convertible subordinated notes, the preferred
trust securities and $88,201 of the project debt have been classified as
current liabilities and are included in the $2,388,620 total current
liabilities balance due to the covenant violations under the Company's
Revolving Credit Agreement and the potential for acceleration of debt
under these various debt agreements. See Note 1 to Financial Statements
for further information.
(4) Includes in 1999 a provision of $37,600 ($27,600 after tax) for cost
realignment and a charge totaling $244,600 ($173,900 after tax) of which
$214,000 relates to the Robbins Facility write-down and $30,600 relates
to the current year operations of the Robbins Facility.
(5) Includes in 1998 a charge for the Robbins Facility of $72,800 ($47,300
after tax) of which $47,000 relates to the Robbins Facility write-down
and $25,800 relates to the current year operations and a provision of
$61,300 for an increase in the income tax valuation allowance for a total
after-tax charge of $108,600.
(6) Includes in 1997 a net charge of $50,900 ($37,400 after tax) consisting
of the following pretax items: gain on sale of Glitsch International,
Inc.'s operations $56,400; provision for reorganization costs of the
Energy Equipment Group $32,000; write-downs of long-lived assets $6,500;
contract write-downs $24,000 (Engineering & Construction Group) and
$30,000 (Energy Equipment Group); and realignment of the Engineering &
Construction Group's European operations $14,800.
(7) Includes in 1997 an operating loss for the Robbins Facility of $38,900
($25,300 after tax).
* The effect of the stock options were not included in the calculation of
diluted earnings per share as these options were antidilutive due to the
2001, 1999 and 1998 losses. In 2001, the effect of the convertible notes
was not included in the calculation as the effect was antidilutive.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Thousands of Dollars, Except per Share Amounts)
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Annual Report contain forward-looking
statements that are based on management's assumptions, expectations and
projections about the various industries within which the Company operates. 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 such as: changes
in the rate of economic growth in the United States and other major
international economies, changes in investment by the power, oil and gas,
pharmaceutical, chemical/petrochemical and environmental industries, changes in
regulatory environment, changes in project schedules, changes in trade, monetary
and fiscal policies worldwide, currency fluctuations, terrorist attacks on
facilities either owned or where equipment or services are or may be provided,
outcomes of pending and future litigation including litigation regarding the
Company's liability for damages and insurance coverage for asbestos exposure,
protection and validity of patents and other intellectual property rights and
increasing competition by foreign and domestic companies, monetization of
certain facilities and recoverability of claims against customers. For
additional information, see Item 1. "Business - Risk Factors of the Business".
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
THREE YEARS ENDED DECEMBER 28, 2001
RESULTS OF OPERATIONS
CONSOLIDATED DATA
2001 2000 1999
---- ---- ----
Unfilled orders..................... $ 6,004,400 $6,142,300 $6,050,500
New orders.......................... 4,109,300 4,480,000 3,623,200
Revenues............................ 3,392,500 3,969,400 3,944,100
Net (loss)/earnings................. (309,100) 39,500 (143,600)
(Loss)/earnings per share:
Basic and diluted.............. (7.56) .97 (3.53)
In the fourth quarter of 2001, the Company took after-tax contract and
restructuring charges of $131,400 and established a valuation allowance for
deferred tax assets of $171,900 for a total after-tax charge of $303,300. Shown
below is a table that details the pretax and after-tax impact of the various
components of the charge.
PRE-TAX AFTER TAX
------- ---------
Contract Related:
HRSGs (a) $ 84,400 $ 54,800
Warranty and Rework (b) 11,100 7,200
Accounts receivable-trade (c) 28,100 18,300
Claims Reassessment (d) 37,000 24,100
------ ------
160,600 104,400
------- -------
Restructuring:
Company-owned life insurance
plan Termination (e) 20,000 13,000
Other Restructuring (e) 21,600 14,000
Increase in Valuation Allowance
for Deferred Tax Assets (f): - 171,900
------------- -------------
Total $ 202,200 $ 303,300
============ =============
20
a) Approximately $54,800 after-tax relates to heat recovery steam generators
("HRSG's"). During 2000 and early 2001, the Company had been extremely
successful in marketing these products, however, it was determined that
the Company had underestimated the cost on seven contracts. The cost
underestimates were primarily related to construction and subcontracted
fabrication. Corrective action was taken on these projects resulting in a
$54,800 after-tax charge. This product line is part of the Energy
Equipment Group.
b) Warranty and rework issues for one project resulted in an after-tax cost
of $7,200 in the E&C Group. This cost related to a technical production
issue on a refinery unit.
c) During the fourth quarter, the Company made an aggressive commitment to
either collect the cash due or establish reserves for past due
receivables. The Company was successful in collecting some trade
receivables, which contributed to the improved cash position in the fourth
quarter. Based on a variety of factors, including clients' ability to pay,
a decision was made to establish after-tax reserves of $18,300 for
approximately 20 receivable balances. The largest was for an Indonesian
customer in the amount of $4,000.
d) Approximately $24,100 in after-tax contract-related charges resulted from
claims reassessment conducted by the Company's legal staff in conjunction
with outside counsel. The claims have been brought by the Company against
its customers and many were in the process of being submitted for
litigation or arbitration.
e) The Company also recorded an after-tax restructuring charge of $27,000
which included $14,000 for workforce reductions in the United States and
subsidiary closures to be finalized in early 2002. The Company also
canceled a company-owned life insurance plan ("COLI") for certain managers
resulting in a $13,000 after-tax charge to earnings.
f) The Company established a valuation allowance of $171,900 primarily for
domestic deferred tax assets under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
("SFAS 109"). Such action is required when there is evidence of losses
from domestic operations in the three most recent fiscal years. As a
result of the fourth quarter charge, the Company on average experienced
losses during the past three years. For statutory purposes, the majority
of the tax benefits for which the valuation allowance was provided in the
current year, do not begin to expire until 2020 and beyond, based on the
current tax laws.
In aggregate, the future cash impact of all of these charges and the tax
reserve is slightly positive, primarily due to proceeds to be received in
2002 from the cancellation of the company-owned life insurance plan.
Subsequent to year-end and prior to the issuance of the financial statements,
the Company performed a further review of the North American Energy Equipment
Group projects, primarily HRSG contracts. At that time, it was determined that
incremental losses were required to be taken in fiscal 2001 as a result of
changes in the estimated final costs of these projects. The Company recorded the
incremental charge of $46,000, primarily related to construction activities.
This charge is included in the amounts discussed above.
The Company's continuing business strategy is to maintain focus on its core
business segments in engineering and construction and energy equipment. In order
to remain competitive in these segments while improving margins, during 1999 and
2000 the Company reduced costs through staff reduction and closure of some
smaller operating facilities. These changes included the reduction of
approximately 1,600 permanent positions, including 500 overhead and other
support positions from its worldwide workforce. In addition, approximately 800
agency personnel within the E&C Group were eliminated during the course of
fiscal 1999. The positions eliminated included engineering, clerical, support
staff and manufacturing personnel.
In connection with this cost realignment plan, the Company recorded charges in
the third quarter of 1999 of approximately $37,600 ($27,600 after-tax). The
pre-tax charge by group was as follows: $19,600 for the Engineering &
Construction Group, $2,500 for the Energy Equipment Group and $15,500 for
Corporate and Financial Services. Approximately $22,600 represented employee
severance costs. The related benefits and the balance represented asset
write-downs and provisions for closing some offices. The plan was completed
prior to the end of the first quarter 2000, with no additional charges being
recorded.
On October 21, 1999, the Company announced it had reached an agreement (the
"Robbins Agreement") with the holders of approximately 80% of the principal
amount of bonds issued in connection with the financing of the Robbins Facility.
Under the Robbins Agreement, the $320,000 aggregate principal amount of existing
bonds were exchanged for $273,000 aggregate principal amount of new bonds on
February 3, 2000, $113,000 of which (the "Company-supported Robbins Bonds") will
be funded by payments from the Company and the balance of which (the
"Non-recourse Robbins Bonds") will be non-recourse to the Company. In addition,
pursuant to the Robbins Agreement the Company exited from its
20
operating role in respect to the Robbins Facility.
Specific elements of the Robbins Agreement are as follows:
o The new Company-supported Robbins Bonds consist of (a) $95,000 aggregate
principal amount of 7.25% amortizing term bonds, $17,800 of which mature on
October 15, 2009 and $77,200 of which mature on October 15, 2024 (see Note
11 to Financial Statements for sinking fund requirements) (the "1999C
Bonds") and (b) $18,000 aggregate principal amount of 7% accretion bonds
maturing on October 15, 2009 with all interest to be paid at maturity (the
"1999D Bonds");
o The Company agreed to operate the Robbins Facility for the benefit of the
bondholders until the earlier of the sale of the Robbins Facility or
October 15, 2001, on a full-cost reimbursable basis with no operational or
performance guarantees;
o Any remaining obligations of the Company under a $55,000 additional credit
support facility in respect of the existing bonds were terminated;
o The Company would continue to prosecute certain pending litigation (the
"Retail Rate Litigation") against various officials of the State of
Illinois (See Note 18 to Financial Statements, "Litigation and
Uncertainties"); and
o The Company would cooperate with the bondholders in seeking a new
owner/operator for the Robbins Facility.
On December 1, 1999, three special purpose subsidiaries of the Company commenced
reorganization proceedings under Chapter 11 of the 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
terms of 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 companies through a Delaware business trust which owns 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. In 2002, a subsidiary of the
Company reached an agreement with the debtor project companies and the requisite
holders of the bonds which agreement is expected to favorably resolve any issues
related to the exit from the project.
In the fourth quarter of 1999, the Company recorded a pre-tax charge of
approximately $214,000. This charge fully recognized all existing obligations of
the Company related to the Robbins Facility, including (a) pre-tax lease expense
of $45,600, (b) $20,400 of outstanding bonds issued in conjunction with the
equity financing of the Robbins Facility and (c) transaction expenses of $4,500.
The liability for all of the Company-supported bonds were recorded at the net
present value of $133,400 with $113,000 being subordinated obligations and
$20,400 as senior Company obligations. The Company is considered to be the
primary obligor on these bonds. The ongoing legal expenses relating to the
Retail Rate Litigation (See Note 18 to Financial Statements, "Litigation and
Uncertainties") are expensed as incurred.
The Company's consolidated unfilled orders at the end of fiscal 2001 were
$6,004,400, a decrease of $137,900 over the amount reported for the end of
fiscal 2000 of $6,142,300 which in turn represented an increase of $91,800 from
unfilled orders at the end of fiscal 1999 of $6,050,500. The dollar amount of
unfilled orders is not necessarily indicative of the future earnings of the
Company related to the performance of such work. Although unfilled orders
represent only business which is considered firm, there can be no assurance that
cancellations or scope adjustments will not occur. Due to additional factors
outside of the Company's control, such as changes in project schedules, the
Company cannot predict with certainty the portion of unfilled orders which may
not be performed. Unfilled orders have been adjusted to reflect project
cancellations, deferrals and revised project scopes and costs. The net reduction
in unfilled orders from project adjustments and cancellations for fiscal 2001
was $781,900, compared with $279,900 in fiscal 2000 and $880,100 in fiscal 1999.
The large size and uncertain timing of projects can create variability in the
Company's contract awards, and therefore, future award trends are difficult to
predict.
New orders awarded for fiscal 2001 ($4,109,300) were 8% lower than new orders
awarded for fiscal 2000 ($4,480,000) which in turn were 24% higher than new
orders awarded in fiscal 1999 ($3,623,200). A total of 55% of new orders in
fiscal 2001 were for projects awarded to the Company's subsidiaries located
outside of the United States as compared to
21
63% in fiscal 2000 and 55% in fiscal 1999. Key geographic regions outside of the
United States contributing to new orders awarded in fiscal 2001 were Europe,
Asia and the Middle East.
Operating revenues of $3,315,300 in fiscal 2001 represent a decrease of $576,100
or 14.8% compared to 2000. The 2000 revenues of $3,891,400 were approximately
the same as 1999. The decrease in 2001 related primarily to a decrease in
flow-through costs and a shift in the United Kingdom towards reimbursable
service-only contracts.
Gross earnings from operations, which are equal to operating revenues minus the
cost of operating revenues ("gross earnings") decreased $174,900 or 53.6% in
fiscal 2001 as compared to fiscal 2000, to $151,300 from $326,200 which was an
increase of approximately 9.5% from fiscal 1999. The gross earnings in 2001 were
reduced by $160,600 due to the fourth quarter charge to earnings previously
discussed. The gross earnings in 1999 were reduced by the Robbins operating loss
of $23,500 and the cost realignment of $17,500.
Selling, general and administrative expenses increased $3,100, or 1.4% in fiscal
2001 as compared to fiscal 2000 to $222,500 from $219,400, which in turn
represented a decrease of $16,200 from expenses reported in fiscal 1999 of
$235,600. The $3,100 increase in 2001 includes severance costs of approximately
$2,000, which were included in the fourth quarter charge. The decrease for 2000
was primarily due to the cost reduction plan implemented in 1999, as well as
lower proposal costs in both the Engineering and Construction Group and the
Energy Equipment Group.
Other income in fiscal 2001 of $77,200 was approximately the same as fiscal 2000
of $78,000 and in 1999 of $77,000.
Other deductions in fiscal 2001 increased by $80,700 from fiscal 2000. The
primary reasons for the 2001 increase were the fourth quarter loss on the sale
of the Mt. Carmel co-generation facility of $35,300; the second quarter loss on
the sale of two hydrogen production plants of $5,000; the fourth quarter
restructuring cost of $39,300; and increased pension and postretirement cost of
$8,000. These were partially offset by non-recurrence of the 2000 provision for
a French lawsuit regarding an indemnity that was given to the purchaser of a
former Foster Wheeler subsidiary in the amount of $6,000. Other deductions in
fiscal 2000 decreased by $900 from fiscal 1999.
The tax provision for fiscal 2001 was $103,100 on losses before tax of $206,000.
The change from a benefit of $68,800 to a provision of $103,100 was primarily
due to the establishment of a valuation allowance for domestic deferred tax
assets of $171,900 in the fourth quarter of 2001. The establishment of a
valuation allowance was required under the provisions of SFAS 109 due to the
cumulative losses incurred domestically in the three years ended December 28,
2001. For statutory purposes, the majority of the domestic federal tax benefits,
against which reserves are being taken, do not expire until 2020 and beyond,
based on current tax laws. In 2000, the low effective tax rate of 29.5% was
primarily due to non-recurring foreign tax benefits. The tax benefit for fiscal
1999 was $46,900 on losses before income taxes of $190,500. The low effective
tax rate benefit of 24.6% in 1999 was primarily due to an increase of $15,000 in
the valuation allowance, caused by losses related to the Robbins Facility, of
which $10,000 related to federal income taxes and $5,000 to state income taxes.
The net loss for fiscal 2001 was $309,100 or $7.56 diluted per share. The
previously described fourth quarter charge impacted the 2001 results by
$303,300, which included an increase in the tax valuation of $171,900. The net
earnings for fiscal 2000 were $39,500 or $.97 diluted per share. The net loss
for fiscal 1999 was $143,600 or $3.53 diluted per share which included net
losses for the Robbins Facility of $173,900 (write-down - $154,000 and operating
losses - $19,900) and cost realignment of $27,600.
ENGINEERING AND CONSTRUCTION GROUP
2001 2000 1999
---- ---- ----
Unfilled orders ...................... $4,539,300 $4,534,600 $4,741,500
New orders ........................... 2,808,700 3,094,600 2,752,200
Operating revenues ................... 2,162,100 2,933,100 2,975,500
Gross earnings from operations ....... 85,300 184,700 189,600
22
The E&C Group's unfilled orders at the end of fiscal 2001 were approximately the
same as 2000, which in turn represented a 4% decrease from unfilled orders at
the end of fiscal 1999.
New orders awarded to the E&C Group in fiscal 2001 decreased by 9.2% compared to
fiscal 2000. The decrease in Continental Europe of $480,000 was partially offset
by increased awards in the other operating units. The 2001 decrease in
Continental Europe was due to the award of a significant Middle Eastern contract
in 2000 that was not repeated in 2001.
Operating revenues for fiscal 2001 decreased $771,000 or 26% from fiscal 2000.
Operating revenues in 2001 decreased primarily due to the lower level of
flow-through costs and a shift in the United Kingdom towards reimbursable
service only contracts. The Company includes pass-through 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 percentage relationship between pass-through costs of
contracts and revenues will fluctuate from year to year depending on a variety
of factors including the mix of business in the years compared. The E&C Group
reported a slight decrease in operating revenues in fiscal 2000 as compared to
fiscal 1999. The decrease in 2000 operating revenues was due to decreased
activities in the United States, United Kingdom and Italy.
The E&C Group's gross earnings decreased $99,400 in fiscal 2001 as compared with
fiscal 2000 or 53.8% which in turn represented a decrease of 2.6% from gross
earnings in fiscal 1999. The gross earnings for 2001 in the E&C Group were
impacted negatively by $67,200 due to the fourth quarter charge, which included
$29,000 for claims reassessments and receivable and contract write-downs of
$38,200. The decrease in 2000 was primarily due to activities in the United
Kingdom and Continental Europe.
ENERGY EQUIPMENT GROUP (EXCLUDING THE ROBBINS FACILITY)
The Company continues to review various methods of monetizing selected power
systems facilities. Based on current economic conditions, management has
concluded that it will 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 was able to monetize these assets, it is
possible that the amounts realized could differ materially from the balances
reflected in the financial statements. In the first quarter of 2002, the Company
has entered a preliminary agreement of sale with a buyer for one of its waste to
energy facilities. If the sale is consummated under the terms of the preliminary
agreement, the Company will recognize a pre-tax loss on the sale of
approximately $19,500.
In addition, the Company anticipates taking a charge in 2002 of approximately
$25,000 for the impairment of goodwill related to a waste-to-energy facility as
required under the provisions of SFAS 142. While no additional charges are
currently anticipated, the Company is still in the process of evaluating the
impact of the adoption of SFAS 142.
2001 2000 1999
---- ---- ----
Unfilled orders .................... $1,493,100 $1,727,400 $1,445,800
New orders ......................... 1,314,500 1,468,700 1,045,900
Operating revenues ................. 1,228,900 1,057,400 982,500
Gross earnings from operations ..... 64,900 139,700 129,700
The Energy Equipment Group's unfilled orders decreased $234,300 at the end of
fiscal 2001, representing a 13.6% decrease from fiscal 2000 which in turn
represented an 19.5% increase from unfilled orders at the end of fiscal 1999.
The decrease in 2001 was due to the lower level of new orders as described
below.
New orders for fiscal 2001 decreased $154,200 or 10.5% from fiscal 2000 which in
turn represented a 40.4% increase from fiscal 1999. New orders for 2001 and 1999
were lower than 2000 primarily due to the high level of orders experienced in
2000 for Heat Recovery Steam Generators (HRSG) and Selective Catalytic Reduction
(SCR) units.
23
Operating revenues for fiscal 2001 increased $171,500 or 16.2% from fiscal 2000
which in turn represented a 7.6% increase from fiscal 1999. Work was performed
during 2001 on the significant awards achieved in 2000.
The gross earnings from operations decreased $74,800 or 53.5% from fiscal 2000.
The gross earnings for 2001 were negatively impacted by the fourth quarter
charge in the amount of $88,400 which included $71,600 for HRSG's and $16,800
for accounts receivable and disputed claims. The 2000 increase of $10,000 or
7.7% from fiscal 1999 was in line with the increase in operating revenues during
that fiscal year.
RESEARCH AND DEVELOPMENT
The Company is continually engaged in research and development efforts, both in
performance and analytical services on current projects and in development of
new products and processes. During fiscal years 2001, 2000 and 1999,
approximately $12,300, $12,000 and $12,500, respectively, were spent on
Company-sponsored research activities. During the same periods, approximately
$39,200, $27,600 and $27,100, respectively, were spent on research activities
that were paid by customers of the Company.
FINANCIAL CONDITION
Shareholders' equity at the end of fiscal 2001 was $7,500 as compared to
$364,100 at the end of fiscal 2000 and $375,900 at the end of fiscal 1999. The
decrease for 2001 relates to the loss for the year of $309,100, a net minimum
pension liability adjustment of $36,800 included in other comprehensive loss, a
change in the accumulated translation adjustment of $10,200 and dividend
payments of $4,900. These were partially offset by net gains on derivative
instruments of approximately $3,800 included in other comprehensive loss. The
decrease for 2000 relates to a change in the accumulated translation adjustment
of $20,000; a net minimum pension liability adjustment of $21,500 included in
other comprehensive loss and dividend payments of $9,800 which were offset by
earnings for the year of $39,500.
For fiscal 2001, 2000 and 1999, investments in land, buildings and equipment
were $34,000, $45,800 and $128,100, respectively. The decreases in 2001 and 2000
are primarily due to lower investments in foreign build, own and operate plants
which is in line with the previously announced repositioning plan for these
types of plants. Capital expenditures will continue to be directed primarily
toward strengthening and supporting the Company's core businesses.
Net debt increased by $38,700 during fiscal 2001 compared to a decrease of
$109,000 during fiscal 2000. Net debt includes corporate and other debt, special
purpose project debt, bank loans, subordinated Robbins Facility exit funding
obligations, convertible subordinated notes and preferred trust securities net
of cash and short term investments. The 2001 increase was primarily due to the
significant use of cash by operating activities during the year. In 2001, the
Company issued $210,000 principal amount of convertible subordinated notes, the
net proceeds of which were used to repay $76,300 under the 364-day revolving
credit facility that expired on May 30, 2001 and to reduce advances outstanding
under the Revolving Credit Agreement. The 2000 decrease was accomplished
primarily by the sale of a 50 percent interest in a waste-to-energy facility in
Italy. Also, the Company entered into a sale/leaseback of an office building in
Spain, which resulted in gross proceeds of approximately $21,000. In 1999, the
Company issued $175,000 of Preferred Trust Securities, the proceeds of which
were used to reduce the Company's indebtedness under its senior credit
facilities. In 1999, the Company entered into a sale/leaseback of an office
building in the United Kingdom, which resulted in gross proceeds of $126,800.
LIQUIDITY AND CAPITAL RESOURCES
As of December 28, 2001, the Company had cash and cash equivalents on hand and
short-term investments of $224,300. Management of the Company does not believe
that this amount will be adequate to meet the Company's working capital and
liquidity needs in the absence of a new or amended credit facility which
replaces the Revolving Credit Agreement. While the waivers remain in effect the
Company cannot make any additional borrowings under the Revolving Credit
Agreement or issue any letters of credit that are not cash collateralized.
Although the Company is in negotiations with its lenders for a new or amended
credit facility, there can be no assurances that the Company will be successful
in entering into a new or amended credit facility.
If the Company fails to enter into a new or amended credit facility during the
pendency of the waiver, which expires April 30, 2002, the lenders under the
Revolving Credit Agreement could accelerate the repayment of amounts borrowed
under such agreement ($140,000 as of March 29, 2002) and to require the Company
to cash collateralize standby letters of credit outstanding thereunder ($93,000
as of March 29, 2002). Acceleration of the Revolving Credit Agreement would
result in a default under the following agreements: the Senior Notes, the
Convertible Subordinated Notes, the Preferred Trust
24
Securities, the Subordinated Robbins Facility exit funding obligations and
certain of the special-purpose project debt, which would allow such debt to be
accelerated. It is unlikely that the Company would be able to repay amounts
borrowed if the payment dates were accelerated. Failure by the Company to repay
such amounts would have a material adverse effect on the Company's financial
condition and operations.
The Company also has in place a receivables sale arrangement pursuant to which
the Company has sold receivables totaling $50,000. The bank that is party to
this financing has elected to terminate the agreement in accordance with its
terms. Notwithstanding the election to terminate the agreement, the bank has
provided extensions while the Company negotiates with other providers to replace
this financing.
The Company is also a lessee under an operating lease financing agreement
relating to a corporate office building in the amount of $33,000 with a
consortium of banks. The lease financing facility matured on February 28, 2002.
The banks that are party to that agreement have provided forbearance through
April 30, 2002 while the Company is negotiating with another financial
institution to replace this lease financing.
There can be no assurance that the Company will be able to negotiate extensions
of the receivables sale arrangement or the lease financing forbearance or that
the Company will be able to enter into replacement facilities for either the
receivables sale arrangement or the lease financing. Failure by the Company to
make the payments required upon expiration of the receivable sale arrangement or
lease financing forbearance would have a material adverse effect on the
Company's financial condition and operations.
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 has been hired for the purpose of carrying out a
performance improvement intervention. The Company's recently appointed Chief
Executive Officer has utilized this approach on several previous occasions with
significant success. 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.
While there is no assurance that funding will be available to execute its plan
to enhance cash generation and to improve profitability, the Company is
continuing to seek financing to support the plan and its ongoing operations. 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.
Cash and cash equivalents amounted to $224,000 at December 28, 2001, an increase
of $32,100 from the prior fiscal year-end. Short-term investments decreased
$1,500 to $300 at the end of 2001. During fiscal 2001, the Company paid $4,900
in shareholder dividends, repaid short and long-term debt in the amount of
$296,800 and received proceeds from short and long-term borrowings of $185,000.
In fiscal 2001, cash flows used by operating activities totaled $88,700 compared
to cash flows used by operating activities of $16,700 in 2000, an increase of
$72,000. The increase was due to $110,500 less cash provided by the EE Group
offset by the lower use of the E&C Group of $29,800 and by the Corporate and
Financial Services Group of $8,700. The $110,500 decrease in cash provided by
the EE Group was primarily due to lower cash generated by the EE Groups' North
American operations.
During fiscal 2000, cash flows used by operating activities totaled $16,700
compared to cash flows used by operating activities of $5,600 in 1999. The
increase of $11,100 was primarily due to a $60,000 increase in the use of cash
by the E&C Group and a $90,900 increase in the use of cash by the Corporate and
Financial Services Group offset by a $139,800 change in the EE Group.
The Company's contracts in process and inventories increased by $39,800 during
2001 from $464,300 at December 29, 2000, to $504,100 at December 28, 2001. This
increase can be attributed to contract activity in the E&C Group of $35,800
primarily due to a higher level of contracts in process. In addition, accounts
receivable increased by $57,100 in fiscal 2001 to $946,300 from $889,200 in
fiscal 2000.
The Company's working capital varies from period to period depending on the mix,
stage of completion and commercial terms and conditions of the Company's
contracts. Working capital needs have increased during the past several years as
a result of the Company's satisfying requests from its customers for more
favorable payment terms under contracts. Such requests generally include reduced
advance payments and less favorable payment schedules to the Company.
In the third quarter of 1998, a subsidiary of the Company entered into a
three-year agreement with a financial institution whereby the subsidiary would
sell an undivided interest in a designated pool of qualified accounts
receivable. Under the terms of the agreement, new receivables are added to the
pool as collections reduce previously sold accounts receivable. The credit risk
of uncollectible accounts receivable has been transferred to the purchaser. The
Company services, administers and collects the receivables on behalf of the
purchaser. Fees payable to the purchaser under this agreement are equivalent to
rates afforded high quality commercial paper issuers plus certain administrative
expenses and are included in other deductions in the Consolidated Statement of
Earnings and Comprehensive Income. The agreement contains certain covenants and
provides for various events of termination. The Company has received a waiver
under this
25
receivables sale agreement and management is in discussions with its lenders
regarding a replacement for this receivables sale arrangement as previously
discussed. There can be no assurance that the Company will be able to negotiate
further waivers or a replacement agreement. As of December 28, 2001 and December
29, 2000, $50,000 in receivables were sold under the agreement and are therefore
not reflected in the accounts receivable - trade balance in the Consolidated
Balance Sheet.
On January 13, 1999, FW Preferred Capital Trust I, a Delaware business trust
issued $175,000 of Preferred Trust Securities. 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, beginning April 15, 1999. Such distributions may be
deferred for periods up to five years during which time additional interest
accrues at 9.0%. On January 15, 2002, the Company exercised its option under the
Preferred Trust Securities to defer the distribution payable on that date. On
April 2, 2002, the Company stated it will also exercise its option to defer the
distribution payable on April 15, 2002. The maturity date of the Trust Preferred
Securities is January 15, 2029. Foster Wheeler can redeem these Preferred Trust
Securities on or after January 15, 2004. The proceeds were used to reduce
borrowing under the Company's Revolving Credit Agreement. See Note 9 to
Financial Statements for further information regarding the Company's Revolving
Credit Agreement.
In May and June 2001, the Company issued convertible subordinated notes in an
aggregate principal amount of $210,000. The notes are due in 2007 and bear
interest at 6.5% per annum, payable semi-annually on June 1 and December 1 of
each year. The notes may be converted into common shares at an initial
conversion rate of 62.3131 common shares per $1,000 principal amount or $16.05
per common share subject to adjustment under certain circumstances. The net
proceeds of approximately $202,900 were used to repay advances outstanding under
the Revolving Credit Agreement. Debt issuance costs are a component of interest
expense over the term of the notes.
The Board of Directors of the Company discontinued the common stock dividend in
July 2001.
The Company has contractual obligations comprised of bank loans, corporate and
other debt, special purpose project debt, subordinated Robbins Facility exit
funding obligations, convertible subordinated notes and preferred trust
securities. The Company is also obligated under non-cancelable operating lease
obligations. The aggregate maturities as of December 28, 2001, of these
contractual obligations are as follows:
TOTAL 2002 2003 2004 2005 2006 THEREAFTER
----- ---- ---- ---- ---- ---- ----------
Bank Loans ................................. $ 20,244 $ 20,244
Corporate and other debt ................... 297,627 297,627
Special-purpose project debt ............... 226,056 88,201 $15,912 $13,913 $14,910 $15,799 $77,321
Subordinated Robbins Facility exit
funding obligations..................... 110,340 110,340
Convertible subordinated notes ............. 210,000 210,000
Preferred trust securities ................. 175,000 175,000
Operating lease commitments ................ 249,500 27,300 21,600 20,500 16,900 12,200 151,000
---------- -------- ------- ------- ------- ------- -------
Total Contractual Cash Obligations ......... $1,288,767 $928,712 $37,512 $34,413 $31,810 $27,999 $228,321
========== ======== ======= ======= ======= ======= =======
In certain instances in its normal course of business, the Company has provided
security for contract performance consisting of standby letters of credit, bank
26
guarantees and surety bonds. As of December 28, 2001, such commitments and their
period of expiration are as follows:
TOTAL LESS THAN 1 YEAR 1-2 YEARS 4-5 YEARS OVER 5 YEARS
----- ---------------- --------- --------- ------------
Bank issued letters of
credit and guarantees ........... $ 558,294 $ 258,508 $ 276,033 $ 16,491 $ 7,262
Surety bonds ........................ 467,317 404,544 61,774 44 955
---------- ---------- ---------- ---------- ----------
Total Commitments ................... $1,025,611 $ 663,052 $ 337,807 $ 16,535 $ 8,217
========== ========== ========== ========== ==========
The Company may experience difficulty in obtaining surety bonds on an unsecured
basis in the future due to the changing view of sureties with respect to risk of
loss given current market conditions and the Company's credit-related matter as
discussed above. This may impact the Company's ability to secure new business.
The Company's liquidity has been negatively impacted by a number of claims
against customers relating to projects that have been affected by a substantial
scope of work changes and other adverse factors. The net exposure associated
with these claims, which has accumulated over a period of time, approximated
$135,000 as of December 28, 2001. While future collections of these claims will
increase cash inflows, the timing of collection of such claims and
recoverability is subject to considerable uncertainty as described in Note 1 to
the Financial Statements.
In April 2001, the Company completed the sale of 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 was recorded in the
second quarter relating to these sales.
In the fourth quarter of 2001, the Company sold a cogeneration facility located
in Pennsylvania. Consideration for the transaction was approximately $40,000,
which included $30,000 in assumption of debt. The sale resulted in an after-tax
charge of $22,900. In addition, the Company sold certain equity interests
located in Italy. Gross proceeds on the sale were approximately $14,100.
In the fourth quarter of 2000, a subsidiary of the Company sold 50 percent of
its interest in Lomellina Energia S.r.l., a waste-to-energy facility located in
northern Italy. Consequently, the transaction reduced the Company's net debt by
approximately $130,000.
In the third quarter of 2000, a transaction was completed relating to the
Petropower project in Chile which was essentially a monetization of the
projected future cash flows of the project. The transaction resulted in an
increase of approximately $42,500 of limited recourse debt and a similar
decrease of corporate debt.
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 relate to legal matters which
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.
INFLATION
The effect of inflation on the Company's revenues and earnings is minimal.
Although a majority of the Company's revenues are realized 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.
27
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are presented in accordance with generally
accepted accounting principles. Highlighted below are the accounting policies
that management considers significant to the understanding and operations of the
Company's business.
REVENUE RECOGNITION
The Engineering and Construction Group records profits on long-term contracts on
a percentage-of-completion basis on 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 Equipment 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 EE 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. The Company has a history of making reasonably dependable estimates
of the extent of progress towards completion, contract revenues and contract
costs. However, 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 through a contract write-down 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 EE 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.
CLAIMS RECOGNITION
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 management's determination of
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 to
the extent that contract costs relating to the claim have been incurred. The
amounts recorded, if material, are disclosed in the notes to the financial
statements. Costs attributable to claims are treated as costs of contract
performance as incurred.
In the fourth quarter of 2001, the Company recorded $24,100 in after-tax
contract-related charges as a result of claims reassessment conducted by the
Company's legal staff in conjunction with outside counsel. The claims have been
brought by the Company against its customers and many were in the process of
being submitted for litigation or arbitration.
LONG-LIVED ASSET ACCOUNTING
The Company accounts for its long-lived assets, including those that it is
considering monetizing, as assets to be held and used. It therefore uses an
undiscounted cash flow analysis to assess impairment. Once a formal decision is
made by management to sell an asset, a discounted cash flow methodology is
28
utilized for such assessment.
In the first quarter 2002, the Company has entered a preliminary agreement of
sale with a buyer for one of its waste to energy facilities. If the sale is
consummated under the terms of the preliminary agreement, the Company will
recognize a pre-tax loss on the sale of approximately $19,500.
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 carryforwards. 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 carryforward amounts.
In the fourth quarter of 2001, the Company established a valuation allowance of
$171,900 primarily for domestic deferred tax assets under the provisions of SFAS
No. 109. Such action was required due to the losses from domestic operations
experienced in the three most recent fiscal years. For statutory purposes, the
majority of the deferred tax assets for which a valuation allowance is provided
do not begin to expire until 2020 and beyond, based on the current tax laws.
Based on the establishment of the valuation allowance, the Company does not
anticipate recognizing a provision for income taxes on domestic operations in
the near future.
ASBESTOS
The Company has recorded a liability related to probable losses on
asbestos-related insurance claims of approximately $500,000 and an asset for
probable recoveries in a similar amount, net of an $18,000 reserve. The
liability is an estimate of future asbestos-related defense costs and indemnity
payments which are based upon assumed average claim resolution costs applied
against currently pending and estimated future claims. The asset is an estimate
of recoveries from insurers based upon assumptions relating to cost allocation
and resolution of pending litigation with certain insurers, as well as
recoveries under a funding arrangement with other insurers which covers claims
brought between 1993 and June 12, 2001. The Company is currently in negotiations
with its insurers regarding an arrangement for handling asbestos claims filed
after June 12, 2001. The defense costs and indemnity payments are expected to be
incurred over the next ten years.
Management of the Company has considered the asbestos litigation and the
financial viability and legal obligations of its insurance carriers and believes
that except for those insurers that have become or may become insolvent, for
which a reserve has been provided, the insurers or their guarantors will
continue to adequately fund claims and defense costs relating to asbestos
litigation.
It should be noted that the estimates of the assets and liabilities related to
asbestos claims and recovery are 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 currently involved in
litigation, the Company's ability to recover from its insurers, uncertainties
surrounding the litigation process from jurisdiction to jurisdiction and from
case to case, as well as potential legislative changes. If the number of claims
received in the future exceeds the Company's estimate, it is likely that the
costs of defense and indemnity will similarly exceed the Company's estimates.
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 verdict was clearly
excessive and should be set aside or reduced on appeal. The Company intends to
move to set aside this 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.
29
ACCOUNTING DEVELOPMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("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 be subject to
impairment assessment.
The provisions of SFAS 142 are required to be applied effective December 29,
2001. The Company anticipates that there will be an impairment of $25,000 after
tax relating to a waste-to-energy facility that will be recorded in 2002. While
no additional charges are currently anticipated, the Company is still in the
process of evaluating the impact of the adoption of SFAS 142. The Company will
also discontinue the recording of goodwill amortization as is required which
approximates $8,000 annually.
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.
In October 2001, the FASB issued 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. Impairment of long-lived assets will be reassessed in the
first quarter of 2002 upon implementation of SFAS 144 which incorporates
probability weighting of undiscounted cash flow assumptions. The Company is
currently assessing the impact of the adoption of this new statement.
SAFE HARBOR STATEMENT
This Management's Discussion and Analysis of Financial Condition and Results of
Operations, other sections of this Report on Form 10-K 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 outcome of negotiations with financing sources, 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 factors described under Item 1. "Business - Risk Factors of the
Business" and 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 errors in estimates made by the Company of costs to complete projects;
o changes in trade, monetary and fiscal policies worldwide;
o currency fluctuations;
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;
30
o protection and validity of patents and other intellectual property
rights;
o increasing competition by foreign and domestic companies;
o negotiation of a long-term extension of the existing credit
facilities;
o monetization of certain Power System facilities; and
o recoverability of claims against customers.
Other factors and assumptions not identified above were also involved in the
derivition of these forward-looking statements and the failure of such other
assumptions to be realized as well as other 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 and current reports on Form 8-K filed with the Securities
and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (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 foreign currency exchange contracts, to hedge its exposure on contracts
into the operating unit's functional currency. The Company utilizes all such
financial instruments solely for hedging. Company policy prohibits the
speculative use of such instruments. The Company is exposed to credit loss in
the event of nonperformance by the counterparties 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,
bank loans and its variable rate project debt. If market rates average 1% more
in 2002 than in 2001, the Company's interest expense would increase, and income
before tax would decrease by approximately $1,700. This amount has been
determined by considering the impact of the hypothetical interest rates on the
Company's variable-rate balances as of December 28, 2001. 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 affiliates are recorded in
their functional currency, which is generally the currency of the country of
domicile of the affiliate. 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 for long-term contracts not negotiated in the affiliates functional
currency, the affiliates of the Company enter into foreign currency exchange
contracts to hedge the exposed contract value back to their functional currency.
At December 28, 2001, the Company's primary foreign currency exposures and
contracts are set forth below:
Notional Amount Notional Amount
Currency Currency Foreign of Forward of Forward
Hedged Against Currency Exposure Buy Contracts Sell Contracts
Euro and legacy currencies US dollar $ 136,547 $ 134,806 $ 1,741
Swedish krona 17,244 17,244 -
Japanese yen US dollar 11,255 - 11,255
Euro 513 513 -
British pound 419 - 419
US dollar Polish zloty 23,809 - 23,809
Euro 70,433 14,154 56,279
British pound 9,545 - 9,545
33
Swiss franc Euro 53,624 53,624 -
Singapore dollar Euro 5,716 - 5,716
US dollar 2,446 - 2,446
Other Other 10,288 4,019 6,269
The fair value of these contracts as of December 28, 2001 was $5,900. Fair value
of the contracts was determined based on published market prices. The difference
between the fair value as of December 28, 2001 and the fair value at contract
inception of $0 of the forward buy and sell contracts resulted in a net of tax
gain of $3,834 which is recorded in other comprehensive income as of December
28, 2001. Increases in fair value of the forward sell contracts result in losses
while fair value increases of the forward buy contracts result in gains. 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.
See Note 10 to the Financial Statements for further information regarding
derivative financial instruments.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
PAGES
-----
Report of Independent Accountants............................................... 35
Consolidated Statement of Earnings and Comprehensive Income for each
of the three years in the period ended December 28, 2001.................. 36
Consolidated Balance Sheet at December 28, 2001 and
December 29, 2000 .................................................. 37
Consolidated Statement of Changes in Shareholders' Equity for each
of the three years in the period ended December 28, 2001.................. 38
Consolidated Statement of Cash Flows for each of the three years in
the period ended December 28, 2001........................................ 39
Notes to Consolidated Financial Statements...................................... 40 - 76
34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Foster Wheeler Ltd.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings and comprehensive income, of shareholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Foster Wheeler Ltd. and its subsidiaries (the "Company") at December
28, 2001 and December 29, 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 28, 2001 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company was out of compliance with its debt covenants as of
December 28, 2001 and was unable to finalize amended agreements or obtain
waivers for the defaults beyond April 30, 2002. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 10 to the financial statements, effective December 30,
2000, the Company adopted Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
PricewaterhouseCoopers LLP
Florham Park, New Jersey
January 29, 2002, except for
Note 1, for which the date is April 12, 2002.
35
FOSTER WHEELER LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999
---- ---- ----
REVENUES:
Operating revenues......................................... $ 3,315,314 $3,891,361 $3,867,030
Other income (including interest:
2001-$9,060; 2000-$15,737; 1999-$13,576)............... 77,160 77,994 77,044
------------ ----------- ------------
Total Revenues......................................... 3,392,474 3,969,355 3,944,074
------------ ----------- ------------
COSTS AND EXPENSES:
Cost of operating revenues................................. 3,164,025 3,565,147 3,569,196
Selling, general and administrative expenses............... 222,532 219,353 235,549
Other deductions .......................................... 122,395 41,721 42,654
Robbins Facility write-down................................ - - 214,000
Minority interest.......................................... 5,043 3,857 2,988
Interest expense........................................... 68,734 67,504 55,032
Dividends on preferred security of subsidiary trust........ 15,750 15,750 15,181
------------ ----------- ------------
Total Costs and Expenses............................... 3,598,479 3,913,332 4,134,600
------------ ----------- ------------
(Loss)/earnings before income taxes............................. (206,005) 56,023 (190,526)
Provision/(benefit) for income taxes............................ 103,138 16,529 (46,891)
------------ ----------- ------------
Net (loss)/earnings............................................. (309,143) 39,494 (143,635)
Other comprehensive (loss)/income
Cumulative effect of prior years (to December 29,2000)
of a change in accounting principle for derivative
instruments designated as cash flow hedges............. 6,300 - -
Change in gain on derivative instruments designated as cash
flow hedges............................................ (2,466) - -
Foreign currency translation adjustment.................... (10,191) (19,988) (30,870)
Minimum pension liability adjustment
(net of tax benefits: 2001 - $0; 2000 - $12,000) ..... (36,770) (21,500) -
------------ ----------- ------------
Comprehensive loss......................................... $ (352,270) $ (1,994) $ (174,505)
============ ========== =============
(Loss)/earnings per share:
Basic...................................................... $ (7.56) $ .97 $(3.53)
======== ===== =======
Diluted.................................................... $ (7.56) $ .97 $(3.53)
======== ===== =======
Shares outstanding:
Basic:
Weighted average number of shares outstanding.......... 40,876 40,798 40,742
Diluted:
Effect of stock options................................ -- 7 --
----------- --------- -------------
Total diluted.............................................. 40,876 40,805 40,742
=========== ========= ==========
See notes to financial statements.
36
FOSTER WHEELER LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 28, 2001 DECEMBER 29, 2000
ASSETS ----------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 224,020 $ 191,893
Short-term investments................................................. 271 1,816
Accounts and notes receivable:
Trade.............................................................. 726,556 699,965
Other.............................................................. 219,788 189,201
Contracts in process................................................... 493,599 453,309
Inventories............................................................ 10,529 11,020
Prepaid, deferred and refundable income taxes.......................... 52,084 50,316
Prepaid expenses....................................................... 27,529 25,456
----------- -------------
Total current assets............................................... 1,754,376 1,622,976
----------- -------------
Land, buildings and equipment............................................... 728,012 865,349
Less accumulated depreciation............................................... 328,814 370,315
----------- -------------
Net book value..................................................... 399,198 495,034
----------- -------------
Notes and accounts receivable - long-term................................... 65,373 76,238
Investment and advances..................................................... 84,514 120,551
Intangible assets, net...................................................... 274,543 288,135
Prepaid pension cost and benefits........................................... 122,407 189,261
Other, including insurance recoveries....................................... 611,113 588,474
Deferred income taxes....................................................... 4,855 96,859
----------- -------------
TOTAL ASSETS....................................................... $ 3,316,379 $ 3,477,528
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments on long-term debt................................. $ 12,759 $ 19,876
Bank loans............................................................. 20,244 103,479
Corporate and other debt............................................... 297,627 -
Special-purpose project debt........................................... 75,442 -
Subordinated Robbins exit funding obligations.......................... 110,340 -
Convertible subordinated notes......................................... 210,000 -
Mandatorily redeemable preferred securities of subsidiary trust holding
solely junior subordinated deferrable interest debentures.......... 175,000 -
Accounts payable....................................................... 408,581 405,707
Accrued expenses....................................................... 369,187 302,808
Estimated costs to complete long-term contracts........................ 580,766 521,277
Advance payments by customers.......................................... 65,417 62,602
Income taxes........................................................... 63,257 38,854
----------- -------------
Total current liabilities.......................................... 2,388,620 1,454,603
----------- -------------
Corporate and other debt less current installments.......................... - 306,001
Special-purpose project debt less current installments...................... 137,855 255,304
Deferred income taxes....................................................... 40,486 15,334
Postretirement and other employee benefits other than pensions.............. 121,600 159,667
Other long-term liabilities and minority interest........................... 620,271 637,190
Subordinated Robbins Facility exit funding obligations...................... - 110,340
Mandatorily redeemable preferred securities of subsidiary trust holding solely
junior subordinated deferrable interest debentures..................... - 175,000
----------- -------------
TOTAL LIABILITIES.................................................. 3,308,832 3,113,439
----------- -------------
SHAREHOLDERS' EQUITY:
Preferred Stock
Authorized 1,500,000 shares, no par value - none outstanding........... - -
Common Stock
$1.00 par value; authorized 160,000,000 shares; issued:
2001-40,771,560 and 2000-40,747,668................................ 40,772 40,748
Paid-in capital............................................................. 201,390 200,963
Retained earnings (deficit)................................................. (72,781) 241,250
Accumulated other comprehensive loss........................................ (161,834) (118,707)
------------ --------------
7,547 364,254
Less cost of treasury stock (shares: 2000-24,616)........................... - 165
----------- -------------
TOTAL SHAREHOLDERS' EQUITY............................................. 7,547 364,089
----------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY........................................................ $ 3,316,379 $ 3,477,528
=========== =============
See notes to financial statements.
37
FOSTER WHEELER LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999
---- ---- ----
COMMON STOCK
Balance at beginning of year .............................................. $ 40,748 $ 40,748 $ 40,748
Sold under stock options: (shares: 2001-66) ............................... 66 -- --
Bermuda reorganization .................................................... (42) -- --
--------- --------- ---------
Balance at end of year .................................................... 40,772 40,748 40,748
--------- --------- ---------
PAID-IN CAPITAL
Balance at beginning of year .............................................. 200,963 201,043 201,158
Stock option exercise price less par value ................................ 561 -- --
Excess of cost of treasury stock or common stock issued
under incentive and other plans over market value ...................... 6 (80) (115)
Bermuda reorganization .................................................... (140) -- --
--------- --------- ---------
Balance at end of year .................................................... 201,390 200,963 201,043
--------- --------- ---------
RETAINED EARNINGS
Balance at beginning of year .............................................. 241,250 211,529 377,147
Net (loss)/earnings for the year .......................................... (309,143) 39,494 (143,635)
Cash dividends paid:
Common (per share outstanding: 2001-$.12;2000-$.24; 1999-$.54) ............ (4,888) (9,773) (21,983)
--------- --------- ---------
Balance at end of year .................................................... (72,781) 241,250 211,529
--------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year ................................................. (118,707) (77,219) (46,349)
Cumulative effect on prior years (to December 29,2000) of
a change in accounting principle for derivative
instruments designated as cash flow hedges ...................... 6,300 -- --
Change in net gain on derivative instruments designated
as cash flow hedges ................................................. (2,466) -- --
Change in accumulated translation adjustment
during the year ..................................................... (10,191) (19,988) (30,870)
Minimum pension liability, (net of tax benefits:
2001-$0; 2000-$12,000) .............................................. (36,770) (21,500) --
--------- --------- ---------
Balance at end of year .................................................... (161,834) (118,707) (77,219)
--------- --------- ---------
TREASURY STOCK
Balance at beginning of year .............................................. 165 238 586
Common stock acquired for Treasury: (shares: 2001-3,000;
2000-28,391; 1999-71,000) ........................................... 37 154 860
Shares issued under incentive and other plans (shares:
2001-3,008; 2000-20,556; 1999-85,023) ............................... (20) (227) (1,208)
Bermuda reorganization .................................................... (182) -- --
--------- --------- ---------
Balance at end of year .................................................... -- 165 238
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY ................................................ $ 7,547 $ 364,089 $ 375,863
========= ========= =========
See notes to financial statements.
38
FOSTER WHEELER LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)/ earnings ...................................................... $(309,143) $ 39,494 $(143,635)
Adjustments to reconcile net(loss)/earnings to cash flows
from operating activities:
Provision for Restructuring ............................................ 41,570 -- --
Depreciation and amortization .......................................... 55,750 57,716 60,448
Noncurrent deferred tax ................................................ 117,544 (2,666) (84,597)
Loss/(gain) on sale of land, building and equipment .................... 30,126 (14,843) (5,824)
Equity earnings, net of dividends ...................................... (4,658) (8,882) (11,002)
Robbins Resource Recovery Facility charge .............................. -- -- 214,000
Other noncash items .................................................... (4,331) (5,702) 6,382
Changes in assets and liabilities: ........................................ -- --
Receivables ............................................................ (68,507) (7,665) (132,264)
Sales of receivables ................................................... -- -- 11,600
Contracts in process and inventories ................................... (39,944) (64,938) 44,251
Accounts payable and accrued expenses .................................. 38,822 35,841 (15,317)
Estimated costs to complete long-term contracts ........................ 59,374 (54,500) 77,402
Advance payments by customers .......................................... 5,399 19,082 (11,334)
Income taxes ........................................................... (14,265) (17,613) (18,890)
Other assets and liabilities ........................................... 3,582 7,932 3,160
--------- --------- ---------
Net cash used by operating activities .................................. (88,681) (16,744) (5,620)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................................... (33,998) (45,807) (128,086)
Proceeds from sale of properties ....................................... 59,672 56,703 142,569
Decrease in investments and advances ................................... 16,008 12,122 1,893
Decrease in short-term investments ..................................... 1,530 15,230 43,923
Minority interest distribution ......................................... (1,367) (2,599) (4,385)
--------- --------- ---------
Net cash provided by investing activities .............................. 41,845 35,649 55,914
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to common Shareholders ....................................... (4,888) (9,773) (21,983)
Repurchase of common stock ............................................. (37) (154) (860)
Proceeds from convertible subordinated notes ........................... 202,912 -- --
Proceeds from the exercise of stock options ............................ 627 -- --
(Decrease)/increase in short-term debt ................................. (82,032) 44,876 (37,254)
Mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated
deferrable interest debentures ...................................... -- -- 169,178
Proceeds from long-term debt ........................................... 185,042 43,168 56,797
Repayment of long-term debt ............................................ (214,724) (88,151) (209,868)
--------- --------- ---------
Net cash provided/(used) by financing activities ....................... 86,900 (10,034) (43,990)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents .............. (7,937) 12,754 (16,104)
--------- --------- ---------
INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................................ 32,127 21,625 (9,800)
Cash and cash equivalents at beginning of year ............................ 191,893 170,268 180,068
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR .................................. $ 224,020 $ 191,893 $ 170,268
========= ========= =========
Cash paid during the year for:
Interest (net of amount capitalized) ................................... $ 60,543 $ 69,551 $ 58,799
Income taxes ........................................................... $ 15,543 $ 33,551 $ 30,526
See notes to financial statements.
39
FOSTER WHEELER LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
1. GOING CONCERN
The accompanying financial statements have been 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 is dependent on the
Company maintaining credit facilities adequate to conduct its business. The
Company has in place a Revolving Credit Agreement with a consortium of banks.
The Company has received a series of waivers from the required lenders under its
Revolving Credit Agreement of certain covenant violations thereunder. The
waivers extend through April 30, 2002, subject to the Company's ongoing
satisfaction of certain conditions. The Company is in negotiations with the
lenders under its Revolving Credit Agreement to replace the current Revolving
Credit Agreement with a new or amended credit facility.
If a new or amended senior credit facility is not completed, the lenders under
the Revolving Credit Agreement would have the ability to accelerate the payment
of amounts borrowed thereunder ($140,000 as of March 29, 2002) and to require
the Company to cash collateralize standby letters of credit outstanding
thereunder ($93,000 as of March 29, 2002).
It is unlikely that the Company would be able to repay amounts borrowed or cash
collateralize standby letters of credit issued under the Revolving Credit
Agreement if the banks were to exercise their right to accelerate payment dates.
Failure by the Company to repay such amounts under the Revolving Credit
Agreement would have a material adverse effect on the Company's financial
condition and operations and result in defaults under the terms of the Company's
following indebtedness: the Senior Notes, the Convertible Subordinated Notes,
the Preferred Trust Securities, the subordinated Robbins Facility exit funding
obligations, and certain of the special-purpose project debt which would allow
such debt to be accelerated. It is unlikely that the Company would be able to
repay such indebtedness.
There can be no assurance that the Company will receive further extensions of
the waiver from the required lenders under the Revolving Credit Agreement or
that the Company will be able to enter into a new or amended credit facility.
The Company also has in place a receivables sale arrangement pursuant to which
the Company has sold receivables totaling $50,000. The bank that is party to
this financing has elected to terminate the agreement in accordance with its
terms. Notwithstanding the election to terminate the agreement, the bank has
provided extensions while the Company negotiates with other providers to replace
this financing.
The Company is also a lessee under an operating lease financing agreement
relating to a corporate office building in the amount of $33,000 with a
consortium of banks. The lease financing facility matured on February 28, 2002.
The banks that are party to that agreement have provided forbearance through
April 30, 2002 while the Company is negotiating with another financial
institution to replace this lease financing.
There can be no assurance that the Company will be able to negotiate extensions
of the receivables sale arrangement or the lease financing forbearance or that
the Company will be able to enter into replacement facilities for either the
receivables sale arrangement or the lease financing. Failure by the Company to
make the payments required upon expiration of the receivables sale arrangement
or lease financing forbearance would have a material adverse effect on the
Company's financial condition and operations.
The above factors raise substantial doubts about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
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 has been hired for the purpose of carrying out a
performance improvement intervention. The Company's current Chief Executive
Officer has utilized this approach on several previous occasions with
significant success. The tactical portion of the performance improvement
intervention concentrates on booking current prospects, 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.
40
While there is no assurance that funding will be available to execute its plan
to enhance cash generation and to improve profitability, the Company is
continuing to seek financing to support the plan and its ongoing operations. To
date, the Company has been able to obtain sufficient financing to support its
ongoing operations. At the same time, the Company has initiated a liquidity
action plan, which focuses on accelerating the collection of receivables, claims
recoveries and asset sales.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Foster Wheeler Ltd. and all significant domestic and foreign
subsidiary companies. All significant intercompany transactions and balances
have been eliminated.
The Company's fiscal year is the 52- or 53-week annual accounting period ending
the last Friday in December for domestic operations and December 31 for foreign
operations. For domestic operations, the years 2001 and 2000 included 52 weeks
while the year 1999 included 53 weeks.
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
are used when 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 December 28, 2001 and
December 29, 2000, costs of approximately $135,000 and $175,000, respectively,
were included in assets, primarily in receivables and contracts in process,
representing amounts expected to be realized from claims to customers. The
reduction was due to a settlement of a claim and the reassessment of the
collectibility of other claims based on current facts.
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 amounts recorded, if material, are
disclosed in the notes to the financial statements. 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. Management believes that these matters will be resolved without a
material effect on the Company's financial position or results of operations.
REVENUE RECOGNITION ON LONG-TERM CONTRACTS - The Engineering and Construction
Group records profits on long-term contracts on a percentage-of-completion basis
on 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 Equipment 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 EE Group are generally considered substantially
40
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. The Company has a history of making reasonably dependable estimates
of the extent of progress towards completion, contract revenues and contract
costs. However, 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 EE 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.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include highly liquid
short-term investments purchased with original maturities of three months or
less.
SHORT-TERM INVESTMENTS - Short-term investments consist primarily of bonds of
foreign governments and are classified as available for sale under FASB
Statement No. 115 "Accounting for Certain Investments in Debt and Equity
Securities". Realized gains and losses from sales are based on the specific
identification method. For the years ended 2001, 2000 and 1999, unrealized gains
and losses were immaterial. The proceeds from sales of short-term investments
for 2001, 2000 and 1999 were $2,000, $15,000 and $15,000, respectively. The
gain/(loss) on sales for the years ended 2001, 2000 and 1999 were $0, $600 and
$(250), respectively.
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 amounts withheld, which
might not be received within a one-year period, are indicated in Note 3. In
conformity with industry practice, however, the full amount of accounts
receivable, including such amounts withheld, has been included in current
assets.
ACCOUNTS AND NOTES RECEIVABLE OTHER - Non-trade accounts and notes receivable
consist primarily of insurance claims receivable ($105,200 in 2001 and $75,100
in 2000), foreign refundable value-added tax ($13,400 in 2001 and $15,800 in
2000) and amounts receivable due to the cancellation of the company-owned life
insurance plan ($22,000 in 2001 and $0 in 2000).
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 Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). 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.
In October 2001, the FASB issued 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. Impairment of long-lived assets will be reassessed in the
first quarter of 2001 upon implementation of SFAS 144 which incorporates
probability weighting of undiscounted cash flow assumptions. The Company is
currently assessing the impact of the adoption of this new statement.
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
41
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 carryforwards. 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 carryforward 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. Unremitted earnings of foreign subsidiaries which have been, or are
intended to be, permanently reinvested (and for which no Federal income tax has
been provided) aggregated $336,700 as of December 28, 2001. It is not
practicable to estimate the additional tax that would be incurred, if any, if
these amounts were repatriated.
FOREIGN CURRENCY TRANSLATION - Assets and liabilities of foreign subsidiaries
are translated into U.S. dollars at year-end exchange rates and income and
expenses and cash flows at monthly weighted average rates. Foreign currency
transaction gains for 2001, 2000 and 1999 were approximately $3,400, $6,100 and
$4,100, respectively ($2,200, $4,000 and $2,700 net of taxes). The Company
enters into foreign exchange contracts in its management of foreign currency
exposures. Changes in the fair value of derivative contracts that qualify as
designated cashflow 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.
Corporate policy prohibits the speculative use of financial 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 for 2001 and 2000 consist principally of
the excess of cost over the fair value of net assets acquired (goodwill)
($200,152 and $208,892), trademarks ($49,594 and $52,158) and patents ($24,797
and $27,085), respectively. These assets are being amortized on a straight-line
basis over periods of 12 to 40 years. The Company periodically evaluates
goodwill on a separate operating unit basis to assess recoverability and
impairments, if any, are recognized in earnings. In the event facts and
circumstances indicate that the carrying amount of goodwill associated with an
investment is impaired, the Company reduces the carrying amount to an amount
representing the estimated undiscounted future cash flows before interest to be
generated by the operation.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("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 intends to utilize the two-step method described in SFAS 142
for purposes of determining the amount of goodwill impairment and the one-step
method of determining the impairment for indefinite-lived intangible assets. The
Company anticipates that there will be an impairment of $25,000 after-tax
relating to a waste-to-energy facility that will be recorded in 2002. While no
additional charges are anticipated, the Company is still in the process of
evaluating the impact of the adoption of SFAS 142. The Company will also
discontinue the recording of goodwill amortization as is required which
approximates $8,000 annually.
EARNINGS PER SHARE - Basic per share data has been computed based on the
weighted average number of shares of common stock outstanding. Diluted per share
data has been computed based on the basic plus the dilution of stock options. On
April 26, 1999, the Company adopted a Directors Deferred Compensation and Stock
Award Plan (the "Plan"). Under the Plan, each non-employee director is credited
42
annually with share units of the Company's common stock. In addition, each
non-employee director may elect to defer receipt of compensation for services
rendered as a director, which deferred amount is credited to his or her account
in the form of share units. The Company makes a supplemental contribution equal
to 15% of the deferred amount. For the years ended December 28, 2001, December
29, 2000, and December 31, 1999, 41,091, 53,443 and 34,832 share units,
respectively, were credited in participants' accounts and are included in the
calculation of basic earnings per share. The shares related to the convertible
notes offering were not included in the computation due to their antidilutive
effect.
3. RESEARCH AND DEVELOPMENT
For the years 2001, 2000 and 1999, approximately $12,300, $12,000 and $12,500,
respectively, were spent on Company-sponsored research activities. During the
same periods, approximately $39,200, $27,600 and $27,100, respectively, were
spent on customer-sponsored research activities.
43
4. ACCOUNTS AND NOTES RECEIVABLE
The following tabulation shows the components of trade accounts and notes
receivable:
December 28, December 29,
2001 2000
---- ----
From long-term contracts:
Amounts billed due within one year................... $ 452,367 $ 418,285
------------ ----------
Retention:
Billed:
Estimated to be due in:
2001............................................ - 71,912
2002............................................ 65,631 27,573
2003............................................ 18,059 41,079
2004............................................ 22,246 8,270
2005............................................ 2,485 -
------------ ---------
Total billed.................................... 108,421 148,834
------------ ---------
Unbilled:
Estimated to be due in:
2001............................................ - 93,158
2002............................................ 127,046 12,459
2003............................................ 9,538 -
------------ ---------
Total unbilled.................................. 136,584 105,617
------------ ---------
Total retentions................................ 245,005 254,451
------------ ---------
Total receivables from long-term contracts...... 697,372 672,736
Other trade accounts and notes receivable.............. 32,172 30,608
------------ ---------
729,544 703,344
Less, allowance for doubtful accounts.................. 2,988 3,379
------------ ---------
$ 726,556 $ 699,965
============ =========
In the third quarter of 1998, a subsidiary of the Company entered into a
three-year agreement with a financial institution whereby the subsidiary would
sell an undivided interest in a designated pool of qualified accounts
receivable. Under the terms of the agreement, new receivables are added to the
pool as collections reduce previously sold accounts receivable. The credit risk
of uncollectible accounts receivable has been transferred to the purchaser. The
Company services, administers and collects the receivables on behalf of the
purchaser. Fees payable to the purchaser under this agreement are equivalent to
rates afforded high quality commercial paper issuers plus certain administrative
expenses and are included in other deductions, in the Consolidated Statement of
Earnings and Comprehensive Income. The agreement contains certain covenants and
provides for various events of termination. As of December 28, 2001 and December
29, 2000, $50,000 in receivables were sold under the agreement and are therefore
not reflected in the accounts receivable - trade balance in the Consolidated
Balance Sheet. The bank that is party to this financing has elected to terminate
the agreement in accordance with its terms. Notwithstanding the election to
terminate the agreement, the bank has provided extensions while the Company
negotiates with other providers to replace this financing.
Refer to Note 1 for information regarding the Company's ability to continue as a
going concern including the extension of the receivables sale agreement
discussed above and the status of bank negotiations.
44
5. CONTRACTS IN PROCESS AND INVENTORIES
Costs of contracts in process and inventories considered in the determination of
cost of operating revenues are shown below:
2001 2000
INVENTORIES ---- ----
- -----------
Materials and supplies ................... $10,190 $10,663
Finished goods ........................... 339 357
------- -------
$10,529 $11,020
======= =======
The following tabulation shows the elements included in contract in process as
related to long-term contracts:
CONTRACTS IN PROCESS 2001 2000
- -------------------- ---- ----
Costs plus accrued profits less
earned revenues on contracts
currently in process ....................... $638,238 $633,178
Less, progress payments ........................ 144,639 179,869
-------- --------
$493,599 $453,309
======== ========
6. LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment are stated at cost and are set forth below:
2001 2000
---- ----
Land and land improvements ................... $ 21,261 $ 16,057
Buildings .................................... 104,869 109,099
Equipment .................................... 598,047 728,390
Construction in progress ..................... 3,835 11,803
-------- --------
$728,012 $865,349
======== ========
Depreciation expense for the years 2001, 2000 and 1999 was $44,348, $46,388 and
$51,282, respectively.
45
7. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
PENSION BENEFITS -Domestic and foreign subsidiaries of the Company have several
pension plans covering substantially all full-time employees. Under the plans,
retirement benefits are primarily a function of both years of service and level
of compensation; the domestic plans are noncontributory. Effective January 1,
1999, a new cash balance program was established. The pension benefit under the
previous formulas remain the same for current employees if so elected, however,
new employees will be offered only the cash balance program. The cash balance
plan resembles a savings account. Amounts are credited based on age and a
percentage of earnings. At termination or retirement, the employee receives the
balance in the account in a lump-sum. Under the cash balance program, future
increases in employee earnings will not apply to prior service costs. It is the
Company's policy to fund the plans on a current basis to the extent deductible
under existing Federal tax regulations. Such contributions, when made, are
intended to provide not only for benefits attributed to service to date, but
also those expected to be earned in the future. The Company also has a
non-qualified, unfunded supplemental executive retirement plan which covers
certain employees.
Through the year ended December 28, 2001, the Company recognized a cumulative
minimum liability in its financial statements for a certain underfunded plan in
the amount of $70,270 resulting in a pre-tax charge to Other Comprehensive
Income. The minimum pension liability will change from year to year as a result
of revisions to actuarial assumptions, experience gains or losses and settlement
rate changes.
Domestic subsidiaries of the Company have a 401(k) plan for salaried employees.
The Company, for the years 2001, 2000 and 1999, contributed a 50% match of the
first 6% of base pay of employee contributions, subject to the annual IRS limit
which amounted to a cost of $5,008, $5,599 and $5,200, respectively.
OTHER BENEFITS - In addition to providing pension benefits, some of the
Company's domestic subsidiaries provide certain health care and life insurance
benefits for retired employees. Employees may become eligible for these benefits
if they qualify for and commence normal or early retirement pension benefits as
defined in the pension plan while working for the Company. Benefits are provided
through insurance companies.
46
The following chart contains the disclosures for pension and other benefits for
the years 2001, 2000 and 1999.
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
PROJECTED BENEFIT OBLIGATION (PBO)
PBO at beginning of period ......................... $ 601,819 $ 586,969 $ 79,649 $ 77,236
Service cost ....................................... 27,248 28,013 996 1,248
Interest cost ...................................... 37,856 37,643 7,227 5,905
Plan participants contributions .................... 4,004 4,003 -- 813
Plan amendments .................................... 1,973 175 (422) --
Actuarial loss/(gain) .............................. 11,161 8,578 21,032 2,111
Benefits paid ...................................... (42,091) (35,470) (8,423) (7,664)
Special termination benefits/other ................. (140) 4,017 -- --
Foreign currency exchange rate changes ............. (730) (32,109) -- --
--------- --------- --------- ---------
PBO at end of period ............................... 641,100 601,819 100,059 79,649
--------- --------- --------- ---------
PLAN ASSETS
Fair value of plan assets beginning of
period ........................................... 575,990 636,890 -- --
Actual return on plan assets ....................... (33,736) (7,452) -- --
Employer contributions ............................. 12,354 11,191 8,423 6,851
Plan participant contributions ..................... 4,004 4,003 -- 813
Benefits paid ...................................... (42,091) (34,544) (8,423) (7,664)
Other .............................................. 2,171 1,186 -- --
Foreign currency exchange rate changes ............. 2,503 (35,284) -- --
--------- --------- --------- ---------
Fair value of plan assets at end of
period ........................................... 521,195 575,990 -- --
--------- --------- --------- ---------
FUNDED STATUS
Funded status ...................................... (119,905) (25,829) (100,059) (79,649)
Unrecognized net actuarial
loss/(gain) ..................................... 213,607 122,618 14,500 (6,236)
Unrecognized prior service cost .................... 12,219 12,052 (18,029) (19,813)
Adjustment for the minimum liability ............... (36,770) (33,500) -- --
--------- --------- --------- ---------
Prepaid (accrued) benefit cost ..................... $ 69,151 $ 75,341 $(103,588) $(105,698)
========= ========= ========= =========
PENSION BENEFITS OTHER BENEFITS
------------------------------------ -----------------------------------0
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
NET PERIODIC BENEFIT COST
Service cost ............................. $ 27,248 $ 28,013 $ 30,728 $ 996 $ 1,248 $ 1,454
Interest cost ............................ 37,856 37,642 35,915 7,227 5,905 5,641
Expected return on plan assets ........... (51,819) (57,022) (52,164) -- -- --
Amortization of transition asset ......... 56 (9) (2,969) -- -- --
Amortization of prior service cost ....... 1,692 2,215 2,805 (2,206) (2,165) (2,164)
Recognized actuarial loss/(gain)
other .................................. 5,020 (326) 5,477 296 (60) --
-------- -------- -------- -------- -------- --------
SFAS No.87 net periodic pension cost ..... 20,053 10,513 19,792 6,313 4,928 4,931
SFAS No.88 cost* ......................... 1,900 -- 3,136 -- -- --
-------- -------- -------- -------- -------- --------
Total net periodic pension cost .......... 21,953 $ 10,513 $ 22,928 6,313 $ 4,928 $ 4,931
======== ======== ======== ======== ======== ========
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate............................. 6.4% 6.7% 6.9% 7.75% 7.8% 8.0%
Long term rate of return.................. 9.3% 9.5% 9.5%
Salary scale.............................. 4.2% 4.2% 4.6%
*Under the provision of SFAS No. 88 "Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits," a provision for
the retirement of the Company's Chief Executive Officer resulted in a charge of
$1,900; the reduction of workforce under the Realignment Plan and early
retirement resulted in a charge of $3,136 in 1999.
Health care cost trend:
2001 9.5%
Decline to 2010.................................................. 5.0%
47
Assumed health care cost trend rates have a significant effect on the amounts
reported for the other benefit plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------0
Effect on total of service and interest cost components .............. $ 309 $ (275)
Effect on accumulated postretirement benefit obligations ............ 4,048 (3,627)
8. BANK LOANS
The approximate weighted average interest rates on borrowings outstanding
(primarily foreign) at the end of 2001 and 2000 were 4.28% and 5.78%,
respectively.
Unused lines of credit for short-term bank borrowings aggregated $59,045 at
year-end 2001, all of which were available outside the United States and Canada
in various currencies at interest rates consistent with market conditions in the
respective countries.
Interest costs incurred (including dividends on preferred security) in 2001,
2000 and 1999 were $85,202, $83,405, and $74,856 of which $718, $151 and $4,643,
respectively, were capitalized.
9. CORPORATE AND OTHER DEBT AND CONVERTIBLE SUBORDINATED NOTES
CORPORATE DEBT - The Company, through its subsidiary Foster Wheeler LLC, has
$200,000 Notes (the "Senior Notes") in the public market, which bear interest at
a fixed rate of 6.75% per annum, payable semiannually, and mature November 15,
2005. The Senior Notes were issued under an indenture between the Company and
BNY Midwest Trust Company. The Notes are not redeemable prior to maturity and
are not subject to any sinking fund requirements. The Senior Notes constitute
senior unsecured indebtedness of the Company and rank on parity with the
Company's other senior unsecured indebtedness.
The Senior Notes described above have been classified as current liabilities due
to the covenant violations under the Company's Revolving Credit Agreement and
the potential for debt acceleration under these agreements. Refer to Note 1 for
further information including a discussion of the Company's ability to continue
as a going concern and the status of bank negotiations.
The Company maintains a revolving credit agreement (the "Revolving Credit
Agreement") consisting of a $270,000 multi-year facility dated December 1, 1999
that expires on February 12, 2003. In 2001, the Company and the banks that are
party to the Revolving Credit Agreement consented to amend the agreement (the
"Amendments") on two occasions. The first Amendment provided for the following:
(i) provisions associated with the planned change of domicile to Bermuda, (ii)
provisions associated with the potential monetization, as previously announced,
of certain build, own and operated assets and (iii) the modification of certain
financial covenants. The second Amendment allows Foster Wheeler LLC to make
payments to Foster Wheeler Ltd. in amounts sufficient to pay amounts due on the
convertible subordinated notes discussed below. The Revolving Credit Agreement
was restated as of May 25, 2001 to reflect these amendments. The Revolving
Credit Agreement requires, among other things, that the Company maintain a
maximum consolidated leverage ratio and a minimum consolidated fixed charge
coverage ratio. As of December 28, 2001, the Company was not in compliance with
these covenants under the Revolving Credit Agreement as a result of the fourth
quarter 2001 contract and restructuring charges recorded.
The borrowings outstanding under the Revolving Credit Agreement have been
classified as current liabilities due to the covenant violations described
above. Refer to Note 1 for further information including a discussion of the
Company's ability to continue as a going concern and the status of waivers
received and bank negotiations.
Loans under the Revolving Credit Agreement bear interest at a floating rate and
are used for general corporate purposes. As of December 28, 2001, $70,000 was
borrowed under the Revolving Credit Agreement. This amount appears on the
48
Consolidated Balance Sheet under the caption "Corporate and Other Debt." The
Company pays various fees to the lenders under these arrangements.
The Company is also permitted to allocate a portion of its available credit
under the Revolving Credit Agreement for the issuance of standby letters of
credit. As of December 28, 2001, $130,229 of such standby letters of credit were
outstanding. New standby letters of credit issued must be cash collateralized.
Corporate and other debt consisted of the following:
2001 2000
---- ----
Revolving Credit Agreement (average interest rate 3.75%) ............. $ 70,000 $ 85,000
6.75% Notes due November 15, 2005 .................................... 200,000 200,000
Other ................................................................ 27,627 21,188
-------- --------
297,627 306,188
Less, Current portion .................................................... 404 187
-------- --------
$297,223 $306,001
======== ========
Principal payments are payable in annual installments of:
2003 ................................................................. $ 75,504
2004 ................................................................. 1,276
2005 ................................................................. 200,031
2006 ................................................................. 31
2007 ................................................................. 31
Balance due in installments through 2017 ............................. 20,350
---------
$ 297,223
=========
CONVERTIBLE SUBORDINATED NOTES - In May and June 2001, the Company issued
convertible subordinated notes having an aggregate principal amount of $210,000.
The notes are due in 2007 and bear interest at 6.50% per annum, payable
semi-annually on June 1 and December 1 of each year, commencing December 2001.
The notes may be converted into common shares at an initial conversion rate of
62.131 common shares per $1,000 principal amount, or $16.05 per common share,
subject to adjustment under certain circumstances. The notes are subordinated in
right of payment to all existing and future senior indebtedness of the Company.
The net proceeds of approximately $202,900 were used to repay $76,300 under the
364-day revolving credit facility that expired on May 30, 2001 and to reduce
advances outstanding under the Revolving Credit Agreement. Amortization of debt
issuance costs are included as a component of interest expense over the term of
the notes.
The Convertible Subordinated Notes described above have been classified as
current liabilities due to the covenant violations under the Company's Revolving
Credit Agreement and the potential for debt acceleration under these agreements.
Refer to Note 1 for further information including a discussion of the Company's
ability to continue as a going concern and the status of bank negotiations.
10. DERIVATIVE FINANCIAL INSTRUMENTS
Effective December 30, 2000, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, an amendment of FASB Statement No. 133", and Statement of
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133". These statements require
that all derivative instruments be reported on the balance sheet at fair value.
The Company operates on a worldwide basis. The Company's activities expose it to
risks related to the effect of changes in the foreign-currency exchange rates.
The Company maintains a foreign-currency risk-management strategy that uses
derivative instruments to protect it from unanticipated fluctuations in earnings
and cash flows that may arise from volatility in currency exchange rates. These
items have been designated as cash flow hedges. The Company does not engage in
currency speculation. The Company's forward exchange contracts do not subject
the Company to significant risk from exchange rate movement because gains and
losses on such contracts offset losses and gains, respectively, in the
transactions being hedged. The Company is exposed to credit loss in the event of
non-performance by the counterparties. All of these counterparties are
49
significant financial institutions that are primarily rated A or better by
Standard & Poor's or A2 or better by Moody's. The amount of unrealized gains
owed to the Company by counterparties as of December 28, 2001 was $15,294 and is
included in Contracts in process in the consolidated balance sheet. The amount
of unrealized losses owed by the Company to the counterparties as of December
28, 2001 was $9,393 and is included in estimated costs to complete long-term
contracts in the consolidated balance sheet. A $3,834 net of tax gain was
recorded in other comprehensive income as of December 28, 2001.
The Company formally documents its hedge relationships at inception, including
identification of the hedging instruments and the hedged items, as well as its
risk management objectives and strategies for undertaking the hedge transaction.
The Company also formally assesses both at inception and at least quarterly
thereafter, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in the fair value of the hedge items.
Changes in the fair value of these derivatives are recorded in other
comprehensive income until earnings are affected the hedged forecasted
transaction. Such amounts, if they occur, will be included in operating revenues
or cost of operating revenues. There were no amounts excluded from the
assessment of hedge effectiveness and there was no material hedge
ineffectiveness for the twelve months ended December 28, 2001. No amounts were
reclassified to earnings during the year in connection with forecasted
transactions that are no longer considered probable of occurring.
The Company recorded a $6,300 net of tax cumulative-effect adjustment in
comprehensive income relating to fair value of hedging instruments as of
December 30, 2000 (the first day of the new fiscal year). As of December 28,
2001, $6,304 of deferred net gains on derivative instruments accumulated in
other comprehensive income are expected to be reclassified as earnings during
the next twelve months based upon the realization of the forecasted cash flows
of the transactions. The maximum term over which the Company is hedging exposure
to the variability of cash flows is twenty-six months.
A reconciliation of current period changes, net of applicable income taxes, in
accumulated other comprehensive income relating to derivatives qualifying as
cash flow hedges are as follows:
Transition adjustment as of December 30, 2000 .......... $ 6,300
Current period declines in fair value .................. (4,877)
Reclassification to earnings ........................... 2,411
-------
Balance at December 28, 2001 ........................... $ 3,834
=======
50
11. SUBORDINATED ROBBINS FACILITY EXIT FUNDING OBLIGATIONS
Foster Wheeler's subordinated obligations entered into in connection with the
restructuring of debt incurred to finance construction of a waste-to-energy
facility in the Village of Robbins, Illinois (the "Exit Funding Agreement") is
limited to funding:
1999C Bonds 7 1/4% interest, due October 15, 2009 ($15,185)
and October 15, 2024 ($77,155) $ 92,340
1999D Bonds accrued at 7% due October 15, 2009 18,000
--------
Total $110,340
========
1999C BONDS. The 1999C Bonds are subject to mandatory sinking fund reduction
prior to maturity at a redemption price equal to 100% of the principal amount
thereof, plus accrued interest to the redemption date by application by the
Trustee of funds on deposit to the credit of the 1999C Sinking Fund Installment
Subaccount on October 15 in the years and in the principal amounts as follows:
1999C BONDS DUE 2009
YEAR AMOUNT YEAR AMOUNT
---- ------ ---- ------
2002 1,475 2006 1,940
2003 1,580 2007 2,080
2004 1,690 2008 2,225
2005 1,810 2009 2,385
----------
$ 15,185
----------
1999C BONDS DUE 2024
YEAR AMOUNT
---- ------
2023 $ 37,230
2024 39,925
---------
77,155
---------
$ 92,340
=========
See Note 24 for further information.
The Subordinated Robbins Facility exit funding obligations described above have
been classified as current liabilities due to the covenant violations under the
Company's Revolving Credit Agreement and the potential for debt acceleration
under these agreements. Refer to Note 1 for further information including a
discussion of the Company's ability to continue as a going concern and the
status of bank negotiations.
12. MANDATORILY REDEEMABLE PREFERRED SECURITIES
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 Foster Wheeler LLC. 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 during which time additional interest accrues at 9.0%.
In accordance with this provision, the Company elected to defer the distribution
due on January 15, 2002 and April 15, 2002. The maturity date is January 15,
2029. Foster Wheeler can redeem these Preferred Trust Securities on or after
January 15, 2004.
The Preferred Trust Securities have been classified as current liabilities due
to the covenant violations under the Company's Revolving Credit Agreement and
51
the potential for acceleration of the these securities. Refer to Note 1 for
further information including a discussion of the Company's ability to continue
as a going concern and the status of bank negotiations.
13. SPECIAL-PURPOSE PROJECT DEBT
Special-purpose project debt represents debt incurred to finance the
construction of cogeneration facilities or waste-to-energy projects. The
notes and/or bonds are collateralized by certain assets of each project. The
Company's obligations with respect to this debt are limited to guaranteeing
the operating performance of the projects.
2001 2000
---- ----
Note payable, interest varies based on one of several money market rates
(2001-year-end rate 4.595%), due semiannually
through July 30, 2006...................................................... $ 33,367(1) $ 38,313
Senior Secured Notes, interest 11.443%,
due annually April 15, 2002 through 2015................................... 42,075(2) 42,500
Solid Waste Disposal and Resource Recovery System Revenue Bonds,
interest 7.125% to 7.5%, due annually December 1, 2002 through 2010........ 97,978(3) 105,746
Resource Recovery Revenue Bonds, interest 7.9% to 10%, due
annually December 15, 2002 through 2012.................................... 52,636(4) 55,586
Floating/Fixed Rate Resource Recovery Revenue Bonds, interest
varies based on tax-exempt money market rates (2000-year-end rate
5.10%), due semiannually February 1, 2001 through February 1, 2010......... - 32,848(5)
--------- ----------
226,056 274,993
Less, Current portion.......................................................... 20,216 19,689
--------- ----------
$ 205,840 $ 255,304
========= =========
1. The note payable for $33,367 represents a loan under a bank credit
facility to a limited partnership whose general partner is a
special-purpose subsidiary.
2. The Senior Secured Notes of $42,075 were issued in a total amount of
$42,500. The notes are collateralized by certain revenues and assets of
a special-purpose subsidiary which is the indirect owner of the project.
3. The Solid Waste Disposal and Resource Recovery System Revenue Bonds
totaling $97,978 were issued in a total amount of $133,500. The bonds
are collateralized by a pledge of certain revenues and assets of the
project, but not the plant (see Note 18).
4. The Resource Recovery Revenue Bonds of $52,636 were issued in a total
amount of $86,780. The bonds are collateralized by a pledge of certain
revenues and assets of the project.
5. The Floating/Fixed resource Recovery Revenue Bonds in the amount of
$32,848 were issued in a total amount of $45,450. The bonds were
collateralized by an irrevocable standby letter of credit issued by a
commercial bank. The entity which held this debt was sold in the fourth
quarter of 2001.
52
Principal payments are payable in annual installments as follows:
2003..................................................... $ 24,227
2004..................................................... 23,195
2005..................................................... 25,165
2006..................................................... 27,072
2007..................................................... 15,323
Balance due in installments through 2015................. 90,858
---------
$ 205,840
=========
The Note payable and Senior Secured Notes described above have been classified
as current liabilities due to the covenant violations under the Company's
Revolving Credit Agreement and the potential for debt acceleration under these
agreements. Refer to Note 1 for further information including a discussion of
the Company's ability to continue as a going concern and the status of bank
negotiations.
14. EQUITY INTERESTS
The Company owns a non-controlling equity interest in three cogeneration project
and one waste-to-energy project; three of which are located in Italy and one in
Chile. 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. The
Company does not have a controlling financial interest in the Chilean project.
Following is summarized financial information for the Company's equity
affiliates combined, as well as the Company's interest in the affiliates.
DECEMBER 28, 2001 DECEMBER 29, 2000
----------------- -----------------
BALANCE SHEET DATA:
Current assets ............................ $ 99,243 $146,277
Other assets (primarily buildings
and equipment) ....................... 538,603 603,665
Current liabilities ....................... 27,234 48,604
Other liabilities (primarily long-
term debt) ........................... 487,154 529,182
Net assets ................................ 123,458 172,156
INCOME STATEMENT DATA FOR THE YEAR:
Total revenues ............................ $204,819 $213,076
Income before income taxes ................ 34,769 46,757
Net earnings .............................. 23,226 33,029
As of December 28, 2001, the Company's share of the net earnings and investment
in the equity affiliates totaled $12,836 and $84,514, respectively. Dividends of
$8,178 were received during the year 2001. 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 amounts have been drawn under the letter
of credit.
In April 2001, the Company completed the sale of its interests 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 was recorded in the
second quarter relating to these sales.
15. INCOME TAXES
The components of (loss)/earnings before income taxes for the years 2001, 2000
and 1999 were taxed under the following jurisdictions:
2001 2000 1999
---- ---- ----
Domestic .............. $(237,849) $ (33,477) $(320,702)
Foreign ............... 31,844 89,500 130,176
--------- --------- ---------
Total .............. $(206,005) $ 56,023 $(190,526)
========= ========= =========
53
The provision/(benefit) for income taxes on those earnings was as follows:
2001 2000 1999
---- ---- ----
Current tax (benefit)/expense:
Domestic....................................... $ 5,486 $ 2,116 $ 15,469
Foreign........................................ 22,545 15,094 66,687
----------- ----------- ---------
Total current.................................. 28,031 17,210 82,156
----------- ----------- ---------
Deferred tax (benefit)/expense:
Domestic....................................... 81,890 (12,729) (109,154)
Foreign........................................ (6,783) 12,048 (19,893)
------------ ----------- ----------
Total deferred................................. 75,107 (681) (129,047)
----------- ------------ ----------
Total provision/(benefit) for income taxes........ $ 103,138 $ 16,529 $ (46,891)
=========== =========== ==========
Deferred tax liabilities (assets) consist of the following:
2001 2000 1999
---- ---- ----
Difference between book and tax
depreciation................................... $ 34,369 $ 72,195 $ 91,380
Pension assets.................................... 7,584 22,881 36,036
Capital lease transactions........................ 8,612 9,733 10,748
Revenue recognition............................... 5,999 16,736 25,744
Other............................................. 192 740 1,392
-------- ----------- ----------
Gross deferred tax liabilities.................... 56,756 122,285 165,300
-------- ----------- ---------
Current taxability of estimated costs to
complete long-term contracts................... (4,297) (5,750) (5,469)
Income currently taxable deferred for
financial reporting............................ (5,307) (5,491) (5,591)
Expenses not currently deductible for tax
purposes....................................... (122,983) (132,898) (166,414)
Investment tax credit carry forwards.............. (30,893) (30,251) (30,251)
Postretirement benefits other than pensions....... (47,242) (51,070) (61,895)
Asbestos claims................................... (7,000) (7,963) (6,370)
Minimum tax credits............................... (11,073) (10,263) (11,371)
Foreign tax credits............................... (6,485) (13,763) (38,197)
Effect of write-downs and restructuring
reserves....................................... (63,680) - -
Other............................................. (12,510) (58,615) (45,274)
Valuation allowance............................... 246,158 71,816 96,250
---------- ----------- ----------
Net deferred tax assets........................... (65,312) (244,248) (274,582)
----------- ------------ ----------
$ (8,556) $ (121,963) $(109,282)
=========== ============= ==========
The provision for income taxes in fiscal 2001 results from the net increase in
the valuation allowance for primarily domestic net deferred tax assets of
$161,400. Such increase is required under FASB 109, "Accounting for Income
Taxes", when there is an evidence of losses from domestic operations in the
three most recent fiscal years. For statutory purposes, the majority of deferred
tax assets for which a valuation allowance is provided in the current year do
not begin expiring until 2020 and beyond, based on the current tax laws.
The domestic investment tax credit carryforwards, if not used, will expire in
the years 2002 through 2007. Foreign tax credit carryforwards are recognized
based on their potential utilization and, if not used,
54
will expire in the years 2002 through 2004. As reflected above, the Company has
recorded various deferred tax assets. Realization is dependent on generating
sufficient taxable income prior to the expiration of the various credits.
Management believes that it is more likely than not that the remaining net
deferred tax assets (after consideration of the valuation allowance) will be
realized through future earnings and/or tax planning strategies. The amount of
the deferred tax assets considered realizable, however, could change in the near
future if estimates of future taxable income during the carryforward period are
changed. The 2000 decrease in the valuation allowance of $24,400 is due to the
expiration of foreign tax credits. The 1999 increase in the valuation allowance
of $15,000, were caused primarily by the losses of the Robbins Facility and
their impact on the realizability of tax benefits in the future.
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory rate to earnings before income taxes,
as a result of the following:
2001 2000 1999
---- ---- ----
Tax provision/(benefit) at U.S.
statutory rate............................. (35.0)% 35.0% (35.0)%
State income taxes, net of Federal
income tax benefit......................... 1.9 6.7 (4.0)
Increase in valuation allowance............... 78.4 - 5.2
Difference in estimated income taxes on
foreign income and losses, net of
previously provided amounts................ 2.2 (7.5) 7.9
Other 2.6 (4.7) 1.3
------- ------- -------
50.1% 29.5% (24.6)%
======= ======= =======
55
16. LEASES
The Company entered into a sale/leaseback of the 600 ton-per-day waste-to-energy
plant in Charleston, South Carolina, in 1989. The terms of the agreement are to
lease back the plant under a long-term operating lease for 25 years. The Company
recorded a deferred gain of $13,800 relating to this sale/leaseback transaction
which is being amortized to income over the term of the lease. As of December
28, 2001 and December 29, 2000, the unamortized gain on the sale/leaseback
transaction was $6,500 and $7,100, respectively, net of the current portion of
$500 each year. The minimum lease payments under the long-term non-cancelable
operating lease are as follows: 2002 - $8,000; 2003 - $8,100; 2004 - $9,800;
2005 - $9,800; 2006 - $9,800; and an aggregate of $51,800 thereafter. Lease
expense recognized for 2001, 2000 and 1999 was $7,500 a year. Recourse under
this agreement is primarily limited to the assets of the special-purpose entity.
In the first quarter of 2002, the Company has entered a preliminary agreement of
sale with a buyer for this waste-to-energy plant. If the sale is consummated
under the terms of the preliminary agreement, the Company will recognize a
pre-tax loss on the sale of approximately $19,500.
The Company and certain of its subsidiaries are obligated under other operating
lease agreements primarily for office space. Rental expense for these leases
subsequent to various sale/leaseback transactions, amounted to $29,800 in 2001,
$30,200 in 2000 and $27,700 in 1999. Future minimum rental commitments on
non-cancelable leases are as follows: 2002 - $27,300; 2003 - $21,600; 2004 -
$20,500; 2005 - $16,900; 2006 - $12,200 and an aggregate of $151,000 thereafter.
The Company has a $33,000 lease financing facility that matured on February 28,
2002. This lease financing facility is an operating lease relating to a
corporate office building which has a fair value in excess of $40,000. Refer to
Note 1 for information regarding the Company's ability to continue as a going
concern including the forbearance received from the banks that are party to this
lease financing facility.
56
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED
---------------------------------------------------------
2001 MARCH 30 JUNE 29(1)(2)(4) SEPT. 28(1) DEC. 28(1)(3)
- ---- -------- --------------- ----------- ------------
Operating revenues ............................................ $ 682,643 $ 826,882 $ 808,798 $ 996,991
Gross earnings/(loss) from operations ......................... 74,958 84,421 68,390 (76,480)
Net earnings/(loss) ........................................... 8,105 789 1,242 (319,279)
Earnings/(loss) per share:
Basic ...................................................... $ .20 $ .02 $ .03 $ (7.81)
Diluted .................................................... $ .20 $ .02 $ .03 $ (7.81)
Shares outstanding:
Basic:
Weighted average number of shares outstanding ........... 40,835 40,891 40,884 40,896
Diluted:
Effect of stock options ................................. 310 360 87 *
----------- ----------- ----------- -----------
Total diluted .............................................. 41,145 41,251 40,971 40,896
=========== =========== =========== ===========
2000 MARCH 31 JUNE 30 SEPT. 29 DEC. 29
- ---- ----------- ----------- ----------- -----------
Operating revenues revenues ................................... $ 822,036 $ 1,004,979 $ 1,008,350 $ 1,055,996
Gross earnings from operations ................................ 80,478 81,856 81,776 82,104
Net earnings .................................................. 8,372 8,647 10,145 12,330
Earnings per share:
Basic ...................................................... $.21 $.21 $.25 $.30
Diluted .................................................... $.21 $.21 $.25 $.30
Shares outstanding:
Basic:
Weighted average number of shares outstanding ...... 40,776 40,795 40,805 40,815
Diluted:
Effect of stock options ............................ 1 13 10 0
----------- ----------- ----------- -----------
Total diluted ........................................... 40,777 40,808 40,815 40,815
=========== =========== =========== ===========
* The effect of the stock options and convertible notes were not included in
the calculation of diluted earnings per share as these options were
antidilutive due to the quarterly loss.
(1) The second, third and fourth quarters of 2001 include after tax increased
pension costs of $1,200, $1,100 and $1,000, respectively.
(2) The second quarter of 2001 includes the following after tax charges: loss
on the sale of cogeneration plants of $5,000 and a provision for CEO
retirement of $1,800.
(3) The fourth quarter of 2001 includes the following after tax charges:
contract write-downs of $104,400; restructuring charges of $27,000; a
reserve for deferred tax assets of $171,900; and loss on the sale of a
cogeneration plant of $22,900.
(4) Net earnings for the second quarter of 2001 have been restated by $1,200
to eliminate the change in accounting principle for pension costs and to
amend the current year calculation of pension expense to be consistent
with prior periods.
57
18. LITIGATION AND UNCERTAINTIES
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 or plant construction and
seeking resulting alleged damages. 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 material charges against assets or earnings
materially in excess of amounts previously provided in the accounts.
The Company and its subsidiaries, along with many other companies, are
codefendants in numerous asbestos-related 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 allegedly performed by
the Company and its subsidiaries during the 1970s and prior. A summary of claim
activity for the three years ended December 28, 2001 is as follows:
NUMBER OF CLAIMS
2001 2000 1999
---- ---- ----
Balance, beginning of year ........ 92,100 73,600 62,400
New claims ........................ 54,700 41,300 30,700
Claims resolved ................... (36,100) (22,800) (19,500)
-------- -------- --------
Balance, end of year .............. 110,700 92,100 73,600
-------- -------- --------
The amount spent on asbestos litigation defense and case resolution,
substantially all of which was reimbursed or will be reimbursed from insurance
coverage, was $66,900 in 2001, $56,200 in 2000 and $40,400 in 1999.
The Company continues to actively manage the claims and to negotiate with
certain insurance carriers concerning the limits of coverage provided during
different time periods. The Company has recorded a liability related to probable
losses on asbestos-related insurance claims of approximately $500,000 and an
asset for probable recoveries in a similar amount, net of an $18,000 reserve.
Approximately $60,000 of the balance is classified as short-term while the
remainder is considered long-term. The liability is an estimate of future
defense costs and indemnity payments, which are based upon assumed average claim
resolution costs applied against currently pending and estimated future claims.
The asset is an estimate of recoveries from insurers based upon assumptions
relating to cost allocation and resolution of pending litigation with certain
insurers, as well as recoveries under a funding arrangement with other insurers,
which has been in place since 1993. The defense costs and underwriting payments
are expected to be incurred over the next ten years during which period new
claims are expected to decline from year to year. In 2001 and 2000 there were a
number of companies that petitioned courts for protection under Federal
Bankruptcy Laws as a result of the burden of litigation relating to asbestos. In
early 2001, lawsuits commenced among the Company and its insurers to determine
their respective rights and responsibilities. Management of the Company, after
consultation with counsel, has considered the litigation, the financial
viability and legal obligations of its insurance carriers and believes that
except for those insurers that have become insolvent, for which a reserve has
been provided 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 currently involved in
litigation, uncertainties surrounding the litigation process from jurisdiction
to jurisdiction and from case to case, as well as potential legislative changes.
If the number of claims received in the future exceeds the Company's estimate,
it is likely that the costs of defense and indemnity will similarly exceed the
Company's estimates.
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 intends to move to set aside this 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.
58
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. 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. As previously reported by the Company, 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. Tray Inc. has filed a notice of appeal to the court of appeals.
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 plant. Those market-based
revenues are not expected to be sufficient to service the debt on outstanding
bonds which were issued to construct the plant and to acquire a landfill for
Camden County's use. These outstanding bonds are public debt, not debt of the
Company. The Company 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. In January 2002, the State of New Jersey
enacted legislation that provides a mechanism for state-supported refinancing of
bond debt on solid waste facilities located within the state. Pending outcome of
the litigation and certain refinancing initiatives, management believes that the
plant will continue to operate at full capacity while receiving market rates for
waste disposal. At this time, management cannot determine the ultimate outcome
of the foregoing and their effect on the Project.
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, 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. (See Note 24 for a
description of the Robbins Settlement.)
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 relate to legal matters, which
are subject to change as events evolve and as additional information becomes
available during the administration and litigation process.
19. STOCK OPTION PLANS
The Company has two fixed option plans which reserve shares of common stock for
issuance to executives, key employees and directors. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting
59
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's three stock option plans been
determined based on the fair value at the grant date for awards in 2001, 2000
and 1999 consistent with the provisions of SFAS No. 123, the Company's net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below:
2001 2000 1999
---- ---- ----
Net (loss)/earnings - as reported............. $ (309,143) $ 39,494 $(143,635)
=========== ========= ==========
Net (loss)/earnings - pro forma............... $ (313,202) $ 38,022 $(145,550)
=========== ========= ==========
Earnings/(loss) per share as reported
Basic...................................... $(7.56) $.97 $(3.53)
Diluted * $.97 *
(Loss)/earnings per share - pro forma
Basic...................................... $(7.66) $.93 $ (3.57)
Diluted * $.93 *
*Stock options not included in diluted earnings per share due to losses in 2001
and 1999.
The assumption regarding the stock options issued to executives in 2001, 2000
and 1999 was that 100% of such options vested in the year of grant.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2001 2000 1999
---- ---- ----
Dividend yield.......................... 1.36% 3.18% 5.89%
Expected volatility..................... 79.20% 59.20% 48.70%
Risk free interest rate................. 4.23% 6.46% 4.90%
Expected life (years)................... 5.0 5.0 5.0
Under the 1995 Stock Option Plan approved by the shareholders in April 1995 and
amended in April 1999, the total number of shares of common stock that may be
granted is 3,300,000. In April 1990, the shareholders approved a Stock Option
Plan for Directors of the Company. On April 29, 1997, the shareholders approved
an amendment of the Directors' Stock Option Plan, which authorizes the granting
of options on 400,000 shares of common stock to non-employee directors of the
Company, who will automatically receive an option to acquire 3,000 shares each
year.
These plans provide that shares granted come from the Company's authorized but
unissued or reacquired common stock. The price of the options granted pursuant
to these plans will not be less than 100% of the fair market value of the shares
on the date of grant. An option may not be exercised within one year from the
date of grant and no option will be exercisable after ten years from the date
granted. Under the Executive Compensation Plan, the long-term incentive segment
provides for stock options to be issued. One third of the options become
exercisable at the end of each of the first three years.
In connection with the reorganization of Foster Wheeler Corporation on May 25,
2001, obligations under the stock option plans were assumed by Foster Wheeler,
Inc., an indirect wholly-owned subsidiary of the Company.
The Company also granted inducement options in 2001 to its chief executive
officer in connection with an employment agreement. The price of the options
granted pursuant to this agreement was fair market value on the date of the
grant. One fifth of these options become exercisable each year after the date of
the agreement; with all options available for exercise by the fifth anniversary
of the agreement date. The options granted under this agreement expire 10 years
from the date granted.
60
Information regarding these option plans for the years 2001, 2000 and 1999
is as follows:
2001 2000 1999
---- ---- ----
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Options outstanding, beginning of year ............ 3,137,621 $ 23.73 2,508,362 $ 27.66 1,816,802 $32.79
Options exercised ................................. (66,000) 9.51 - - - -
Options granted ................................... 1,936,250 5.30 671,486 8.76 698,500 14.17
Options cancelled or expired....................... (50,250) 21.07 (42,227) 18.96 (6,940) 14.84
--------- ---------- ---------
Options outstanding, end of year................... 4,957,621 $ 16.75 3,137,621 $ 23.73 2,508,362 $27.66
========= ========== =========
Option price range at end of year.................. $4.985 to $6.34375 to $11.34375 to
45.6875 $45.6875 $45.6875
Option price range for exercised shares............ $9.00 to - -
$15.0625
Options available for grant at end of year......... 566,180 1,192,180 1,847,166
======== ========== =========
Weighted-average fair value of options granted
during the year................................. $3.23 $3.38 $4.20
Options exercisable at end of year................. 2,620,547 2,265,468 1,607,279
Weighted-average of exercisable options at
end of year ....................................... $26.30 $28.63 $33.10
The following table summarizes information about fixed-price stock options
outstanding as of December 28, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- --------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/28/01 CONTRACTUAL LIFE EXERCISE PRICE AT 12/28/01 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
26.9375 to 27.4375 76,833 1 years 27.33 76,833 27.33
27.4375 to 28.75 89,667 2 years 28.49 89,667 28.49
32.9375 to 40.0625 160,834 3 years 36.04 160,834 36.04
29.75 to 35.25 371,967 4 years 30.19 371,967 30.19
42.1875 to 45.6875 255,584 5 years 42.63 255,584 42.63
36.9375 to 37.25 379,500 6 years 36.96 379,500 36.96
27.50 to 27.625 414,000 7 years 27.62 414,000 27.62
11.34375 to 15.0625 665,500 8 years 14.16 599,333 14.23
6.34375 to 10.00 610,486 9 years 8.74 272,829 8.65
4.985 to 11.60 1,933,250 10 years 5.30 -
---------- ---------
4.985 to 45.6875 4,957,621 2,620,547
========= =========
61
20. PREFERRED SHARE PURCHASE RIGHTS
On September 22, 1987, the Company's Board of Directors (the "Board") declared a
dividend distribution of one Preferred Share Purchase Right ("Right") on each
share of the Company's common stock outstanding as of October 2, 1987 and
adopted the Rights Agreement, dated as of September 22, 1987 (the "Rights
Agreement"). On September 30, 1997, the Board amended and restated the Rights
Agreement. Each Right allows the shareholder to purchase one one-hundredth of a
share of a new series of preferred stock of the Company at an exercise price of
$175. Rights are exercisable only if a person or group acquires 20% or more of
the Company's common stock or announces a tender offer the consummation of which
would result in ownership by a person or group of 20% or more of the Company's
common stock. In connection with the reorganization on May 25, 2001, the Foster
Wheeler Corporation Rights were exchanged for Rights of Foster Wheeler Ltd. A
new rights agreement governs the Rights, although the terms are the same. The
Rights, which do not have the right to vote or receive dividends, expire on May
20, 2011, and may be redeemed, prior to becoming exercisable, by the Board at
$.02 per Right or by shareholder action with an acquisition proposal.
If any person or group acquires 20% or more of the Company's outstanding common
stock, the "flip-in" provision of the Rights will be triggered and the Rights
will entitle a holder (other than such person or any member of such group) to
acquire a number of additional shares of the Company's common stock having a
market value of twice the exercise price of each Right.
In the event the Company is involved in a merger or other business combination
transaction, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, a number of the acquiring Company's common stock
having a market value at that time of twice the Right's exercise price. The
Board of Directors may amend the Rights Agreement to prevent approved
transactions from triggering the Rights.
62
21. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
values:
CASH AND SHORT-TERM INVESTMENTS - All investments are considered available for
sale and the carrying amount approximates fair value because of the short-term
maturity of these instruments.
LONG-TERM DEBT - The fair value of the Company's long-term debt (including
current installments) is estimated based on the quoted market prices for the
same or similar issues or on the current rates offered to the Company for debt
of the same remaining maturities. The carrying amount for 2001 includes those
debt issuances that were classified to current liabilities due to the covenant
violations under the Company's Revolving Credit Agreement and the potential for
acceleration of debt under certain debt agreements. See Note 1 for further
information.
FOREIGN CURRENCY CONTRACTS - The fair values of these financial instruments
(used for hedging purposes) are estimated by obtaining quotes from brokers. The
Company is exposed to market risks from fluctuations in foreign exchange rates.
Financial instruments are utilized by the Company to reduce this risk. The
Company does not hold or issue financial instruments for trading purposes. The
Company is exposed to credit loss in the event of nonperformance by the
counterparties. All of these financial instruments are with significant
financial institutions that are primarily rated A or better by Standard & Poor's
or A2 or better by Moody's (see Notes 1, 8 and 12).
CARRYING AMOUNTS AND FAIR VALUES - The estimated fair values of the Company's
financial instruments are as follows:
2001 2000
---- ----
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
Nonderivatives:
Cash and short-term investments....... $ 224,291 $224,291 $193,709 $193,709
Long-term debt........................ (735,158) (592,517) (581,181) (579,494)
Derivatives:
Foreign currency contracts............ 5,900 5,900 - 9,684
In the ordinary course of business, the Company is contingently liable for
performance under standby letters of credit, bank guarantees and surety bonds
totaling $1,025,612 and $1,050,496 as of December 28, 2001 and December 29,
2000, respectively. These balances include the standby letters of credit issued
under the Revolving Credit Agreement discussed in Note 9. In the Company's past
experience, no material claims have been made against these financial
instruments. Management of the Company does not expect any material losses to
result from these off-balance-sheet instruments and, therefore, is of the
opinion that the fair value of these instruments is zero.
As of December 28, 2001, the Company had $328,200 of foreign currency contracts
outstanding. These foreign currency 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 currencies
or other currencies for which they have payment obligations to third parties.
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash equivalents and trade receivables.
The Company places its cash equivalents with financial institutions and limits
the amount of credit exposure to any one financial institution. Concentrations
of credit risk with respect to trade receivables are limited due to the large
number of customers comprising the Company's customer base and their dispersion
across different business and geographic areas. As of December 28, 2001 and
December 29, 2000, the Company had no significant concentrations of credit risk.
The Company had issued a third-party financial guarantee totaling $2,750 at
year-end 2001 and 2000 with respect to a partnership interest in a commercial
real estate project.
63
22. BUSINESS SEGMENTS - DATA
The business of the Company and its subsidiaries falls within two business
groups. THE ENGINEERING AND CONSTRUCTION GROUP designs, engineers and constructs
petroleum, chemical, petrochemical and alternative-fuels facilities and related
infrastructure, including power generation and distribution facilities,
production terminals, pollution control equipment, water treatment facilities
and process plants for the production of fine chemicals, pharmaceuticals,
dyestuffs, fragrances, flavors, food additives and vitamins. Also, the E&C Group
provides a broad range of environmental remediation services, together with
related technical, design and regulatory services. THE ENERGY EQUIPMENT GROUP
designs, manufactures and erects steam generating and auxiliary equipment for
power stations and industrial markets worldwide. Steam generating equipment
includes a full range of fluidized-bed and conventional boilers firing coal,
oil, gas, biomass and other municipal solid waste, waste wood and low-Btu gases.
Auxiliary equipment includes feedwater heaters, steam condensers, heat-recovery
equipment and low-NOX burners. Site services related to these products encompass
plant erection, maintenance engineering, plant upgrading and life extension and
plant repowering. The EE Group also provides research analysis and experimental
work in fluid dynamics, heat transfer, combustion and fuel technology, materials
engineering and solids mechanics. In addition, the EE Group also builds, owns
and operates cogeneration, independent power production and resource recovery
facilities, as well as facilities for the process and petrochemical industries.
Since fiscal 2000, the Power Systems Group has been combined with the EE Group,
where the rest of the Company's power expertise resides. The prior years amounts
have been adjusted to reflect this change. This unit has a small project
development team but will no longer develop waste-to-energy facilities in the
United States.
The Company conducts its business on a global basis. The E&C Group accounted for
the largest portion of the Company's operating revenues and operating income
over the last ten years. In 2001, the E&C Group accounted for approximately 65%
of the operating revenues. The geographic dispersion of these operating revenues
was as follows: 40% North America, 22% Asia, 29% Europe, 8% Middle East and 1%
other. The EE Group accounted for 35% of the operating revenues of the Company.
The geographic dispersion of these operating revenues was as follows: 61% North
America, 37% Europe and 2% Asia.
Earnings of segments represent revenues less expenses attributable to that group
or geographic area where the operating units are located. Revenues between
business segments are immaterial and are eliminated in Corporate and Financial
Services.
Export revenues account for 7.6% of operating revenues. No single customer
represented 10% or more of operating revenues for 2001, 2000 or 1999.
Identifiable assets by group are those assets that are directly related to and
support the operations of each group. Corporate assets are principally cash,
investments and real estate.
64
Summary financial information concerning the Company's reportable segments is
shown in the following table:
CORPORATE
ENGINEERING AND
AND ENERGY FINANCIAL
2001 TOTAL CONSTRUCTION GROUP EQUIPMENT GROUP SERVICES(1)
- ---- ----- ------------------ --------------- -----------
Revenues....................................... $ 3,392,474 $ 2,195,617 $ 1,274,099 $ (77,242)
Interest income(2)............................. 9,060 6,588 4,071 (1,599)
Interest expense(2)............................ 84,484 705 25,608 58,171(6)
Loss before income taxes....................... (206,005) (10,307)(3) (62,760)(3)(4) (132,938)(3)(4)
Income taxes/(benefits)........................ 103,138 2,604 (19,052) (119,586)(5)
Net loss....................................... (309,143) (12,911) (43,708) (252,524)
Identifiable assets............................ 3,316,379 1,368,035 1,663,471 284,873
Capital expenditures........................... 33,998 14,426 12,531 7,041
Depreciation and amortization.................. 55,750 20,680 31,511 3,559
2000
- ----
Revenues....................................... $ 3,969,355 $ 2,979,543 $ 1,094,189 $ (104,377)
Interest income(2)............................. 15,737 16,716 9,654 (10,633)
Interest expense(2)............................ 83,254 7,100 34,649 41,505(6)
Earnings/(loss) before income taxes............ 56,023 87,909 45,079 (76,965)
Income taxes/(benefits)........................ 16,529 27,737 17,998 (29,206)
Net earnings/(loss)............................ 39,494 60,172 27,081 (47,759)
Identifiable assets............................ 3,477,528 1,299,596 1,697,592 480,340
Capital expenditures........................... 45,807 33,766 10,581 1,460
Depreciation and amortization.................. 57,716 22,596 32,889 2,231
1999 (a)
- --------
Revenues........................................ $ 3,944,074 $ 3,015,881 $ 1,039,763 $ (111,570)
Interest income(2).............................. 13,576 17,469 13,372 (17,265)
Interest expense(2)............................. 70,213 6,842 46,482 16,889(6)
(Loss)/earnings before income taxes............. (190,526) 92,041(7) (204,201)(7)(8) (78,366)(7)
Income (benefits)/taxes......................... (46,891) 35,183 (56,096) (25,978)
Net (loss)/earnings............................. (143,635) 56,858 (148,105) (52,388)
Identifiable assets............................. 3,438,109 1,535,783 1,600,903 301,423
Capital expenditures............................ 128,086 118,946 7,588 1,552
Depreciation and amortization................... 60,448 26,010 32,103 2,335
(1) Includes general corporate income and expense, the Company's captive
insurance operation and eliminations.
(2) Includes intercompany interest charged by Corporate and Financial Services
to the business groups on outstanding borrowings.
(3) Includes in 2001, contract write-downs of $160,600 ($104,400 after-tax):
Engineering and Construction Group $67,200, Energy Equipment Group $88,400
and Corporate and Financial Services $5,000.
(4) Includes in 2001, loss on sale of cogeneration plants in Energy Equipment
Group of $40,300 ($27,900 after-tax) and increased pension cost in
Corporate and Financial Services of $5,000 ($3,300 after-tax).
(5) Includes in 2001, a valuation allowance for deferred tax assets of
$171,900 on Corporate and Financial Services.
(6) Includes dividends on Preferred Security of $15,750 in 2000 and 2001, and
$15,181 in 1999.
(7) Includes in 1999 cost realignment of $37,600 ($27,600 after tax), the
pre-tax charge per group is: Engineering and Construction Group $19,600,
Energy Equipment Group $2,500, and Corporate and Financial Services
$15,500.
(8) Includes in 1999, $214,000 ($154,000 after tax) related to final
settlement of the Robbins Facility and $30,600 relates to the current year
operation of the Robbins Facility.
(a) Restated to reflect inclusion of Power System Group operations in the
Energy Equipment Group.
65
2001 2000 1999
---- ---- ----
EQUITY EARNINGS IN UNCONSOLIDATED SUBSIDIARIES
WERE AS FOLLOWS:
Engineering and Construction Group ........ $ 4,432 $ 6,719 $ 8,939
Energy Equipment Group .................... 8,404 13,268 6,813
----------- ----------- -----------
Total ..................................... $ 12,836 $ 19,987 $ 15,752
=========== =========== ===========
Geographic Concentration
REVENUES:
United States ............................. $ 1,673,457 $ 1,897,038 $ 1,430,511
Europe .................................... 1,669,409 2,099,539 2,533,682
Canada .................................... 126,851 77,155 91,451
Corporate and Financial Services, including
eliminations ......................... (77,243) (104,377) (111,570)
----------- ----------- -----------
Total ..................................... $ 3,392,474 $ 3,969,355 $ 3,944,074
=========== =========== ===========
LONG-LIVED ASSETS:
United States ............................. $ 534,345 $ 628,940 $ 652,641
Europe .................................... 174,058 228,762 358,937
Canada .................................... 1,958 1,511 1,510
Corporate and Financial Services, including
eliminations ......................... 47,894 44,507 45,260
----------- ----------- -----------
Total ..................................... $ 758,255 $ 903,720 $ 1,058,348
=========== =========== ===========
Revenues and long-lived assets are based on the country in which the contracting
subsidiary is located.
66
23. CONSOLIDATING FINANCIAL INFORMATION
The following represents summarized consolidating financial information as of
December 28, 2001 and December 29, 2000, with respect to the financial position,
and for each of the three years in the period ended December 28, 2001 for
results of operations and 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"). Foster
Wheeler USA Corporation, Foster Wheeler Energy Corporation, Foster Wheeler Power
Group, Inc. formerly known as Foster Wheeler Energy International, Inc., Foster
Wheeler International Holdings, Inc., Foster Wheeler Ltd., Foreign Holdings
Ltd., and Foster Wheeler Inc. issued guarantees in favor of the holders of the
Notes or otherwise assumed the obligations under the indenture governing the
Notes. 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, as more fully described in Note 8. 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 guarantor are restricted from making distributions to the
Company.
The comparative statements for December 29, 2000, with respect to the financial
position, and the results of operations and cash flows for the years ended
December 29, 2000 and December 31, 1999 reflect the financial information of the
Company prior to the reorganization that occurred on May 25, 2001. It is
management's belief that due to the nature of the reorganization, a restatement
of the prior financial statements would not be meaningful.
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 28, 2001
(In Thousands of Dollars)
ASSETS
------ FOSTER FOSTER WHEELER GUARANTOR NON-GUARANTOR
WHEELER LTD. LLC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ -------------- ------------ ------------- ------------ ------------
Current assets .............................. $ -- $ 121,298 $ 1,085,669 $ 1,644,843 $(1,097,434) $ 1,754,376
Investment in subsidiaries .................. 10,102 (57,847) 1,327,480 566,982 (1,762,203) 84,514
Land, buildings & equipment (net) ........... -- -- 23,548 381,367 (5,717) 399,198
Notes and accounts receivable - long-term ... -- 595,655 46,062 844,730 (1,421,074) 65,373
Intangible assets (net) ..................... -- -- 239,862 374,335 (339,654) 274,543
Other non-current assets .................... -- 15,962 545,329 183,480 (6,396) 738,375
----------- ----------- ----------- ----------- ----------- -----------
TOTAL ASSETS ................................ $ 10,102 $ 675,068 $ 3,267,950 $ 3,995,737 $(4,632,478) $ 3,316,379
=========== =========== =========== =========== =========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities ......................... $ 2,555 $ 667,521 $ 1,334,268 $ 1,485,639 $(1,101,363) $ 2,388,620
Long-term debt .............................. -- -- 236,104 1,334,581 (1,432,830) 137,855
Other non-current ........................... -- -- 942,894 62,902 (223,439) 782,357
----------- ----------- ----------- ----------- ----------- -----------
liabilities
TOTAL LIABILITIES ........................... 2,555 667,521 2,513,266 2,883,122 (2,757,632) 3,308,832
TOTAL SHAREHOLDERS' EQUITY .................. 7,547 7,547 754,684 1,112,615 (1,874,846) 7,547
----------- ----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ..................... $ 10,102 $ 675,068 $ 3,267,950 $ 3,995,737 $(4,632,478) $ 3,316,379
=========== =========== =========== =========== =========== ===========
67
FOSTER WHEELER CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
December 29, 2000
(In Thousands of Dollars)
GUARANTOR NON-GUARANTOR
ASSETS FWC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ --- ------------ ------------- ------------ ------------
Current assets.......................... $ 391,560 $ 497,486 $ 1,571,314 $ (837,384) $ 1,622,976
Investment in subsidiaries.............. 918,582 317,663 139,008 (1,375,253)
Land, buildings & equipment (net)....... 46,621 26,455 428,080 (6,122) 495,034
Notes and accounts receivable -
long-term............................ 48,203 5,245 330,867 (308,077) 76,238
Intangible assets (net)................. - 85,977 202,158 - 288,135
Other non-current assets................ 754,246 5,735 193,070 42,094 995,145
------------- ------------ ----------- ------------ -----------
TOTAL ASSETS $ 2,159,212 $ 938,561 $ 2,864,497 $(2,484,742) $ 3,477,528
=========== ============ =========== ============ ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities..................... $ 543,360 $ 470,835 $ 1,277,792 $ (837,384) $ 1,454,603
Long-term debt.......................... 309,190 - 389,173 (137,058) 561,305
Other non-current liabilities........... 657,233 9,081 263,435 (117,558) 812,191
Subordinated Robbins obligations........ 110,340 110,340
Preferred trust securities.............. 175,000 - 175,000 (175,000) 175,000
----------- ------------ ----------- ------------ -----------
TOTAL LIABILITIES ...................... 1,795,123 479,916 2,105,400 (1,267,000) 3,113,439
TOTAL SHAREHOLDERS'
EQUITY.............................. 364,089 458,645 759,097 (1,217,742) 364,089
----------- ------------ ----------- ------------ -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY................. $ 2,159,212 $ 938,561 $ 2,864,497 $(2,484,742) $ 3,477,528
=========== ============ =========== ============ ===========
68
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
For the Year Ended December 28, 2001
(In Thousands of Dollars)
Non-
Foster Wheeler Foster Wheeler Guarantor Guarantor
LTD. LLC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---- --- ------------ ------------ ------------ ------------
Operating revenues ..................... -- -- $ 835,806 $ 2,808,304 $ (328,796) $ 3,315,314
Other income ........................... -- $ 276,203 38,690 77,026 (314,759) 77,160
----------- ----------- ----------- ----------- ----------- -----------
Revenues ........................... -- 276,203 874,496 2,885,330 (643,555) 3,392,474
Cost of operating revenues ............. -- -- 886,464 2,606,357 (328,796) 3,164,025
Selling, general and adminis-
trative expenses ................... -- 7,895 45,554 169,083 -- 222,532
Other deductions and minority
Interest(*) ........................ 148 55,504 127,409 114,684 (85,823) 211,922
Equity in net losses of
subsidiaries ...................... (309,047) (300,693) (234,202) -- 843,942 --
----------- ----------- ----------- ----------- ----------- -----------
Loss before income
taxes ............................. (309,195) (87,889) (419,133) (4,794) 615,006 (206,005)
Provision/(benefit) for income
taxes ............................. (52) (7,791) 110,147 834 -- 103,138
----------- ----------- ----------- ----------- ----------- -----------
Net loss(**) ........................... (309,143) (80,098) (529,280) (5,628) 615,006 (309,143)
Other comprehensive (loss)/income:
Foreign currency translation
adjustment ......................... (10,191) -- -- (12,683) 12,683 (10,191)
Net gain /(loss) on derivative
instruments ........................ -- -- 4,118 (284) -- 3,834
Minimum pension liability
adjustment, net of tax benefit
of $0 .............................. -- -- (36,770) -- -- (36,770)
----------- ----------- ----------- ----------- ----------- -----------
Comprehensive loss ..................... $ (319,334) $ (80,098) $ (561,932) $ (18,595) $ 627,689 $ (352,270)
=========== =========== =========== =========== =========== ===========
(*) Includes interest expense and dividends on preferred securities of
$84,484.
(**) Includes contract write-downs of $160,600 ($104,400 after tax);
restructuring cost of $41,600 ($27,000 after-tax); a reserve for deferred
tax assets of $171,900; loss on the sale of cogeneration plants of $40,300
($27,900 after tax); increased pension cost of $5,000 ($3,300 after tax);
and a provision for CEO retirement of $2,700 ($1,800 after tax).
69
FOSTER WHEELER CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
For the Year Ended December 29, 2000
(In Thousands of Dollars)
GUARANTOR NON-GUARANTOR
FWC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--- ------------ ------------- ------------ ------------
Operating revenues ..................... -- $ 1,157,227 $ 3,106,434 $ (372,300) $ 3,891,361
Other income ........................... $ 107,063 3,489 15,397 (47,955) 77,994
----------- ----------- ----------- ----------- -----------
Total revenues ..................... 107,063 1,160,716 3,121,831 (420,255) 3,969,355
Cost of operating revenues ............. -- 1,083,787 2,853,660 (372,300) 3,565,147
Selling, general and adminis-
trative expenses ................... 14,886 51,611 152,856 -- 219,353
Other deductions and minority
Interest(*) ........................ 60,522 3,570 112,695 (47,955) 128,832
Equity in net earnings of
subsidiaries ...................... (3,887) 6,520 -- (2,633) --
----------- ----------- ----------- ----------- -----------
Earnings/(loss) before income
taxes ............................. 27,768 28,268 2,620 (2,633) 56,023
(Benefit)/provision for income
taxes ............................. (11,726) 8,699 19,556 -- 16,529
----------- ----------- ----------- ----------- -----------
Net earnings ........................... 39,494 19,569 (16,936) (2,633) 39,494
Other comprehensive loss:
Foreign currency translation
adjustment ...................... (19,988) (6,585) (17,462) 24,047 (19,988)
adjustment
Minimum pension liability
adjustment net of $12,000
tax benefit ...................... (21,500) -- -- -- (21,500)
----------- ----------- ----------- ----------- -----------
Comprehensive earnings/(loss) .......... $ (1,994) $ 12,984 $ (34,398) $ 21,414 $ (1,994)
=========== =========== =========== =========== ===========
(*) Includes interest expense and dividends on preferred securities of $83,254.
70
FOSTER WHEELER CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
For the Year Ended December 31, 1999
(In Thousands of Dollars)
GUARANTOR NON-GUARANTOR
FWC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--- ------------ ------------- ------------ ------------
Operating revenues ......................... -- $ 845,553 $ 3,391,965 $ (370,488) $ 3,867,030
Other income ............................... $ 78,381 5,501 58,582 (65,420) 77,044
----------- ----------- ----------- ----------- -----------
Total revenues ......................... 78,381 851,054 3,450,547 (435,908) 3,944,074
Cost of operating revenues ................. -- 806,789 3,132,895 (370,488) 3,569,196
Selling, general and adminis-
trative expenses ....................... 29,286 39,797 166,466 -- 235,549
Other deductions, minority
interests and Robbins Facility
write-down(*) .......................... 247,244 9,439 138,592 (65,420) 329,855
Equity in net earnings of
Subsidiaries .......................... (7,177) 14,645 -- (7,468) --
----------- ----------- ----------- ----------- -----------
(Loss)/earnings before income
taxes ................................. (205,326) 9,674 12,594 (7,468) (190,526)
(Benefit)/provision for income
taxes ................................. (61,691) (1,596) 16,396 -- (46,891)
----------- ----------- ----------- ----------- -----------
Net (loss)/earnings(**) .................... (143,635) 11,270 (3,802) (7,468) (143,635)
Other comprehensive loss:
Foreign currency translation
adjustment .......................... (30,870) (17,020) (19,788) 36,808 (30,870)
----------- ----------- ----------- ----------- -----------
Comprehensive (loss)/earnings .............. $ (174,505) $ (5,750) $ (23,590) $ 29,340 $ (174,505)
=========== =========== =========== =========== ===========
(*) Includes interest expense and dividends on preferred securities of
$70,213.
(**) Includes a provision of $37,600 ($27,600 after tax) for cost realignment
and a charge totaling $244,600 ($173,900 after tax) of which $214,000
relates to the Robbins Facility write-down and $30,600 relates to the
current year operations of the Robbins Facility.
71
FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
For the Year Ended December 28, 2001
(In Thousands of Dollars)
FOSTER WHEELER FOSTER WHEELER GUARANTOR NON-GUARANTOR
LTD. LLC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---- --- ------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES
NET CASH (USED)/PROVIDED BY
OPERATING ACTIVITIES .............. $ 2,446 $(183,713) $ 427,190 $ (79,961) $(254,643) $ (88,681)
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures ................. -- (2,346) (1,937) (29,715) -- (33,998)
Proceeds from sale of properties ..... -- -- -- 59,672 -- 59,672
Decrease in investment and advances .. -- -- 2 16,006 -- 16,008
Decrease in short-term
investments ....................... -- -- -- 1,530 -- 1,530
Partnership distribution ............. -- -- -- (1,367) -- (1,367)
--------- --------- --------- --------- --------- ---------
NET CASH PROVIDED/(USED) BY
INVESTING ACTIVITIES .............. -- (2,346) (1,935) 46,126 -- 41,845
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends to Common
Shareholders ...................... (2,446) (2,442) (70,000) (184,643) 254,643 (4,888)
Decrease in short-term debt .......... -- -- (76,250) (5,782) -- (82,032)
Proceeds from convertible subordinated
notes, net ........................... -- 202,912 -- -- -- 202,912
Proceeds from long-term debt ......... -- 178,061 (285,000) 291,981 -- 185,042
Repayment of long-term debt .......... -- (193,062) (1,475) (20,187) -- (214,724)
Other ................................ -- 590 -- -- -- 590
--------- --------- --------- --------- --------- ---------
NET CASH PROVIDED/(USED) BY
FINANCING ACTIVITIES .............. (2,446) 186,059 (432,725) 81,369 254,643 86,900
--------- --------- --------- --------- --------- ---------
Effect of exchange rate changes on
cash and cash equivalents ............ -- -- -- (7,937) -- (7,937)
Increase in cash and cash
equivalents ....................... -- -- (7,470) 39,597 -- 32,127
Cash and cash equivalents,
beginning of year ................. -- -- 33,163 158,730 -- 191,893
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents, end
of year ........................... $ -- $ -- $ 25,693 $ 198,327 $ -- $ 224,020
========= ========= ========= ========= ========= =========
72
FOSTER WHEELER CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
For the Year Ended December 29, 2000
(In Thousands of Dollars)
GUARANTOR NON-GUARANTOR
FWC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--- ------------ ------------- ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES
NET CASH (USED)/PROVIDED BY
OPERATING ACTIVITIES .................... $ (71,278) $ 79,743 $ (63,011) $ 37,802 $ (16,744)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures ....................... -- (6,000) (39,807) -- (45,807)
Proceeds from sale of properties ........... -- -- 56,703 -- 56,703
(Increase)/decrease in investment and
advances ................................ (27,705) 1,073 (42,832) 81,586 12,122
Decrease in short-term
investments ............................. -- -- 15,230 -- 15,230
Other ...................................... -- 2,891 (5,490) -- (2,599)
--------- --------- --------- --------- ---------
NET CASH (USED)/PROVIDED BY
INVESTING ACTIVITIES .................... (27,705) (2,036) (16,196) 81,586 35,649
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends to Common
Shareholders ............................ (9,773) -- -- -- (9,773)
Increase/(decrease) in short-
term debt ............................... 76,250 -- (31,374) -- 44,876
Proceeds from long-term debt ............... -- -- 43,168 -- 43,168
Repayment of long-term debt ................ (65,000) -- (23,151) -- (88,151)
Other ...................................... 112,220 (78,600) 85,614 (119,388) (154)
--------- --------- --------- --------- ---------
NET CASH PROVIDED/(USED) BY
FINANCING ACTIVITIES .................... 113,697 (78,600) 74,257 (119,388) (10,034)
Effect of exchange rate changes on
cash and cash equivalents ............... -- -- 12,754 -- 12,754
Increase/(decrease) in cash and cash
equivalents ............................. 14,714 (893) 7,804 -- 21,625
Cash and cash equivalents,
beginning of year ...................... 16,262 3,080 150,926 -- 170,268
--------- --------- --------- --------- ---------
Cash and cash equivalents, end
of year ................................. $ 30,976 $ 2,187 $ 158,730 $ -- $ 191,893
========= ========= ========= ========= =========
73
FOSTER WHEELER CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
For the Year Ended December 31, 1999
(In Thousands of Dollars)
GUARANTOR NON-GUARANTOR
FWC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--- ------------ ------------- ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES
NET CASH PROVIDED/(USED) BY
OPERATING ACTIVITIES ..................... $ 14,126 $ 12,608 $ (60,047) $ 27,693 $ (5,620)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures ........................ -- (5,419) (122,667) -- (128,086)
Proceeds from sale of properties ............ -- 214 142,355 -- 142,569
(Increase)/decrease in investment and
advances ................................. (66,883) 20,400 (34,837) 83,213 1,893
Decrease in short-term
investments .............................. -- -- 43,923 -- 43,923
Other ....................................... -- 3,391 (7,776) -- (4,385)
--------- --------- --------- --------- ---------
NET CASH (USED)/PROVIDED BY
INVESTING ACTIVITIES ..................... (66,883) 18,586 20,998 83,213 55,914
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends to Common
Shareholders ............................. (21,983) -- -- -- (21,983)
Issuance of trust preferred
securities ............................... 169,178 -- -- -- 169,178
Decrease in short-term debt ................. (20,000) -- (17,254) -- (37,254)
Proceeds from long-term debt ................ -- -- 56,797 -- 56,797
Repayment of long-term debt ................. (190,000) -- (19,868) -- (209,868)
Other ....................................... 118,104 (34,666) 26,608 (110,906) (860)
--------- --------- --------- --------- ---------
NET CASH PROVIDED/(USED) BY
FINANCING ACTIVITIES ....................... 55,299 (34,666) 46,283 (110,906) (43,990)
--------- --------- --------- --------- ---------
Effect of exchange rate changes
on cash and cash equivalents ............. -- -- (16,104) -- (16,104)
Increase/(decrease) in cash and
cash equivalents ......................... 2,542 (3,472) (8,870) -- (9,800)
Cash and cash equivalents,
beginning of year ........................ 13,720 6,552 159,796 -- 180,068
--------- --------- --------- --------- ---------
Cash and cash equivalents, end
of year .................................. $ 16,262 $ 3,080 $ 150,926 $ -- $ 170,268
========= ========= ========= ========= =========
74
24. ROBBINS SETTLEMENT
On October 21, 1999, the Company announced it had reached an agreement (the
"Robbins Agreement") with the holders of approximately 80% of the principal
amount of bonds issued in connection with the financing of the Robbins Facility.
Under the Robbins Agreement, the $320,000 aggregate principal amount of existing
bonds were exchanged for $273,000 aggregate principal amount of new bonds on
February 3, 2000, $113,000 of which (the "Company-supported Robbins Bonds") will
be funded by payments from the Company and the balance of which (the
"Non-recourse Robbins Bonds") will be non-recourse to the Company. In addition,
pursuant to the Robbins Agreement the Company would exit from its operating role
in respect to the Robbins Facility.
Specific elements of the Robbins Agreement are as follows:
o The new Company-supported Robbins Bonds consist of (a) $95,000 aggregate
principal amount of 7.25% amortizing terms bonds, $17,845 of which mature
on October 15, 2009 and $77,155 of which mature on October 15, 2024 (see
Note 10 for sinking fund requirements) (the "1999 C Bonds") and (b) $18,000
aggregate principal amount of 7% accretion bonds maturing on October 15,
2009 with all interest to be paid at maturity (the "1999D Bonds");
o The Company agreed to operate the Robbins Facility for the benefit of the
bondholders until the earlier of the sale of the Robbins Facility or
October 15, 2001, on a full-cost reimbursable basis with no operational or
performance guarantees;
o Any remaining obligations of the Company under the $55,000 additional
credit support facility in respect of the existing bonds were terminated;
o The Company would continue to prosecute certain pending litigation (the
"Retail Rate Litigation") against various officials of the State of
Illinois (See Note 17 to Financial Statements, "Litigation and
Uncertainties,"); and
o The Company would cooperate with the bondholders in seeking a new
owner/operator for the Robbins Facility.
On December 1, 1999, three special purpose subsidiaries of the Company commenced
reorganization proceedings under Chapter 11 of the 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
companies through a Delaware business trust, which owns 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, if any. In 2002, a subsidiary of the
Company reached an agreement with the debtor project companies and the requisite
holders of the bonds which agreement is expected to favorably resolve any issues
related to the exit from the project.
In the fourth quarter of 1999, the Company recorded a pre-tax charge of
approximately $214,000. This charge fully recognized all existing obligations of
the Company related to the Robbins Facility, including (a) pre-paid lease
expense of $45,600, (b) $20,400 of outstanding bonds issued in conjunction with
the equity financing of the Robbins Facility and (c) transaction expenses of
$4,500. The liability as of December 31, 1999 for all of the Company-supported
bonds were recorded at the net present value of $133,400 with $113,000 being
subordinated obligations and $20,400 as senior Company obligations. The Company
is considered to be the primary obligor on these bonds. The ongoing legal
expenses relating to the Retail Rate Litigation (See Note 17 to Financial
Statements, "Litigation and Uncertainties,") will be expensed as incurred.
In the third quarter of 1998 the Company recorded a charge of approximately
$47,000 for asset impairments relating to the Robbins Facility, which was
included in the $72,800 losses for 1998.
75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to Foster Wheeler's Proxy Statement for the Annual
Meeting of Shareholders to be held May 22, 2002. Certain information regarding
executive officers is included in PART I hereof in accordance with General
Instruction G (3) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to Foster Wheeler's Proxy Statement for the Annual
Meeting of Shareholders to be held May 22, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to Foster Wheeler's Proxy Statement for the Annual
Meeting of Shareholders to be held May 22, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Public Service Electric & Gas Company ("PSE&G") is a customer of the Company.
James E. Ferland, Chairman and Chief Executive Officer of PSE&G, serves on the
Board of Directors of Foster Wheeler. The value of the contracts in the
Company's backlog as of December 28, 2001, which are to supply engineering,
procurement and construction services, was approximately, $45.2 million. The
Company believes the contracts were entered into on commercial terms no more
favorable than those available in an arms-length transaction with other parties.
77
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements - See Item 8.
All schedules and financial statements other than those
indicated above have been omitted because of the absence of
conditions requiring them or because the required information
is shown in the financial statements or the notes thereto.
EXHIBIT NO. EXHIBITS
- ----------- --------
2.0 Agreement and Plan of Merger, dated as of May 25, 2001, among
Foster Wheeler Corporation, Foster Wheeler LLC and Foster
Wheeler Ltd. (Filed as Exhibit 2.0 to Foster Wheeler Ltd.'s
Quarterly Report on Form 10-Q for the Quarter ended June 29,
2001 and incorporated herein by reference.)
3.1 Memorandum of Association of Foster Wheeler Ltd. (filed as
Annex II to Foster Wheeler Ltd.'s Form S-4/A (Registration
No. 333-52468) filed on March 9, 2001 and incorporated herein
by reference).
3.2 Bye-Laws of Foster Wheeler Ltd., as corrected (filed as
Exhibit 3.2 to Foster Wheeler Ltd.'s Quarterly Report on Form
10-Q for the Quarter ended September 28, 2001 and
incorporated herein by reference).
4.0 Foster Wheeler Ltd. hereby agrees to furnish copies of
instruments defining the rights of holders of long-term debt
of Foster Wheeler Ltd. and its consolidated subsidiaries to
the Commission upon its requests.
4.1 Rights Agreement, dated as of May 21, 2001, between Foster
Wheeler Ltd. and Mellon Investor Services LLC (filed as Annex
I to Foster Wheeler Ltd.'s current report on Form 8-K (File
No. 333-52468) dated May 25, 2001 and incorporated herein by
reference).
4.2 Amended and Restated First Supplemental Indenture, dated
August 10, 2001, to the Indenture, dated as of November 5,
1995, among Foster Wheeler LLC, Foster Wheeler USA
Corporation, Foster Wheeler Power Group, Inc. (formerly known
as Foster Wheeler Energy International, Inc.), Foster Wheeler
Energy Corporation, Foster Wheeler Inc., Foster Wheeler
International Holdings, Inc., and BNY Midwest Trust Company.
(Filed as Exhibit 4.2 to Foster Wheeler Ltd.'s Quarterly
Report on Form 10-Q for the Quarter ended June 29, 2001 and
incorporated herein by reference.)
4.3 Indenture, dated as of May 31, 2001, among Foster Wheeler
Ltd., Foster Wheeler LLC and BNY Midwest Trust Company (filed
as Exhibit 4.4 to Foster Wheeler Ltd.'s Form S-3
(Registration No. 333-64090) filed on June 28, 2001, and
incorporated herein by reference).
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4.4 Registration Rights Agreement, dated as of May 31, 2001,
among Foster Wheeler Ltd., Foster Wheeler LLC and Lehman
Brothers Inc., Banc of America Securities LLC and First Union
Securities, Inc. (filed as Exhibit 4.6 to Foster Wheeler
Ltd.'s Form S-3 (Registration No. 333-64090) filed on June
28, 2001, and incorporated herein by reference).
4.5 Form of specimen share certificate for Foster Wheeler Ltd.'s
common shares (filed as Annex II to Foster Wheeler Ltd.'s
current report on Form 8-K (File No. 333-52468) filed on May
25, 2001, and incorporated herein by reference).
4.6 First Supplemental Indenture dated February 20, 2002, between
Foster Wheeler Ltd. and B.N.Y. Midwest Trust Company
regarding the 6.50% Convertible Subordinated Notes due 2007.
10.1 Second Amended and Restated Revolving Credit Agreement, dated
as of May 25, 2001, among Foster Wheeler LLC, the Borrowing
Subsidiaries signatory thereto, the Guarantors signatory
thereto, the Lenders signatories thereto, Bank of America,
N.A., as Administrative Agent, First Union National Bank, as
Syndication Agent, ABN AMRO Bank N.V., as Documentation
Agent, Banc of America Securities LLC, as Lead Arranger and
Book Manager and First Union Capital Markets, ABN AMRO Bank
N.V., Greenwich NatWest Structured Finance Inc. and Toronto
Dominion Bank, as Arrangers. (Filed as Exhibit 10.1 to Foster
Wheeler Ltd.'s Quarterly Report on Form 10-Q for the Quarter
ended June 29, 2001, and incorporated herein by reference.)
10.2 Subordination Agreement, dated as of May 25, 2001, by and
among Foster Wheeler LLC, Foster Wheeler Ltd. and Bank of
America, N.A. (Filed as Exhibit 10.2 to Foster Wheeler Ltd.'s
Quarterly Report on Form 10-Q for the Quarter ended June 29,
2001, and incorporated herein by reference.)
10.3 Pledge Agreement, dated as of May 25, 2001, by each of the
undersigned pledgors in favor of Bank of America National
Trust and Savings Association. (Filed as Exhibit 10.3 to
Foster Wheeler Ltd.'s Quarterly Report on Form 10-Q for the
Quarter ended June 29, 2001, and incorporated herein by
reference.)
10.4 Retirement and Consulting Agreement of Richard J. Swift dated
as of April 2, 2001 (filed as Exhibit 10.1 to Foster Wheeler
Corporation's current report on Form 8-K (File No. 001-00286)
dated April 5, 2001, and incorporated herein by reference).
10.5 Form of Change of Control Agreement dated May 25, 2001, and
entered into by the Company with the following executive
officers: H. E. Bartoli, L. F. Gardner, R. D. Iseman, T. R.
O'Brien, G. A. Renaud and J. E. Schessler. (Filed as Exhibit
10.5 to Foster Wheeler Ltd.'s Quarterly Report on Form 10-Q
for the Quarter ended June 29, 2001, and incorporated herein
by reference.)
10.6 Foster Wheeler Inc. Directors' Stock Option Plan (filed as
Exhibit 99.1 to Foster Wheeler Ltd.'s post effective
amendment to Form S-8 (Registration No. 333-25945) dated June
27, 2001, and incorporated herein by reference).
10.7 1995 Stock Option Plan of Foster Wheeler Inc. (filed as
Exhibit 99.1 to Foster Wheeler Ltd.'s post effective
amendment to Form S-8 (Registration No. 003-59739) dated June
27, 2001, and incorporated herein by reference).
10.8 1984 Stock Option Plan of Foster Wheeler Inc. (filed as
Exhibit 99.1 to Foster Wheeler Ltd.'s post effective
amendment to Form S-8 (Registration No. 002-91384) dated June
27, 2001, and incorporated herein by reference).
10.9 Master Guarantee Agreement, dated as of May 25, 2001, by and
among Foster Wheeler LLC, Foster Wheeler International
Holdings, Inc. and Foster Wheeler Ltd. (Filed as Exhibit 10.9
to Foster Wheeler Ltd.'s Quarterly Report on Form 10-Q for
the Quarter ended June 29, 2001, and incorporated herein by
reference.)
10.10 Form of Transitional Executive Severance Agreement dated May
29, 2001, entered into with the following officers: H.E.
Bartoli, L.F. Gardner, R.D. Iseman, T. R. O'Brien, G.A.
Renaud and J.E. Schessler. (Filed as Exhibit 10.10 to Foster
Wheeler Ltd.'s Quarterly Report on Form 10-Q for the Quarter
ended June 29, 2001, and incorporated herein by reference.)
10.11 Employment Agreement of Raymond J. Milchovich, dated as of
October 22, 2001. (Filed as Exhibit 10.1 to Foster Wheeler
Ltd.'s Quarterly Report on Form 10-Q for the Quarter ended
September 28, 2001, and incorporated herein by reference.)
10.12 First Amendment to Receivables Purchase Agreement dated
September 25, 2001, among Foster Wheeler Funding Corporation,
Foster Wheeler Capital & Finance Corporation, Market Street
Funding Corporation and PNC Bank, National Association.
(Filed as Exhibit 10.2 to Foster Wheeler Ltd.'s Quarterly
Report on Form 10-Q for the Quarter ended September 28, 2001,
and incorporated herein by reference.)
10.13 Stock Option Agreement of Raymond J. Milchovich dated as of
October 22, 2001.
10.14 Amendment No. 1 and Waiver dated as of January 28, 2002
relating to the Second Amended and Restated Revolving Credit
Agreement dated as of May 25, 2001 among Foster Wheeler LLC,
Foster Wheeler USA Corporation, Foster Wheeler Power Group,
Inc. Foster Wheeler Energy Corporation, the Guarantors, the
Lenders signatory thereto, Bank of America N.A., as
Administrative Agent, First Union National Bank, as
Syndication Agent and ABN AMRO Bank N.V. as Documentation
Agent arranged by Banc of America Securities LLC , as Lead
Arranger and Book Manager and ABN AMRO Bank N.V., First Union
Capital Markets, Greenwich Natwest Structured Finance Inc.
and Toronto Dominion Bank, as Arrangers (the "Lenders").
10.15 Waiver and Amendment to Master Lease dated as of January 28,
2002 by and among (i) Perryville III Trust, a trust created
under the laws of the state of New York pursuant to a trust
agreement dated as of December 16, 1994, (ii) BNY Midwest
Trust Company, (iii) Foster Wheeler Realty Services, Inc.
(iv) Foster Wheeler LLC, (v) NatWest Leasing Corporation,
(vi) National Westminster Bank Plc and (vii) the banks listed
on Schedule I to that certain Construction Loan Agreement
dated as of December 16, 1994, among the Landlord, as
Borrower, the lenders party thereto and their permitted
successors and assigns and the Agent.
10.16 Forbearance Agreement dated as of February 28, 2002 by and
among (i) Perryville III Trust, a trust created under the
laws of the state of New York pursuant to a trust agreement
dated as of December 16, 1994, (ii) BNY Midwest Trust
Company, (iii) Foster Wheeler Realty Services, Inc., (iv)
Foster Wheeler LLC, (v) Lombard US Equipment Finance
Corporation, (vi) National Westminster Bank Plc and (vii) the
banks listed on Schedule I to that certain Construction Loan
Agreement dated as of December 16, 1994, among the Landlord,
as Borrower, the lenders party thereto and their permitted
successors and assigns and the Agent.
10.17 Amendment dated as of April 12, 2002 to Amendment No. 1 and
Waiver dated as of January 28, 2002 relating to the Second
Amended and Restated Revolving Credit Agreement dated as of
May 25, 2001 among Foster Wheeler LLC, Foster Wheeler USA
Corporation, Foster Wheeler Power Group, Inc. (formerly known
as Foster Wheeler Energy International, Inc.), Foster Wheeler
Energy Corporation, the Guarantors signatory thereto and the
Lenders.
10.18 Waiver Letter dated April 12, 2002, to the Receivables
Purchase Agreement dated as of September 25, 1998 among
Foster Wheeler Funding Corporation, as Seller, Foster Wheeler
Capital & Finance Corporation, as Service, Market Street
Funding Corporation, as Issuer and PNC Bank, National
Association, as Administrator.
10.19 Forbearance Extension Agreement dated as of April 12, 2002 by
and among (i) Perryville III Trust, a trust created under the
laws of the state of New York pursuant to a trust agreement
dated as of December 16, 1994, (ii) BNY Midwest Trust
Company, (iii) Foster Wheeler Realty Services, Inc., (iv)
Foster Wheeer LLC, (v) Lombard US Equipment Finance
Corporation, (vi) National Westminster Bank Plc and (vii) the
banks listed on Schedule I to that certain Construction Loan
Agreement dated as of December 16, 1994, among the Landlord,
as Borrower, the lenders party thereto and their permitted
successors and assigns and the Agent.
12.0 Statement of Computation of Consolidated Ratio Earnings to
Fixed Charges and Preferred Shares Dividend Requirements.
21.0 Subsidiaries of the Registrant.
23.0 Consent of Independent Accountants.
B) REPORTS ON FORM 8-K
Report Date Description
December 6, 2001 Foster Wheeler Ltd. announced that it sold its
power-generation plant in Mt. Carmel, Pennsylvania, and will
be taking of charge of approximately $22 million in the
fourth quarter as a result of the transaction.
January 10, 2002 Foster Wheeler Ltd. announced that it sold its
power-generation plant in Mt. Carmel, Pennsylvania, and will
be taking of charge of approximately $22 million in the
fourth quarter as a result of the transaction. In addition,
the Company is considering the possibility of taking certain
restructuring and contract charges which have not been
quantified.
January 14, 2002 Foster Wheeler Ltd. announced that it will exercise its right
to defer the January 15, 2002 payment of the FW Preferred
Capital Trust I 9% Preferred Securities.
January 29, 2002 Foster Wheeler Ltd. announced its 2001 year-end results and
its comprehensive performance improvement plan.
March 8, 2002 Foster Wheeler Ltd. announced that it obtained an extension
of its $50 million receivables sale arrangement through April
12, 2002 and has been taking steps to find a replacement for
this facility. In addition, the Company also received a
forbearance of the exercise of any remedies from February 28,
2002 through April 15, 2002 from the required lenders under
its $33 million lease financing facility, which facility
matured on February 28, 2002.
April 2, 2002 Foster Wheeler Ltd. announced that a San Francisco,
California jury returned a verdict finding Foster Wheeler
liable in the case of TODAK VS. FOSTER WHEELER CORPORATION,
ET AL.
April 3, 2002 Foster Wheeler Ltd. announced that it will exercise its right
to defer the April 15, 2002 interest payment of the FW
Preferred Capital Trust I 9% Preferred Securities.
April 3, 2002 Foster Wheeler Ltd. announced that the United States District
Court for the Northern District of Texas has entered an
amended final judgment in the matter of KOCH ENGINEERING
COMPANY, INC. ET AL VS. GLITSCH, INC. ET AL.
April 11, 2002 Foster Wheeler Ltd. filed a description of its common shares.
For the purposes of complying with the amendments to the rules governing Form
S-8, under the Securities Act of 1933, the undersigned Registrant hereby
undertakes as follows, which undertaking shall be incorporated by reference into
the Registrant's Statements on Form S-8: Registration No. 003-59739 (filed June
28, 2001); Registration No. 002-91384 (filed June 28, 2001); Registration No.
002-91384 (filed June 28, 2001).
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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)
Dated April 12, 2002 BY: /s/ Lisa Fries Gardner
----------------------------------
Lisa Fries Gardner
Vice President and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed, as of April 12, 2002, by the following persons on behalf of the
Registrant, in the capacities indicated.
/s/ Raymond J. Milchovich /s/ E. James Ferland
- ------------------------------- -------------------------------
Raymond J. Milchovich E. James Ferland
Director, Chairman, President & Director
Chief Executive Officer
(Principal Executive Officer)
/s/ Gilles A. Renaud /s/ Martha Clark Goss
- ------------------------------- -------------------------------
Gilles A. Renaud Martha Clark Goss
Senior Vice President and Director
Chief Financial Officer
(Principal Financial Officer)
/s/ Thomas J. Mazza /s/ Victor A. Hebert
- ------------------------------- -------------------------------
Thomas J. Mazza Victor A. Hebert
Vice President and Controller Director
(Principal Accounting Officer)
/s/ Eugene D. Atkinson /s/ Constance J. Horner
- ------------------------------- -------------------------------
Eugene D. Atkinson Constance J. Horner
Director Director
/s/ Louis E. Azzato /s/ Joseph J. Melone
- ------------------------------- -------------------------------
Louis E. Azzato Joseph J. Melone
Director Director
/s/ John P. Clancey /s/ James E. Schessler
- ------------------------------- -------------------------------
John P. Clancey James E. Schessler
Director Director
/s/ David J. Farris /s/ John E. Stuart
- ------------------------------- -------------------------------
David J. Farris John E. Stuart
Director Director
78