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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

OR

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from .......... to ..........

Commission file number 001-31305

FOSTER WHEELER LTD.
(Exact Name of Registrant as Specified in its Charter)

BERMUDA
    22-3802649  
(State or other jurisdiction of incorporation or organization)
    (I.R.S. Employer 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:

(Title of Each Class)
    (Name of Each Exchange on which Registered)  
Foster Wheeler Ltd.
Common Stock, $0.01 par value
    Over-the-Counter Bulletin Board  
         
Foster Wheeler Ltd.
Series B Convertible Preferred Stock, $0.01 par value
    Over-the-Counter Bulletin Board  
         
Foster Wheeler Ltd.
Class A and Class B Stock Purchase Warrants
    Over-the-Counter Bulletin Board  
         
FW Preferred Capital Trust I
9.00% Preferred Securities, Series I
(Guaranteed by Foster Wheeler LLC)
    Over-the-Counter Bulletin Board  
         

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.  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.  

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)
Yes  No

As of June 25, 2004, the aggregate market value of common shares held by non-affiliates of the Registrant was approximately $28,148,000 (based on the last price on that date of $28.60 per share, which has been adjusted for the one-for-twenty reverse stock split that was effective on November 29, 2004), assuming for these purposes, but without conceding, that all executive officers and directors are affiliates of the Registrant.

As of February 28, 2005, 44,577,858 shares of the Registrant’s common shares were issued and outstanding. The aggregate market value of such shares held by non-affiliates of the Registrant on such date was approximately $395,275,000 (based on the last price on that date of $17.95 per share), assuming for these purposes, but without conceding, that all executive officers and directors are affiliates of the Registrant.

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:

Part III incorporates certain information by reference from the registrant’s definitive proxy statement for the annual meeting of shareholders to be held on May 10, 2005, which proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2004.


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FOSTER WHEELER LTD.

2004 Form 10-K Annual Report

Table of Contents

               
      PART I        
ITEM
          Page  
           
 
    Business     2  
    Properties     22  
    Legal Proceedings     23  
    Submission of Matters to a Vote of Security Holders     28  
               
      PART II        
    Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities     29  
    Selected Financial Data     30  
    Management’s Discussion and Analysis of Financial Condition and Results of Operations     31  
    Quantitative and Qualitative Disclosures about Market Risk     65  
    Financial Statements and Supplementary Data     67  
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     409  
    Controls and Procedures     409  
    Other Information     411  
               
      PART III        
    Directors and Executive Officers of the Registrant     412  
    Executive Compensation     412  
    Security Ownership of Certain Beneficial Owners and Management     412  
    Certain Relationships and Related Transactions     413  
    Principal Accounting Fees and Services     413  
               
      PART IV        
    Exhibits and Financial Statement Schedules     414  

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, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Safe Harbor Statement” for further information.

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PART I

ITEM 1. BUSINESS
 
General

Foster Wheeler Ltd. is incorporated under the laws of Bermuda and is a holding company that owns the stock of its 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 direct and indirect subsidiaries.

Description of Business

The Company operates through two business groups which also constitute separate reportable segments: the Engineering and Construction Group (the “E&C Group”) and the Global Power Group. The E&C Group designs, engineers, and constructs upstream oil and gas processing facilities, oil refining, chemical and petrochemical, pharmaceutical, natural gas liquefaction (LNG) facilities and receiving terminals, and related infrastructure, including power generation and distribution facilities. The E&C Group provides engineering, project management and construction management services, and purchases equipment, materials and services from third-party suppliers and subcontractors. The E&C Group owns industry leading technology in delayed coking, solvent de-asphalting, and hydrogen production processes used in oil refineries and has access to numerous technologies owned by others. The E&C Group also provides international environmental remediation services, together with related technical, engineering, design and regulatory services. The E&C Group generates revenues from engineering and construction activities pursuant to long-term contracts spanning up to four years in duration.

The Global Power Group designs, manufactures, and erects steam generating and auxiliary equipment for electric power generating stations and industrial markets worldwide. Steam generating equipment includes a full range of fluidized bed and conventional boilers firing coal, oil, gas, biomass and municipal solid waste, waste wood, and low-Btu gases. The Company’s circulating fluidized-bed boiler technology is recognized as one of the leading solid fired fuel technologies in the world. Auxiliary equipment includes feedwater heaters, steam condensers, heat-recovery equipment, selective non-catalytic recovery units, selective catalytic recovery units and low-NOx burners. The Company provides a broad range of site services relating to these products, including full plant construction, maintenance engineering, plant upgrading and life extension, and plant repowering. The Global Power 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 Global Power Group builds, owns and operates cogeneration, independent power production and waste-to-energy facilities, as well as facilities for the process and petrochemical industries. The Global Power Group generates revenues from long-term engineering activities, supply of equipment and construction contracts, and from operating activities pursuant to the long-term sale of project outputs (i.e., electricity, steam, etc.), operating and maintenance agreements, and from returns on its equity investments in certain production facilities.

Please see Note 20 to the consolidated financial statements in this Form 10-K for a discussion of the Company’s financial reporting segments and geographic financial information relating to the Company’s domestic and foreign operations and export sales.

Products and Services

The E&C Group provides the following services:

 
Project Management.     The E&C Group offers a wide range of project management services overseeing engineering, procurement and construction activities either performed by the Company or by others on behalf of their clients.
     
 
Engineering & Design.     The E&C Group provides a broad range of engineering and design-related services to the industries the Company serves. Engineering capabilities include process, mechanical, instrumentation, architectural, civil, structural, electrical, environmental and water resources. For each

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project, the Company identifies the project requirements and then integrates and coordinates the various design elements. Other critical tasks in the design process may include value analysis and the assessment of construction and maintenance requirements.
     
 
Procurement.     The E&C Group manages the procurement of materials, subcontractors and craft labor. Often, materials are purchased on behalf of the client, at cost or including a profit margin typically below the profit margin earned on other engineering or construction services, depending on the terms of the customer agreement.
     
 
Construction.     The E&C Group provides construction and construction management services on a worldwide basis. Depending on the project, the Company may function as the primary contractor or as a subcontractor to another firm. On some projects, the Company functions as the construction manager, engaged by the customer to oversee another contractor’s compliance with design specifications and contracting terms.
     
 
Operations & Maintenance.     Under operations and maintenance contracts, the E&C Group provides project management, plant operations and maintenance services, such as repair, renovation, predictive and preventative services and other aftermarket services to customer facilities worldwide.
     
 
Consulting.     The E&C Group provides technical and economic analysis and recommendations to owners, investors, developers, operators, and governments in the industries served. These services include, among other things, conducting conceptual studies, competitive market valuations, asset valuations, assessment of stranded costs, plant technical descriptions and product demand and supply modeling, among others.

The principal products of the Global Power Group are boilers. These boilers may be described as either heat-recovery steam generators, circulating fluidized-bed steam generators, or pulverized coal boilers. A boiler is a device that turns water into steam. It is a critical component in any solid or liquid fuel or combined-cycle gas-fired power generation facility. A boiler creates steam either through the combustion of solid or liquid fuel or the recapture of heat exhaust from a gas turbine. The boiler’s steam is then directed to a steam turbine to generate electricity.

Circulating Fluidized-Bed Steam Generators (“CFB”).     The Global Power Group provides circulating fluidized-bed technology. Circulating fluidized-bed combustion is one of the most efficient, environmentally friendly and versatile ways to generate steam from coal and virtually any other solid or gaseous fuel with reduced emission of sulfur and other environmental pollutants. A CFB boiler utilizes air jets at the base of the boiler to blow the fuel particles upward from the bed to be recombusted. In a power plant, this circulating action increases efficiency and reduces sulfur emissions by further extending the contact between fuel particles and limestone, thereby reducing the need for air pollution control devices to remove sulfur, fly ash and other pollutants.

Pulverized Coal Boilers (“PCB”).     The Global Power Group provides pulverized coal boilers, which are an important component in solid fuel power generation systems, particularly in underdeveloped nations. In a pulverized coal power plant, ground-up coal particles are burned, which heats water in tubes surrounding the boiler to produce steam. Due to the variability among different power plants such as size, expected operating rates and fuel types, boiler design is not standardized, and some degree of customization is required in every plant.

Auxiliary Equipment & Aftermarket Services.     The Global Power Group also manufactures and installs integral components of both natural gas and solid fuel power generation facilities, including surface condensers, feedwater heaters, coal pulverizers and nitrogen oxide reduction systems. The nitrogen oxide, or NOx, reduction systems include selective catalytic reduction equipment and low NOx burners and can significantly reduce nitrogen oxide emissions. These products have application in a wide range of steam generators. The Global Power Group also supplies replacement components, repair parts, boiler modifications and engineered solutions for steam generators worldwide.

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Industries Served

Power.     The Company supplies advanced steam generation equipment for power plants. It also provides comprehensive engineering, procurement and construction services for the development of power generation plants.

Oil & Gas/Refinery.      The Company has been in the petroleum refining industry for over 75 years, designing and building grassroots facilities and upgrading existing plants for nearly all of the world’s major oil companies. The Company has extensive experience with virtually all petroleum refining technologies, including alkylation, catalytic cracking and reforming, delayed coking, distillation, isomerization, hydrocracking, hydrotreating and solvent deasphalting and visbreaking. The Company offers expertise in clean fuels in order to ensure that refined products and the refineries meet lower emission requirements cost effectively. The Company also has proprietary technologies and processes in the areas of delayed coking and hydrogen. In addition to servicing the downstream and oil refining segment, the Company provides complete design, engineering, procurement, construction and project management services for all aspects of oil and gas field development both onshore and offshore.

Pharmaceutical.     The Company engineers, designs and builds research laboratories, biotechnology facilities and a range of pharmaceutical bulk and finishing plants around the world. In addition, the Company provides clean room, containment, simulation and optimization, advanced enterprise and production resource planning to help clients optimize their operations. The Company also has expertise in regulatory validation, which streamlines the testing and paperwork required for Food and Drug Administration approval.

Chemical/Petrochemical.      The Company has over 60 years of experience in the chemical, petrochemical and polymer industries. The Company has used over 70 major chemical, petrochemical and polymer processes in raw materials, intermediate products and finished product plants worldwide. The Company also provides project management, plant operations and maintenance services to this industry. To provide greater resources to the Company’s chemicals clients, the Company is capable of utilizing most available process technologies from licensors or implementing a front-end engineering process to develop a technology for a particular project for unit operation.

LNG.     The Company provides services to the Liquefied Natural Gas (LNG) industry and has experience with major liquefaction projects. This is part of the Company’s expertise in providing services for gas monetization which includes gas gathering/processing and gas-to-liquids plants as well as LNG. The Company offers a complete range of services in this sector to meet client needs including project management, front-end design, project development, engineering, procurement, construction and commissioning, plant operations and maintenance.

Environmental.     The Company provides environmental engineering and consulting services. The Company provides private industry and federal, state and local governments with a broad range of hazardous, nuclear, and mixed waste assessments and investigations, design, remediation, program/project management, operations, risk-based management, regulatory compliance and permitting, ecological and geoscience services, ports, harbors and water way services, natural and water resources services, and environmental technologies and spent nuclear fuel storage systems products.

Power Production.     The Company provides services to build, own or lease, and operate cogeneration, independent power production and resource recovery facilities as well as facilities for the process and petrochemical industries. The Company generates revenues from operating activities pursuant to long-term sale of project outputs (i.e., electricity and steam contracts), operating and maintenance agreements.

Customers and Marketing

Foster Wheeler markets its services and products through a worldwide staff of sales and marketing personnel, and through a network of sales representatives. The Company’s businesses are not seasonal and are not dependent on a limited group of clients. No single client accounted for ten percent or more of Foster Wheeler’s consolidated revenues in fiscal 2004, 2003 or 2002. Representative clients include national and independent oil companies, major petrochemical, chemical, LNG, and pharmaceutical clients, national and independent electric power generation companies, and government agencies, throughout the world.

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Licenses, Patents and Trademarks
(amounts in thousands of dollars)

Foster Wheeler owns and licenses patents, trademarks and know-how, which are used in each of its business groups. The life cycle of the patents and trademarks are of varying durations. Neither business group is materially dependent on any particular or related patent or trademark, although the Company does depend on its ability to protect its intellectual property rights to the technologies and know how used in its proprietary products. See risk factor entitled “The Company may lose market share to its competitors and be unable to operate its business profitably if its patents and other intellectual property rights do not adequately protect its proprietary products” for further information. Foster Wheeler has granted licenses to companies throughout the world to manufacture stationary steam generators and related equipment and certain of its other products. Principal licensees are located in Japan and China. Royalty revenues approximate $5,000 per year.

Backlog
(amounts in thousands of dollars)

The Company executes contracts on lump-sum, fixed-price bases, target-priced contracts with incentives, and on cost-reimbursable bases. Generally, contracts are awarded on the basis of price, delivery schedule, technical performance and service. E&C and Global Power’s clients 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. Global Power’s products are custom designed and manufactured, and are not produced for inventory. The E&C Group frequently purchases materials, equipment, and third-party services at cost for clients on a cash neutral/reimbursable basis. Such “flow-through” amounts are recorded both as revenues and cost of operating revenues with no profit recognized.

Foster Wheeler’s unfilled orders, substantially all of which are represented by signed contracts, by business segment are as follows:

    December 31,
2004
  December 26,
2003
 
   

 

 
Engineering and Construction Group
  $ 1,405,900   $ 1,331,300  
Global Power Group
    646,300     958,000  
Corporate and Financial Services (primarily eliminations)
    (4,100 )   (3,900 )
   

 

 
    $ 2,048,100   $ 2,285,400  
   

 

 

The dollar amount of unfilled orders is not necessarily indicative of the future earnings of the Company related to the performance of such work. The Company cannot predict with certainty the portion of unfilled orders that will be performed, or the timing of the projects’ execution.

Refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the changes in unfilled orders for the periods presented.

Raw Materials

The materials used in the Company’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 overseas projects. Generally, lead-time for delivery of materials does not constitute a problem.

Government Regulation

The Company’s subsidiaries are subject to certain foreign, federal, state and local environmental, occupational health and product safety laws. The Company believes that all its operations are in material compliance with those laws and does not anticipate any material capital expenditures or material adverse effect on earnings or cash flows as a result of maintaining compliance with those laws.

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Competition

Many companies compete in the engineering and construction business. The Company estimates, based on an industry publication “Engineering News-Record,” that it is among the 20 largest of the many large and small companies engaged in designing, engineering and constructing petroleum refineries, petrochemical, chemical and pharmaceutical facilities in the world. Neither Foster Wheeler nor any other single company contributes a large percentage of the total design, engineering and construction business servicing the global businesses previously noted. Many companies also compete in the global energy business. E&C competitors include Bechtel Corporation, Fluor Corporation, Jacobs Engineering Group, Technip, Kellogg, Brown & Root, Chiyoda Corporation and JGC Corporation. Global Power competitors included GEC Alstom, Man B&W Diesel, Aker Kvaerner ASA, Babcock Power Inc., Babcock-Hitachi Europe GmbH, Lurgi PSI, and Austrian Energy & Environment AG.

Employees

Foster Wheeler employed 6,723 full-time employees as of December 31, 2004. The following table indicates the number of full-time employees in each of its business groups.

Engineering and Construction Group
    4,383  
Global Power Group
    2,269  
Corporate and Financial Services
    71  
   

 
      6,723  
   

 
Available Information

The Company’s website address is www.fwc.com. You may obtain free electronic copies of the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports at the investor relations website, www.fwc.com, under the heading “Investor Relations” by selecting the heading “SEC Filings.” These reports are available on the Company’s investor relations website as soon as reasonably practicable after electronically filing the reports with the SEC. The information disclosed on this website is not incorporated herein and does not form a part of this Report on Form 10-K.

The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room located at 450 Fifth Street NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of the Company’s reports on its website at www.sec.gov.

Risk Factors
(amounts in thousands of dollars)

The Company’s business is subject to a number of risks and uncertainties, including those described below. 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. 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.”

Foster Wheeler Ltd.’s financial statements are prepared on a going concern basis, but the Company may not be able to continue as a going concern.

The consolidated financial statements of Foster Wheeler Ltd., for the fiscal year ended December 31, 2004, are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company may not, however, be able to continue as a going concern. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the ability to return to profitability, to generate cash flows from operations, collections of receivables to fund its obligations, including those resulting from asbestos related liabilities, as

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well as maintaining credit facilities and bonding capacity adequate to conduct its business. The Company incurred significant losses in each of the years in the three-year period ended December 31, 2004 and had a shareholders’ deficit of approximately $513,300 at December 31, 2004. Although the Company entered into a new credit facility in March 2005, it may not be able to comply with the terms of its new Senior Credit Agreement and other debt agreements during 2005 or thereafter. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

Foster Wheeler’s domestic operating entities are cash flow positive. However, they do not generate sufficient cash flow to cover the costs related to the Company’s indebtedness, obligations to fund U.S. pension plans and corporate overhead expenses and the ability to repatriate funds from the non-U.S. subsidiaries is limited by a number of factors. Accordingly, the Company is limited in its ability to use these funds for working capital purposes, to repay debt or to satisfy other obligations, which could limit the Company’s ability to continue as a going concern.

The Company’s domestic operating entities are cash flow positive. However, they do not generate sufficient cash flow to cover the costs related to the Company’s indebtedness, obligations to fund U.S. pension plans and corporate overhead expenses. As of December 31, 2004, the Company had aggregate indebtedness of $570,100, substantially all of which must be serviced from distributions from its operating subsidiaries and from the proceeds of financings. In addition, as of December 31, 2004, the Company had $559,900 of undrawn letters of credit, bank guarantees and surety bonds issued and outstanding, $56,700 of which were cash collateralized. As of December 31, 2004, the Company had cash, cash equivalents, short-term investments and restricted cash of approximately $390,200, of which approximately $319,600 was held by the non-U.S. subsidiaries. The Company’s 2005 forecast assumes total cash repatriation from its non-U.S. subsidiaries of approximately $107,000 from royalties, management fees, intercompany loans, debt service on intercompany loans and dividends. The Company will require these cash distributions from its non-U.S. subsidiaries to meet an anticipated $67,000 shortfall in the U.S. operations’ minimum working capital needs in 2005. There can be no assurance that the forecasted foreign cash repatriation will occur on a timely basis or at all, as there are significant contractual and statutory restrictions and the non-U.S. subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of the Company’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. The repatriation of funds may also subject those funds to taxation. As a result of these factors, the Company may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries in sufficient amounts to fund its U.S. working capital requirements, to repay debt, or to satisfy other obligations of its U.S. operations, which could limit the Company’s ability to continue as a going concern.

If the Company is unable to successfully address the material weakness in its internal control over financial reporting, its ability to report its financial results on a timely and accurate basis may be adversely affected.

In connection with the preparation of its 2004 year-end financial statements, the Company detected a reporting deficiency in the measurement and tracking processes during the fourth quarter of 2004 at of one of European Power’s lump-sum turnkey projects. The project was nearing completion during the fourth quarter and the worse than expected project performance compressed the time available to meet the scheduled completion dates. In an attempt to meet the completion dates, construction site personnel entered into additional commitments beyond the planned commitments for the project, and did not adequately communicate these updated commitments on a timely basis to the home office personnel, who were responsible for tracking actual and estimated costs of the project and the details of updated commitments being made in the field. Moreover, one of the two lead managers of the project responsible for monitoring the commitments made at the project site and relaying this information back to the home office, became ill and was absent during November and December of 2004. As a result, the project’s management did not have adequate control of outstanding commitments to third-party subcontractors and vendors during the fourth quarter of 2004, and therefore could not adequately track the ongoing financial results of the project until after the quarter had ended.

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As stated in Management’s Report on Internal Control over Financial Reporting, management concluded that the control deficiency in reporting at the project represented a “material weakness” in its internal control over financial reporting as of December 31, 2004. A material weakness is defined as a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected. Management believes that the failure to adequately control outstanding commitments to third-party subcontractors and vendors on this project was the result of a deficiency in the project’s measurement processes that arose when the volume of activity increased substantially in the fourth quarter of 2004 combined with the absence of a member of the projects key oversight personnel. Additionally, management noted that there was no compensating control that detected this deficiency on a timely basis. Because of the overall magnitude of this project, this results in a deficiency in the Company’s internal control over financial reporting. These controls and procedures are designed to ensure that outstanding commitments are known, quantified and communicated to the appropriate project personnel responsible for estimating the project’s financial results.

The control deficiency was detected in the first quarter of 2005. At that time, management immediately implemented a detailed review of all costs incurred to date plus the estimate of costs to complete. Additional project management personnel were assigned to the project from the E&C Group as these operating units have more experience working on lump-sum turnkey projects, and specialists in negotiating subcontractor settlements were added to the project team. The Company has previously announced that its European Power operating unit will no longer undertake lump-sum turnkey projects for full power plants without the involvement of one of the Company’s E&C operating companies or a third-party partner, and there is no evidence that any similar problems managing third-party commitments exist on other projects.

The Company has assigned the highest priority to the assessment and remediation of this material weakness and is working together with the audit committee to resolve the issue. Management believes that its consolidated financial statements contained herein contain its best estimates of the project’s final estimated costs and that the appropriate compensating controls have been implemented at the particular site to ensure commitment information is adequately controlled and communicated on a timely basis. However, management believes more time must pass to adequately evidence that the new procedures at this project are operating as intended. If these actions are not successful in addressing this material weakness, the Company’s ability to report its financial results on a timely and accurate basis may be adversely affected. The Company has taken the actions described above, which it believes address the material weaknesses described above. If the Company is unable to successfully address the identified material weaknesses in its internal controls, its ability to report its financial results on a timely and accurate basis may be adversely affected.

If the Company is unable to effectively and efficiently implement its plan to improve its disclosure controls and procedures, its ability to provide the public with timely and accurate material information may be adversely affected, and could hurt its reputation and the prices of its debt and equity securities.

One of the Company’s foreign subsidiaries is a party to a project-specific, Euro-denominated performance bonding facility, which as of December 31, 2004 had the equivalent of approximately $24,500 of performance bonds outstanding as of such date. This bonding facility required compliance by the subsidiary with a minimum equity ratio, as defined in the facility. During the second quarter of fiscal 2004, due to operating losses of this subsidiary, the subsidiary fell below the minimum equity ratio, breaching the covenant. On March 15, 2005, the project-specific bond expired and the banks funded the client and the Company reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of the Company to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

In early August of 2004, in connection with the Company’s review of the performance bonding facility described above, it became aware for the first time that the same subsidiary was also in breach under a minimum equity ratio covenant contained in a separate performance bonding facility with one of the same financial institutions. This facility had the equivalent of approximately $10,100 of performance bonds outstanding as of December 31, 2004. The equity ratio covenant contained in this facility requires the subsidiary to maintain a minimum equity ratio, as defined in the facility. As a result of operating losses at the subsidiary during the second quarter of 2004, the subsidiary’s equity ratio fell below the required minimum,

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breaching the equity ratio covenant under the facility. On August 9, 2004, the subsidiary obtained a waiver of this covenant. The waiver for the general performance bond facility is effective through March 31, 2005.

In response to the discovery of this breach under the facility at such a late date, the Company undertook a review of its procedures relating to the monitoring of, and reporting of the status under, its subsidiaries’ financial covenants globally. Although the management of the subsidiary in question was aware of the covenant’s existence, they did not fully understand its implications. As a consequence, they did not notify the corporate center on a timely basis of the breach of the covenant. Further, the corporate center did not independently detect the breach on a timely basis. Management concluded that the failure to detect the covenant breach on a timely basis was the result of a deficiency in its disclosure controls and procedures, which are intended to be designed to ensure that this type of breach is detected on a timely basis. After reviewing the Company’s controls and procedures relating to covenant monitoring and reporting as of the end of fiscal 2003 and each of the two fiscal quarters in fiscal 2004, management concluded that the deficiency arose in February 2004.

The Company has given this issue the highest priority and has updated its disclosure controls and procedures relating to covenant compliance. In order to address this issue, during the third quarter of 2004 it:

 
comprehensively reviewed and updated its covenant inventory;
     
 
upgraded the reporting procedure at the subsidiary level on a global basis; and
     
 
set up policies and procedures to ensure the quarterly global covenant monitoring process by its corporate center is properly implemented.

In order for investors and the equity analyst community to make informed investment decisions and recommendations about the Company’s securities, it is important that it provide them with accurate and timely information in accordance with the Exchange Act and the rules promulgated thereunder.

If the Company is unable to implement these changes effectively or efficiently, it could adversely affect its ability to provide the public with timely and accurate material information about the Company, and could hurt its reputation and the prices of its debt and equity securities.

Foster Wheeler’s international operations involve risks that may limit or disrupt operations, limit repatriation of earnings, increase foreign taxation or otherwise have a material adverse effect on the business and results of operations.

The Company has substantial international operations that are conducted through foreign and domestic subsidiaries, as well as through agreements with foreign joint-venture partners. The international operations accounted for approximately 80% of the Company’s fiscal year 2004 operating revenues and substantially all of the operating cash flow. The Company has international operations in Europe, the Middle East, Asia and South America. The foreign operations are subject to risks that could materially adversely affect the business and results of operations, including:

 
uncertain political, legal and economic environments;
     
 
potential incompatibility with foreign joint venture partners;
     
 
foreign currency controls and fluctuations;
     
 
energy prices;
     
 
terrorist attacks against facilities owned or operated by U.S. companies;
     
 
the imposition of additional governmental controls and regulations;
     
 
war and civil disturbances; and
     
 
labor problems.

Because of these risks, the international operations may be limited, or disrupted; may be restricted in moving funds; may lose contract rights; foreign taxation may be increased; or may be limited in repatriating earnings. In addition, in some cases, applicable law and joint venture or other agreements may provide that

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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.

Foster Wheeler’s high levels of debt and significant interest payment obligations could limit the funds the Company has available for working capital, capital expenditures, dividend payments, acquisitions and other business purposes which could adversely impact the business.

As of December 31, 2004, Foster Wheeler Ltd.’s total consolidated debt amounted to approximately $570,100. The Company may not have sufficient funds available to pay all of this long-term debt upon maturity.

Over the last five years, the Company has been required to allocate a significant portion of its earnings to pay interest on debt. After paying interest on debt, the Company has fewer funds available for working capital, capital expenditures, acquisitions and other business purposes. This could limit the Company’s ability to respond to changing market conditions, limit the ability to expand through acquisitions, increase the vulnerability to adverse economic and industry conditions and place the Company at a competitive disadvantage compared to competitors that have less indebtedness. The Company’s 2005 estimated cash debt service is $81,100.

Foster Wheeler’s various debt agreements impose significant financial restrictions, which may prevent the Company from capitalizing on business opportunities and taking some corporate actions which could materially adversely affect the Company’s business.

The Company’s various debt agreements impose significant financial restrictions on the Company. These restrictions limit the ability to incur indebtedness, pay dividends or make other distributions, make investments and sell assets. Failure to comply with these covenants may allow lenders to elect to accelerate the repayment dates with respect to such debt. The Company would not be able to repay such indebtedness if accelerated and as a consequence may be unable to continue operating as a going concern. The failure to repay such amounts under its new Senior Credit Agreement and its other debt obligations 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 other indebtedness.

One of Foster Wheeler’s subsidiaries is a party to a contract to construct a spent fuel processing facility for a U.S. government agency that will require the Company to obtain third-party project financing in excess of $100,000 and the posting of a performance bond in excess of $100,000 if the contract is not restructured or terminated. Inability to restructure or terminate the contract would have a material adverse impact on the Company’s financial condition, results of operations and cash flow.

One of Foster Wheeler’s subsidiaries is a party to a contract to construct a spent fuel processing facility for a U.S. government agency that will require the Company to obtain third-party project financing in excess of $100,000 and the posting of a performance bond in excess of $100,000 if the contract is not restructured or terminated. The Company has completed the first phase of the contract and is currently executing the second phase of the contract. Technical specification and detailed guidance from the U.S. government agency regarding U.S government agency-directed changes to the project scope remain outstanding. Resolution of the outstanding issues will be required before the second phase of the contract can be completed. The third phase would begin with the purchase of long-lead time items and is expected to last two years. The contract requires the Company to fund the construction cost of the project during the third phase, which cost is estimated to be in excess of $100,000. The contract also requires the Company to provide a surety bond for the full amount of the cost. Management is currently pursuing its alternatives with respect to this project and has engaged in discussions with the government about restructuring and termination alternatives. If the Company cannot successfully restructure the contract, and if the Company cannot obtain third-party financing or the required surety bond, the Company’s ability to perform its obligations under the contract is unlikely. If the company fails to perform its obligations under the contract, and as a result the government agency terminates the contract, and thereafter the government re-bids the contract under its exact terms and the resulting cost is greater than it would have been under the existing terms with the Company, the government may seek to hold the Company liable for this difference. This could result in a claim against the Company in

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amounts that could be materially adverse to the Company’s financial condition, results of operations and cash flow.

Foster Wheeler faces severe limitations on the ability to obtain new letters of credit, bank guarantees and performance bonds from banks and surety on the same terms as the Company had historically. If the Company is unable to obtain letters of credit, bank guarantees, or performance bonds on reasonable terms, the business would be materially adversely affected.

It is customary in the industries in which the Company operates to provide letters of credit, bank guarantees or performance bonds in favor of clients to secure obligations under contracts. The Company has traditionally obtained letters of credit or bank guarantees from banks, or performance bonds from a surety on an unsecured basis. Due to the Company’s financial condition, current credit ratings, as well as changes in the bank and surety markets, the Company is now required in certain circumstances to provide collateral to banks and sureties to obtain new letters of credit, bank guarantees and performance bonds. If the Company is unable to provide sufficient collateral to secure the letters of credit, bank guarantees, and performance bonds, the ability to enter into new contracts could be materially limited.

Providing security to obtain letters of credit, bank guarantees and performance bonds increases the Company’s working capital needs and limits the ability to provide bonds, guarantees, and letters of credit, and to repatriate funds or pay dividends. The Company may not be able to continue obtaining new letters of credit, bank guarantees, and performance bonds on either a secured or an unsecured basis in sufficient quantities to match the business requirements. If the Company’s financial condition further deteriorates, the Company may also be required to provide cash collateral or other security to maintain existing letters of credit, bank guarantees and performance bonds. If this occurs, the ability to perform under existing contracts may be adversely affected.

Foster Wheeler’s current and future lump-sum or fixed-price contracts and other shared risk contracts may result in significant losses if costs are greater than anticipated.

Many of the Company’s contracts are lump-sum contracts and other shared-risk contracts that are inherently risky because the Company agrees to the selling price of the project at the time the Company enters the contracts. The selling price is based on estimates of the ultimate cost of the contract and the Company assumes substantially all of the risks associated with completing the project, as well as the post-completion warranty obligations. In 2004, 2003 and 2002, the Company recorded charges of approximately $42,200, $30,800 and $216,700, respectively, relating to underestimated costs on lump-sum contracts.

The Company assumes the project’s technical risk, meaning that the Company must tailor 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 Company also assumes the risks related to revenue, cost and gross profit realized on such contracts which can vary, sometimes substantially, from the original projections due to changes in a variety of other factors, including but not limited to:

 
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;
     
 
changes in the costs of components, materials or labor;
     
 
difficulties in obtaining required governmental permits or approvals;
     
 
changes in local laws and regulations;
     
 
changes in local labor conditions;
     
 
project modifications creating unanticipated costs;
     
 
delays caused by local weather conditions; and
     
 
the Company’s suppliers’ or subcontractors’ failure to perform.

These risks are exacerbated as most projects are long-term which result in increased risk that the circumstances upon which the Company based its original bid will change in a manner that increases its

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costs. In addition, the Company sometimes bears the risk of delays caused by unexpected conditions or events. Long-term, fixed-price projects often make the Company subject to penalties if portions of the project are not completed in accordance with agreed-upon time limits. Therefore, significant losses can result from performing large, long-term projects on a lump-sum basis. These losses may be material and could negatively impact the business, financial condition and results of operations.

The Company also performs government contracts containing fixed labor rates that are subject to audit by governmental agencies. These audits can occur several years after completion of the project and could result in claims for reimbursement from the Company. These reimbursement amounts could be materially different than estimated which could have a negative impact on the Company’s results of operations and cash flows.

Foster Wheeler may be unable to successfully implement its performance improvement plan, which could negatively impact its results of operations.

In order to mitigate future charges due to underestimated costs on lump-sum contracts and to otherwise reduce operating costs, the Company has implemented a series of management performance enhancements. This initiative may not be successful and the Company may record significant charges and its operating costs may increase in the future.

Foster Wheeler plans to expand the operations of its Engineering and Construction Group which could negatively impact the Group’s performance and bonding capacity.

The Company plans to expand the operations of its Engineering and Construction Group which may increase the size and number of lump-sum turnkey contracts, sometimes in countries where the Company has limited previous experience. The Company may bid for and enter into such contracts through partnerships or joint ventures with third parties that have greater bonding capacity than the Company. This would increase the Company’s ability to bid for the contracts. Entering into these partnerships or joint ventures will expose the Company to credit and performance risks of those third-party partners which could have a negative impact on the business and results of operations if these parties fail to perform under the arrangements.

Foster Wheeler has high working capital requirements and will be required to repay some of its indebtedness in the near term and may have difficulty obtaining financing which would have a negative impact on its financial condition.

The Company’s business requires a significant amount of working capital and the U.S. operations, including the corporate center, are expected to continue to be cash flow negative in the near future. In some cases, significant amounts of working capital are required to finance the purchase of materials and performance of engineering, construction and other work on projects before payment is received from customers. In some cases, the Company is contractually obligated to its customers to fund working capital on its projects. Moreover, the Company may need to incur additional indebtedness in the future to satisfy its working capital needs. In addition, the $11,400 of 2005 Senior Notes will need to be repaid or refinanced on or prior to November 2005. As a result, the Company is subject to risks associated with debt financing, including increased interest expense, insufficient cash flow to meet required debt payments, inability to meet credit facility covenants and inability to refinance or repay debt as it becomes due.

The Company’s working capital requirements may increase if the Company is required to give its customers more favorable payment terms under contracts in order to compete successfully for certain projects. These terms may include reduced advance payments from customers and payment schedules from customers that are less favorable to the Company. In addition, the working capital requirements of the Company have increased in recent years because the Company has had to advance funds to complete projects under lump-sum contracts and have been involved in lengthy arbitration or litigation proceedings to recover these amounts from customers. 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 increases in working capital requirements would have a material adverse effect on the Company’s financial condition and results of operations.

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Projects included in the Company’s backlog may be delayed or cancelled which could materially harm its cash flow, revenues and earnings.

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 legally binding letters of intent which management has determined are likely to be performed. Backlog projects represent only business that is considered firm, although cancellations or scope adjustments may occur. Most contracts require clients to pay for work performed to the point of contract cancellation. Due to changes in project scope and schedule, the Company cannot predict with certainty when or if backlog will be performed. In addition, even where a project proceeds as scheduled, it is possible that contracted parties may default and fail to pay amounts owed. Any delay, cancellation or payment default could materially harm the Company’s cash flow, revenues and/or earnings.

Backlog at the end of 2004 declined 10% as compared to the end of year 2003. This decline is primarily attributable to operating revenues exceeding new orders during 2004. Backlog may continue to decline.

The cost of Foster Wheeler’s current and future asbestos claims in the United States could be substantially higher than the Company had estimated, which could materially adversely affect its financial condition.

Some of the Company’s subsidiaries are named as defendants in numerous lawsuits and out-of-court administrative claims pending in the United States in which the plaintiffs claim damages for bodily injury or death arising from exposure to asbestos in connection with work performed or heat exchange devices assembled, installed and/or sold by those subsidiaries. The Company expects these subsidiaries to be named as defendants in similar suits and claims brought in the future. For purposes of the Company’s financial statements, the Company has estimated the indemnity payments and defense costs to be incurred in resolving pending and forecasted domestic claims through year-end 2019. Although the Company believes its estimates are reasonable, the actual number of future claims brought against the Company and the cost of resolving these claims could be substantially higher than the estimates. Some of the factors that may result in the costs of these claims being higher than current estimates include:

 
the rate at which new claims are filed;
     
 
the number of new claimants;
     
 
changes in the mix of diseases alleged to be suffered by the claimants, such as type of cancer, asbestosis or other illness;
     
 
increases in legal fees or other defense costs associated with these claims;
     
 
increases in indemnity payments as a result of more expensive medical treatments for asbestos-related diseases;
     
 
bankruptcies of other asbestos defendants, causing a reduction in the number of available solvent defendants and thereby increasing the number of claims and the size of demands against the Company’s subsidiaries;
     
 
adverse jury verdicts requiring the Company to pay damages in amounts greater than it expected to pay in settlement;
     
 
changes in legislative or judicial standards which make successful defense of claims against the Company’s subsidiaries more difficult; or
     
 
enactment of legislation requiring the Company to contribute amounts to a national settlement trust in excess of its expected net liability, after insurance, in the tort system.

The total liability recorded on the balance sheet is based on estimated indemnity payments and defense costs expected to be incurred through year-end 2019. The Company believes that it is likely that there will be new claims filed after 2019, but in light of uncertainties inherent in long-term forecasts, the Company does not believe that it can reasonably estimate the indemnity payments and defense costs which might be incurred after 2019. The forecast contemplates new claims requiring indemnity will decline from year to year. Failure

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of future claims to decline as the Company expects will result in the aggregate liability for asbestos claims being higher than estimated.

The forecast is based on a regression model, which employs the statistical analysis of the Company’s historical claims data to generate a trend line for future claims and in part on an analysis of future disease incidence. Although the Company believes this forecast method is reasonable, other forecast methods that attempt to estimate the population of living persons who could claim they were exposed to asbestos at worksites where the Company’s subsidiaries performed work or sold equipment, could also be used and might project higher numbers of future claims than forecast.

All of these factors could cause the actual claims, indemnity payments and defense costs to exceed estimates. The Company periodically updates its forecasts to take into consideration recent claims experience and other developments, such as legislation, that may affect the Company’s estimates of future asbestos-related costs. The announcement of increases to asbestos reserves as a result of revised forecasts, adverse jury verdicts or other negative developments involving asbestos litigation may cause the value or trading prices of the Company’s securities to decrease significantly. These negative developments could also cause the Company to default under covenants in its indebtedness or cause the Company’s credit ratings to be downgraded, restrict the Company’s access to the capital markets or otherwise have a material adverse effect on the Company’s financial condition, results of operations, cash flows and liquidity.

The number of asbestos-related claims received by the Company’s subsidiaries in the United Kingdom has increased in 2004. These claims are covered by insurance policies and proceeds from the policies are paid directly to the plaintiffs. The timing and amount of asbestos claims which may be made in the future, the financial solvency of the insurers, and the amount which may be paid to resolve the claims are uncertain. The insurance carriers’ failure to make payments due under the policies could have a material adverse effect on the Company’s financial condition.

Some of the Company’s subsidiaries in the U.K. have received claims alleging personal injury arising from exposure to asbestos in connection with work performed and heat exchange devices assembled, installed and/or sold by those subsidiaries. The total number of claims received to date in the U.K. is 446 of which 255 remain open at December 31, 2004. The Company expects these subsidiaries to be named as defendants in similar suits and claims brought in the future. The Company has recorded an estimated liability to resolve pending and future forecasted claims through year-end 2019 of $44,300 as of December 31, 2004 and a corresponding asset for probable insurance recoveries in the same amount. To date, insurance policies have provided coverage for substantially all of the costs incurred in connection with the Company resolving asbestos claims in the U.K. The Company’s ability to continue to recover under these insurance policies is dependant upon, among other things, the timing and amount of asbestos claims which may be made in the future, the financial solvency of the insurers, and the amount which may be paid to resolve the claims. These factors could materially limit insurance recoveries, which could have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

The amount and timing of insurance recoveries of the Company’s asbestos-related costs in the United States is uncertain. The failure to obtain insurance recoveries would cause a material adverse effect on the Company’s financial condition.

The Company believes that a significant portion of its subsidiaries’ liability and defense costs for asbestos claims will be covered by insurance. The Company’s balance sheet as of December 31, 2004, includes as an asset an aggregate of approximately $385,500 in probable insurance recoveries relating to a liability for pending and expected future asbestos claims through year-end 2019. Under an interim funding agreement in place with a number of its insurers from 1993 through June 12, 2001 covering certain subsidiaries, insurers paid a substantial portion of the costs incurred prior to 2002, and a portion of the costs incurred in connection with resolving asbestos claims during 2002 and 2003. The interim funding agreement was terminated in 2003. On February 13, 2001, litigation was commenced against certain subsidiaries of the Company by certain insurers that were parties to the interim funding agreement seeking to recover from other insurers amounts previously paid by them under the interim funding agreement and to adjudicate their rights and responsibilities under the subsidiaries’ insurance policies. As a result of the termination of the interim

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funding agreement, the Company has had to cover a substantial portion of the settlement payments and defense costs out of working capital.

After the termination of the interim funding agreement, the Company’s subsidiaries entered into several settlement agreements calling for insurers to make lump-sum payments, as well as payments over time, for use by the subsidiaries to fund asbestos-related indemnity and defense costs and, in certain cases, for reimbursement for portions of out-of-pocket costs previously incurred. The Company intends to negotiate additional settlements in order to minimize the amount of future costs the Company will be required to fund out of working capital. If the Company and its subsidiaries cannot achieve settlements in amounts necessary to cover their future costs, the Company and its subsidiaries will continue to fund a portion of future costs out of pocket, which will reduce cash flow and working capital and will adversely affect liquidity.

Although the Company continues to believe that insurers eventually will reimburse its subsidiaries for a significant portion of their prior and future asbestos-related liability and defense costs, their ability ultimately to recover a substantial portion of asbestos-related costs from insurance is dependent on successful resolution of outstanding coverage issues related to their insurance policies. These issues include:

 
disputes regarding allocations of liabilities among the subsidiaries and the insurers;
     
 
the effect of deductibles and policy limits on available insurance coverage; and
     
 
the characterization of asbestos claims brought against the subsidiaries as product related or non-product related.

An adverse outcome in the insurance litigation on these coverage issues could materially limit the Company’s insurance recoveries. In this regard, on January 10, 2005, a New York state trial court entered an order finding that New York, rather than New Jersey, law applies in the litigation described above regarding the allocation of liability for asbestos-related personal injury claims among the Foster Wheeler entities and their various insurers. Since the inception of this litigation, the Company has calculated estimated insurance recoveries applying New Jersey law. However, the application of New York, rather than New Jersey, law would result in the Company’s subsidiaries realizing lower insurance recoveries. Thus, as a result of this decision, the Company recorded a charge to earnings in the fourth quarter of 2004 of approximately $75,800 and reduced the year-end carrying value of its probable insurance recoveries by a similar amount. Unless this decision is reversed on appeal, the Company expects that it will be required to fund a portion of its asbestos liabilities from its own cash beginning in 2010. The amount and timing of these funding requirements will be dependent upon, among other things, litigated or negotiated resolution of the various disputes between the Company and the insurers with whom it has not yet settled. On February 16, 2005, the Company’s subsidiaries filed separate motions seeking (i) the re-argument of this decision and (ii) an appeal of this decision to a higher court. There can be no assurances as to the timing or the outcome of these motions.

In addition, even if these coverage issues are resolved in a manner favorable to the Company, it may not be able to collect all of the amounts due under its insurance policies. The recoveries will be limited by insolvencies among its insurers. The Company is aware of at least two of its significant insurers which are currently insolvent. Other insurers may become insolvent in the future and its insurers may also fail to reimburse amounts owed to the Company on a timely basis. If the Company does not receive timely payment from its insurers, it may be unable to make required payments under settlement agreements with asbestos plaintiffs or to fund amounts required to be posted with the court in order to appeal trial judgments. If the Company is unable to file such appeals, the Company’s subsidiaries may be ordered to pay large damage awards arising from adverse jury verdicts, and such awards may exceed their available cash. Any failure to realize expected insurance recoveries, and any delays in receiving from its insurers amounts owed to the subsidiaries, will reduce cash flow and adversely affect liquidity and could have a material adverse effect on the Company’s financial condition.

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Proposed national asbestos trust fund legislation could require the Company to pay amounts in excess of current estimates of its net asbestos liability which would adversely affect the Company’s liquidity and financial condition.

Although no specific federal legislation has been formally passed in the United States Congress, a possibility exists that a bill entitled Fairness in Asbestos Injury Resolution Act of 2005 currently being discussed by members of the Senate Judiciary Committee may be enacted. Because the Company has been named as a defendant in a significant number of asbestos related bodily injury claims it would be a “defendant participant” in a proposed national trust fund should such enabling legislation become law. As a result of this proposed legislation, all current and future asbestos claims will be removed from the tort system and claimants’ exclusive remedy will be payment from a national trust fund. The Company, as a defendant participant in the fund, would be required to make annual contributions to this fund for a period of up to 30 years. While the exact amount the Company may be required to pay over this period of time is unknown, the Company expects that it will materially exceed costs it will incur, net of insurance, to defend and resolve claims in the tort system. This proposed legislation, should it become law in its present form, would adversely impact the Company’s domestic liquidity and its results of operations for a thirty-year period.

Failure by the Company to recover adequately on claims made against project owners could have a material adverse effect upon the Company’s financial condition, results of operations and cash flows.

Project claims are claims brought by the Company against project owners for additional costs exceeding the contract price or amounts not included in the original contract price. These claims typically arise 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. Project claims may continue in the future.

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 were found liable for any of these counterclaims, the Company would have to incur write- downs and charges against earnings to the extent a reserve is not established. Failure to recover amounts under these claims and charges related to counterclaims could have a material adverse impact on the Company’s liquidity and financial condition.

Because operations are concentrated in four particular industries, Foster Wheeler may be adversely impacted by economic or other developments in these industries.

The Company derives a significant amount of revenues from services provided to corporations that are concentrated in four industries: power, oil and gas, chemical/petrochemical and pharmaceuticals. Unfavorable economic or other developments in one or more of these industries could adversely affect the Company’s clients and could have a material adverse effect on financial condition, results of operations and cash flows.

Foster Wheeler’s failure to successfully manage geographically-diverse operations could impair its ability to react quickly to changing business and market conditions and comply with industry standards and procedures.

The Company operates in more than 55 countries around the world, with approximately 5,400, or 81%, of its employees located outside of the United States. In order to manage its day-to-day operations, management 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. Failure to successfully manage geographically-diverse operations could impair the Company’s ability to react quickly to changing business and market conditions and comply with industry standards and procedures.

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Foster Wheeler may lose business to competitors who have greater financial resources.

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 and may have significantly more favorable leverage ratios. Because financial strength is a factor in deciding whether to grant a contract in the business, the Company’s competitors’ more favorable leverage ratios give them a competitive advantage and could prevent the Company from obtaining contracts for which the Company has bid.

A failure by Foster Wheeler to attract and retain qualified personnel, joint venture partners, advisors and subcontractors could have an adverse effect on the Company.

The ability to attract and retain qualified engineers and other professional personnel, as well as joint-venture partners, advisors and subcontractors, will be an important factor in determining future success. The market for these professionals, joint-venture partners, advisors and subcontractors is competitive, and the Company may not be successful in efforts to attract and retain these professionals, joint-venture partners, advisors and subcontractors. In addition, success depends in part on the Company’s ability to attract and retain skilled laborers. Failure to attract or retain these workers could have a material adverse effect on the Company’s business and results of operations.

Foster Wheeler is subject to various environmental laws and regulations in the countries in which it operates. If the Company fails to comply with these laws and regulations, the Company may have to incur significant costs and penalties that could adversely affect its liquidity or financial condition.

Operations are subject to U.S., European and other laws and regulations governing the generation, management, and use of regulated materials, the discharge of materials into the environment, the remediation of environmental contamination, 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 Global Power Group make use of and produce as wastes or 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 as an owner or operator of a facility or as a generator of hazardous substances without regard to negligence or fault, and the Company is subject to additional liabilities if the Company does not comply with applicable laws regulating such hazardous substances, and, in either case, such liabilities can be substantial.

The Company may be subject to significant costs, fines and penalties and/or compliance orders if the Company does not comply with environmental laws and regulations including those referred to above. Some environmental laws, including CERCLA, provide for joint and several strict liabilities for remediation of releases of hazardous substances, which could result in a liability for environmental damage without regard to negligence or fault. These laws and regulations and common laws principles could expose the Company to liability arising out of the conduct of current and past operations or conditions, including those associated with formerly owned or operated properties caused by the Company or others, or for acts by the Company or others which were in compliance with all applicable laws at the time the acts were performed. In some cases, the Company has assumed contractual indemnification obligations for environmental liabilities associated with some formerly owned properties. Additionally, the Company may be subject to claims alleging personal injury, property damage or natural resource damages as a result of alleged exposure to or contamination by hazardous substances. The ongoing costs of complying with existing environmental laws and regulations can be substantial. Changes in the environmental laws and regulations, remediation obligations, enforcement actions or claims for damages to persons, property, natural resources or the environment, could result in material costs and liabilities.

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Foster Wheeler Ltd. relies on its information systems in its operations. Failure to protect these systems against security breaches could adversely affect the Company’s business and results of operations. Additionally, if these systems fail or become unavailable for any significant period of time, the business could be harmed.

The efficient operation of the Company’s business is dependent on computer hardware and software systems. The Company relies on its information systems to communicate and store customer and project information, to track new bookings and inventory, to procure materials and equipment for projects, to perform computerized design and engineering drawings, to perform project scheduling and cost tracking, to maintain internet and extranet web sites, to maintain the Company’s proprietary research and development data and to effectively manage accounting and financial functions.

Information systems are vulnerable to security breaches by computer hackers and cyber terrorists. The Company relies on industry accepted security measures and technology to securely maintain confidential and proprietary information maintained on its information systems. However, these measures and technology may not always be adequate to properly prevent security breaches. Moreover, advances in computing capabilities or other developments may result in a compromise or breach of the technology used by the Company to protect its systems.

In February 2005, the Company experienced a security breach in the computer systems that service the Company’s North America operations. The Company is currently conducting an investigation into the breach, which investigation extends to, among other things, the extent and impact of the breach. At present, the preliminary findings of the investigation indicate that about ten percent of the Company’s North American servers were accessed and that information, including, but not limited to, proposal files, drawing files, financial information and business plans, was copied. Although, it does not appear that the Company’s primary financial information system was accessed, or that the integrity of the Company’s financial information was compromised, the Company cannot ensure that this is the case. Upon identifying the unauthorized access, security measures were immediately taken to “lock out” the intruder and no further breaches have been identified. The Company has retained a third-party consultant to assist in the investigation and to assess and provide recommendations concerning the Company’s security technology and this investigation is ongoing.

This breach, as well as any future compromises of the Company’s security systems, could expose the Company to a risk of loss or litigation and possible liability, which could substantially harm the Company’s business and results of operations. Further, anyone who is able to circumvent the Company’s security measures could misappropriate proprietary or confidential information, as the Company believes occurred in the February 2005 breach, which could adversely affect the Company’s ability to effectively compete for new business or could cause interruptions in the Company’s operations. Because of the nature and magnitude of the Company’s projects, the Company may be the target of cyber terrorists or be the subject of industrial espionage. Although the Company maintains property and liability insurance, the insurance may not cover potential losses and/or claims of this type or may not be adequate to cover all related costs or liability that may be incurred.

In addition, the unavailability of the information systems or the failure of these systems to perform as anticipated could disrupt the Company’s business and could result in decreased performance and increased overhead costs, causing the Company’s business and results of operations to suffer. The Company’s information systems are vulnerable to damage or interruption from:

 
earthquake, fire, flood and other natural disasters;
     
 
terrorist attacks;
     
 
computer virus attacks;
     
 
operator negligence;
     
 
power loss; and
     
 
computer systems, Internet, or data network failure.

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Any significant interruption or failure of the Company’s information systems or any significant breach of security, including the one that occurred in February 2005, could adversely affect the Company’s business and results of operations.

The Company may lose market share to its competitors and be unable to operate its business profitably if its patents and other intellectual property rights do not adequately protect its proprietary products.

The Company’s success depends significantly on its ability to protect its intellectual property rights to the technologies and know how used in its proprietary products. The Company relies on patent protection, as well as a combination of trade secret, unfair competition and similar laws and nondisclosure, confidentiality and other contractual restrictions to protect its proprietary technology. However, these legal means afford only limited protection and may not adequately protect the Company’s rights or permit the Company to gain or keep any competitive advantage. The Company’s issued patents and those that may be issued in the future may be challenged, invalidated or circumvented, which could limit the Company’s ability to stop competitors from marketing related products. Although the Company has taken steps to protect its intellectual property and proprietary technology, there is no assurance that third parties will not be able to design around the patents. The Company also relies on unpatented proprietary technology. The Company cannot provide assurance that it can meaningfully protect all its rights in its unpatented proprietary technology or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to the Company’s unpatented proprietary technology. The Company seeks to protect its trade secrets, know-how and other unpatented proprietary technology, in part with confidentiality agreements and intellectual property assignment agreements with its employees, independent distributors and consultants. However, such agreements may not be enforceable or may not provide meaningful protection for the Company’s trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements or in the event that the Company’s competitors discover or independently develop such trade secrets or other proprietary information.

Furthermore, the laws of foreign countries may not protect the Company’s intellectual property rights to the same extent as the laws of the United States. If the Company cannot adequately protect its intellectual property rights in these foreign countries, the Company’s competitors may be able to compete more directly with the Company, which could adversely affect the Company’s competitive position and business.

The Company also hold licenses from third parties that are necessary to utilize certain technologies used in the design and manufacturing of some of the Company’s products. The loss of such licenses would prevent the Company from manufacturing and selling these products, which could harm the Company’s business.

Foster Wheeler Ltd. has anti-takeover provisions in its bye-laws that may discourage a change of control.

Foster Wheeler Ltd.’s bye-laws contain provisions that could make it more difficult for a third-party to acquire it without the consent of its Board of Directors. These provisions provide for:

 
The Board of Directors to be divided into three classes serving staggered three-year terms. Directors can be removed from office only for cause, by the affirmative vote of the holders of two-thirds of the issued shares generally entitled to vote. The Board of Directors does not have the power to remove directors. Vacancies on the Board of Directors may only be filled by the remaining directors. Each of these provisions can delay a shareholder from obtaining majority representation on the Board of Directors.
     
 
Any amendment to the bye-law limiting the removal of directors to be approved by the Board of Directors and the affirmative vote of the holders of three-quarters of the issued shares entitled to vote at general meetings.
     
 
The Board of Directors to consist of not less than three nor more than 20 persons, the exact number to be set from time to time by a majority of the whole Board of Directors. Accordingly, the Board of Directors, and not the shareholders, has the authority to determine the number of directors and could delay any shareholder from obtaining majority representation on the Board of Directors by enlarging the Board of Directors and filling the new vacancies with its own nominees until a general meeting at which directors are to be appointed.

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Restrictions on the time period in which directors may be nominated. A shareholder notice to nominate an individual for election as a director must be received not less than 120 calendar days in advance of Foster Wheeler Ltd.’s proxy statement released to shareholders in connection with the previous year’s annual meeting.
     
 
Restrictions on the time period in which shareholder proposals may be submitted. To be timely for inclusion in Foster Wheeler Ltd.’s proxy statement, a shareholder’s notice for a shareholder proposal must be received not less than 120 days prior to the first anniversary of the date on which Foster Wheeler Ltd. first mailed its proxy materials for the preceding year’s annual general meeting. To be timely for consideration at the annual meeting of shareholders, a shareholder’s notice must be received no less than 45 days prior to the first anniversary of the date on which Foster Wheeler Ltd. first mailed its proxy materials for the preceding year’s annual meeting.
     
 
The Board of Directors to determine the powers, preferences and rights of preference shares and to issue the preference shares without shareholder approval. The Board of Directors could authorize the issuance of preference shares with terms and conditions that could discourage a takeover or other transaction that holders of some or a majority of the common shares might believe to be in their best interests or in which holders might receive a premium for their shares over the then market price of the shares.
     
 
A general prohibition on “business combinations” between Foster Wheeler Ltd. and an “interested member.” Specifically, “business combinations” between an interested member and Foster Wheeler Ltd. are prohibited for a period of five years after the time the interested member acquires 20% or more of the outstanding voting shares, unless the business combination or the transaction resulting in the person becoming an interested member is approved by the Board of Directors prior to the date the interested member acquires 20% or more of the outstanding voting shares.
     
   
“Business combinations” is defined broadly to include amalgamations or consolidations with Foster Wheeler Ltd. or its subsidiaries, sales or other dispositions of assets having an aggregate value of 10% or more of the aggregate market value of the consolidated assets, aggregate market value of all outstanding shares, consolidated earning power or consolidated net income of Foster Wheeler Ltd., adoption of a plan or proposal for liquidation and most transactions that would increase the interested member’s proportionate share ownership in Foster Wheeler Ltd.
     
   
“Interested member” is defined as a person who, together with any affiliates and/or associates of that person, beneficially owns, directly or indirectly, 20% or more of the issued voting shares of Foster Wheeler Ltd.
     
 
Any matter submitted to the shareholders at a meeting called on the requisition of shareholders holding not less than one-tenth of the paid-up voting shares of Foster Wheeler Ltd. to be approved by the affirmative vote of all of the shares eligible to vote at such meeting.

These provisions could make it more difficult for a third-party to acquire Foster Wheeler Ltd., even if the third-party’s offer may be considered beneficial by many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares.

On November 14, 2003, the Company’s common shares and trust securities were delisted from the NYSE. The Company intends to seek an alternate listing of the common shares, however it may not be able to successfully list the common shares. The Company’s common shares are currently quoted on the Over-the-Counter Bulletin Board under the symbol “FWHLF.OB.” Common shares quoted on the Over-the-Counter Bulletin Board may be less liquid and trade at a lower price than common shares listed on the NYSE.

As a result of the Company’s delisting from the NYSE, the trading price of the Company’s common shares may decline substantially and shareholders may experience a significant decrease in the liquidity of the common shares. Securities that trade on the Over-the- Counter Bulletin Board, including the Company’s common shares, may also be subject to higher transaction costs for trades and have reduced liquidity compared to securities that trade on the NYSE and other organized markets and exchanges. The Company may not be able to successfully list the common shares

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Foster Wheeler Ltd. is a Bermuda company and it may be difficult to enforce judgments against the Company or its directors and executive officers.

Foster Wheeler Ltd. is a Bermuda exempted company. As a result, the rights of shareholders are governed by Bermuda law and the memorandum of association and bye-laws of Foster Wheeler Ltd. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions. A substantial portion of the assets of Foster Wheeler Ltd. are located outside the United States. It may be difficult for investors to enforce in the United States judgments obtained in U.S. courts against Foster Wheeler Ltd. or its directors based on the civil liability provisions of the U.S. securities laws. Uncertainty exists as to whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States against the Company or its directors or officers, under the securities laws of those jurisdictions or entertain actions in Bermuda under the securities laws of other jurisdictions.

Foster Wheeler Ltd.’s bye-laws restrict shareholders from bringing legal action against its officers and directors.

Foster Wheeler Ltd.’s bye-laws contain a broad waiver by its shareholders of any claim or right of action, both individually and on Foster Wheeler Ltd.’s behalf, against any of its officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against Foster Wheeler Ltd.’s officers and directors unless the act or failure to act involves fraud or dishonesty.

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ITEM 2. PROPERTIES

The following chart provides the name of the subsidiary that owns or leases the property, the location and general use of each of the Company’s properties as of December 31, 2004, and the business segment in which each property is grouped.

Company (Business Segment*)
                         
and Location
   
Use
   
Land Area
    Building
Square Feet
    Lease
Expires(1)
 
                           
Foster Wheeler Realty Services, Inc. (C & F)              
Union Township, New Jersey
    Investment in undeveloped land     203.8 acres            
      General office & engineering     29.4 acres     294,000     2022  
      Storage and reproduction facilities     10.8 acres     30,400        
Livingston, New Jersey
    Research center     6.7 acres     51,355        
Bedminster, New Jersey
    Investment in land and office     10.7 acres (2)   135,000 (2)(3)      
Bridgewater, New Jersey
    Investment in undeveloped land     21.9 acres (4)          
                           
Foster Wheeler Energy Corporation (GPG)              
Dansville, New York
    Manufacturing & offices(5)     82.4 acres     513,786        
                           
Foster Wheeler Energy Services, Inc. (GPG)              
San Diego, California
    Office         12,673     2005  
                           
Foster Wheeler USA Corporation (E&C)              
Houston, Texas
    Office & engineering         107,890     2013  
                           
Foster Wheeler Iberia, S.A. (E&C)/(GPG)              
Madrid, Spain
    Office & engineering     5.5 acres     110,000     2015  
                           
Foster Wheeler Energia, S.A. (GPG)              
Tarragona, Spain
    Manufacturing & office     25.6 acres     77,794        
                           
Foster Wheeler France, S.A. (E&C)              
Paris, France
    Office & engineering         80,000     2006  
Paris, France
    Storage facilities         12,985     2006  
                           
Foster Wheeler International Corporation (Thailand Branch) (E&C)              
Sriracha, Thailand
    Office & engineering         61,600     2005  
                           
Foster Wheeler Constructors, Inc. (GPG)              
McGregor, Texas
    Storage facilities     15.0 acres     24,000        
                           
Foster Wheeler Limited (United Kingdom) (E&C)              
Glasgow, Scotland
    Office & engineering     2.3 acres     28,798        
Reading, England
    Office & engineering         47,940 (2)   2006/2009  
Reading, England
    Office & engineering     14.0 acres     365,521     2024  
Reading, England
    Investment in undeveloped land     12.0 acres            
Teeside, England
    Office & engineering         18,100     2005/2014  
                           
Foster Wheeler Canada Ltd. (GPG)              
Niagara-On-The-Lake, Ontario
    Office & engineering         29,066     2008  
                           
Foster Wheeler Andina, S.A. (E&C)              
Bogota, Colombia
    Office & engineering     2.3 acres     26,000        
                           
Foster Wheeler Power Machinery Company Limited (GPG)              
Xinhui, Guangdong, China
    Manufacturing & office     30.0 acres     319,073 (6)   2045  
Jiangmen City, Guangdong, China
    Manufacturing         47,275     2005  
                           
Foster Wheeler Italiana, S.p.A. (E&C)              
Milan, Italy
    Office & engineering         142,000     2007  
Milan, Italy
    Office & engineering         121,870 (2)   2008  

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Company (Business Segment*)
and Location
   
Use
   
Land Area
    Building
Square Feet
    Lease
Expires(1)
 
                           
Foster Wheeler Pyropower, Inc. (GPG)              
Ridgecrest, California
    Office & storage facilities         10,000     month to month  
                           
Foster Wheeler Birlesik Insaat ve Muhendislik A.S. (E&C)              
Istanbul, Turkey
    Office & engineering         26,000     2007  
                           
Foster Wheeler Eastern Private Limited (E&C)              
Singapore
    Office & engineering         29,196     2005  
                           
Foster Wheeler Power Systems, Inc. (GPG)              
Martinez, California
    Cogeneration plant     6.4 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 (GPG)              
Varkaus, Finland
    Manufacturing & offices     29.2 acres     369,365        
      Office         100,645     2031  
Karhula, Finland
    Research center     12.8 acres     15,100     2095  
      Office and laboratory           57,986 (2)   2095  
Helsinki, Finland
    Office         13,904     2005  
Norrkoping, Sweden
    Manufacturing & offices         37,990     2014  
                           
Foster Wheeler Energy FAKOP Ltd. (GPG)              
Sosnowiec, Poland
    Manufacturing & offices     23.9 acres     271,152 (7)      
                           

 
* Designation of Business Segments:
E&C - Engineering & Construction Group
 
GPG - Global Power Group
 
C&F - Corporate & Financial Services
   
(1)
Represents leases in which Foster Wheeler is the lessee.
(2)
Portion or entire facility leased or subleased to third parties.
(3)
50% ownership interest.
(4)
75% ownership interest.
(5)
Facility has been mothballed and is not operating.
(6)
52% ownership interest.
(7)
53% ownership interest.

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.

ITEM 3. LEGAL PROCEEDINGS
(amounts in thousands of dollars)
 
Asbestos — United States

Some of the Company’s U.S. subsidiaries, along with many non-related companies, are codefendants in numerous asbestos-related lawsuits and administrative claims 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 the work allegedly performed by the Company’s subsidiaries during the 1970’s and prior. As of December 31, 2004, the Company has determined that the subsidiaries are named defendants in lawsuits involving approximately 58,800 plaintiffs. Claims by approximately 22,300 of those plaintiffs have been stayed or placed on inactive dockets by courts. Claims that have not been settled and are six or more years old are considered abandoned and are no longer valued in the estimated liability. There were approximately 9,100 of such cases at December 31, 2004. The Company’s subsidiaries also are respondents in approximately 109,000 open administrative claims. The total number of open cases involves approximately 167,800 claimants.

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All of the open administrative claims have been filed under blanket administrative agreements the Company has with various law firms representing claimants and do not specify monetary damages sought. Based on management’s analysis of open lawsuits, approximately 81% do not specify the monetary damages sought or merely recite that the amount of monetary damages sought meets or exceeds the required jurisdictional minimum in the jurisdiction in which suit is filed. Approximately 8% request damages ranging from $10 to $50; approximately 7% request damages ranging from $50 to $1,000; approximately 3% request damages ranging from $1,000 to $10,000; and the remaining 1% request damages ranging from $10,000 to, in a very small number of cases, $50,000.

In all cases, requests for monetary damages are asserted against multiple named defendants, typically ranging from 25 to 250, in a single complaint.

On February 13, 2001, litigation was commenced against certain domestic subsidiaries of the Company by certain insurers that were parties to an interim funding agreement seeking to recover from other insurers amounts previously paid by them under the interim funding agreement and to adjudicate their rights and responsibilities under the subsidiaries’ insurance policies. An adverse outcome in the insurance litigation on these coverage issues could materially limit the Company’s insurance recoveries. In this regard, on January 10, 2005, a New York state trial court entered an order finding that New York, rather than New Jersey, law applies in a lawsuit regarding the allocation of liability for asbestos-related personal injury claims among the Company’s subsidiaries and their various insurers. On February 16, 2005, the Company’s subsidiaries filed separate motions seeking (i) the re-argument of this decision and (ii) an appeal of this decision to a higher court. There can be no assurances as to the timing and the outcome of these matters.

Asbestos — United Kingdom

Some of the Company’s U.K. subsidiaries have also received claims alleging personal injury arising from exposure to or use of asbestos. The number of asbestos-related claims received increased in 2004. To date, 446 claims have been brought against the U.K. subsidiaries, of which 255 remain open at December 31, 2004. Insurance policies have provided coverage for substantially all of the costs incurred in connection with resolving asbestos claims in the U.K with the proceeds from these policies paid directly to plaintiffs. None of the settled claims has resulted in material costs to the Company. The Company has considered the asbestos claims in the U.K. and the viability and legal obligations of its insurance carriers and believes the insurers will continue to adequately fund asbestos claims and related defense costs. The Company’s ability to continue to recover under these insurance policies is dependant upon, among other things, the timing and amount of asbestos claims which may be made in the future, the financial solvency of the insurers, and the amount which may be paid to resolve the claims. These factors could materially limit insurance recoveries, which could have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

Project Claims

In the ordinary course of business, the Company and its subsidiaries are parties to litigation involving clients and subcontractors arising out of project contracts. Such litigation includes claims and counterclaims by the Company for additional costs incurred in excess of current contract provisions, as well as for back charges for alleged breaches of warranty and other contract commitments. If the Company were found to be liable for any of the claims/counterclaims against it, the Company would have to incur a write-down or charge against earnings to the extent a reserve has not been established for the matter in its accounts. Amounts ultimately realized on claims/counterclaims by the Company could differ materially from the balances included in the Company’s financial statements, resulting in a charge against earnings to the extent profit has already been accrued on a project contract. Such charges could have a material adverse impact on the Company’s liquidity and financial condition. The Company believes, after consultation with counsel, that such litigation should not have a material adverse effect upon the Company’s financial position or liquidity, after giving effect to the provisions already recorded.

In addition to the matters described above, an arbitration has been commenced against the Company arising out of a compact circulating fluidized-bed boiler that the Company engineered, supplied and erected

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for a client in Asia. In addition to claims for damages for breach of contract, the client is seeking to rescind the contract based upon alleged material misrepresentations by the Company. If such relief were granted, the Company could be compelled to reimburse the client for the purchase price paid (approximately $25,700), in addition to other damages, which have not yet been quantified. The Company is vigorously defending the case and has counterclaimed for unpaid receivables (approximating $5,200), plus interest, for various breaches and non-performance by the client. (Due to its age, a reserve for the full amount of the receivable was taken prior to the arbitration.) The case is in the initial stages of discovery and a final award is not expected until 2007. Based upon the Company’s investigation and the proceedings to date, there appear to be valid defenses to the claim. However, it is premature to predict the outcome of this proceeding.

The Company has been notified of a claim by its client with respect to a thermal electric power plant in South America that the Company designed, supplied and erected as a member of a consortium with other parties. The plant’s concrete foundations have experienced cracking, allegedly due to out-of-specification materials used in the concrete poured by the consortium’s subcontractor. The client has adopted a plan to repair the foundations and is seeking reimbursement of its costs (approximating $11,000) from the consortium. Additional damages could be alleged if the matter proceeds to an adversary proceeding. The Company is investigating the claim, as well as any rights that it may have to seek reimbursement for the damages from third parties. Valid legal defenses to the claim appear to exist. However, it is premature to predict the outcome of this matter.

Camden County Waste-to-Energy Project

One of the Company’s project subsidiaries, Camden County Energy Recovery Associates, LP (“CCERA”), owns and operates a waste-to-energy facility in Camden County, New Jersey (the “Project”). In 1997, the United States Supreme Court effectively invalidated New Jersey’s long-standing municipal solid waste flow rules and regulations, eliminating the guaranteed supply of municipal solid waste to the Project with its corresponding tipping fee revenue. As a result, tipping fees have been reduced to market rate in order to provide a steady supply of fuel to the Project. Since the ruling, those market-based revenues have not been, and are not expected to be, sufficient to service the debt on outstanding bonds, which were issued by the Pollution Control Finance Authority of Camden County (“PCFA”) to finance the construction of the Project and to acquire a landfill for Camden County’s use.

In 1998, the CCERA filed suit against the PCFA and other parties seeking, among other things, to void the applicable contracts and agreements governing the Project (Camden County Energy Recovery Assoc. v. N.J. Department of Environmental Protection, et al., Superior Court of New Jersey, Mercer County, L-268-98). Since 1999, the State of New Jersey has provided subsidies sufficient to ensure the payment of each of the Project’s debt service payments as they became due. The bonds outstanding on the Camden Project were issued by the PCFA, not the Company or CCERA, and the bonds are not guaranteed by the Company or CCERA. Pursuant to the loan agreement between PCFA and CCERA, proceeds from the bonds were used to finance the construction of the facility and accordingly these proceeds were recorded as debt on CCERA’s balance sheet and therefore are included in the Company’s consolidated balance sheet. CCERA’s obligation to service the debt obtained pursuant to the loan agreement is limited to depositing all tipping fees and electric revenues received with the trustee of the PCFA bonds. The trustee is required to pay CCERA its service fees prior to servicing PCFA bonds. CCERA has no further debt repayment obligations under the loan agreement with the PCFA. In the litigation, the defendants have asserted, among other things, that an equitable portion of the outstanding debt on the Project should be allocated to CCERA even though CCERA did not guarantee the bonds. At this time, management cannot determine the ultimate outcome of the foregoing and the potential effects on CCERA and the Project. If the State were to fail to subsidize the debt service, and there were to be a default on a debt service payment, the bondholders might proceed to attempt to exercise their remedies, by among other things, seizing the collateral securing the bonds. The Company does not believe this collateral includes CCERA’s plant.

Environmental Matters

Under U.S. federal statutes, such as the Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”), the Clean Water Act and

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the Clean Air Act, 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 in excess of those for which reserves have been established.

The Company also may receive claims, pursuant to indemnity obligations from owners of recently sold facilities, which may require the Company to incur costs for investigation and/or remediation. Based on the available information, the Company does not believe that such costs will be materially in excess of those reserves which it has established. No assurance can be provided that the Company will not discover environmental conditions at its currently owned or operated properties, or that additional claims will not be made with respect to formerly owned properties, requiring the Company to incur material expenditures to investigate and/or remediate such conditions.

The Company 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 off-site facilities as to which it has received a notice of potential liability will exceed $500 in the aggregate.

In February 1988, one of the Company’s subsidiaries, Foster Wheeler Energy Corporation (“FWEC”), entered into a Consent Agreement and Order (“Order”) with the United States Environmental Protection Agency (“USEPA”) and the Pennsylvania Department of Environmental Protection (“PADEP”) regarding its former manufacturing facility in Mountaintop, Pennsylvania. The Order essentially required FWEC to investigate and remediate as necessary contaminants, including trichloroethylene (“TCE”), in the soil and groundwater at the facility. Pursuant to the Order, FWEC in 1993 installed a “pump and treat” system to remove TCE from the groundwater. It is not possible at the present time to predict how long FWEC will be required to operate and maintain the system. The annual cost of operating and maintaining the system has not been material.

In September 2004, FWEC sampled the domestic water supply of approximately 16 residences in Mountaintop, and it received validated testing data regarding that sampling in October 2004. The residences are located approximately one mile to the southwest of the historic source of the TCE at FWEC’s former facility, and it is believed the residences use private wells for domestic water. The results of this sampling indicated that TCE was present in the water at several of the residences at levels in excess of Safe Drinking Water Act standards. Since the initial round of testing in September 2004, FWEC has tested more wells. As of February 2005, the number of wells in the area containing TCE in excess of the standards is approximately 30, and FWEC believes the boundaries of the affected area have been delineated.

The source of the TCE in the wells has not yet been determined. FWEC is working closely with the appropriate regulatory authorities in responding to this situation. FWEC first provided the affected residences with temporary replacement water and then arranged to have filters installed on the residences’ water system to remove the TCE. FWEC has also arranged to have the filters periodically tested and maintained. The cost of the foregoing is not expected to be material. If the source of the TCE is determined to be from a third-

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party, FWEC will evaluate its options regarding the recovery of the costs it has incurred, which options could include seeking to recover those costs from those determined to be the source. The agencies have incurred over $500 in costs responding to the situation, which they may seek to recover from those determined to be the source(s) of the TCE. The Company and the agencies are reviewing the technical and economic feasibility of extending a public water line that exists at one end of the effected area to the other end of the effected area. Given the preliminary stage of the investigations, FWEC is unable to estimate the potential financial impact of the foregoing on FWEC.

Additional Information

For additional information on asbestos claims and other material litigation affecting the Company, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies” and Note 23 to the consolidated financial statements in this Form 10-K.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On November 29, 2004, the Company held a special general meeting of common shareholders and a joint annual and special general meeting of all shareholders.

The voting results of the two general meetings of shareholders were as follows (after reflecting the reverse stock split):

    For   Against(A)
Withheld(W)
  Abstain   Broker
Non-Votes
 
   
 
 
 
 
Special Meeting
                 
1. Consolidation of authorized common share capital.
  5,751,571   219,665 (A)   5,631      
                   
Joint Meeting
                 
1. Election of directors. (*)
                 
a. Eugene D. Atkinson
  40,860,282   148,985 (W)          
b. Stephanie Hanbury-Brown
  40,867,289   141,978 (W)          
c. David M. Sloan
  40,868,573   140,693 (W)          
2. Auditor appointment.
  40,432,673   36,760 (A)   N/A      
3. Approval of restricted stock awards and options to directors.
  33,115,936   286,389 (A)   N/A      
4. Amendment of bye-law 10(4), regarding director retirement age.
  40,307,337   149,627 (A)   N/A      
5. Amendment of bye-law 10(5), regarding directors’ share ownership policy.
  33,374,806   154,773 (A)   N/A      
6. Amendment of bye-law 20, regarding director remuneration.
  40,248,574   203,060 (A)   N/A      
7. Consolidation of authorized common share capital and related reduction in par value of authorized common share capital.
  33,810,722   255,845 (A)       6,932,381  
8. Reduction in par value of authorized common and preferred share capital.
  33,910,201   147,574 (A)   N/A      
9. Increase in authorized capital.
  33,835,969   220,196 (A)   N/A      
   
*
In addition, the following directors continued to serve after the meetings: Diane C. Creel, Roger L. Heffernan, Joseph J. Melone, Raymond J. Milchovich and James D. Woods.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(amounts in thousands of dollars, except share data and per share amounts)

The Company’s common stock and 9% FW Preferred Capital Trust I securities are quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under the ticker symbols “FWHLF.OB” and “FWLRP.OB,” respectively.

On November 29, 2004, the Company’s shareholders approved a series of capital alterations including the consolidation of the authorized common share capital at a ratio of one-for-twenty and a reduction in the par value of the common shares and preferred shares (see Item 4, “Submission of Matters to a Vote of Security Holders,” for additional information). As a result of these capital alterations, all references to common stock prices, share capital, the number of shares, per share amounts, cash dividends, and any other reference to shares in this annual report on Form 10-K, unless otherwise noted, have been adjusted to reflect such capital alterations on a retroactive basis.

The common stock prices shown below for the quarters prior to the Company’s de-listing from the NYSE reflect the high and low sales prices for each such quarter as reported in the consolidated transaction reporting system. The common stock prices shown for quarters ended subsequent to the Company’s NYSE de-listing reflect the high and low bid prices as reported on the OTCBB System. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.

    Three months ended  
   
 
2004
  March 26   June 25   Sept. 24   Dec. 31  

 

 

 

 

 
Cash dividends per share
                 
Common stock prices:
                         
High
  $ 38.40   $ 36.60   $ 29.20   $ 17.00  
Low
  $ 19.60   $ 21.60   $ 8.80   $ 8.40  
                           
                           
    Three months ended  
   
 
2003
  March 28   June 27   Sept. 26   Dec. 26  

 

 

 

 

 
Cash dividends per share
                 
Common stock prices:
                         
High
  $ 37.40   $ 60.00   $ 44.80   $ 27.60  
Low
  $ 17.00   $ 24.00   $ 21.40   $ 15.00  

The Company had 5,631 common shareholders of record and 40,542,898 common shares outstanding as of December 31, 2004.

Under Bermuda law, the consent of the Bermuda Monetary Authority (“BMA”) is required prior to the transfer by non-residents of Bermuda of a Bermuda company’s shares. Because the Company is not listed on a national stock exchange, the Company obtained the consent of the BMA for transfers between non-residents so long as the Company’s shares continue to be quoted on the OTCBB. The Company believes that this consent will continue to be available.

The Board of Directors of the Company discontinued the common stock dividend in July 2001. The Company was prohibited from paying dividends under its prior Senior Credit Facility and therefore, the Company paid no dividends on common shares during 2004. Additionally, the Company does not expect to pay dividends on the common shares for the foreseeable future.

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ITEM 6. SELECTED FINANCIAL DATA

COMPARATIVE FINANCIAL STATISTICS
(in thousands, except share data and per share amounts)

    2004   2003   2002   2001   2000  
   

 

 

 

 

 
Statement of Operations Data:
                               
Operating revenues
  $ 2,661,300   $ 3,723,800   $ 3,519,200   $ 3,315,300   $ 3,891,400  
(Loss)/earnings before income taxes
    (232,200 )(1)   (109,700 )(2)   (360,000 )(3)   (213,000 )(4)   52,200  
Provision for income taxes
    (53,100 )   (47,400 )   (14,700 )   (123,400 )(5)   (15,200 )
(Loss)/earnings prior to cumulative effect of a change in accounting principle
    (285,300 )   (157,100 )   (374,700 )   (336,400 )   37,000  
Cumulative effect of a change in accounting principle for goodwill, net of $0 tax
            (150,500 )(6)        
Net (loss)/earnings
  $ (285,300 ) $ (157,100 ) $ (525,200 ) $ (336,400 ) $ 37,000  
                                 
(Loss)/earnings per share—basic and diluted:(7)
                               
Net (loss)/earnings prior to cumulative effect of a change in accounting principle
  $ (57.84 ) $ (76.53 ) $ (182.98 ) $ (164.58 ) $ 18.13  
Cumulative effect on prior years (to December 31, 2001) of a change in accounting principle
            (73.49 )        
Net (loss)/earnings per share—basic and diluted
  $ (57.84 ) $ (76.53 ) $ (256.47 ) $ (164.58 ) $ 18.13  
Shares outstanding:(7)
                               
Weighted-average number of basic shares outstanding
    4,932,400     2,052,200     2,047,800     2,043,800     2,039,900  
Effect of stock options
    *     *     *     *      
   

 

 

 

 

 
Total weighted-average number of diluted shares
    4,932,400     2,052,200     2,047,800     2,043,800     2,039,900  
   

 

 

 

 

 
Balance Sheet Data:
                               
Current assets
  $ 1,049,300   $ 1,174,400   $ 1,329,800   $ 1,754,400   $ 1,623,000  
Current liabilities
    1,255,100     1,350,400     1,449,800     2,388,600     1,454,600  
Working capital
    (205,800 )   (176,000 )   (120,000 )   (634,200 )   168,400  
Land, buildings and equipment, net
    280,300     309,600     407,800     399,200     495,000  
Total assets
    2,187,500     2,506,500     2,842,300     3,325,800     3,507,600  
Long-term borrowings (including current installments):
    570,100     1,033,100     1,124,300     1,042,100     972,900  
Cash dividends per share of common stock(7)
                2.40     4.80  
Other data:
                               
Unfilled orders, end of year
  $ 2,048,100   $ 2,285,400 (8) $ 5,445,900   $ 6,004,400   $ 6,142,300  
New orders booked
    2,437,100     2,163,500     3,052,400     4,109,300     4,480,000  
                                 

 
(1)
Includes in 2004: a gain of $19,200 on the sales of minority equity interests in special-purpose companies established to develop power plant projects in Europe; a loss of $(3,300) on the sale of 10% of the Company’s equity interest in a waste-to-energy project in Italy; positive changes in contract cost estimates of $58,000; a charge of $(75,800) on the revaluation of asbestos insurance assets as a result of an adverse court decision in asbestos coverage allocation litigation; a net gain of $15,200 on the settlement of coverage litigation with certain asbestos insurance carriers; restructuring and credit agreement costs of $(17,200); a net charge of $(175,100) recorded in conjunction with the equity-for-debt exchange; and charges for severance cost of $(5,700).
(2)
Includes in 2003: a $(15,100) impairment loss on the anticipated sale of a domestic corporate office building; a $16,700 gain on the sale of certain assets of Foster Wheeler Environmental Corporation and a gain of $4,300 on the sale of a waste-to-energy plant; a gain on revisions to project claim estimates and related cost of $1,500; a charge related to revisions of project estimates and related receivable allowances of $(32,300); a provision for asbestos claims of $(68,100); restructuring and credit agreement costs of $(43,600); and charges for severance cost of $(15,900).
(3)
Includes in 2002: a loss recognized in anticipation of sales of assets of $(54,500); a charge related to revisions of project claim estimates and related costs of $(136,200); a charge related to revisions of project cost estimates and related receivable allowances of $(80,500); a provision for asbestos claims of $(26,200); a provision for a domestic plant impairment of $(18,700); restructuring and credit agreement costs of $(37,100); and charges for severance cost of $(7,700).

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(4)
Includes in 2001: losses recognized in anticipation of sales of assets of $(40,300); a charge related to revisions of project claim estimates and related costs of $(37,000); a charge related to revisions of project cost estimates and related receivable allowances of $(123,600); and a provision for domestic plant impairment of $(6,100).
(5)
Includes a valuation allowance for domestic deferred tax assets of $(194,600) in 2001.
(6)
In 2002: the Company recognized $(150,500) of impairment losses upon adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
(7)
Amounts have been adjusted to reflect the impact of the one-for-twenty reverse split that was effective November 29, 2004.
(8)
The decline in backlog reflects, in part, the divestiture of Foster Wheeler Environmental Corporation in March 2003.
*
The effect of stock options and convertible notes was not included in the calculation of diluted earnings per share due to their antidilutive effect.
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (amounts in 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 report on Form 10-K 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. See Item 1, “Business—Risk Factors of the Business,” for additional risk information.

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.

Overview

The accompanying consolidated financial statements and management’s discussion and analysis herein are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company may not, however, be able to continue as a going concern (see Note 1 to the consolidated financial statements and “Liquidity and Capital Resources” for additional going concern information).

The Company operates through two reportable business segments—the Engineering & Construction (“E&C”) Group and the Global Power (“Global Power”) Group. In addition, the Company’s corporate center, restructuring expenses and certain legacy liabilities (e.g. asbestos and corporate debt) are reported independently in the Corporate and Finance (“C&F”) Group.

2004 Results

In September 2004, the Company consummated an equity-for-debt exchange that significantly strengthened its balance sheet. The equity-for-debt exchange reduced debt by $437,000, reduced the shareholders’ deficit by $448,100, is expected to reduce annual interest expense by approximately $28,000, and when combined with the proceeds from new notes issued concurrently with the equity-for-debt exchange that were used to repay amounts that were outstanding under the previous Senior Credit Facility, eliminated substantially all material scheduled corporate debt maturities prior to 2011. A pretax charge of $175,100 was recorded as part of the exchange, relating primarily to conversion expense on the Convertible Subordinated Notes, as required by Statement of Financial Accounting Standards (“SFAS”) No. 84, “Induced Conversions of Convertible Debt.” In addition, in the fourth quarter of 2004, the Company’s shareholders approved a one-for-twenty reverse stock split and par value reduction. See Note 7 to the consolidated financial statements for additional details on the exchange and Note 12 to the consolidated financial statements for additional details of the reverse stock split and par value reduction.

The Company reported a net loss of $285,300 in 2004. Included in the loss is the $175,100 pretax charge described above, $163,900 of which was non-cash, relating to the equity-for-debt exchange, and a

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$60,600 net charge relating to the carrying value of the Company’s asbestos insurance assets. The Company continued its strategy of settling with asbestos insurance carriers by monetizing policies or arranging coverage in place agreements. A net pretax gain of $15,200 resulting from the asbestos insurance settlements in 2004 was more than offset by a $75,800 charge recorded when the Company revalued its asbestos insurance asset after a New York court ruled that New York law, rather than New Jersey law, applied in litigation among the Company and its asbestos insurance carriers. The net charges are recorded in the C&F Group.

Operations in the E&C Group’s Continental Europe and the Global Power Group’s North America business units were strong in 2004 resulting from incentive bonuses and profits earned from the successful completion of several large projects below original cost estimates, ahead of schedule, and with strong safety records. Operations in the Global Power Group’s European unit were unacceptable on three large lump-sum turnkey (“LSTK”) power plant contracts, where $74,800 in profits were reversed and losses recorded from significant cost overruns and completion delays. As previously announced, the Global Power’s European Power business will not execute engineering, procurement and construction contracts for full power plants on a LSTK basis without partnering with one of the E&C business units or a third-party.

The Company’s retained Foster Wheeler Environmental Corporation project, which processes spent nuclear waste for the U.S. Department of Energy in Oak Ridge, Tennessee, commenced commercial operations processing its initial waste stream in January 2004. The project generated $53,300 in cash flows from the recovery of capital funded by the Company during the construction phase of the project. Capital recovery and operating revenues are generated as the plant processes several streams of waste materials. The Company expects to recover the remainder of the capital it funded during the construction phase during 2005, however the level of cash flow is expected to decline significantly during the year. Once all of its capital has been recovered, the Company will continue to receive revenues from the project over the course of its operations. The facility is being modified to process a second waste stream that is expected to commence operation in the third quarter of 2005.

Challenges and Drivers for 2005

The Company’s primary focus in 2005 is obtaining new contract awards and building its backlog. The global markets in which the Company operates are largely dependent on overall economic growth and continue to be highly competitive. Consolidated new orders and backlog have declined from recent years. However, the E&C markets served by the Company, including the chemical, petrochemical, oil refining, liquefied natural gas, and upstream oil and gas industries, were strong during 2004. Management expects capital investments by its clients in these markets to be strong in 2005. The Company is currently working on the early stages of four major chemical and petrochemical facilities in the Middle East that could result in significant follow on awards in 2005. The solid fuel fired power markets served by Global Power Group were soft during 2004. Management expects 2005 capital investment in the domestic U.S. power market to be focused on service type projects with limited investment in new power generating facilities. Client investments in solid fuel fired electric power generation in Europe are expected to increase from 2004 as emission standards in Europe have been clarified in a number of countries. The Company believes it is well-positioned to address these markets through its existing network of operating companies, and expects an increase in the amount of new orders compared with the amounts recorded in 2004. Because these markets remain highly competitive, and many of these contracts will be awarded on a competitive bid basis, the Company cannot provide assurance that these increases will be achieved.

The Company expects to continue to execute a portion of its engineering, procurement and construction contracts on a LSTK basis in 2005. LSTK contracts are inherently risky because the Company agrees to the selling prices at the time it enters into the contracts. Consequently, costs and execution schedules are based on estimates, and the Company assumes substantially all of the risks associated with completing the project as well as the post-completion warranty obligations within these estimates. The majority of the Company’s existing LSTK contracts and current sales prospects are power plants located in the domestic markets of the E&C European businesses. In order to control the risks involved in LSTK contracts, the Company’s Project Risk Management Group (“PRMG”) reviews proposals and contracts to evaluate the levels of risk acceptable to the Company. To date, no project has recorded losses where the PRMG reviewed and approved the proposal prior to submission to the client. Controlling these risks remains a priority for Company.

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Proposed asbestos trust fund legislation being discussed in Washington D.C, if enacted in the form currently under discussion, would have a material adverse impact on the Company’s cash flow and results of operations. Without this legislation, management continues to forecast that, prior to any impact from potential asbestos trust fund legislation, the Company will not be required to fund asbestos liability payments from its own working capital before 2010, although it may be required to fund a portion of such liabilities from its own cash thereafter. This assumes that the Company will be able to successfully resolve certain outstanding insurance coverage issues. Management believes this proposed legislation in the form currently under discussion is detrimental to the Company and would have a material adverse impact. The Company is part of a consortium of companies actively monitoring any proposed legislation.

One of Foster Wheeler’s subsidiaries is a party to a contract to construct a spent fuel processing facility for a U.S. government agency that will require the Company to obtain third-party project financing in excess of $100,000 and a performance bond in excess of $100,000 if the contract is not restructured or terminated. The Company has completed the first phase of this contract and is currently executing the second phase. Technical specification and detailed guidance from the U.S. government agency regarding U.S. government agency-directed changes to the project scope remain outstanding. Resolution of the outstanding issues will be required before the second phase of the contract can be completed. The third phase would begin with the purchase of long-lead time items and is expected to last two years. The contract requires the Company to fund the construction cost of the project during the third phase, which cost is estimated to be in excess of $100,000. The contract also requires the Company to provide a surety bond for the full amount of the cost. Management is currently pursuing its alternatives with respect to this project and has engaged in discussions with the government about restructuring and termination alternatives. If the Company cannot successfully restructure the contract, and if the Company cannot obtain third-party financing or the required surety bond, the Company’s ability to perform its obligations under the contract is unlikely. If the company fails to perform its obligations under the contract, and as a result the government agency terminates the contract, and thereafter the government re-bids the contract under its exact terms and the resulting cost is greater than it would have been under the existing terms with the Company, the government may seek to hold the Company liable for this difference. This could result in a claim against the Company in amounts that could be materially adverse to the Company’s financial condition, results of operations and cash flow. At this stage, no claims have been raised by the government against the Company, and the Company does not believe a claim is probable. Additionally, the Company believes that it has a variety of potential legal defenses should the government agency decide to pursue any such action.

2005 Liquidity

Maintaining adequate domestic liquidity continues to be a management priority in 2005. The Company normally repatriates cash from its foreign operations and expects to continue to need to repatriate cash from its foreign operations in the future. In addition, in the first quarter of 2005, the Company entered into a new 5-year Senior Credit Agreement that replaces its prior Senior Credit Facility. This new facility is available to issue letters of credit for up to $250,000 and provides a revolving line of credit of up to $75,000. The sum of the letters of credit issued under the facility and the utilization under the revolving line of credit cannot exceed $250,000. Management forecasts that sufficient cash will be available to fund the Company’s U.S. and foreign working capital needs—See “Liquidity and Capital Resources” for additional details. As with any forecast, there can be no assurance that the cash amounts realized and/or timing of the cash flows will match the Company’s forecast.

Results of Operations:
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Operating revenues
  $ 2,661,300   $ 3,723,800   $ 3,519,200  
Net loss
    (285,300 )   (157,100 )   (525,200 )
Basic and diluted loss per share
  $ (57.84)   $ (76.53)   $ (256.47)  

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The financial results for the years ended December 31, 2004, December 26, 2003, and December 27, 2002 contain net pretax charges of $184,700, $152,500 and $511,400, respectively. Details of the charges are identified below to provide a comprehensive understanding of the financial results.

    For the Year Ended December 31, 2004  
   
 
    E&C   Global Power   C&F   Total  
   

 

 

 

 
1)  Change in accounting for goodwill
  $   $   $   $  
2)  Gains/(losses) recognized on/or in anticipation of sale of assets
    15,900             15,900  
3)  Reevaluation of project claim estimates
                 
4)  Reevaluation of contract cost estimates
    98,700     (40,700 )       58,000  
5)  Gains/(losses) related to asbestos
            (60,600 )   (60,600 )
6)  Provision for domestic plant impairment
                 
7)  Restructuring and credit agreement costs
            (17,200 )   (17,200 )
8)  Equity-for-debt exchange charge
            (175,100 )   (175,100 )
9)  Severance costs
    (2,900 )   (1,900 )   (900 )   (5,700 )
   

 

 

 

 
Total
  $ 111,700   $ (42,600 ) $ (253,800 ) $ (184,700 )
   

 

 

 

 
                           
                           
    For the Year Ended December 26, 2003  
   
 
    E&C   Global Power   C&F   Total  
   

 

 

 

 
1)  Change in accounting for goodwill
  $   $   $   $  
2)  Gains/(losses) recognized on/or in anticipation of sale of assets
    16,700     4,300     (15,100 )   5,900  
3)  Reevaluation of project claim estimates
    (900 )   2,400         1,500  
4)  Reevaluation of contract cost estimates
    (33,000 )   700         (32,300 )
5)  Gains/(losses) related to asbestos
            (68,100 )   (68,100 )
6)  Provision for domestic plant impairment
                 
7)  Restructuring and credit agreement costs
    (1,000 )       (42,600 )   (43,600 )
8)  Equity-for-debt exchange charge
                 
9)  Severance costs
    (6,600 )   (6,700 )   (2,600 )   (15,900 )
   

 

 

 

 
Total
  $ (24,800 ) $ 700   $ (128,400 ) $ (152,500 )
   

 

 

 

 
                           
                           
    For the Year Ended December 27, 2002  
   
 
    E&C   Global Power   C&F   Total  
   

 

 

 

 
1)  Change in accounting for goodwill
  $ (48,700 ) $ (101,800 ) $   $ (150,500 )
2)  Gains/(losses) recognized on/or in anticipation of sale of assets
        (54,500 )       (54,500 )
3)  Reevaluation of project claim estimates
    (86,800 )   (40,800 )   (8,600 )   (136,200 )
4)  Reevaluation of contract cost estimates
    (34,850 )   (45,650 )       (80,500 )
5)  Gains/(losses) related to asbestos
            (26,200 )   (26,200 )
6)  Provision for domestic plant impairment
        (18,700 )       (18,700 )
7)  Restructuring and credit agreement costs
            (37,100 )   (37,100 )
8)  Equity-for-debt exchange charge
                 
9)  Severance costs
    (500 )   (4,300 )   (2,900 )   (7,700 )
   

 

 

 

 
Total
  $ (170,850 ) $ (265,750 ) $ (74,800 ) $ (511,400 )
   

 

 

 

 
                           

 
(1)
The Company’s implementation of SFAS No. 142, “Goodwill and Other Intangible Assets,” in 2002 resulted in the impairment of goodwill in the E&C Group on Foster Wheeler Environmental Corporation of $(48,700), and in the Global Power Group on the Camden waste-to-energy facility of $(24,800) and the North American power operations of $(77,000), for a total of $(101,800). Refer to Note 2 of the consolidated financial statements for a discussion of the requirements of SFAS No. 142.
(2)
In 2004, the Company sold minority equity interests in special-purpose companies established to develop power plant projects in Europe. The Company recorded an aggregate gain on the sales of $19,200 in the E&C Group, which was recorded in other income. In addition, the Company entered into an agreement to sell 10% of its equity interest in a waste-to-energy project in Italy in 2004. The Company recorded a loss

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on the sale of $(3,300) in the E&C Group in other income. In 2003, the Company recorded a $(15,100) impairment loss in the C&F Group in other deductions on the anticipated sale of a domestic corporate office building that was sold in 2004. Also in 2003, the Company sold certain assets of its wholly owned subsidiary, Foster Wheeler Environmental Corporation, resulting in a net gain of $16,700 recorded in the E&C Group in other income, and the Global Power Group recorded a gain of $4,300 on the sale of the Hudson Falls, New York waste-to-energy plant, which was also recorded in other income. In 2002, a charge of $(19,000) was recorded in the Global Power Group in other deductions on the anticipated sale of the Charleston, South Carolina waste-to-energy facility; the sale of this facility was completed in the fourth quarter of 2002. Also in 2002, a loss of $(35,500) was recognized in the Global Power Group in other deductions on the anticipated sale of the Hudson Falls waste-to-energy facility that was sold in October 2003.
(3)
In 2003, the E&C Group recorded a net charge of $(2,100) on the settlement of claims retained from the sale of assets of Foster Wheeler Environmental Corporation and a net gain on other sales of $1,200, resulting in a net charge of $(900). The Global Power Group had a recovery on a North American contract of $2,400 in 2003. In 2002, the Company reduced its estimates of claim recoveries to reflect recent adverse recovery experience due to management’s desire to monetize claims, and the poor economic conditions impacting the markets served by the Company. These charges were reflected in the cost of operating revenues: $(86,800) in the E&C Group, $(40,800) in the Global Power Group and $(8,600) in the C&F Group. These charges include claims write-downs and the establishment of a provision for probable liquidated damages.
(4)
In 2004, the E&C businesses experienced positive changes in contract cost estimates of $98,700 due primarily to project performance. During 2004, the Global Power Group’s North American Power businesses earned several project incentive bonuses, experienced better than estimated execution on two large domestic projects and successfully negotiated the elimination of all warranty risk on another major project. The North American Power business contracts experienced a positive change in contract profit estimates of $30,800, while the European Power business, driven primarily from problems on three lump-sum turnkey power projects in Europe, experienced a net negative change in contract profit estimates of $(71,500). In 2003, the E&C Group recorded contingencies relating to Foster Wheeler Environmental Corporation contracts retained in the amount of $(32,900) and on three other contracts resulting in a net write-down of $(100). The Global Power Group had a net gain of $700 on six contracts. In 2002, charges for revisions to project cost estimates and related receivable reserves totaled $(34,850) in the E&C Group and $(45,650) in the Global Power Group. All of the above amounts were reflected in the cost of operating revenue.
(5)
In 2004, the Company recorded a charge of $(75,800) on the revaluation of asbestos insurance assets as a result of an adverse court decision in asbestos coverage allocation litigation, as discussed in the risk factor entitled “The amount and timing of insurance recoveries of the Company’s asbestos-related costs in the United States is uncertain. The failure to obtain insurance recoveries would cause a material adverse effect on the Company’s financial condition.” The charge was recorded in the C&F Group in other deductions. In addition, in 2004, the Company entered into settlement and release agreements that resolve coverage litigation with certain asbestos insurance carriers. The Company recorded an aggregate gain on the settlements of $15,200 in 2004 in the C&F Group. The gain on the settlements was recorded in other deductions. The Company recorded charges related to increases in the valuation allowance for insurance claims receivable of $(68,100) and $(26,200) for the fiscal years 2003 and 2002, respectively, in the C&F Group. These charges were recorded in other deductions. The 2003 non-cash asbestos charge was due to the Company receiving a somewhat larger number of claims in 2003 than had been expected, which resulted in an increase in the projected liability related to asbestos. In addition, the size of the Company’s insurance assets was reduced due to the insolvency of a significant carrier in 2003. The 2002 charge was recorded due to the allocation of future costs to an insurer who became insolvent.
(6)
In 2002, a provision for impairment was recorded in cost of operating revenues of $(13,400) relating to the write-down of fixed assets, and in other deductions of $(5,300) for the Dansville, New York manufacturing facility under the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” These charges were recorded in the Global Power Group. Cash outflows related to the ultimate mothballing of the facility were approximately $3,300 in 2003.

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(7)
Cost for restructuring activities and credit agreement costs were recorded in other deductions for $(17,200), $(43,600) and $(37,100) for the fiscal years 2004, 2003 and 2002, respectively. The costs were recorded in the C&F Group, except for $(1,000) of costs, which were recorded in the E&C Group in 2003.
(8)
The Company recorded a net charge of $(175,100) on the consummation of the equity-for-debt exchange in 2004, as described in Note 7 to the consolidated financial statements. The charge was recorded in the C&F Group.
(9)
The 2004 severance costs were recorded in cost of operating revenues for the E&C Group ($2,900) and the Global Power Group ($1,900) and selling, general and administrative expenses for the C&F Group ($900). The 2003 severance costs were recorded in cost of operating revenues for the E&C Group ($6,600) and the Global Power Group ($6,700) and selling, general and administrative expenses for the C&F Group ($2,600). The 2002 severance costs were recorded in cost of operating revenues for the E&C Group ($500), selling, general and administrative expenses for the Global Power Group ($4,300) and other deductions for the C&F Group ($2,900).
 
Consolidated Operating Revenues:
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Amount
  $ 2,661,300   $ 3,723,800   $ 3,519,200  
$ Change
    (1,062,500 )   204,600        
% Change
    (28.5 )%   5.8 %      

The 2004 decline reflects reduced revenues in both the E&C Group ($610,500) and the Global Power Group ($447,500) (see Note 20 to the consolidated financial statements) and reflects, in general, reduced volumes of new orders received during the last three years. Revenues in 2003 included approximately $400,000 of E&C reimbursable flow-through costs that result in no profit or loss for the Company from a U.K. power project, a U.S. refinery project and a sulfur reduction project in Spain that were not repeated in 2004. The decline in Global Power occurred in both the North American and European Power operations where several large power projects were substantially completed in 2003 and early 2004. These type projects were not replaced in 2004.

In March 2003, substantially all the assets of Foster Wheeler Environmental Corporation were sold to a third-party. Two legacy projects remained with the Company but the sale resulted in reduced consolidated operating revenues. The operating revenues from this entity for 2004, 2003 and 2002 were $22,800, $68,100 and $303,700, respectively.

See the individual group discussions for additional details on operating revenues.

Consolidated Cost of Operating Revenues:
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Amount
  $ 2,382,000   $ 3,435,700   $ 3,426,900  
$ Change
    (1,053,700 )   8,800        
% Change
    (30.7 )%   0.3 %      

The 2004 decline reflects a lower cost of operating revenues in E&C ($687,900) and Global Power ($361,500) and relates primarily to reduced volumes of contract activity which resulted from reduced volumes of new orders received in 2003 and 2004. 2003 cost of operating revenues included approximately $400,000 of E&C flow-through costs from a U.K. power project, a U.S. refinery project and a sulfur reduction project in Spain that were not repeated in 2004. The decline in Global Power occurred in both the North American and European Power operations where several large power projects were substantially completed in 2003 and were not replaced in 2004. The 2004 amount includes profit reversals and losses totaling $74,800 on the three large European Power LSTK contracts.

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Consolidated Selling, General, and Administrative (SG&A) Expenses:
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Amount
  $ 229,000   $ 205,600   $ 226,500  
$ Change
    23,400     (20,900 )      
% Change
    11.4 %   (9.2 )%      

The 2004 increase primarily reflects $8,500 of increased sales pursuit costs (proposal and sales expenses), third-party costs associated with implementing and auditing the Company’s Sarbanes-Oxley initiatives $8,200, and $8,200 from an employee retention program in Global Power’s North America unit and C&F’s corporate staff. The employee retention program is payable after March 31, 2005.

The decline in 2003 largely reflects the sale of certain assets of Foster Wheeler Environmental Corporation in March 2003. The decline also reflects the impact of the cost reduction initiatives implemented under a performance improvement intervention plan.

Consolidated Other Income:
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Amount
  $ 88,400   $ 77,500   $ 55,400  
$ Change
    10,900     22,100        
% Change
    14.1 %   39.9 %      

2004 other income consists primarily of $8,800 of interest income, $34,200 in pretax equity earnings generated from investments, primarily from minority ownership interests, in build, own, and operate projects in Italy and Chile, $15,900 in net gains on the sales of minority equity interests in special-purpose companies established to develop power plant projects in Europe and a minority interest in a waste-to-energy project in Italy, a $8,600 gain recognized at the Camden, New Jersey waste-to-energy facility due to the State of New Jersey’s payment on the project’s debt, $1,400 of investment income earned by the Company’s captive insurance company, and $4,500 in gains on dispute settlements.

2003 other income consists primarily of $10,100 of interest income, $29,400 in pretax equity earnings generated from investments, primarily from minority ownership interests, in build, own, and operate projects in Italy and Chile, $20,900 in gains on the sale of the majority assets of the domestic environmental business and the Hudson Falls, New York waste-to-energy project, $2,300 of investment income earned by the Company’s captive insurance company, and a $3,900 gain recognized at the Camden, New Jersey waste-to-energy facility due to the State of New Jersey’s payment on the project’s debt.

2002 other income consists primarily of $12,300 of interest income, $24,400 in pretax equity earnings generated from investments, primarily from minority ownership interests, in build, own, and operate projects in Italy and Chile, $4,200 of investment income earned by the Company’s captive insurance company, $6,400 of exchange gains and a $3,300 gain on the sale of investments.

Consolidated Other Deductions:
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Amount
  $ 96,400   $ 168,500   $ 193,200  
$ Change
    (72,100 )   (24,700 )      
% Change
    (42.8 )%   (12.8 )%      

Other deductions is dominated by asbestos-related charges and professional fees incurred as part of the Company’s restructuring activities associated with the equity-for-debt exchange offer and domestic credit

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agreements. The 2004 amount consists primarily of a net charge of $60,600 related to the reduction of the asbestos-related insurance receivable and $17,200 for professional fees and expenses for restructuring activities and the domestic U.S. credit agreements. The asbestos charge nets a reduction in the asbestos insurance receivable of $75,800 recorded in the fourth quarter of 2004 that resulted when a New York State court ruled that New York law, rather than New Jersey law, will apply in litigation among the Company and several of its asbestos insurance carriers, and $15,200 in gains from increased asbestos insurance receivables recorded throughout the year on settlements with other insurance companies. Operating unit related expenses include $3,700 for the amortization of intangible assets and $2,600 relating to new government-mandated postretirement benefits in France.

Other deductions in 2003 included a $68,100 reduction in the asbestos-related insurance receivable for potentially uncollectible and insolvent insurance companies, $31,900 in professional services rendered in relation to the equity-for-debt exchange offer and the domestic credit agreement, $11,700 in professional services rendered as part of the Company’s performance intervention activities, a $15,100 provision for a loss on the anticipated sale of a domestic corporate office building that was sold in 2004, $3,700 in amortization expense of intangible assets, $5,300 in exchange losses, $4,900 in European legal expenses associated with contract disputes, $5,900 in allowance for doubtful accounts, and $1,000 in fees and expenses associated with a credit facility at the Company’s U.K. operating unit.

Other deductions in 2002 included a $26,200 reduction in the asbestos-related insurance receivable for potentially uncollectible and insolvent insurance companies, a $54,500 loss in anticipation of the sales of the Charleston, South Carolina and Hudson Falls, New York waste-to-energy facilities sold in 2002 and 2003, respectively, a $5,300 charge relating to the closure and mothballing of the Dansville, New York manufacturing facility, $19,300 for professional fees and expenses associated with the equity-for-debt exchange offer, $17,800 for professional services relating to the Company’s performance intervention activities, $18,000 in legal fees and commercial dispute settlements, $8,400 in increased pension and postretirement benefit costs, $10,400 in allowance for doubtful accounts, $3,500 in amortization expense of intangible assets and $6,500 of bank fees.

Consolidated Interest Expense:
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Amount
  $ 94,600   $ 95,500   $ 83,000  
$ Change
    (900 )   12,500        
% Change
    (0.9 )%   15.1 %      

The 2004 interest expense reflects increased interest costs and the amortization of fees associated with the previous Senior Credit Facility, offset by the reduction in outstanding debt resulting from completion of the equity-for-debt exchange at the end of the third quarter of 2004.

The increase in interest expense in 2003 reflects increased borrowing costs associated with the previous Senior Credit Facility and the amortization of fees associated with this agreement and subsequent amendments.

Consolidated Minority Interest:
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Amount
  $ 4,900   $ 5,700   $ 5,000  
$ Change
    (800 )   700        
% Change
    (14.0 )%   14.0 %      

Minority interest reflects third-party ownership interests in Global Power’s Martinez, California gas-fired cogeneration facility, and manufacturing facilities in Poland and the People’s Republic of China.

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Consolidated Loss on Equity-for-Debt Exchange:
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Amount
  $ 175,100   $   —   $   —  
$ Change
    175,100            
% Change
    100.0 %          

The loss on equity-for-debt exchange results from conversion expense of $202,600 recorded on the Subordinated Convertible Notes, transaction fees of $11,200 and the write-off of unamortized issuance costs of $9,600, partially offset by a net gain of $48,300 on the exchange of 2005 Senior Notes, Trust Preferred Securities and Robbins Bonds.

Consolidated Tax Provision:
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Amount
  $ 53,100   $ 47,400   $ 14,700  
$ Change
    5,700     32,700        
% Change
    12.0 %   222.4 %      

The consolidated tax provision results from the fact that certain of the Company’s operating units in Europe and Asia are profitable and are liable for local income taxes. Additionally, taxes may be due in countries where the Company’s operating units execute project related works. The pretax earnings of the international operations cannot be offset against entities generating losses in the United States and certain other international jurisdictions. The provisions of SFAS No. 109, “Accounting for Income Taxes,” prohibit the Company from recording domestic and certain foreign tax benefits due to the cumulative losses incurred domestically and in certain international tax jurisdictions in the three years ended December 31, 2004. Accordingly, the tax provision represents primarily taxes from profits generated in Europe and Asia that cannot be used to reduce losses incurred in other tax jurisdictions.

For statutory purposes, the majority of the domestic federal tax benefits, against which reserves have been taken, do not expire until 2024 and beyond, based on current tax laws. As a result of the recently consummated exchange offer discussed in Note 7 to the consolidated financial statements, the Company was subject to substantial limitations on the use of pre-exchange period losses and credits to offset U.S. federal taxable income in any post-exchange period. The Company has significantly reduced its deferred tax assets and the corresponding valuation allowance to give effect to such limitation. At the end of 2004, the Company has $25,800 of remaining domestic deferred tax assets with full valuation allowance for tax credits related to the pre-exchange period and $13,200 of post-exchange net operating loss carryforwards with full valuation allowance reflected on its consolidated financial statements. The net impact of the adjustments on the current year financial statements was not material.

Cumulative Effect of a Change in Accounting Principle for Goodwill—Net of $0 Tax:

Each year, the Company and its subsidiaries evaluate goodwill for potential impairment, as prescribed by SFAS No. 142. The Company tests for impairment at the reporting unit level as defined in SFAS No. 142, “Goodwill and Other Intangible Assets.” This test is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. In the fourth quarter of each year, the Company evaluates goodwill on a separate reporting unit basis to assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the

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goodwill. SFAS No. 142 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives and reviewed annually for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In 2004 and 2003, the evaluation indicated that no adjustment to the carrying value of goodwill was required.

In 2002, after completion of the goodwill impairment test, a charge of $150,500 was recorded. The E&C Group recorded $48,700 of the charge related to Foster Wheeler Environmental Corporation, and the Global Power Group recorded $77,000 of the charge related to its North American power operations and $24,800 of the charge related to the Camden waste-to-energy facility.

Consolidated Net Loss:
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Amount
  $ (285,300 ) $ (157,100 ) $ (525,200 )
$ Change
    (128,200 )   368,100        
% Change
    (81.6 )%   70.1 %      

The pre and after tax losses for 2004 were comprised primarily of four items: (i) a $175,100 charge relating to the equity-for-debt exchange offer completed at the end of the third quarter; (ii) a $60,600 net charge for the revaluation of the Company’s asbestos insurance assets; (iii) profit reversals and losses totaling $74,800 on three major LSTK power generation projects located in Europe, and (iv) $17,200 in professional fees and expenses relating to the equity-for-debt restructuring and performance intervention efforts. Additional details of the net loss are included in the chart appearing at the beginning of Item 7 and in the E&C and Global Power discussions below.

The net loss for 2003 and 2002 were due primarily to the pretax charges detailed in the chart appearing at the beginning of this Item 7.

Consolidated EBITDA:
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Amount
  $ (104,800 ) $ 21,400   $ (219,200 )
$ Change
    (126,200 )   240,600        
% Change
    (589.7 )%   109.8 %      

The decrease in 2004 EBITDA reflects the $175,100 charge from the equity-for-debt exchange offer (see Note 7 to the consolidated financial statements for additional details), partially offset by the reduction in other deductions described above. Asbestos-related charges included in 2004, 2003 and 2002 EBITDA were $60,600, $68,100 and $26,200, respectively.

EBITDA is a supplemental, non-generally accepted accounting principle (“GAAP”) financial measure. EBITDA is defined as earnings/(loss) before taxes (and before goodwill charges), interest expense, depreciation and amortization. The Company has presented EBITDA because it believes it is an important supplemental measure of operating performance. EBITDA, was also used as a measure, after adjustment for unusual and infrequent items specifically excluded in the terms of the previous Senior Credit Facility, and is used for certain covenants under the new Senior Credit Agreement. The Company believes that the line item on its consolidated statement of operations and comprehensive loss entitled “net loss” is the most directly comparable GAAP measure to EBITDA. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net loss as an indicator of operating performance. EBITDA, as the Company calculates it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure does not necessarily represent funds available for discretionary use, and is not necessarily a measure of the Company’s ability to fund its cash needs. As EBITDA excludes certain financial information compared with net loss, the most

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directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions which are excluded. The Company’s non-GAAP performance measure, EBITDA, has certain material limitations as follows:

     
 
It does not include interest expense. Because the Company has borrowed substantial amounts of money to finance some of its operations, interest is a necessary and ongoing part of the Company’s costs and has assisted the Company in generating revenue. Therefore, any measure that excludes interest has material limitations;
     
 
It does not include taxes. Because the payment of taxes is a necessary and ongoing part of the Company’s operations, any measure that excludes taxes has material limitations;
     
 
It does not include depreciation. Because the Company must utilize substantial property, plant and equipment in order to generate revenues in its operations, depreciation is a necessary and ongoing part of the Company’s costs. Therefore, any measure that excludes depreciation has material limitations.

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A reconciliation of EBITDA, a non-GAAP financial measure, to net loss, a GAAP measure, is shown below.

    Total   Engineering and
Construction
  Global Power
Group
  Corporate and
Financial Services
 
   

 

 

 

 
For the Year Ended December 31, 2004
                         
Third party revenues
  $ 2,661,300   $ 1,658,200   $ 1,002,600   $ 500  
Intercompany revenues
        3,400     2,300     (5,700 )
   

 

 

 

 
Operating revenues
  $ 2,661,300   $ 1,661,600   $ 1,004,900   $ (5,200 )
   

 

 

 

 
EBITDA
  $ (104,800 ) $ 135,700   $ 80,700   $ (321,200 )
         
 
 
 
Less: Interest expense
    (94,600 )                  
Less: Depreciation and amortization
    (32,800 )                  
   
                   
Loss before income taxes
    (232,200 )                  
Tax provision
    (53,100 )                  
   
                   
Net loss
  $ (285,300 )                  
   
                   
For the Year Ended December 26, 2003
                         
Third party revenues
  $ 3,723,800   $ 2,271,200   $ 1,452,900   $ (300 )
Intercompany revenues
        900     (600 )   (300 )
   

 

 

 

 
Operating revenues
  $ 3,723,800   $ 2,272,100   $ 1,452,300   $ (600 )
   

 

 

 

 
EBITDA
    21,400   $ 68,700   $ 137,800   $ (185,100 )
         
 
 
 
Less: Interest expense
    (95,500 )                  
Less: Depreciation and amortization
    (35,600 )                  
   
                   
Loss before income taxes
    (109,700 )                  
Tax provision
    (47,400 )                  
   
                   
Net loss
  $ (157,100 )                  
   
                   
For the Year Ended December 27, 2002
                         
Third party revenues
  $ 3,519,200   $ 1,974,300   $ 1,545,700   $ (800 )
Intercompany revenue
        1,200     27,700     (28,900 )
   

 

 

 

 
Operating revenues
  $ 3,519,200   $ 1,975,500   $ 1,573,400   $ (29,700 )
   

 

 

 

 
EBITDA
  $ (219,200 ) $ (35,600 ) $ (29,800 ) $ (153,800 )
         
 
 
 
Less: Interest expense
    (83,000 )                  
Less: Depreciation and amortization
    (57,800 )                  
   
                   
Loss before income taxes and cumulative effect of a change in accounting principle for goodwill
    (360,000 )                  
Tax provision
    (14,700 )                  
   
                   
Net loss prior to cumulative effect of a change in accounting principle for goodwill
    (374,700 )                  
Cumulative effect on prior years of a change in accounting principle for goodwill
    (150,500 )                  
   
                   
Net loss
  $ (525,200 )                  
   
                   

Additional segment information is detailed in Note 20 to the consolidated financial statements.

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Reportable Segments

Management uses several financial metrics to measure the performance of the Company’s business segments. EBITDA, as discussed and defined above, is the primary earnings measure used by the Company’s chief decision makers.

Engineering and Construction Group
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Operating revenues
  $ 1,661,600   $ 2,272,100   $ 1,975,500  
Change from prior year $
    (610,500 )   296,600        
Change from prior year %
    (26.9 )%   15.0 %      
EBITDA
  $ 135,700   $ 68,700     $ (35,600)  
Change from prior year $
    67,000     104,300        
Change from prior year %
    97.5 %   293.0 %      
 
     Results

The 2004 decrease in operating revenues includes $400,000 in reduced volumes of reimbursable and flow-through costs associated with a large power project in the U.K., a refinery project in the United States and a sulfur reduction project in Spain that were not repeated in 2004. The decline also reflects reduced levels of man-hour bookings in 2003 and early 2004 that translate into approximately $75,000 in reduced billings.

Operating revenues were impacted by the sale of substantially all of the Foster Wheeler Environmental Corporation assets in March 2003. Operating revenues related to Foster Wheeler Environmental Corporation for 2004, 2003 and 2002 were $22,800, $68,100 and $303,700, respectively.

Operating revenues for 2003 excluding Foster Wheeler Environmental Corporation increased $532,200 and is attributable to the Group’s Continental Europe and United Kingdom operating units, partially offset by a decline in the U.S. operations. The Group’s subsidiaries executed several major projects in Europe, the Middle East and Asia-Pacific.

The increase in 2004 EBITDA reflects primarily strong performance at the E&C Group’s European and Asian operations. Two major power projects and an environmental project were completed in Europe at costs below budget. Additionally, an aggregate pretax gain of $15,900 was recorded on the sales of minority equity interests in special-purpose companies established to develop power plant projects in Europe and a portion of minority equity interest in an existing waste-to-energy project in Italy.

In addition, the decrease in the charges outlined at the beginning of this Item 7 also accounts for the increase in EBITDA for 2004.

     Overview of Segment

Global economic growth was strong in 2004 and, although slowing from that peak, is expected to remain positive in 2005. This has led to strong growth in demand for oil and gas, petrochemicals and refined products, in turn stimulating an increase in investment in new and expanded plants.

Both oil and gas prices have been at high levels for a prolonged period and this is expected to lead to higher levels of investment in oil and gas production facilities during 2005. The Company anticipates that spending will likely increase in most regions particularly West Africa, the Middle East, Russia and the Caspian states. Rising demand for natural gas in Europe and the U.S. combined with a shortfall in indigenous production is acting as a stimulant to the LNG business. The Company expects that investment will continue in 2005 for both liquefaction plants and receiving terminals. At least one new gas-to-liquids plant is expected to proceed in Qatar during 2005.

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The Company believes that the cycle of investment at U.S. and European refineries to meet the demands of clean fuels legislation has now wound down. However, refineries in the Middle East and Asia are now embarking on similar programs. In addition the ongoing market shift towards transportation fuels, combined with the current wide price differential between heavier higher-sulphur crudes and lighter sweeter crudes is expected to lead to refinery investment in upgrading projects in Europe and the U.S., some of which will be authorized in 2005.

Investment in petrochemical plants rose sharply in 2004 in response to strong economic growth and this is expected to be sustained in 2005. The Company believes this will continue to be centered in the Middle East but an upturn is likely in South East Asia.

Although the pharmaceutical industry continues to grow rapidly, investment in new production facilities is expected to slow in 2005 as the industry deals with issues of cost pressure and increased regulation. Investment is expected to be focused on plant upgrading and improvement projects rather than major new production facilities.

The overall result of all the market factors described above is that the market for engineering and construction companies looks positive for 2005.

Global Power Group
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Operating revenues
  $ 1,004,900   $ 1,452,300   $ 1,573,400  
Change from prior year $
    (447,400 )   (121,100 )      
Change from prior year %
    (30.8 )%   (7.7 )%      
EBITDA
  $ 80,700   $ 137,800   $ (29,800 )
Change from prior year $
    (57,100 )   167,600        
Change from prior year %
    (41.4 )%   562.4 %      
 
     Results

The decrease in operating revenues in 2004 primarily reflects the Company’s North American and European units’ execution and completion of several major projects that were not replaced during 2004. The decline in 2004 EBITDA was driven by $74,800 in profit reversals and losses on three lump-sum turnkey contracts for complete power plants in Ireland, Estonia and Germany. The poor performance in European Power offset strong performance in North America where incentive bonuses and cost under-runs on three large projects drove earnings. The execution phase of the three European Power projects is now substantially complete. However, the projects remain subject to final closeout and completion of the respective warranty periods. The impact of the charges from these contracts and others relating to the change in EBITDA are outlined at the beginning of this Item 7. The project in Ireland has a number of claims that have not been substantiated or settled. The financial statements reflect management’s best estimate of settlement costs for currently known claims and costs to complete the project and cover its warranty period. However, the close out of the project costs may change which management estimates could range from a $5,000 improvement to a $15,000 deterioration.

     Overview of Segment

Management anticipates several general global market forces to have a positive influence on its power business. Expected key market drivers include worldwide economic growth, rising natural gas pricing, an aging world boiler fleet, and tightening environmental regulations. The Company expects that coal will take an increasing share of the new power growth.

In the United States, Germany, Japan and Australia, management believes moderate to strong economic growth, natural gas supply concerns, high historic coal dependency and tightening environmental regulations will translate into increased demand for new clean coal boilers for the utility power sector. High growth

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developing countries, such as China, India, South Korea, Taiwan and Indonesia, with high coal dependencies, low coal qualities and increasing awareness of environmental concerns, are expected to drive demand for CFB boilers in the region. The Company expects China to lead the demand for new coal power at between 15 to 20 gigawatts of electricity (“GWe”) per year. In countries such as Poland, Czech Republic and Russia, the Company expects the combination of low to moderate economic growth, high coal dependency, and antiquated boiler fleets, to drive demand for CFB boiler repowerings due to the region’s low coal quality and increasing environmental awareness.

In the industrial sector, the Company expects manufacturers and producers to seek alternative lower cost methods of meeting their power needs in regions where rising gas prices are forecast (e.g., United States and Western Europe). The Company believes CFB technology is well positioned to offer substantial value to this market due to its ability to convert a wide array of opportunity industrial fuels to power or steam. It is expected that this will translate into an additional two to four GWe per year of CFB demand for the United States and Western Europe. The Company believes China also represents a significant industrial market however, centered mainly on their growing petrochemical industry which could have a demand exceeding five GWe per year. Finally, environmental policies across all world regions leads the Company to expect continued growth for biomass energy, which is another growing market best served by the Company’s CFB technology.

The Company believes the major markets for the boiler service business are in countries with the largest installed boiler fleets experiencing economic growth and the need to upgrade the units to today’s environmental and reliability standards. These markets include the United States, China, Germany, Japan, Australia and Poland.

Management estimates the United States boiler service market to be at $2,000,000-$2,500,000 per year for boiler maintenance and construction activities which could grow to over $8,000,000 per year when anticipated environmental upgrades occur driven by pending regulation. The service business is largely allocated on among the original equipment manufacturers and in the future will be largely driven by being able to utilize cost efficient manufacturing and engineering networks.

Liquidity and Capital Resources

Management closely monitors liquidity and updates its U.S. liquidity forecasts weekly. These forecasts cover, among other analyses, existing cash balances, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, working capital needs and unused credit line availability. The Company’s cash flow forecasts continue to indicate that sufficient cash will be available to fund the Company’s working capital needs throughout 2005.

As of December 31, 2004, the Company had cash and cash equivalents on hand, short-term investments, and restricted cash totaling $390,200, compared to $430,200 as of December 26, 2003. Of the $390,200 total at December 31, 2004, approximately $319,600 was held by foreign subsidiaries. See Note 2 to the consolidated financial statements for additional details on cash and restricted cash balances.

The Company’s operations used cash of $30,900 during 2004 compared to $62,100 during 2003. The decrease in cash used by operations is due primarily to the cash generated from a domestic U.S. environmental project and from the Italian operations of the E&C Group, partially offset by costs associated with three lump-sum turnkey power projects in the Global Power Group’s operations in Europe and the C&F Group’s costs associated with the equity-for-debt exchange.

The Company’s domestic operating entities are cash flow positive. However they do not generate sufficient cash flow to cover the costs related to the Company’s indebtedness, obligations to fund U.S. pension plans and corporate overhead expenses. Consequently, the Company requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs and to service its debt. The Company’s 2005 forecast assumes total cash repatriation from its non-U.S. subsidiaries of approximately $107,000 from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends. In 2004 and 2003, the Company repatriated approximately $77,000 and $100,000, respectively, from its non-U.S. subsidiaries.

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There can be no assurance that the forecasted foreign cash repatriation will occur on a timely basis or at all, as the non-U.S. subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of the Company’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. The repatriation of funds may also subject those funds to taxation. As a result of these factors, the Company may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries in the amount forecasted above.

Commercial operations under a domestic contract retained by the Company in connection with the sales of assets of the Foster Wheeler Environmental Corporation, as described further in Note 21 to the consolidated financial statements, commenced in January 2004. The plant processes low-level nuclear waste for the U.S. Department of Energy (“DOE”). The Company funded the plant’s construction costs and operates the facility. The majority of the Company’s invested capital was recovered during the early stages of processing the first stream of waste materials. This project successfully processed all quantities of the first waste stream of materials ahead of schedule and is currently finalizing the processing line for the second waste stream. In 2004, the project generated net cash flow of approximately $53,300. An additional $17,800 of capital recovery is dependent on the initial processing of the second waste stream of materials. This capital recovery is expected in 2005.

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 in the E&C Group tends to rise as workload increases while working capital tends to decrease in Global Power when the workload increases.

During 2004, the E&C Group’s Italian business unit sold minority equity interests in special-purpose companies established to develop power plant projects in Europe. The Company’s share of the proceeds from the sales, prior to repaying any borrowings as required per the previous Senior Credit Facility, approximated $19,200 in 2004. While the sales of the minority equity interests are recorded as one-time gains in 2004, the business in Italy has historically developed and sold such project rights, and is continuing to actively develop other project rights that could be offered for sale in the future. One of the sales was executed through a joint venture and the Company does not have immediate access to the funds. Management forecasts that part of the sales proceeds will be distributed to the joint venture owners in the first half of 2005.

In 2004, the Company settled several domestic contract disputes and was required to pay portions of settlements finalized in 2003. Net settlement proceeds of $8,400 were collected by the Company in 2004. During 2003, the Company collected approximately $39,000 in net proceeds from domestic contract dispute settlements.

Throughout 2003 and 2004, the Company’s subsidiaries entered into several settlement and release agreements that resolved coverage litigation between them and certain asbestos insurance companies. The majority of the proceeds from these settlements has been or will be deposited in trusts for use by the subsidiaries for future asbestos defense and indemnity costs. The Company projects that it will not be required to fund any asbestos liabilities from its cash flow before 2010, although it may be required to fund a portion of such liabilities from its own cash thereafter. In addition, the Company continues to evaluate whether the decision of a New York trial court to apply New York, rather than New Jersey, law in insurance coverage litigation brought against it will have any additional impact on the calculation of its insurance asset, its cash flow requirements, or both. This forecast assumes that the Company will be able to successfully resolve certain outstanding insurance coverage issues. This forecast also assumes that the proposed asbestos trust fund legislation as currently being discussed in Washington D.C. will not become law. See risk factor entitled “Proposed national asbestos trust fund legislation could require the Company to pay amounts in excess of current estimates of its net asbestos liability which would adversely affect the Company’s liquidity and financial condition” for further information.

Capital expenditures in 2004, 2003 and 2002, were $9,600, $12,900 and $53,400, respectively. The investments were primarily related to information technology equipment and office equipment. In 2002,

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investments also included the buyout of an operating lease financing agreement on a corporate office building in New Jersey of approximately $33,000, approximately $4,700 of routine capital expenditures at the Company’s build, own and operate plants and $15,700 of other capital expenditures worldwide.

The Company retained a long-term contract with a government agency in connection with the Foster Wheeler Environmental Corporation sale. The contract is scheduled to be completed in four phases. The first phase was for the initial design, permitting and licensing of a spent fuel facility. The first phase of this project was profitable.

The second phase of the contract, which is currently being executed, is billed on a cost-plus-fee basis and was expected to conclude in 2004. In this phase, the Company must license the facility with the NRC, respond to any questions regarding the initial design included in phase one and complete final design. Technical specification and detailed guidance from the government agency regarding government agency-directed changes to the project scope remain outstanding. Resolution of the outstanding issues will be required before the second phase of the contract can be completed.

Phase three is for the construction, start-up and testing of the facility for a fixed contractual price of $114,000, subject to escalation. The actual commencement of this phase will be delayed as a result of the significant delay in the issuance of the NRC license for the facility which was received on November 30, 2004. This delay will also result in substantial additional facility costs. The third phase would begin with the purchase of long-lead items followed by the construction activities. Construction is expected to last two years and requires that a subsidiary of the Company fund the construction cost. Foster Wheeler USA Corporation, the parent company of Foster Wheeler Environmental Corporation, provided a performance guarantee on the project. In addition, a surety bond for the full contract price is required. The cost of the facility is expected to be recovered in the first nine months of operations under phase four, during which a subsidiary of the Company will operate the facility at fixed rates, subject to escalation, for approximately four years. The Company and the government agency have engaged in discussions about possibly restructuring or terminating subsequent phases of the contract. If the project were to proceed, the Company intends to seek third-party financing to fund the majority of the construction costs, but there can be no assurance that the Company will secure such financing on acceptable terms, or at all. There also can be no assurance that the Company will be able to obtain the required surety bond. If the Company cannot successfully restructure the contract and cannot obtain third-party financing or the required surety bond, the Company’s ability to perform its obligations under the contract is unlikely. This could have a material adverse effect on the Company’s financial condition, results of operations, and cash flow. No claims have been raised by the government agency against the Company. The ultimate potential liability to the Company would arise in the event that the government agency terminates the contract (for example, due to the Company’s inability to continue with the contract) and re-bids the contract under its exact terms and the resulting cost to the government agency is greater than it would have been under the existing terms with the Company. The Company does not believe a claim is probable and is unable to estimate the possible loss that could occur as a result of any claims. Additionally, the Company believes that it has a variety of potential legal defenses should the government agency decide to pursue any such action.

It is customary in the industries in which the Company operates to provide letters of credit, bank guarantees or performance bonds in favor of clients to secure obligations under contracts. The Company and its subsidiaries traditionally obtained letters of credit or bank guarantees from its banks, or performance bonds from a surety on an unsecured basis. Due to the Company’s financial condition and current credit ratings, as well as changes in the bank and surety markets, the Company and its subsidiaries are now required in certain circumstances to provide security to banks and the surety to obtain new letters of credit, bank guarantees and performance bonds. Certain of the Company’s European subsidiaries are required to cash collateralize their bonding requirements. (Refer to Note 2 to the consolidated financial statements.) If the Company is unable to provide sufficient collateral to secure the letters of credit, bank guarantees and performance bonds, its ability to enter into new contracts could be materially limited. Providing collateral increases working capital needs and limits the ability to repatriate funds from operating subsidiaries.

The Company maintains several defined benefit pension plans in its North American, United Kingdom, South African and Canadian operations. Funding requirements for these plans are dependent, in part, on the

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performance of global equity markets and the discount rates used to calculate the present value of the liability. The poor performance of the global equity markets during recent years and low interest rates significantly increased the funding requirements for these plans. The non-U.S. plans are funded from the local operating cash flows while funding for the U.S. plans is included within the U.S. working capital requirements. The U.S. pension plans are frozen and the United Kingdom’s plan is now closed to new entrants. The South African and Canadian plans are immaterial in size. The funding requirement for the U.S. plans will approximate $20,400 in 2005 and is projected to decline to zero by 2010. See Note 9 to the consolidated financial statements for additional information on pensions.

The Board of Directors of the Company discontinued the common stock dividend in July 2001. The Company was prohibited from paying dividends under its prior Senior Credit Facility and therefore, the Company paid no dividends on common shares during 2004. Additionally, the Company is currently prohibited from paying dividends under its new Senior Credit Agreement and, accordingly, does not expect to pay dividends on the common shares for the foreseeable future.

In September 2004, the Company consummated an equity-for-debt exchange in which it issued common shares, preferred shares, warrants to purchase common shares, and new senior notes due 2011 in exchange for certain of its outstanding debt and trust securities. The exchange offer reduced the Company’s existing debt (excluding a reduction in deferred accrued interest of $31,100) by $437,000, improved the Company’s shareholders’ deficit by $448,100, and is expected to reduce annual interest expense by approximately $28,000. After completing the exchange, the Company had outstanding debt obligations of approximately $570,100 as of December 31, 2004. The Company’s annual cash interest expense after reflecting the exchange offer approximates $49,300. (Refer to Notes 7 and 8 to the consolidated financial statements for further details of the exchange and information regarding the Company’s indebtedness.)

In connection with the equity-for-debt exchange, the Company prepaid the term loan and amounts outstanding under the revolving credit portion of the Senior Credit Facility. Accordingly, there were no borrowings outstanding under the Senior Credit Facility as of December 31, 2004. Letters of credit of $90,000 remained outstanding under the Senior Credit Facility as of December 31, 2004.

In March 2005, the Senior Credit Facility was replaced with a new 5-year $250,000 Senior Credit Agreement. The new Senior Credit Agreement includes a $75,000 sub-limit for borrowings at a rate equal to LIBOR plus a spread. Standby letters of credit issued under the new Senior Credit Agreement will carry a fixed price throughout the life of the facility. The Senior Credit Agreement is collateralized by the assets and/or the stock of certain of the Company’s domestic subsidiaries and certain of its foreign subsidiaries. The Company paid up-front fees to the lender of approximately $8,200 in conjunction with the execution of the Senior Credit Agreement. Such fees, paid predominately in the first quarter of 2005, have been deferred and will be amortized to expense over the life of the agreement.

The Company finalized a sale/leaseback arrangement for an office building at its corporate headquarters in the third quarter of 2002. Under this arrangement, the Company leases the facility for an initial non-cancelable period of 20 years. The long-term capital lease obligation of $45,300 as of December 31, 2004 is included in capital lease obligations in the accompanying consolidated balance sheet.

The new Senior Credit Agreement and the sale/leaseback arrangement have quarterly financial covenant compliance requirements. Management’s forecast indicates that the Company will be in compliance with the financial covenants throughout 2005. The forecast assumes a significant level of new contracts and improved performance on existing contracts. However, there can be no assurance that the Company will comply with the covenants. If the Company violates a covenant under the Senior Credit Agreement or the sale/leaseback arrangement, repayment of amounts outstanding under such agreements could be accelerated and the following borrowings outstanding could also be accelerated: the 2011 Senior Notes, the 2005 Senior Notes, the Convertible Subordinated Notes, the Trust Preferred Securities, the Subordinated Robbins Facility Exit Funding Obligations, and certain of the special-purpose project debt facilities. The total amount of Foster Wheeler Ltd. debt that could be accelerated is $463,600 as of December 31, 2004. The Company would not be able to repay amounts borrowed if the payment dates were accelerated.

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Holders of the Company’s new 2011 Senior Notes have a security interest in the stock, debt and assets of certain of Foster Wheeler Ltd.’s subsidiaries. The 2011 Senior Notes contain incurrence covenants that limit the Company’s ability to undertake certain actions including incurring debt, making certain payments and investments, granting liens, selling assets and entering into specific intercompany transactions, among others. Management monitors these covenants to ensure the Company remains in compliance with the indenture.

On January 26, 2004, subsidiaries in the U.K. entered into a two-year $45,000 revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. As of December 31, 2004, the facility remained undrawn. In December 2004, the U.K. subsidiaries gave notice voluntarily canceling the revolving credit facility effective January 24, 2005.

Global Power’s European Power subsidiary in Finland is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. Obligations under both facilities are guaranteed by Foster Wheeler Ltd. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio.

One of the performance bond facilities is dedicated to a specific project and, as of December 31, 2004, had performance bonds outstanding equivalent to approximately $24,500 (none of which has been drawn as of such date). Covenants under this facility are tested quarterly. The second facility is a general performance bond facility and, as of December 31, 2004, had performance bonds outstanding in favor of several clients equivalent to approximately $10,000 (none of which has been drawn).

As a result of operating losses at the foreign subsidiary in 2004, the equity of the Company’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the two performance bond facilities. On August 6, 2004 and August 9, 2004, the Company’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities.

The waiver for the project-specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum equity ratio levels so long as the performance bonds are outstanding. The Company’s subsidiary remained below the minimum equity ratio as of December 31, 2004. On March 15, 2005, the bond expired and the banks funded the client and the Company reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of the Company to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

The waiver for the general performance bond facility is effective through March 31, 2005. As of that date, approximately $4,900 is forecasted to be outstanding under the facility. The Company has provided a standby letter of credit to back up the general performance bond facility and intends to do so until such facility can be permanently replaced or the last performance bond issued thereunder has expired. Therefore, the Company believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio covenant is reflected in the Company’s liquidity forecasts.

Since January 15, 2002, the Company has exercised its right to defer payments on the Trust Preferred Securities. The aggregate liquidation amount of the Trust Preferred Securities at December 31, 2004 was $71,200 after completing the equity-for-debt exchange. The previous Senior Credit Facility required the Company to defer the payment of the dividends on the Trust Preferred Securities and, accordingly, no dividends were paid during 2004 or 2003. As of December 31, 2004, the amount of dividends deferred plus accrued interest approximates $23,500. The Company intends to continue to defer payment of the dividends on the Trust Preferred Securities until January 15, 2007—the full term allowed by the underlying agreement. Once the deferred dividend obligation has been satisfied, the Company has the right to defer subsequent dividend payments for an additional 20 consecutive quarters. The new Senior Credit Agreement requires the

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approval of the lenders to make payments on the Trust Preferred Securities to the extent such payments are not contractually required by the underlying Trust Preferred Securities agreements.

Contractual Obligations

The Company has contractual obligations comprised of long-term debt, deferred accrued interest on subordinated deferrable interest debenture, capital lease commitments and pension funding requirements. The Company is also obligated under non-cancelable operating lease commitments and purchase commitments. The aggregate maturities as of December 31, 2004, of these contractual obligations are as follows:

    Total   2005   2006   2007   2008   2009   Thereafter  
   

 

 

 

 

 

 

 
Long-term debt, including interest
  $ 759,400   $ 73,700   $ 59,900   $ 52,300   $ 48,700   $ 48,600   $ 476,200  
Deferred accrued interest on subordinated deferrable interest debentures
    264,400             42,300             222,100  
Operating lease commitments
    366,600     33,100     27,600     23,400     21,200     20,600     240,700  
Purchase commitments
    537,500     488,000     46,400     1,900     900     300      
Capital lease obligations, including interest
    163,400     7,400     7,900     7,400     7,600     7,900     125,200  
Pension funding requirements — Domestic (1)
    68,500     20,400     22,000     16,400     7,900     1,800      
Pension funding requirements — Foreign (1)
    140,600     30,700     28,800     27,900     27,000     26,200      
   

 

 

 

 

 

 

 
Total contractual cash obligations
  $ 2,300,400   $ 653,300   $ 192,600   $ 171,600   $ 113,300   $ 105,400   $ 1,064,200  
   

 

 

 

 

 

 

 

 
(1)
Funding requirements for the domestic plans conclude in 2009; funding requirements for the foreign plans will extend beyond 2009, however, data for contribution requirements subsequent to 2009 are not yet available.

In certain instances in its normal course of business, the Company has provided security for contract performance consisting of standby letters of credit, bank guarantees and surety bonds. As of December 31, 2004, such commitments and their period of expiration are as follows:

    Total   Less than
1 Year
  2-3 Years   4-5 Years   Over
5 Years
 
   

 

 

 

 

 
Bank issued letters of credit and guarantees
  $ 465,700   $ 301,600   $ 63,400   $ 29,600   $ 71,100  
Surety bonds
    94,200     57,500     2,500         34,200  
   

 

 

 

 

 
Total commitments
  $ 559,900   $ 359,100   $ 65,900   $ 29,600   $ 105,300  
   

 

 

 

 

 

The Company may experience difficulty in obtaining surety bonds and bank guarantees/letters of credit on an unsecured basis in the future due to the changing view toward risk of loss in the current market, and the Company’s credit-rating. This may impact the Company’s ability to secure new business.

See Note 10 to the accompanying consolidated financial statements for a discussion of guarantees.

Backlog and New Orders

The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent which management has determined are legally binding and are likely to be performed. Although backlog represents only business that is considered firm, cancellations or scope adjustments may occur. The elapsed time from the award of a contract to completion of performance may be up to four years. The dollar amount of backlog is not necessarily indicative of the future earnings of the Company related to the performance of such work due to factors outside the Company’s control, such as changes in project schedules or project cancellations. The Company cannot predict with certainty the portion of backlog to be performed in

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a given year. Backlog is adjusted quarterly to reflect project cancellations, deferrals, sale of subsidiaries and revised project scope and cost.

    Consolidated Data  
   
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Backlog (Future Revenues)
  $ 2,048,100   $ 2,285,400   $ 5,445,900  
New orders
  $ 2,437,100   $ 2,163,500   $ 3,052,400  
E&C man-hours in year-end backlog (in thousands)
    5,100     3,830     5,900  
Foster Wheeler scope in year-end backlog (1)
  $ 1,417,800   $ 1,325,500   $ 2,271,800  
                     

 
(1)
Excludes build, own and operate projects.

The decline in backlog at year-end 2004 compared to the prior year-end is attributable primarily to reductions in the Global Power Group which offset increases in the E&C Group. The decline in the Global Power Group backlog is due primarily to the reduced new bookings resulting from the continued weakness in the domestic U.S. power market, uncertainty that existed regarding European emission standards and the ratification of the Kyoto agreement, and management believes the Company’s financial condition prior to its restructuring. The increase in the E&C Group backlog is due primarily to increased contract awards resulting from the strong chemical, oil and gas and refining markets as well as from the booking of a major lump-sum turnkey power project in Italy, and a major reimbursable mineral processing facility in the Pacific region.

Consolidated new orders in 2004 increased 13% compared to the prior year. The increase is due to significant growth in the E&C Group and was partially offset by a reduction in new orders for the Global Power Group. Growth in E&C new orders occurred in the following industry segments: power $216,000 (primarily a lump-sum turnkey project in Italy), chemicals $148,000, and pharmaceutical $133,000, partially offset by a decline in Global Power new orders of $184,000.

The increase in E&C man-hours in backlog corresponds to the bookings previously discussed.

Backlog measured in Foster Wheeler scope reflects the dollar value of backlog excluding third-party costs incurred by Foster Wheeler on a reimbursable basis as agent or principal (i.e., flow-through costs). Foster Wheeler scope measures the component of backlog with mark-up and corresponds to Foster Wheeler services plus fees for reimbursable contracts, and total selling price for lump-sum contracts. Consolidated Foster Wheeler scope at year-end 2004 increased $92,300, or 7%, compared to year-end 2003 attributable to the E&C operations in the U.K. and Continental Europe which offset declines in European and North America Power operations. Since December 2002, Foster Wheeler scope has declined $854,000, or 38%, due primarily to the European and North American operations of the Global Power Group.

Backlog, measured in terms of future revenues, broken down by contract type is as follows:

    Consolidated Data  
   
 
    For the Year Ended  
   
 
    December 31,
2004
    December 26,
2003
    December 27,
2002
 
   

   

   

 
Backlog by type of contract:
                       
Lump-sum turnkey
  $ 430,700     $ 450,600     $ 872,000  
      21 %     20 %     16 %
Other fixed-price
  $ 798,900     $ 822,500     $ 1,155,100  
      39 %     36 %     21 %
Reimbursable
  $ 908,300     $ 1,171,100     $ 3,834,800  
      44 %     51 %     70 %
Eliminations
  $ (89,800 )   $ (158,800 )   $ (416,000 )
      -4 %     -7 %     -7 %
Total
  $ 2,048,100     $ 2,285,400     $ 5,445,900  
      100 %     100 %     100 %

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The majority of the lump-sum turnkey contracts in backlog are power projects located in the domestic markets of the E&C Group’s European operations. As previously announced, no Global Power operating unit will undertake future engineering, procurement and construction of a full power plant on a lump-sum turnkey basis. Approximately $8,000 of the LSTK backlog at December 31, 2004 relates to the three troubled European Power projects where significant profit reversals and losses were incurred in 2004.

The preponderance of the Company’s workload is for projects located outside of North America. Backlog and new orders by location, expressed as future revenues, are as follows:

    Consolidated Data  
   
 
    For the Year Ended  
   
 
    December 31,
2004
    December 26,
2003
    December 27,
2002
 
   

   

   

 
Backlog by project location:
                       
North America
  $ 387,100     $ 561,900     $ 2,469,300  
      19 %     25 %     45 %
South America
  $ 35,700     $ 11,100     $ 47,800  
      2 %     0 %     1 %
Europe
  $ 811,000     $ 1,097,000     $ 1,922,600  
      40 %     48 %     35 %
Asia
  $ 392,000     $ 314,200     $ 525,800  
      19 %     14 %     10 %
Middle East
  $ 244,400     $ 102,700     $ 216,100  
      12 %     4 %     4 %
Other
  $ 177,900     $ 198,500     $ 264,300  
      8 %     9 %     5 %
Total
  $ 2,048,100     $ 2,285,400     $ 5,445,900  
      100 %     100 %     100 %
                         
    Consolidated Data  
   
 
    For the Year Ended  
   
 
    December 31,
2004
    December 26,
2003
    December 27,
2002
 
   

   

   

 
New orders by project location:
                       
North America
  $ 429,600     $ 591,400     $ 1,204,100  
      18 %     27 %     39 %
South America
  $ 95,000     $ 19,900     $ 69,300  
      4 %     1 %     2 %
Europe
  $ 1,090,300     $ 922,400     $ 1,130,800  
      45 %     43 %     37 %
Asia
  $ 392,000     $ 261,700     $ 412,700  
      16 %     12 %     14 %
Middle East
  $ 293,600     $ 169,000     $ 162,100  
      12 %     8 %     5 %
Other
  $ 136,600     $ 199,100     $ 73,400  
      5 %     9 %     3 %
Total
  $ 2,437,100     $ 2,163,500     $ 3,052,400  
      100 %     100 %     100 %

The increase in workload outside of North America reflects the strength of the E&C Group’s foreign operations in Europe, the Middle East, and Asia. Backlog and new orders in North America declined for both the E&C and Global Power Groups and reflects the competitive nature of the domestic E&C market and the oversupply of electric power capacity in the United States.

Additional segment information is included in the group discussions below and in Note 20 to the consolidated financial statements.

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Engineering and Construction Group (E&C)
 
    E&C Group  
   
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Backlog
  $ 1,405,900   $ 1,331,300   $ 3,993,000  
New orders
  $ 1,746,000   $ 1,277,300   $ 1,672,200  
E&C Man-hours in year-end backlog (in thousands)
    5,100     3,830     5,900  
Foster Wheeler scope in year-end backlog
  $ 883,400   $ 480,400   $ 931,600  

The decline in backlog, new orders and Foster Wheeler scope reflect, in part, the divestiture of Foster Wheeler Environmental Corporation in March 2003. Foster Wheeler Environmental Corporation’s backlog at December 26, 2002 was approximately $1,800,000 and new orders booked in 2002 were $288,000.

E&C backlog at year-end 2004 increased $74,600, or 6%, compared to year-end 2003 due primarily to increased new orders in the Middle East and Asia-Pacific.

E&C new orders in 2004 increased $468,700, or 37%, compared to the prior year reflecting broad-based growth in the markets the Company presently serves and due primarily to the booking of a major lump-sum turnkey power project in the European operations, and several major cost-plus reimbursable projects by the U.K. and Asia-Pacific operations. The market growth was due in part to an overall improvement in the world economy, high oil prices and increased demand for energy products. Although new orders increased in 2004, overall the level of bookings in U.S. dollar terms is less than the E&C Group’s recent history.

E&C man-hours in 2004 increased 1,270, or 33%, compared to 2003 due primarily to several major contracts including the engineering, procurement and construction (“EPC”) phase of ExxonMobil’s sulfur-free motor gasoline (“MOGAS”) project in Fawley, U.K. This is one of the most complex refineries in Europe and this project is being undertaken to meet European Union legislation for reducing sulfur in gasoline. Other major wins included an engineering, onshore procurement, project and construction management (“EPCm”) services contract with Indorama Petrochem Ltd. for a world-scale purified terephthalic acid (“PTA”) plant in Thailand, and a lump-sum turnkey contract for the EPC of a 400 MWe grassroots combined-cycle power plant to be built at Teverola, Italy for SET S.r.l. a project company whose majority shareholder is Rätia Energie AG, a Swiss utility company, and its minority shareholder is a company belonging to the Merloni group.

E&C Foster Wheeler scope increased $403,000, or 84%, compared to year-end 2003 due primarily to the projects noted above, major petrochemical wins in the Middle East, and LSTK refinery contracts in Italy and Lithuania.

Backlog by contract type are listed below:

    E&C Group  
   
 
    For the Year Ended  
   
 
    December 31,     December 26,     December 27,  
    2004     2003     2002  
   

   

   

 
Backlog by type of contract:
                       
Lump-sum turnkey
  $ 422,700     $ 237,300     $ 400,800  
      30 %     18 %     10 %
Other fixed-price
  $ 155,900     $ 276,900     $ 290,300  
      11 %     21 %     7 %
Reimbursable
  $ 838,600     $ 927,600     $ 3,558,900  
      60 %     70 %     89 %
Eliminations
  $ (11,300 )   $ (110,500 )   $ (257,000 )
      -1 %     -9 %     -6 %
Total
  $ 1,405,900     $ 1,331,300     $ 3,993,000  
      100 %     100 %     100 %

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The decrease in other fixed-price backlog is due primarily to the completion of several similar contracts by the European operations in 2003 that were not replaced in 2004. Backlog for reimbursable contracts at year-end 2004 decreased compared to year-end 2003 due primarily to lower bookings in the European operations, which were predominately flow-through costs.

    E&C Group  
   
 
    For the Year Ended  
   
 
    December 31,     December 26,     December 27,  
    2004     2003     2002  
   

   

   

 
Backlog by project location:
                       
North America
  $ 83,400     $ 172,800     $ 1,960,100  
      6 %     13 %     49 %
South America
  $ 24,700     $ 4,800     $ 34,500  
      2 %     0 %     1 %
Europe
  $ 686,400     $ 702,700     $ 1,168,300  
      49 %     53 %     29 %
Asia
  $ 200,800     $ 165,900     $ 449,300  
      14 %     12 %     11 %
Middle East
  $ 234,300     $ 86,500     $ 118,400  
      17 %     6 %     3 %
Other
  $ 176,300     $ 198,600     $ 262,400  
      12 %     16 %     7 %
Total
  $ 1,405,900     $ 1,331,300     $ 3,993,000  
      100 %     100 %     100 %
                         
    E&C Group  
   
 
    For the Year Ended  
   
 
    December 31,     December 26,     December 27,  
    2004     2003     2002  
   

   

   

 
New orders by project location:
                       
North America
  $ 78,300     $ 47,700     $ 367,800  
      4 %     4 %     22 %
South America
  $ 79,800     $ 11,600     $ 56,100  
      5 %     1 %     3 %
Europe
  $ 949,900     $ 763,800     $ 686,700  
      54 %     60 %     41 %
Asia
  $ 228,700     $ 105,000     $ 380,100  
      13 %     8 %     23 %
Middle East
  $ 274,500     $ 158,400     $ 111,300  
      16 %     12 %     7 %
Other
  $ 134,800     $ 190,800     $ 70,200  
      8 %     15 %     4 %
Total
  $ 1,746,000     $ 1,277,300     $ 1,672,200  
      100 %     100 %     100 %

The increase in the percentage of backlog and new orders outside North America reflect the sale of Foster Wheeler Environmental Corporation in March 2003 and a reduced level of bookings in North America. The international oil and chemical markets are much stronger than in recent years and have provided increased bookings for the international operations. The Company has been successful in securing projects in the growth areas of Asia-Pacific and the Middle East such as a contract awarded to the Company by Goro Nickel SA to provide services related to the engineering, procurement and construction management of a nickel-cobalt project. In addition, the Company’s market share of the domestic refinery market has declined over the past three years due to a decline in refinery opportunities and likely client perception toward the Company’s financial condition prior to completing the equity for debt exchange.

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Global Power Group
 
    Global Power Group  
   
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Backlog
  $ 646,300   $ 958,000   $ 1,461,300  
New orders
  $ 696,700   $ 880,700   $ 1,398,700  
Foster Wheeler scope in year-end backlog
  $ 534,400   $ 845,100   $ 1,340,200  

Global Power Group’s backlog decreased $311,700, or 33%, at the year-end 2004 compared to year-end 2003 due to reduced levels of new orders. The full release of a major contract anticipated for 2004 to the Finnish operation was delayed because of client financing issues and is now anticipated in 2006.

The decline in new orders in 2004 of $184,000, or 21%, is due primarily to the Finnish and North American operations and is the result of an overall weakness in the power sector and the delay of the full release for a major contract anticipated in 2004. Management believes the successful completion of its equity-for-debt exchange will have a positive effect on clients who had concerns about the financial condition of the Company. This should assist the Company’s sales efforts in the future.

Foster Wheeler scope declined $310,700, or 37%, as compared to year-end 2003. This is in line with the 33% decrease in backlog.

While backlog, new orders and Foster Wheeler scope all declined in 2004 as compared to 2003, the Global Power Group had significant wins in 2004 including a contract for the design and supply of two large shop-assembled package boilers for the first phase of the Long Lake Project in the Athabasca oil sands region of northern Alberta, Canada, for OPTI Canada Inc., and the engineering and supply of two 100 MW non-reheat compact circulating fluidized-bed steam generators in Xinhui, China, for the China Petrochemical International Company (SINOPEC)’s Maoming Petrochemical Company.

    Global Power Group  
   
 
    For the Year Ended  
   
 
    December 31,     December 26,     December 27,  
    2004     2003     2002  
   

   

   

 
Backlog by type of contract:
                       
Lump-sum turnkey
  $ 8,000     $ 213,400     $ 471,200  
      1 %     22 %     32 %
Other fixed price
  $ 643,000     $ 545,500     $ 864,800  
      99 %     57 %     59 %
Reimbursable
  $ 69,700     $ 243,500     $ 275,900  
      11 %     25 %     19 %
Eliminations
  $ (74,400 )   $ (44,400 )   $ (150,600 )
      -11 %     -4 %     -10 %
Total
  $ 646,300     $ 958,000     $ 1,461,300  
      100 %     100 %     100 %

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Approximately 1% of the 2004 year-end Global Power backlog is lump-sum turnkey contracts. The decline in lump-sum turnkey projects is due to the completion of multiple similar contracts by the Finnish operations in 2003 that were not replaced in 2004 and the continued overall weakness in the worldwide power sector. The LSTK backlog at December 31, 2004 relates to the three European Power projects where significant profit reversals and losses were incurred in 2004. Year-end backlog for other fixed-price backlog increased due primarily to increased services projects. Year-end backlog for reimbursable contracts decreased again due primarily to the continued overall weakness in the worldwide power sector and the resulting decline in new orders.

    Global Power Group  
   
 
    For the Year Ended  
   
 
    December 31,     December 26,     December 27,  
    2004     2003     2002  
   

   

   

 
Backlog by project location:
                       
North America
  $ 304,500     $ 390,600     $ 513,000  
      47 %     41 %     35 %
South America
  $ 11,100     $ 6,300     $ 13,400  
      2 %     1 %     1 %
Europe
  $ 126,300     $ 395,800     $ 757,400  
      20 %     41 %     52 %
Asia
  $ 192,000     $ 148,800     $ 77,400  
      30 %     16 %     5 %
Middle East
  $ 10,600     $ 16,300     $ 98,000  
      1 %     1 %     7 %
Other
  $ 1,800     $ 200     $ 2,100  
      0 %     0 %     0 %
Total
  $ 646,300     $ 958,000     $ 1,461,300  
      100 %     100 %     100 %
                         
    Global Power Group  
   
 
    For the Year Ended  
   
 
    December 31,     December 26,     December 27,  
    2004     2003     2002  
   

   

   

 
New orders by project location:
                       
North America
  $ 348,900     $ 544,600     $ 845,300  
      50 %     62 %     60 %
South America
  $ 15,500     $ 8,200     $ 13,500  
      2 %     1 %     1 %
Europe
  $ 145,000     $ 154,800     $ 450,000  
      21 %     18 %     32 %
Asia
  $ 164,800     $ 155,600     $ 34,800  
      24 %     17 %     2 %
Middle East
  $ 20,300     $ 9,900     $ 51,600  
      3 %     1 %     4 %
Other
  $ 2,200     $ 7,600     $ 3,500  
      0 %     1 %     1 %
Total
  $ 696,700     $ 880,700     $ 1,398,700  
      100 %     100 %     100 %

Approximately 53% of year-end 2004 backlog and 50% of 2004 new orders were for projects located outside North America. The percentage decrease in 2004 year-end backlog for projects located outside North America compared to 2003 is due to a decline in new orders in the European operations. The decline in 2004 new orders located outside North America reflects the softness of the power sector and a major new contract anticipated to be awarded in 2004 to the Finnish operation was delayed and is now anticipated in 2006.

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Results in 2004 for both the North American and European power markets continue to suffer from relatively slow economic growth, over capacity, and the financial difficulties of independent power producers. In 2005, maintenance and service contracts continue to be the growth opportunities in the North American power market. Supply opportunities for new equipment associated with solid fuel boiler contracts are expected to be limited in the short term except for growth opportunities in circulating fluidized-bed boilers which are expected to continue in certain European and Asian markets. Selected opportunities in environmental retrofits are expected to continue.

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.

Application of Critical Accounting Estimates

The Company’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America. Management and the Audit Committee of the Board of Directors approve the critical accounting policies.

Highlighted below are the accounting policies that management considers significant to the understanding and operations of the Company’s business as well as key estimates that are used in implementing the policies.

Revenue Recognition

Revenues and profits on long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress towards completion is measured using physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress toward completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.

The Company has thousands of projects in both reporting segments that are in various stages of completion. Such contracts require estimates to determine the appropriate final estimated cost (“FEC”), profits, revenue recognition, and the percentage complete. In determining the FEC, the Company uses significant estimates to forecast quantities to be expended (i.e. man-hours, materials and equipment), the costs for those quantities (including exchange rate fluctuations), and the schedule to execute the scope of work including allowances for weather, labor and civil unrest. Many of these estimates cannot be based on historical data as most contracts are unique, specifically designed facilities. In determining the revenues, the Company must estimate the percentage complete, the likelihood of the client paying for the work performed, and the cash to be received net of any taxes ultimately due or withheld in the country where the work is performed. Projects are reviewed on an individual basis and the estimates used are tailored to the specific circumstances. Significant judgment is exercised by management in establishing these estimates, as all possible risks cannot be specifically quantified.

The percentage-of-completion method requires that adjustments or revaluations to estimated project revenues and costs, including estimated claim recoveries, be recognized on a cumulative basis, as changes to the estimates are identified. Revisions to project estimates are made as additional information becomes available. If the FEC to complete long-term contracts indicates a loss, provision is made immediately for the total loss anticipated. Profits are accrued throughout the life of the project based on the percentage complete. The project life cycle, including the warranty commitments, can be up to six years in duration.

The project actual results can be significantly different from the estimated results. When adjustments are identified near or at the end of a project, the full impact of the change in estimate would be recognized as a change in the margin on the contract in that period. This can result in a material impact on the Company’s results for a single reporting period. In accordance with the accounting and disclosure recommendations of American Institute of Certified Public Accountants (“AICPA”) Statement of Position 81-1 (“SOP 81-1”), “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” and Accounting

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Principles Board Opinion No. 20, “Accounting Changes,” the Company reviews its contracts monthly. As a result of this process in 2004, 54 individual projects had final estimated profit revisions, both positive and negative, exceeding $1,000. These revisions resulted from events such as earning project incentive bonuses or the incurrence or forecast incurrence of contractual liquidated damages for performance or schedule issues, executing services and purchasing third-party materials and equipment at costs differing from previously estimated, and testing of completed facilities which in turn eliminates or incurs completion and warranty-related costs. The net aggregate dollar value of the accrued contract profit resulting from these estimate changes during 2004 amounted to $37,600.

 
Asbestos

Some of the Company’s U.S. and U.K. subsidiaries are codefendants in numerous asbestos-related lawsuits and administrative claims pending in the United States and the United Kingdom. The calculation of asbestos-related assets and liabilities involves the use of estimates as discussed below.

     United States

At December 31, 2004, the Company has recorded total liabilities of $480,000 comprised of an estimated liability relating to open (outstanding) claims of $257,000 and an estimated liability relating to future unasserted claims of $223,000. Of the total, $75,000 is recorded in accrued expenses and $405,000 is recorded in asbestos-related liability on the consolidated balance sheet. These estimates are based upon the following information and/or assumptions: number of open claims; forecasted number of future claims; estimated average cost per claim by disease type (i.e., mesothelioma vs. non-mesothelioma); and the breakdown of known and future claims into disease type (i.e., mesothelioma vs. non-mesothelioma). The total estimated liability includes both the estimate of forecasted indemnity amounts and forecasted defense expenses. Total estimated defense costs and indemnity payments are estimated to be incurred through the year 2019, during which period new claims are expected to decline from year to year. Recently received claims also suggest that the percentage of claims to be closed without payment of indemnity costs should increase as claims are resolved during the next few years. The Company believes that it is likely that there will be new claims filed after 2019, but in light of uncertainties inherent in long-term forecasts, the Company does not believe that it can reasonably estimate defense and/or indemnity costs, which might be incurred after 2019. Historically, defense costs have represented approximately 21% of total defense and indemnity costs. Through December 31, 2004, total indemnity costs paid, prior to insurance recoveries, were approximately $443,700 and total defense costs paid were approximately $119,900.

At December 31, 2004, the Company has recorded assets of $385,500 relating to actual and probable insurance recoveries, of which approximately $95,000 is recorded in accounts and notes receivables, and $290,500 is recorded as long-term. The asset includes an estimate of recoveries from insurers based upon assumptions relating to cost allocation and resolution of pending legal proceedings with certain insurers, as well as recoveries under settlements with other insurers.

As of December 31, 2004, approximately $165,200 was contested by the Company’s subsidiaries’ insurers in ongoing litigation. The litigation relates to the proper allocation of the coverage liability among the subsidiaries’ various insurers and the subsidiaries as self-insurers. The Company believes that any amounts that its subsidiaries might be allocated as self-insurers would be immaterial.

Management of the Company has considered the asbestos litigation and the financial viability and legal obligations of its subsidiaries’ insurance carriers and believes that except for those insurers which have become or may become insolvent for which a reserve has been provided, the insurers or their guarantors will continue to reimburse a significant portion of claims and defense costs relating to asbestos litigation. The average cost per closed claims since 1993 is $2.0.

The Company plans to update its forecasts periodically to take into consideration its future experience and other considerations to update its estimate of future costs and expected insurance recoveries. However, 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 uncertainties as to the ultimate number of claims filed, the amounts of claim costs, the impact of

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bankruptcies of other companies currently involved in litigation, the Company’s subsidiaries’ ability to recover from their 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. These factors are beyond the Company’s control and could have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

The following chart reflects the sensitivities in the 2004 consolidated financial statements associated with a change in certain estimates used in relation to the domestic asbestos-related liabilities.

Change in assumption:
  Increase/
(decrease)
in liabilities
 
   

 
One-percentage point increase in the inflation rate
  $ 27,100  
One-percentage point decrease in the inflation rate
    (25,000 )
Twenty-five percent increase in average indemnity settlement amount
    102,100  
Twenty-five percent increase in forecasted new claims
    55,900  
Inactive claims are valued at zero
    (36,100 )

The impact of the change in assumption on expense is dependent upon the available insurance recoveries.

The Company’s subsidiaries have been effective in managing the asbestos litigation in part because (1) the Company’s subsidiaries have access to historical project documents and other business records going back more than 50 years, allowing them to defend themselves by determining if they were present at the location that is the cause of the alleged asbestos claim and, if so, the timing and extent of their presence, (2) the Company’s subsidiaries maintain good records on insurance policies and have identified policies issued since 1952, and (3) the Company’s subsidiaries have consistently and vigorously defended these claims which has resulted in dismissal of claims that are without merit or settlement of claims at amounts that are considered reasonable.

     United Kingdom

Subsidiaries of the Company in the U.K. have also received claims alleging personal injury arising from exposure to asbestos. To date 446 claims have been brought against the U.K. subsidiaries of which 255 remain open at December 31, 2004. None of the settled claims has resulted in material costs to the Company.

At December 31, 2004 the Company recorded the estimated U.S. dollar equivalent for the total U.K. asbestos liabilities of $44,300. Of the total, $1,900 is recorded in accrued expenses and $42,400 is recorded in asbestos-related liability on the consolidated balance sheet. The estimated U.S. dollar equivalent liability for open (outstanding) U.K. asbestos claims is $5,800 and the estimated liability for future unasserted U.K. asbestos claims is $38,500. An asset in an equal amount was recorded for the expected U.K. asbestos-related insurance recoveries, of which $1,900 is recorded in accounts and notes receivable, and $42,400 is recorded as asbestos-related insurance recovery receivable on the consolidated balance sheet.

Pension

Details of the Company’s pension plans are included in Note 9 to the consolidated financial statements. The calculations of pension liability, annual service cost and cash contributions required rely heavily on estimates about future events often extending decades into the future. Management is responsible for establishing the assumptions used for the estimates, which include:

 
The discount rate used to present value the future obligations
     
 
The expected long-term rate of return on plan assets
     
 
The expected percentage of annual salary increases
     
 
The selection of the actuarial mortality tables
     
 
The annual inflation percentage

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The expected long-term rate of return on plan assets is developed using a weighted-average methodology, blending the expected returns on each class of investment in the plans’ portfolio. The expected returns by asset class are developed considering both past performance and future considerations. The long-term rate of return is reviewed annually by the Company for its funded plans and adjusted, if required. The weighted-average expected long-term rate of return on plan assets has declined from 8.2% to 7.5% over the past three years.

Management utilizes its business judgment in establishing the estimates used in the calculations of pension liability, annual service cost and cash contributions. The estimates can vary significantly from the actual results and management cannot provide any assurance that the estimates used to calculate the pension liabilities included herein will approximate actual results. The volatility between the assumptions and actual results can be significant.

The following chart reflects the sensitivities in the 2004 consolidated financial statements associated with a change in certain estimates used in relation to the domestic pension plans. Each of the sensitivities below reflects an evaluation of the change based solely on a change in that particular estimate.

    Increase (Decrease)  
   
 
    Impact on
liabilities
  Impact on 2005
benefit cost
 
   

 

 
Change in Actuarial Estimate:
             
One-percentage point increase in the discount rate
  $ (32,900 ) $ (100 )
One-percentage point decrease in the discount rate
    36,700     (300 )
One-percentage point increase in the expected return on plan assets
        (2,200 )
One-percentage point decrease in the expected return on plan assets
        2,200  

A one-percentage point decrease in the current liability interest rate, used for calculating future funding requirements through 2009, would increase cumulative contributions to the domestic plan by $28,900, while an increase by one-percentage point would decrease cumulative contributions by $23,700 to the domestic plan.

A one-tenth of a percentage point decrease in the discount rate used for the U.K. pension plan would increase the pension liability by $10,200 and decrease the 2005 benefit cost by $200.

Pension liability calculations are normally updated annually at each year-end, but may be updated in interim periods if any major plan amendments or curtailments occur. The Company’s liability calculation is reflected in the financial statements herein.

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.

For statutory purposes, the majority of the deferred tax assets for which a valuation allowance is provided as of December 31, 2004 do not begin to expire until 2024 and beyond, based on the current tax laws. As a result of the recently consummated exchange offer discussed in Note 7 to the consolidated financial statements, the Company is subject to substantial limitations on the use of pre-exchange period losses and credits to offset U.S. federal taxable income in any post-exchange period. Since a valuation allowance had already been reflected to offset these losses and credits, the limitation did not result in a significant write-off by the Company. The Company has significantly reduced its deferred tax assets and the corresponding valuation allowance to give effect to such limitation. At the end of 2004, the Company has $25,800 of remaining domestic deferred tax assets with full valuation allowance for tax credits related to the pre-exchange period and $13,200 of post-exchange net operating loss carryforwards with full valuation

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allowance reflected on its consolidated financial statements. The net impact of the adjustments on the current year financial statements was not material.

Code of Ethics

The Company has adopted a Code of Business Conduct and Ethics which applies to all of its directors, officers and employees including the Chief Executive Officer, Chief Financial Officer and other senior finance organization employees. The Code of Business Conduct and Ethics is publicly available on the Company’s website at www.fwc.com/corpgov. Any waiver of this Code of Business Conduct and Ethics for executive officers or directors may be made only by the Board of Directors or a committee of the Board of Directors and will be promptly disclosed to the shareholders. If the Company makes any substantive amendments to this Code of Business Conduct and Ethics or grants any waiver, including an implicit waiver, from a provision of the Code to the Chief Executive Officer, Chief Financial Officer, Controller or any person performing similar functions, the Company will disclose the nature of such amendment or waiver on the website, in a report on Form 8-K, as required by law and the rules of any exchange on which the Company’s securities are publicly traded.

A copy of the Code of Business Conduct and Ethics can be obtained upon request, without charge, by writing to the Office of the Secretary, Foster Wheeler Ltd., Perryville Corporate Park, Clinton, New Jersey 08809-4000.

Accounting Developments

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) became law in the United States. The Medicare Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In May 2004, the FASB issued a FASB Staff Position (“FSP”) No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP 106-2 provides guidance on accounting for the effects of the Medicare Act for employers that sponsor postretirement healthcare plans that provide prescription drug benefits. The provisions of FSP No. 106-2 were effective for the Company’s interim period ending September 24, 2004. Based upon the proposed regulations of the Medicare Act, the Company concluded that the benefits provided by the plan were actuarially equivalent to Medicare Part D under the Medicare Act. Accordingly, the Company reflected the impact of the Medicare Act prospectively as of the start of the third quarter 2004. The impact of the Medicare Act resulted in decreases in the accumulated postretirement benefit obligation of approximately $9,100 and in the annual net periodic postretirement benefit costs for 2004 of approximately $900. On January 21, 2005, final regulations related to the Medicare Act were issued. The Company has not yet determined the effect of the final regulations on the Company’s accumulated postretirement benefit obligation and net periodic postretirement benefit costs.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires that all share-based payments to employees, including grants of employee stock options and restricted stock, be recognized in the consolidated statement of operations and comprehensive loss based on their fair values. Prior to SFAS No. 123R, the Company adopted the disclosure-only provisions of SFAS No. 123 and therefore only certain pro forma disclosures of the fair value of share-based payments were required in the notes to the consolidated financial statements. SFAS No. 123R provides for the adoption of the new standard in one of two ways: the modified prospective transition method and the modified retrospective transition method. Using the modified prospective transition method, share-based employee compensation cost would be recognized from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date. Using the modified retrospective method, employee compensation cost would be recognized for periods presented prior to the adoption of the proposed standard in accordance with the original provisions of SFAS No. 123; that is, employee compensation cost would be recognized in the amounts reported in the pro forma disclosures

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provided in accordance with SFAS No. 123. Adoption of the provisions of SFAS No. 123R is effective as of the beginning of the Company’s quarter ending September 30, 2005. The Company is still evaluating the method of adoption and the impact that the adoption of SFAS No. 123R will have on its consolidated financial position and results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets, which were previously required to be recorded on a carryover basis rather than a fair value basis. Instead, SFAS No. 153 provides that exchanges of nonmonetary assets that do not have commercial substance be reported at carryover basis rather than a fair value basis. A nonmonetary exchange is considered to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the consolidated financial statements of the Company.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FW PREFERRED CAPITAL TRUST I
(amounts in thousands of dollars)

FW Preferred Capital Trust I (“the Capital Trust”) is a 100% indirectly-owned finance subsidiary of the Company which issued a $175,000 of Trust Preferred Securities (the “Trust Securities”) in 1999. The Capital Trust invested the proceeds from the Trust Securities in an equal principal amount of 9.0% junior subordinated deferrable interest debentures (the “Debentures”) of Foster Wheeler LLC. Prior to December 27, 2003 the Capital Trust was consolidated in the financial statements of the Company and the Trust Securities were reported in the consolidated financial statements as mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated deferrable interest debentures. The accumulated undistributed quarterly distributions were reported as deferred accrued mandatorily redeemable preferred security distributions of subsidiary trust. The distributions expense on the Trust Securities was reported as interest expense in the consolidated statement of operations and comprehensive loss.

In 2004, the Company adopted FIN No. 46, “Consolidation of Variable Interest Entities,” for variable interest entities formed prior to February 1, 2003. In accordance with the provisions of FIN No. 46, the Company determined that (i) the Capital Trust is a variable interest entity and (ii) the Company is not the primary beneficiary. Accordingly, the Company de-consolidated the Capital Trust as of December 27, 2003. The Company’s consolidated financial statements now reflect Foster Wheeler LLC’s obligations to the Capital Trust as subordinated deferrable interest debentures and deferred accrued interest on subordinated deferrable interest debentures. The interest expense on the Debentures is reported as interest expense in the consolidated statement of operations and comprehensive loss.

The following is management’s discussion and analysis of certain significant factors that have affected the financial condition and results of operations of the Capital Trust for the periods indicated below. This management’s discussion and analysis and other sections of this Report on Form 10-K contain forward-looking statements that are based on management’s assumptions, expectations and projections about the Capital Trust. Such forward-looking statements by their nature involve a degree of risk and uncertainty.

Overview — The Capital Trust

The financial condition and results of operations of the Capital Trust are dependent on the financial condition and results of operations of Foster Wheeler Ltd. and Foster Wheeler LLC since the Capital Trust’s only assets are the Debentures. The Capital Trust’s only source of income and cash is the interest income on the Debentures. These Debentures have essentially the same terms as the Trust Securities. Therefore, the Capital Trust can only make payments on the Trust Securities if Foster Wheeler LLC first makes payments on the Debentures.

Since January 15, 2002, Foster Wheeler LLC has exercised its right to defer payments on the Debentures. Foster Wheeler Ltd.’s previous Senior Credit Facility, as amended, required that the payment of the dividends on the Trust Securities continue to be deferred; accordingly, no dividends were paid during the

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three-year period ending December 31, 2004. The Company’s new Senior Credit Agreement requires the approval of the lenders to make payments on the Trust Securities to the extent such payments are not contractually required by the underlying Trust Securities agreements.

In 2004, Foster Wheeler Ltd. and Foster Wheeler LLC completed an equity-for-debt exchange offer in which Foster Wheeler Ltd. issued common shares, preferred shares and warrants to purchase common in exchange for Trust Securities. In conjunction with the exchange, the Capital Trust recorded a $103,800 reduction in the Trust Securities and a $31,100 reduction in deferred accrued mandatorily redeemable preferred security distributions payable. The Capital Trust also recorded a corresponding reduction in the Debentures and accrued interest receivable.

Results of Operations—The Capital Trust
 
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Change in valuation allowance
  $ 151,600   $ 11,600   $ (90,100 )
Change from prior year $
    140,000     101,700      
Change from prior year %
    1206.9 %   112.9 %    
                     
Gain on equity-for-debt exchange
  $ 39,400   $   $  
Change from prior year $
    39,400          
Change from prior year %
    n/a          
                     
Preferred security distributions expense
  $ 16,600   $ 18,100   $ 16,600  
Change from prior year $
    (1,500 )   1,500      
Change from prior year %
    (8.3 )%   9.0 %    

The valuation allowance on the investment in subordinated deferrable interest debentures and related interest income receivable was established based on the financial condition of Foster Wheeler LLC and Foster Wheeler Ltd. and Foster Wheeler LLC’s decision to exercise its right to defer payments on the subordinated deferrable interest debentures since January 15, 2002. The Capital Trust recorded a gain on the exchange of its mandatorily redeemable preferred trust securities of $39,400 in 2004. The difference between the gain recognized by the Capital Trust of $39,400 and the gain recorded by Foster Wheeler LLC of $66,400 is due to (1) a $34,700 loss recognized by the Capital Trust on the settlement of 59.3% of the subordinated deferrable interest debentures and the corresponding accrued interest and (2) transaction fees of $4,200 and the write-off of unamortized issuance costs of $3,500 borne solely by Foster Wheeler LLC. The change in the valuation allowance for 2004 and 2003 resulted from an increase in the market price of the Trust Securities, which is deemed a proxy for the fair value of the subordinated deferrable interest debentures. The market price per security of the Trust Securities was $27.05 as of December 31, 2004, $3.00 as of December 26, 2003 and $1.35 as of December 27, 2002.

The preferred security distributions expense represents the accrual for cash distributions due on the Trust Securities. Distributions accrue at an annual rate of 9% on the outstanding liquidation amount of the Trust Securities, compounded quarterly. Additionally, deferred distributions accrue interest at an annual rate of 9%, compounded quarterly, as well. The decrease in preferred security distributions expense for 2004 results primarily from the reduction in the amount of Trust Securities outstanding during the period as a result of the equity-for-debt exchange. The increase in preferred security distributions expense for 2003 resulted from the accrual on the undistributed preferred security distributions. As noted previously, the Capital Trust has deferred the distributions on the Trust Securities in conjunction with Foster Wheeler LLC’s decision to defer interest payments on the Debentures since January 15, 2002.

Financial Condition—The Capital Trust

The investment in subordinated deferrable interest debentures of Foster Wheeler LLC increased by $50,200 during 2004 as a result of a decrease in the valuation allowance. The change in the required valuation allowance resulted from the increase in the market price of the Trust Securities, which is deemed a proxy for the fair value of the subordinated deferrable interest debentures.

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The decrease in the deferred accrued mandatorily redeemable preferred security distributions payable during 2004 results primarily from the impact of the equity-for-debt exchange, partially offset by the continued deferral of distributions on the Trust Securities. During this deferral period, distributions on Trust Securities continue to accrue at an annual rate of 9%, compounded quarterly. Additionally, deferred distributions accrue interest at an annual rate of 9%, also compounded quarterly.

The preferred securities holders’ deficit at December 31, 2004 decreased by $174,400, due primarily to the decrease in the valuation allowance (as a result of an increase in the market price of the Trust Securities) and to a lesser extent the impact of the equity-for-debt exchange.

Liquidity and Capital Resources—The Capital Trust

The Capital Trust’s ability to continue as a going concern is dependent on Foster Wheeler Ltd.’s and Foster Wheeler LLC’s ability to continue as a going concern as the Capital Trust’s only asset is the Debentures. Foster Wheeler LLC, an indirect wholly owned subsidiary of the Company, is essentially a holding company which owns the stock of various subsidiary companies, and is included in the consolidated financial statements of the Company. As previously discussed, Foster Wheeler Ltd. may not be able to continue as a going concern. Refer to the previous discussion of Foster Wheeler Ltd.’s liquidity and capital resources.

Safe Harbor Statement

This management’s discussion and analysis of financial condition and results of operations, other sections of this Annual 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, the outcome of litigation and legal proceedings and recoveries from customers for claims, and the costs of current and future asbestos claims and the amount and timing of insurance recoveries. 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:

 
changes in the rate of economic growth in the United States and other major international economies;
     
 
changes in investment by the power, oil & gas, pharmaceutical, chemical/petrochemical and environmental industries;
     
 
changes in the financial condition of customers;
     
 
changes in regulatory environment;
     
 
changes in project design or schedules;
     
 
contract cancellations;
     
 
changes in estimates made by the Company of costs to complete projects;
     
 
changes in trade, monetary and fiscal policies worldwide;
     
 
currency fluctuations;
     
 
war and/or 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;
     
 
increasing competition by foreign and domestic companies;

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compliance with debt covenants;
     
 
monetization of certain Power System facilities;
     
 
implementation of its restructuring plan;
     
 
recoverability of claims against customers; and
     
 
changes in estimates used in its critical accounting policies.

Other factors and assumptions not identified above were also involved in the formation 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 (amounts in thousands of dollars)

Management’s strategy for managing transaction risks associated with currency fluctuations is for each operating unit to enter into derivative transactions, such as 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 “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies). Management believes that the geographical diversity of the Company’s operations mitigates the effects of the currency translation exposure. However, the Company maintains substantial operations in Europe and is subject to translation risk for the Euro and Pound Sterling. No significant unhedged assets or liabilities are maintained outside the functional currencies of the operating subsidiaries. Accordingly, translation exposure is not hedged.

Interest Rate Risk — The Company is exposed to changes in interest rates as a result of any future borrowings under its Revolving Credit Agreement, $5,400 of bank loans, and $15,300 of variable-rate special-purpose project debt. If market rates average 1% more in 2005 than in 2004, the Company’s interest expense would increase, and income before tax would decrease by approximately $100. This amount has been determined by considering the impact of the hypothetical interest rates on the Company’s variable-rate balances as of December 31, 2004. In the event of a significant change in interest rates, management would likely attempt to take action to further mitigate its exposure to the change. However, due to the Company’s financial situation, it is unlikely that a hedging facility would be available.

Foreign Currency Risk — The Company has significant overseas operations. Generally, all significant activities of the overseas subsidiaries are recorded in their functional currency, which is generally the currency of the country of domicile of the subsidiary. 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 subsidiary’s functional currency, the subsidiaries enter into foreign currency exchange contracts, when possible, to hedge the exposed contract value back to their functional currency.

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At December 31, 2004, the Company’s primary foreign currency forward contracts are set forth below:

Currency Hedged (bought or
sold forward)
  Functional
Currency
    Foreign Currency
Exposure (in equivalent
U.S. dollars)
  Notional Amount of
Forward Buy
Contracts
  Notional Amount of
Forward Sell
Contracts
 

 
   
 
 
 
Euro and legacy countries
  U.S. dollar     $ 5,300   $ 5,300   $  
Polish zloty
  Euro       4,756     4,756      
    U.S. dollar       400     400      
Swiss franc
  Euro       17,113     12,861     4,252  
Singapore dollar
  Euro       6,235     6,235      
U.S. dollar
  Euro       12,471     2,110     10,361  
         
 
 
 
    Total     $ 46,275   $ 31,662   $ 14,613  
         
 
 
 

The notional principal amount provides one measure of the transaction volume outstanding as of year end, and does not represent the amount of exposure to market loss. Amounts ultimately realized upon final settlement of these financial instruments, along with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments. The contracts mature in 2005. Increases in fair value of the forward sell contracts result in losses while fair value increases of the forward buy contracts result in gains. The contracts have been established by various international subsidiaries to sell a variety of currencies and receive their respective functional currency or other currencies for which they have payment obligations to third parties. See Note 19 to the consolidated financial statements for further information regarding derivative financial instruments.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

    Pages  
   

 
Report of Independent Registered Public Accounting Firm
    68  
Consolidated Statement of Operations and Comprehensive Loss for each of the three years in the period ended December 31, 2004
    70  
Consolidated Balance Sheet at December 31, 2004 and December 26, 2003
    71  
Consolidated Statement of Changes in Shareholders’ Deficit for each of the three years in the period ended December 31, 2004
    72  
Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2004
    73  
Notes to Consolidated Financial Statements
    74  
Financial Statement Schedule
    164  
         
Other Financial Statements of Certain Foster Wheeler Ltd. Subsidiaries
       
The following financial statements for certain of Foster Wheeler Ltd. indirectly wholly owned subsidiaries are included pursuant to Regulation S-X Rule 3-16, “Financial Statements of Affiliates Whose Securities Collateralize an Issue Registered or Being Registered.” See Note 8 to the Foster Wheeler Ltd. consolidated financial statements.
       
Foster Wheeler Holdings Ltd. and Subsidiaries
    165  
Foster Wheeler LLC and Subsidiaries
    220  
Foster Wheeler International Holdings, Inc. and Subsidiaries
    276  
Foster Wheeler International Corporation and Subsidiaries
    304  
Foster Wheeler Europe Limited and Subsidiaries
    331  
FW Netherlands C.V. and Subsidiaries
    358  
Financial Services S.a.r.l. and Subsidiary
    382  
FW Hungary Licensing Limited Liability Company
    396  

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Foster Wheeler Ltd.:

We have completed an integrated audit of Foster Wheeler Ltd.’s (the “Company’s”) 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

     Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Foster Wheeler Ltd. and its subsidiaries at December 31, 2004 and December 26, 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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.

As discussed in Note 2 to the consolidated financial statements, effective December 29, 2001, the Company adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.”

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant losses in each of the years in the three-year period ended December 31, 2004 and has a shareholders’ deficit of $513,283,000 at December 31, 2004. The Company has substantial debt obligations and during 2004 it was required to obtain an additional amendment to its senior credit facility to provide covenant relief by modifying certain definitions of financial measures utilized in the calculation of certain financial covenants. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to return to profitability, to complete planned restructuring activities, to generate cash flows from operations and collections of receivables to fund its operations, including obligations resulting from asbestos claims, as well as the Company maintaining credit facilities and bonding capacity adequate to conduct its business. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

     Internal control over financial reporting

Also, we have audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company did not maintain effective internal control over financial reporting as of December 31, 2004, because the Company did not maintain effective controls over completeness and accuracy of estimated costs to complete at one of its European power projects based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s

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assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is defined as a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment. As of December 31, 2004, the Company did not maintain effective controls over the completeness and accuracy of estimated costs to complete at one of its European power projects. Specifically, the Company’s controls over its estimated costs to complete were not operating effectively because project management and accounting personnel did not have adequate control of commitments to third-party subcontractors and vendors, and therefore did not adequately track the actual financial results of the project on a timely basis. The control deficiency did not result in any adjustments to the 2004 annual or interim consolidated financial statements. However, this control deficiency could result in a misstatement to the estimated costs to complete long-term contracts and cost of operating revenue accounts resulting in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2004 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the COSO. Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the COSO.

PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 30, 2005

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FOSTER WHEELER LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND
COMPREHENSIVE LOSS
(in thousands of dollars, except share data and per share amounts)

    For the Year Ended

 
    December 31,   December 26,   December 27,  
    2004   2003   2002  
   

 

 

 
Operating revenues
  $ 2,661,324   $ 3,723,815   $ 3,519,177  
Cost of operating revenues
    (2,381,969 )   (3,435,726 )   (3,426,910 )
   

 

 

 
Contract profit
    279,355     288,089     92,267  
Selling, general and administrative expenses
    (228,962 )   (205,565 )   (226,524 )
Other income (including interest:
                   
2004—$8,832; 2003—$10,130; 2002—$12,251)
    88,383     77,493     55,360  
Other deductions
    (96,372 )   (168,455 )   (193,156 )
Interest expense
    (94,622 )   (95,484 )   (83,028 )
Minority interest
    (4,900 )   (5,715 )   (4,981 )
Loss on equity-for-debt exchange
    (175,054 )        
   

 

 

 
Loss before income taxes
    (232,172 )   (109,637 )   (360,062 )
Provision for income taxes
    (53,122 )   (47,426 )   (14,657 )
   

 

 

 
Loss prior to cumulative effect of a change in accounting principle
    (285,294 )   (157,063 )   (374,719 )
Cumulative effect of a change in accounting principle for goodwill, net of $0 tax
            (150,500 )
   

 

 

 
Net loss
    (285,294 )   (157,063 )   (525,219 )
Other comprehensive income/(loss):
                   
Change in gain on derivative instruments designated as cash flow hedges
            (3,834 )
Foreign currency translation adjustment
    27,155     6,762     22,241  
Minimum pension liability adjustment (net of tax (provision)/benefits: 2004—$986; 2003—$(18,886); 2002—$73,418)
    (7,617 )   58,677     (226,011 )
   

 

 

 
Net comprehensive loss
  $ (265,756 ) $ (91,624 ) $ (732,823 )
   

 

 

 
Loss per share—basic and diluted:
                   
Net loss prior to cumulative effect of a change in accounting principle
  $ (57.84 ) $ (76.53 ) $ (182.98 )
Cumulative effect on prior years (to December 28, 2001) of a change in accounting principle for goodwill
            (73.49 )
   

 

 

 
Net loss
  $ (57.84 ) $ (76.53 ) $ (256.47 )
   

 

 

 
Shares outstanding:
                   
Basic: weighted-average number of shares outstanding
    4,932,370     2,052,229     2,047,835  
Diluted: effect of share options
             
   

 

 

 
Total diluted
    4,932,370     2,052,229     2,047,835  
   

 

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands of dollars, except share data and per share amounts)

    December 31,
2004
  December 26,
2003
 
   

 

 
ASSETS
             
Current Assets:
             
Cash and cash equivalents
  $ 291,567   $ 364,095  
Short-term investments
    25,775     13,390  
Accounts and notes receivable, net:
             
Trade
    388,200     451,010  
Other
    118,296     105,404  
Contracts in process
    166,997     166,503  
Inventories
    7,080     6,790  
Prepaid, deferred and refundable income taxes
    26,144     37,160  
Prepaid expenses
    25,239     30,024  
   

 

 
Total current assets
    1,049,298     1,174,376  
   

 

 
Land, buildings and equipment, net
    280,305     309,615  
Restricted cash
    72,844     52,685  
Notes and accounts receivable — long-term
    7,053     6,776  
Investment and advances
    158,324     142,559  
Goodwill, net
    51,812     51,121  
Other intangible assets, net
    69,690     71,568  
Prepaid pension cost and related benefit assets
    6,351     7,240  
Asbestos-related insurance recovery receivable
    332,894     495,400  
Other assets
    108,254     138,243  
Deferred income taxes
    50,714     56,947  
   

 

 
TOTAL ASSETS
  $ 2,187,539   $ 2,506,530  
   

 

 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
             
Current Liabilities:
             
Current installments on long-term debt
  $ 35,214   $ 21,100  
Accounts payable
    288,899     305,286  
Accrued expenses
    308,229     381,376  
Estimated costs to complete long-term contracts
    458,421     552,754  
Advance payment by customers
    111,300     50,248  
Income taxes
    53,058     39,595  
   

 

 
Total current liabilities
    1,255,121     1,350,359  
   

 

 
Long-term debt
    534,859     1,011,972  
Deferred income taxes
    7,948     9,092  
Pension, postretirement and other employee benefits
    265,869     295,133  
Asbestos-related liability
    447,400     526,200  
Other long-term liabilities
    139,113     123,517  
Deferred accrued mandatorily redeemable preferred security distributions of subsidiary trust
        38,021  
Deferred accrued interest on subordinated deferrable interest debentures
    23,460      
Minority interest
    27,052     24,676  
Commitments and contingencies
             
   

 

 
TOTAL LIABILITIES
    2,700,822     3,378,970  
   

 

 
Shareholders’ Deficit:
             
Preferred shares:
             
$0.01 par value; authorized 975,540 shares; issued: 2004 — 75,484 and 2003 — none
    1      
Common shares:
             
$0.01 par value; authorized 74,319,908 shares; issued: 2004 — 40,542,898 and 2003 — 2,038,578
    405     20  
Paid-in capital
    883,167     242,593  
Accumulated deficit
    (1,096,348 )   (811,054 )
Accumulated other comprehensive loss
    (284,461 )   (303,999 )
Unearned compensation
    (16,047 )    
   

 

 
TOTAL SHAREHOLDERS’ DEFICIT
    (513,283 )   (872,440 )
   

 

 
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
  $ 2,187,539   $ 2,506,530  
   

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIT
(in thousands of dollars, except share data and per share amounts)

    December 31, 2004

  December 26, 2003

  December 27, 2002

 
    Shares   Amount   Shares   Amount   Shares   Amount  
   

 

 

 

 

 

 
Preferred Shares:
                                     
Balance at beginning of year
      $       $       $  
Issued as part of equity-for-debt exchange
    599,944     6                  
Conversion of preferred shares into common shares
    (524,460 )   (5 )                
   

 

 

 

 

 

 
Balance at end of year
    75,484   $ 1       $       $  
   

 

 

 

 

 

 
Common Shares:
                                     
Balance at beginning of year
    2,038,578   $ 20     2,038,578   $ 20     2,038,578   $ 20  
Issued as part of equity-for-debt exchange
    3,062,574     31                  
Issuance of restricted shares to employees and directors
    1,351,846     13                  
Conversion of preferred shares into common shares
    34,089,900     341                  
   

 

 

 

 

 

 
Balance at end of year
    40,542,898   $ 405     2,038,578   $ 20     2,038,578   $ 20  
   

 

 

 

 

 

 
Paid-in Capital:
                                     
Balance at beginning of year
        $ 242,593         $ 242,470         $ 242,142  
Stock options issued to non-employees
                    123           328  
Change due to equity-for-debt exchange
          623,153                      
Issuance of restricted stock to employees and directors
          17,757                      
Conversion of preferred shares into common shares
          (336 )                    
         
       
       
 
Balance at end of year
        $ 883,167         $ 242,593         $ 242,470  
         
       
       
 
Accumulated Deficit:
                                     
Balance at beginning of year
        $ (811,054 )       $ (653,991 )       $ (128,772 )
Net loss for the year
          (285,294 )         (157,063 )         (525,219 )
         
       
       
 
Balance at end of year
        $ (1,096,348 )       $ (811,054 )       $ (653,991 )
         
       
       
 
Accumulated Other Comprehensive Loss:
                                     
Balance at beginning of year
        $ (303,999 )       $ (369,438 )       $ (161,834 )
Change in net gain on derivative instruments designated as cash flow hedges
                              (3,834 )
Change in accumulated translation adjustment during the year
          27,155           6,762           22,241  
Minimum pension liability (net of tax (provision)/benefits: 2004 — $986; 2003 — $(18,886); 2002 — $73,418)
          (7,617 )         58,677           (226,011 )
         
       
       
 
Balance at end of year
        $ (284,461 )       $ (303,999 )       $ (369,438 )
         
       
       
 
Unearned Compensation:
                                     
Balance at beginning of year
        $         $         $  
Issuance of restricted stock to employees and directors
          (17,771 )                    
Amortization of unearned compensation
          1,724                      
         
       
       
 
Balance at end of year
        $ (16,047 )       $         $  
         
       
       
 
Total Shareholders’ Deficit
        $ (513,283 )       $ (872,440 )       $ (780,939 )
         
       
       
 

See notes to consolidated financial statements.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars, except share data)

    For the Year Ended

 
    December 31,   December 26,   December 27,  
    2004   2003   2002  
   

 

 

 
CASH FLOWS FROM OPERATING ACTIVITIES
                   
Net loss
  $ (285,294 ) $ (157,063 ) $ (525,219 )
Adjustments to reconcile net loss to cash flows from operating activities:
                   
Cumulative effect of a change in accounting principle
            150,500  
Provision for impairment loss
        15,100     18,700  
Equity-for-debt exchange
    163,857          
Amortization of premium on long-term debt
    (288 )        
Amortization of unearned compensation
    1,724          
Depreciation and amortization
    32,755     35,574     44,425  
Deferred tax
    32,351     19,774     (28,355 )
(Gain)/provision for loss on sale of cogeneration plants
        (4,300 )   54,500  
Provision for asbestos claims, net of settlements
    60,600     68,081     26,200  
Claims (recoveries)/write downs and related contract provisions
        (1,500 )   136,200  
Contract reserves and receivable provisions
    (58,000 )   32,300     80,500  
Mandatorily redeemable preferred security distributions of subsidiary trust
        18,130     16,610  
Interest expense on subordinated deferrable interest debentures
    16,567          
Gain on sale of land, building and equipment
    (15,834 )   (17,970 )   (1,269 )
Earnings on equity interests, net of dividends
    (11,415 )   (9,145 )   (4,262 )
Other equity earnings, net of dividends
    (4,974 )   (3,312 )   (1,850 )
Other noncash items
    7,523     (2,884 )   (14,827 )
Changes in assets and liabilities:
                   
Receivables
    90,612     78,069     192,801  
Contracts in process and inventories
    14,072     47,353     53,361  
Accounts payable and accrued expenses
    (93,117 )   11,265     (153,565 )
Estimated costs to complete long-term contracts
    (67,329 )   (142,914 )   62,870  
Advance payments by customers
    58,922     (38,287 )   18,206  
Income taxes
    (2,215 )   2,499     15,535  
Other assets and liabilities
    28,620     (12,868 )   19,304  
   

 

 

 
Net cash (used)/provided by operating activities
    (30,863 )   (62,098 )   160,365  
   

 

 

 
CASH FLOWS FROM INVESTING ACTIVITIES
                   
Change in restricted cash
    (17,941 )   38,414     (84,793 )
Capital expenditures
    (9,613 )   (12,870 )   (53,395 )
Proceeds from sale of assets
    17,495     87,159     6,282  
(Increase)/decrease in investments and advances
    (14 )       9,107  
(Increase)/decrease in short-term investments
    (9,426 )   (6,808 )   93  
   

 

 

 
Net cash (used)/provided by investing activities
    (19,499 )   105,895     (122,706 )
   

 

 

 
CASH FLOWS FROM FINANCING ACTIVITIES
                   
Distributions to minority shareholder
    (2,663 )   (2,879 )   (2,061 )
Decrease in short-term debt
    (121 )   (14,826 )   (7,792 )
Proceeds from long-term debt
    120,000         70,546  
Proceeds from lease financing obligation
            44,900  
Repayment of long-term debt
    (147,722 )   (34,100 )   (45,591 )
   

 

 

 
Net cash (used)/provided by financing activities
    (30,506 )   (51,805 )   60,002  
   

 

 

 
Effect of exchange rate changes on cash and cash equivalents
    8,340     27,798     22,624  
   

 

 

 
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    (72,528 )   19,790     120,285  
Cash and cash equivalents at beginning of year
    364,095     344,305     224,020  
   

 

 

 
CASH AND CASH EQUIVALENTS AT END OF YEAR
  $ 291,567   $ 364,095   $ 344,305  
   

 

 

 
Cash paid during the year for:
                   
Interest (net of amount capitalized)
  $ 53,952   $ 63,194   $ 60,973  
   

 

 

 
Income taxes
  $ 23,446   $ 17,588   $ 13,508  
   

 

 

 

NON-CASH FINANCING ACTIVITIES
In 2004, the Company exchanged 3,062,574 common shares, 599,944 preferred shares, warrants to purchase 6,994,059 common shares and $147,130 of long-term debt for $593,102 of existing debt and trust securities. See Note 7 for information regarding the equity-for-debt exchange.

See notes to consolidated financial statements.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars, except share data and per share amounts)

1. Going Concern

The accompanying consolidated financial statements of Foster Wheeler Ltd., hereinafter referred to as “Foster Wheeler” or the “Company,” were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company may not, however, be able to continue as a going concern. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably, to generate cash flows from operations, collections of receivables to fund its obligations, including those resulting from asbestos-related liabilities, as well as the Company’s ability to maintain credit facilities and bonding capacity adequate to conduct its business. The Company incurred significant operating losses in each of the years in the three-year period ended December 31, 2004, and has a shareholders’ deficit of $513,283 as of December 31, 2004.

In 2004, the Company consummated an equity-for-debt exchange in which it issued common shares, preferred shares, warrants to purchase common shares and new notes in exchange for certain of its outstanding debt securities and trust securities. The exchange offer reduced the Company’s existing debt (excluding a reduction in deferred accrued interest of $31,128) by $437,041, improved the Company’s shareholders’ deficit by $448,136 and when combined with the proceeds from the issuance of the new notes that were used to repay amounts that were outstanding under a previous Senior Credit Facility, eliminated substantially all material scheduled corporate debt maturities prior to 2011. After completing the exchange, the Company had outstanding debt obligations of approximately $570,073 as of December 31, 2004. (Refer to Notes 7 and 8 for further details of the exchange and information regarding the Company’s outstanding indebtedness.)

In August of 2002, the Company negotiated a Senior Credit Facility that was comprised of a $71,000 term loan, a $69,000 revolving credit facility and a $149,900 letter of credit facility having an April 30, 2005 maturity date. In connection with the equity-for-debt exchange, the Company prepaid the term loan and amounts outstanding under the revolving credit facility. Accordingly, there were no borrowings outstanding under the Senior Credit Facility as of December 31, 2004. Letters of credit of $90,018 remained outstanding under the Senior Credit Facility as of December 31, 2004.

In March 2005, the Senior Credit Facility was replaced with a new 5-year $250,000 Senior Credit Agreement. The new Senior Credit Agreement includes a $75,000 sub-limit for borrowings at a rate equal to LIBOR plus a spread. Standby letters of credit issued under the new Senior Credit Agreement will carry a fixed price throughout the life of the facility. The Senior Credit Agreement is collateralized by the assets and/or the stock of certain of the Company’s domestic subsidiaries and certain of its foreign subsidiaries. The Company paid up-front fees to the lender of approximately $8,225 in conjunction with the execution of the Senior Credit Agreement. Such fees, paid predominately in the first quarter of 2005, have been deferred and will be amortized to expense over the life of the agreement.

The Company finalized a sale/leaseback arrangement for an office building at its corporate headquarters in the third quarter of 2002. Under this arrangement, the Company leases the facility for an initial non-cancelable period of 20 years. The long-term capital lease obligation of $45,280 as of December 31, 2004 is included in long-term debt in the accompanying consolidated balance sheet.

The new Senior Credit Agreement and the sale/leaseback arrangement have quarterly financial covenant compliance requirements. Management’s forecast indicates that the Company will be in compliance with the financial covenants throughout 2005. The forecast assumes a significant level of new contracts and improved performance on existing contracts. However, there can be no assurance that the Company will comply with the covenants. If the Company violates a covenant under the Senior Credit Agreement or the sale/leaseback arrangement, repayment of amounts outstanding under such agreements could be accelerated and the following borrowings outstanding could also be accelerated: the 2011 Senior Notes, the 2005 Senior Notes, the Convertible Subordinated Notes, the Trust Preferred Securities, the Subordinated Robbins Facility Exit

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

1. Going Concern — (Continued)

Funding Obligations, and certain of the special-purpose project debt facilities. The total amount of Foster Wheeler Ltd. debt that could be accelerated is $463,563 as of December 31, 2004. The Company would not be able to repay amounts borrowed if the payment dates were accelerated.

Holders of the Company’s new 2011 Senior Notes have a security interest in the stock, debt and assets of certain of Foster Wheeler Ltd.’s subsidiaries. The 2011 Senior Notes contain incurrence covenants that limit the Company’s ability to undertake certain actions including incurring debt, making certain payments and investments, granting liens, selling assets and entering into specific intercompany transactions, among others. Management monitors these covenants to ensure the Company remains in compliance with the indenture.

In connection with the exchange, the holders of the Company’s 2005 Senior Notes agreed to amend the indenture governing these notes to effectively eliminate the security interest previously held by the notes.

On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provided for up to $45,000 of additional revolving loans available to provide working capital. As of December 31, 2004, the facility remained undrawn. In December 2004, the U.K. subsidiaries gave notice canceling the revolving credit facility effective January 24, 2005.

Since January 15, 2002, the Company has exercised its right to defer payments on the Trust Preferred Securities. The aggregate liquidation amount of the Trust Preferred Securities at December 31, 2004 was $71,177 after completing the equity-for-debt exchange. See Note 7 to the consolidated financial statements for further details of the exchange offer. The previous Senior Credit Facility required the Company to defer the payment of the dividends on the Trust Preferred Securities and, accordingly, no dividends were paid during 2004 or 2003. As of December 31, 2004, the amount of dividends deferred plus accrued interest approximates $23,460. The Company intends to continue to defer payment of the dividends on the Trust Preferred Securities until January 15, 2007 — the full term allowed by the underlying agreement. Once the deferred dividend obligation has been satisfied, the Company has the right to defer subsequent dividend payments for an additional 20 consecutive quarters. The new Senior Credit Agreement requires the approval of the lenders to make payments on the Trust Preferred Securities to the extent such payments are not contractually required by the underlying Trust Preferred Securities agreements.

Global Power’s European Power subsidiary in Finland is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. Obligations under both facilities are guaranteed by Foster Wheeler Ltd. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio.

One of the performance bond facilities is dedicated to a specific project and, as of December 31, 2004, had performance bonds outstanding equivalent to $24,522 (none of which has been drawn as of such date). Covenants under this facility are tested quarterly. The second facility is a general performance bond facility and, as of December 31, 2004, had performance bonds outstanding in favor of several clients equivalent to $10,114 (none of which has been drawn).

As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of the Company’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the two performance bond facilities. On August 6, 2004 and August 9, 2004, the Company’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

1. Going Concern — (Continued)

The waiver for the project-specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum equity ratio levels so long as the performance bonds are outstanding. The Company’s subsidiary remained below the minimum equity ratio as of December 31, 2004. On March 15, 2005, the bond expired and the banks funded the client and the Company reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of the Company to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

The waiver for the general performance bond facility is effective through March 31, 2005. As of that date, approximately $4,900 is forecasted to be outstanding under the facility. The Company has provided a standby letter of credit to back up the general performance bond facility and intends to do so until such facility can be permanently replaced or the last performance bond issued thereunder has expired. Therefore, the Company believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio covenant is reflected in the Company’s liquidity forecasts.

Management closely monitors liquidity and updates its U.S. liquidity forecasts weekly. These forecasts cover, among other analyses, existing cash balances, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, working capital needs and unused credit line availability. The Company’s cash flow forecasts continue to indicate that sufficient cash will be available to fund the Company’s U.S. and foreign working capital needs throughout 2005.

As of December 31, 2004, the Company had cash and cash equivalents, short-term investments, and restricted cash totalling $390,186, compared to $430,170 as of December 26, 2003. Of the $390,186 total at December 31, 2004, $319,612 was held by foreign subsidiaries. See Note 2 for additional details on cash and restricted cash balances.

The Company’s domestic operating entities are cash flow positive. However they do not generate sufficient cash flow to cover the costs related to the Company’s indebtedness, obligations to fund U.S. pension plans, and corporate overhead expenses. Consequently, the Company requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs and to service its debt. The Company’s current 2005 forecast assumes total cash repatriation from its non-U.S. subsidiaries of approximately $107,000 from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends. In 2004 and 2003, the Company repatriated approximately $77,000 and $100,000, respectively, from its non-U.S. subsidiaries.

There can be no assurance that the forecasted foreign cash repatriation will occur, as the non-U.S. subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of the Company’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. The repatriation of funds may also subject those funds to taxation. As a result of these factors, the Company may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries in the amount forecasted above.

Commercial operations under a domestic contract retained by the Company in connection with the sales of assets of the Foster Wheeler Environmental Corporation (“Environmental”), as described further in Note 21 to the consolidated financial statements, commenced in January 2004. The plant processes low-level nuclear waste for the U.S. Department of Energy (“DOE”). The Company funded the plant’s construction costs and operates the facility. The majority of the Company’s invested capital was recovered during the early stages of

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

1. Going Concern — (Continued)

processing the first stream of waste materials. This project successfully processed all quantities of the first waste stream of materials ahead of schedule and is currently finalizing the processing line for the second waste stream. In 2004, the project generated net cash flow of approximately $53,300. An additional $17,800 of capital recovery is dependent on the initial processing of the second waste stream of materials. This capital recovery is expected in 2005.

The Company’s inability to operate profitably and to generate cash flows from operations, its reliance on repatriated cash from its foreign subsidiaries to fund its domestic obligations, and its obligations to maintain minimum debt covenants to avoid possible acceleration of its debt, raises substantial doubt about the Company’s ability to continue as a going concern.

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. 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, 2004 included 53 weeks; 2003 and 2002 included 52 weeks.

Capital Alterations — On November 29, 2004, the Company’s shareholders approved a series of capital alterations including the consolidation of the authorized common share capital at a ratio of one-for-twenty and a reduction in the par value of the common shares and preferred shares. As a result of these capital alterations, all references to share capital, the number of shares, per share amounts, cash dividends, and any other reference to shares in the consolidated financial statements, unless otherwise noted, have been adjusted to reflect such capital alterations on a retroactive basis.

Reclassifications — Certain prior period financial statement amounts have been reclassified to conform with the current year presentation.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the periods 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, customer and vendor claims, depreciation, employee benefit plans, taxes, asbestos litigation and expected recoveries and contingencies, among others.

Revenue Recognition on Long-term Contracts — Revenues and profits on long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress towards completion is measured using physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress toward completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.

Revenues and profits on cost-reimbursable contracts are recorded as the costs are incurred. The Company includes flow-through costs consisting of materials, equipment and subcontractor costs as revenue on cost-reimbursable contracts when the Company is responsible for the engineering specifications and procurement for such costs.

Contracts in process are stated at cost, increased for profits recorded on the completed effort or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. Negative balances are presented as “estimated costs to complete long-term contracts.” The Company has

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

2. Summary of Significant Accounting Policies — (Continued)

numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. However, current estimates may be revised as additional information becomes available. In accordance with the accounting and disclosure requirements of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”) and Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes,” the Company reviews its contracts monthly. As a result of this process in 2004, 54 individual projects had final estimated profit revisions exceeding $1,000. These revisions resulted from events such as earning project incentive bonuses or the incurrence or forecasted incurrence of contractual liquidated damages for performance or schedule issues, executing services and purchasing third-party materials and equipment at costs differing from previously estimated, and testing of completed facilities which in turn eliminates or incurs completion and warranty-related costs. The net aggregate dollar value of the accrued contract profit resulting from these estimate changes during 2004 amounted to $37,600. 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.

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 SOP 81-1. 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. 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. As of December 31, 2004, the Company had recorded a commercial claims receivable of $3,946. The claims were recorded in the Company’s European operations. Additionally, the consolidated financial statements assume recovery of $11,000 in requests for equitable adjustment (“REA”) at December 31, 2004, of which $1,200 was recorded in contracts in process. The balance of $9,800 represents costs yet to be incurred. The REA relates primarily to a claim against a U.S. Government agency for a project currently being executed. The Company is currently discussing the details of the REA with the U.S. Government agency. If this claim were to be unsuccessful, the costs would be charged to cost of operating revenues. The Company had no commercial claims receivable or requests for equitable adjustment recorded as of December 26, 2003.

In certain circumstances, the Company may defer pre-contract costs when it is probable that these costs will be recovered under a future contract. Such deferred costs would then be included in contract costs on receipt of the anticipated contract. If it is not probable that pre-contract costs will be recovered under a future contract, then these costs are expensed as incurred. Costs related to anticipated contracts, which are charged to expense because their recovery is not considered probable, are not subsequently reclassified to contract costs on the subsequent receipt of the contract. As of December 31, 2004, no pre-contract costs were deferred.

Certain special-purpose subsidiaries in the Global Power 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.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

2. Summary of Significant Accounting Policies — (Continued)

Cash and Cash Equivalents — Cash and cash equivalents include highly liquid short-term investments purchased with original maturities of three months or less. Cash and cash equivalents of $225,861 are maintained by foreign subsidiaries as of December 31, 2004. These subsidiaries require a substantial portion of these funds to support their liquidity and working capital needs, as well as required minimum capitalization and contractual restrictions. Accordingly, these funds may not be readily available for repatriation to U.S. entities.

Short-term Investments — Short-term investments consist primarily of certificates of deposit and are classified as held to maturity under Financial Accounting Standards Board Statement of Financial Accounting Standard (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.”

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.

Trade accounts receivable are continually evaluated in accordance with corporate policy. Provisions are established on a project specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues. Customer payment history, trends within the various markets served and general economic trends are also evaluated when considering the necessity of a provision.

Inventories — Inventories, principally materials and supplies, are stated at the lower of cost or market, determined primarily on the average-cost method.

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 as incurred. 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.

Restricted Cash — The following table details the restricted cash held by the Company:

    December 31, 2004

  December 26, 2003

 
    Foreign   Domestic   Total   Foreign   Domestic   Total  
   

 

 

 

 

 

 
Held by special purpose entities and restricted for debt service payments
  $ 245   $ 3,924   $ 4,169   $ 92   $ 3,884   $ 3,976  
Collateralize letters of credit and bank guarantees
    57,151         57,151     44,895         44,895  
Client escrow funds
    10,580     944     11,524     3,052     762     3,814  
   

 

 

 

 

 

 
Total
  $ 67,976   $ 4,868   $ 72,844   $ 48,039   $ 4,646   $ 52,685  
   

 

 

 

 

 

 

Investments and Advances — The Company uses the equity method of accounting for investment ownership of between 20% and 50% in affiliates unless significant economic considerations indicate that the cost method is appropriate. The equity method is also used for investments in which ownership is greater than 50% when the Company does not have a controlling financial interest. Investment ownership of less than 20% in affiliates is carried at cost. Currently, all of the Company’s significant investments in affiliates that are not consolidated are recorded using the equity method.

Intangible Assets — Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (goodwill), trademarks and patents. Goodwill was allocated to the reporting units based on the

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

2. Summary of Significant Accounting Policies — (Continued)

original purchase price allocation. Patents and trademarks are being amortized on a straight-line basis over periods of 12 to 40 years.

The Company tests for impairment at the reporting unit level as defined in SFAS No. 142, “Goodwill and Other Intangible Assets.” This test is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. In the fourth quarter of each year, the Company evaluates goodwill on a separate reporting unit basis to assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. SFAS No. 142 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives and reviewed annually for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

As of December 31, 2004 and December 26, 2003, the Company had unamortized goodwill of $51,812 and $51,121, respectively. The increase in goodwill of $691 resulted from foreign currency translation gains. All of the goodwill is related to the Global Power Group. In accordance with SFAS No. 142, the Company is no longer amortizing goodwill, and in 2003 and 2004, the fair value of the reporting units exceeded the carrying amounts. The Company recognized $150,500 of impairment losses in 2002 related to the goodwill as a cumulative effect of a change in accounting principle. Of this total, $24,800 was associated with the Camden, New Jersey waste-to-energy facility and $77,000 was associated with the North American Power unit included in the operations of the Global Power Group. The fair value of the facility and the operating unit were estimated using the expected present value of future cash flows. The remaining $48,700 related to Foster Wheeler Environmental Corporation in the E&C Group. An impairment of the goodwill on this subsidiary was initially determined based upon indications of its market value from potential buyers. Based upon the market value, it was determined under step one that a potential impairment existed. The Company then completed step two and determined that a full write down of the goodwill was required. All of the other reporting units were also subjected to the first step of the goodwill impairment test.

As of December 31, 2004 and December 26, 2003, the Company had unamortized identifiable intangible assets of $69,690 and $71,568, respectively. The following table details amounts relating to those assets.

    As of December 31, 2004

  As of December 26, 2003

 
    Gross Carrying
Amount
  Accumulated
Amortization
  Gross Carrying
Amount
  Accumulated
Amortization
 
   

 

 

 

 
Patents
  $ 37,392   $ (15,622 ) $ 36,703   $ (13,802 )
Trademarks
    63,026     (15,106 )   61,943     (13,276 )
   

 

 

 

 
Total
  $ 100,418   $ (30,728 ) $ 98,646   $ (27,078 )
   

 

 

 

 

Amortization expense related to patents and trademarks for fiscal years 2004, 2003, and 2002 was $3,650, $3,675, and $3,535, respectively. Amortization expense is expected to approximate $3,600 each year in the next five years.

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

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

2. Summary of Significant Accounting Policies — (Continued)

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. In 2003, to the extent such credits were not currently utilized on the Company’s tax return, deferred tax assets, as adjusted for any valuation allowance, were 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 $223,330 as of December 31, 2004. It is not practicable to estimate the additional tax that would be incurred, if any, if these amounts were repatriated.

The Company is in the process of reviewing the foreign earnings repatriation provision of the American Jobs Creation Act of 2004 (the “Act”). The review is not yet complete due to the complexity of the provision as it relates to the structure of the Company’s unrepatriated foreign earnings. Given the effective foreign tax rates applicable to the Company’s unrepatriated earnings as well as certain restrictions in the Act concerning the definitions of extraordinary dividends and U.S. investment, it is currently considered unlikely that the Company will change its existing repatriation practices as a result of the Act. The Company’s evaluation is expected to be completed in the second quarter of 2005.

Restricted Net Assets — Global Power’s European Power subsidiary in Finland is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. Obligations under both facilities are guaranteed by Foster Wheeler Ltd. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio.

One of the performance bond facilities is dedicated to a specific project and, as of December 31, 2004, had performance bonds outstanding equivalent to $24,522 (none of which has been drawn as of such date). Covenants under this facility are tested quarterly. The second facility is a general performance bond facility and, as of December 31, 2004, had performance bonds outstanding in favor of several clients equivalent to $10,114 (none of which has been drawn).

As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of the Company’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the two performance bond facilities. On August 6, 2004 and August 9, 2004, the Company’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities.

The waiver for the project-specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum equity ratio levels so long as the performance bonds are outstanding. The Company’s subsidiary remained below the minimum equity ratio as of December 31, 2004. On March 15, 2005, the bond expired and the banks funded the client and the Company reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of the Company to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

The waiver for the general performance bond facility is effective through March 31, 2005. As of that date, approximately $4,900 is forecasted to be outstanding under the facility. The Company has provided a

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

2. Summary of Significant Accounting Policies — (Continued)

standby letter of credit to back up the general performance bond facility and intends to do so until such facility can be permanently replaced or the last performance bond issued thereunder has expired.

Therefore, the Company believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio covenant is reflected in the Company’s liquidity forecasts.

Foreign Currency — 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 exchange rates.

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Cumulative translation adjustment at beginning of year
  $ (78,395 ) $ (85,157 ) $ (107,398 )
Current year foreign currency adjustment
    27,155     6,762     22,241  
   

 

 

 
Cumulative translation adjustment at end of year
  $ (51,240 ) $ (78,395 ) $ (85,157 )
   

 

 

 
                     
Foreign currency transaction (loss)/gains
  $ (83 ) $ 1,700   $ 2,900  
   

 

 

 
Foreign currency transaction (loss)/gains, net of tax
  $ (54 ) $ 1,100   $ 1,900  
   

 

 

 

Earnings per Share — In accordance with Emerging Issues Task Force Issue No. 03-6, “Participating Securities and the Two-Class Method under SFAS No. 128,” the Company uses the two-class method to allocate earnings to the holders of the preferred shares when computing basic and diluted earnings per share for the common shareholders. However, losses will not be allocated to holders of the preferred shares for purposes of calculating earnings per share since the preferred shareholders are not required to fund losses. There were 75,484 preferred shares outstanding as of December 31, 2004, which are convertible into 4,906,441 common shares at the option of the preferred shareholder. See Note 13 for further information regarding the preferred shares.

Basic per share data has been computed based on the weighted-average number of common shares outstanding. Non-vested restricted common shares of 1,351,846 have been excluded from the computation of the weighted-average number of common shares outstanding. Restricted common shares will be included in the weighted-average number of common shares outstanding as such shares vest. See Note 14 for further information regarding the restricted shares.

There is no impact of outstanding stock options, warrants to purchase common shares, convertible securities, and the non-vested portion of restricted common shares and restricted common share awards on the computation of diluted per share data since the Company reported a net loss for all periods presented. See the following table of potentially dilutive securities.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

2. Summary of Significant Accounting Policies — (Continued)

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
                     
Options to purchase common shares not included in the computation of diluted earnings per share due to their antidilutive effect
    2,828,570     5,857     193,868  
   

 

 

 
                     
Warrants to purchase common shares not included in the computation of diluted earnings per share due to their antidilutive effect
    9,941,292          
   

 

 

 
Options to purchase common shares not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price
    405,056     412,376     240,887  
   

 

 

 
Common shares on convertible subordinated notes not included in the computation of diluted earnings per share due to their antidilutive effect
    9,565     654,288     654,288  
   

 

 

 
Unvested portion of restricted common shares and restricted common share awards not included in the computation of diluted earnings due to their antidilutive effect
    1,901,810          
   

 

 

 

Stock Option Plans — The Company has three fixed-option plans that reserve shares of common stock for issuance to executives, key employees and directors. The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock Based Compensation — Transition and Disclosure.” The Company continues to account for stock options granted to employees and directors using the intrinsic value method under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Had compensation costs for the Company’s stock-based compensation plans been accounted for using the fair value method of accounting described by SFAS No. 123, the Company’s net loss and loss per share would have been as follows:

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Net loss — as reported
  $ (285,294 ) $ (157,063 ) $ (525,219 )
Deduct: Total stock-based employee compensation expense determined under fair value based method for awards net of taxes of $210 in 2004, $127 in 2003 and $31 in 2002.
    2,679     2,114     1,722  
   

 

 

 
Net loss — pro forma
  $ (287,973 ) $ (159,177 ) $ (526,941 )
   

 

 

 
Loss per share — basic and diluted:
                   
As reported
  $ (57.84 ) $ (76.53 ) $ (256.47 )
Pro forma
  $ (58.38 ) $ (77.56 ) $ (257.32 )

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

2. Summary of Significant Accounting Policies — (Continued)

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:

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Dividend yield
    0.00 %   0.00 %   0.00 %
Expected volatility
    50.00 %   88.23 %   83.62 %
Risk free interest rate
    2.99 %   3.22 %   2.90 %
Expected life (years)
    3     5     5  

Recent Accounting Developments — In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) became law in the United States. The Medicare Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In May 2004, the FASB issued a FASB Staff Position (“FSP”) No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP 106-2 provides guidance on accounting for the effects of the Medicare Act for employers that sponsor postretirement healthcare plans that provide prescription drug benefits. The provisions of FSP No. 106-2 were effective for the Company’s interim period ending September 24, 2004. Based upon the proposed regulations of the Medicare Act, the Company concluded that the benefits provided by the plan were actuarially equivalent to Medicare Part D under the Medicare Act. Accordingly, the Company reflected the impact of the Medicare Act prospectively as of the start of the third quarter 2004. The impact of the Medicare Act resulted in decreases in the accumulated postretirement benefit obligation of approximately $9,100 and in the annual net periodic postretirement benefit costs for 2004 of approximately $900. On January 21, 2005, final regulations related to the Medicare Act were issued. The Company has not yet determined the effect of the final regulations on the Company’s accumulated postretirement benefit obligation and net periodic postretirement benefit costs.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires that all share-based payments to employees, including grants of employee stock options and restricted stock, be recognized in the consolidated statement of operations and comprehensive loss based on their fair values. Prior to SFAS No. 123R, the Company adopted the disclosure-only provisions of SFAS No. 123 and therefore only certain pro forma disclosures of the fair value of share-based payments were required in the notes to the consolidated financial statements. SFAS No. 123R provides for the adoption of the new standard in one of two ways: the modified prospective transition method and the modified retrospective transition method. Using the modified prospective transition method, share-based employee compensation cost would be recognized from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date. Using the modified retrospective method, employee compensation cost would be recognized for periods presented prior to the adoption of the proposed standard in accordance with the original provisions of SFAS No. 123; that is, employee compensation cost would be recognized in the amounts reported in the pro forma disclosures provided in accordance with SFAS No. 123. Adoption of the provisions of SFAS No. 123R is effective as of the beginning of the Company’s quarter ending September 30, 2005. The Company is still evaluating the method of adoption and the impact that the adoption of SFAS No. 123R will have on its consolidated financial position and results of operations.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

2. Summary of Significant Accounting Policies — (Continued)

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets, which were previously required to be recorded on a carryover basis rather than a fair value basis. Instead, SFAS No. 153 provides that exchanges of nonmonetary assets that do not have commercial substance be reported at carryover basis rather than a fair value basis. A nonmonetary exchange is considered to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the consolidated financial statements of the Company.

3. Accounts and Notes Receivable

The following table shows the components of trade accounts and notes receivable:

    December 31,
2004
  December 26,
2003
 
   

 

 
From long-term contracts:
             
Amounts billed due within one year
  $ 251,866   $ 332,135  
   

 

 
Retention:
             
Billed:
             
Estimated to be due in:
             
2004
        30,502  
2005
    18,098     21,338  
2006
    6,282     656  
2007
    1,654      
2008
         
2009
    3,417      
   

 

 
Total billed
    29,451     52,496  
   

 

 
Unbilled:
             
Estimated to be due in:
             
2004
        79,937  
2005
    115,046     669  
2006
    954      
2007
        2,699  
2008
    4,019      
   

 

 
Total unbilled
    120,019     83,305  
   

 

 
Total retentions
    149,470     135,801  
   

 

 
Total receivables from long-term contracts
    401,336     467,936  
Other trade accounts and notes receivable
    10,063     20,480  
   

 

 
      411,399     488,416  
Less allowance for doubtful accounts
    23,199     37,406  
   

 

 
Trade accounts and notes receivable, net
  $ 388,200   $ 451,010  
   

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

3. Accounts and Notes Receivable — (Continued)

The following table shows the components of non-trade accounts and notes receivable:

    December 31,
2004
  December 26,
2003
 
   

 

 
Asbestos insurance claims receivable
  $ 96,900   $ 60,000  
Foreign refundable value-added tax
    3,061     13,637  
Other
    18,335     31,767  
   

 

 
Non-trade accounts and notes receivable
  $ 118,296   $ 105,404  
   

 

 

4. Contracts in Process and Inventories

The following table shows the elements included in contracts in process as related to long-term contracts:

      December 31,
2004
    December 26,
2003
 
   

 

 
Contracts in Process:
             
Costs plus accrued profits less earned revenues on contracts currently in process
  $ 207,621   $ 238,645  
Less: progress payments
    40,624     72,142  
   

 

 
Net
  $ 166,997   $ 166,503  
   

 

 

Costs of inventories are shown below:

      December 31,
2004
    December 26,
2003
 
   

 

 
Inventories:
             
Materials and supplies
  $ 6,651   $ 5,098  
Finished goods
    429     1,692  
   

 

 
Total
  $ 7,080   $ 6,790  
   

 

 

5. Land, Buildings and Equipment

Land, buildings and equipment are stated at cost and are set forth below:

      December 31,
2004
    December 26,
2003
 
   

 

 
Land and land improvements
  $ 24,052   $ 24,057  
Buildings
    137,346     142,608  
Equipment
    458,356     450,941  
Construction in progress
    1,192     5,123  
   

 

 
Land, buildings and equipment
    620,946     622,729  
Less: accumulated depreciation
    340,641     313,114  
   

 

 
Net book value
  $ 280,305   $ 309,615  
   

 

 

Depreciation expense for the years 2004, 2003, and 2002 was $28,447, $31,214 and $54,492, respectively.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

6. Equity Interests

The Company owns a non-controlling equity interest in two electric power generation projects and one waste-to-energy project in Italy and a refinery/electric power generation project in Chile. Two of the projects in Italy are each 42% owned while the third is 49% owned by the Company. In 2004, the Company entered into a binding agreement to sell 10% of its minority equity interest in the third Italian project. The project in Chile is 85% owned by the Company; however, 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 31, 2004

  December 26, 2003

 
    Italian
Projects
  Chilean
Project
  Italian
Projects
  Chilean
Project
 
   

 

 

 

 
Balance Sheet Data:
                         
Current assets
  $ 149,346   $ 23,456   $ 95,977   $ 23,891  
Other assets (primarily buildings and equipment)
    414,779     175,653     409,267     185,315  
Current liabilities
    41,003     17,179     32,735     17,188  
Other liabilities (primarily long-term debt)
    404,802     113,567     385,047     121,362  
Net assets
    118,320     68,363     87,462     70,656  
                           
    For the Year Ended

 
    December 31, 2004

  December 26, 2003

  December 27, 2002

 
    Italian
Projects
  Chilean
Project
  Italian
Projects
  Chilean
Project
  Italian
Projects
  Chilean
Project
 
   

 

 

 

 

 

 
Income Statement Data:
                                     
Total revenues
  $ 244,225   $ 41,137   $ 219,818   $ 39,114   $ 171,565   $ 38,425  
Gross earnings
    60,108     20,152     56,699     20,739     43,133     20,777  
Income before income taxes
    43,947     11,229     38,405     10,712     31,358     10,087  
Net earnings
    26,664     8,787     23,144     8,891     17,648     8,372  

The Company’s share of the net earnings of equity affiliates, which are recorded within other income on the consolidated statement of operations and comprehensive loss, totaled $20,636, $17,142 and $14,006 for the years ended December 31, 2004, December 26, 2003 and December 27, 2002, respectively. The Company’s investment in the equity affiliates totaled $109,106 and $98,651 as of December 31, 2004 and December 26, 2003, respectively. Dividends of $9,221 and $7,997 were received during the years ended December 31, 2004 and December 26, 2003, respectively.

The Company has guaranteed certain performance obligations of these projects. The Company’s contingent obligations under the guarantees for three of the projects are approximately $1,300 in total. The contingent obligation for the fourth project is capped at approximately $10,300 over the twelve-year life of the project’s financing; to date, no amounts have been paid under this guarantee. The Company has also provided a guarantee of $5,200 representing 49% of the debt service reserve letter of credit providing liquidity should the performance of the fourth project be insufficient to cover the debt service payments. Finally, the Company has provided a $10,000 debt service reserve letter of credit providing liquidity should the performance of the Chilean project be insufficient to cover the debt service payments. No amounts have been drawn under the letter of credit.

The undistributed retained earnings of the Company’s equity investees amounted to approximately $42,087 and $28,765 at December 31, 2004 and December 26, 2003, respectively.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

7. Equity-for-Debt Exchange

In 2004, the Company consummated an equity-for-debt exchange in which it issued common shares, preferred shares, warrants to purchase common shares and new senior notes due 2011 in exchange for certain of its outstanding debt securities and trust securities. The exchange reduced the Company’s existing debt (excluding a reduction in deferred accrued interest of $31,128) by $437,041, improved the Company’s shareholders’ deficit by $448,136 and when combined with the proceeds from the issuance of the new notes that were used to repay amounts that were outstanding under the previous Senior Credit Facility, eliminated substantially all material scheduled corporate debt maturities prior to 2011. The exchange offer resulted in an aggregate $623,190 increase in capital stock and paid-in capital, which was partially offset by a $175,054 charge to income. The pretax charge, which was substantially non-cash, related primarily to the exchange of Convertible Subordinated Notes tendered in the exchange offer.

     Accounting for the Equity-for-Debt Exchange:

The following table summarizes the impact of the exchange offer:

    2005 Senior
Notes
  Robbins
Bonds
  Convertible
Notes
  Trust Securities   Senior Credit
Facility
  2011 Senior
Notes
  Total Change  
   

 

 

 

 

 

 

 
Current Liabilities:
                                           
Current installments on long-term debt
  $   $ (1,676 ) $   $   $ (115,869 ) $   $ (117,545 )
   

 

 

 

 

 

 

 
Total current liabilities
        (1,676 )           (115,869 )       (117,545 )
   

 

 

 

 

 

 

 
Long-term debt
    (188,628 )   (92,045 )   (206,930 )   (103,823 )       271,930     (319,496 )
Deferred accrued interest on subordinated deferrable interest debentures
                (31,128 )           (31,128 )
   

 

 

 

 

 

 

 
Total Liabilities
  $ (188,628 ) $ (93,721 ) $ (206,930 ) $ (134,951 ) $ (115,869 ) $ 271,930   $ (468,169 )
   

 

 

 

 

 

 

 
                                             
Shareholders’ Deficit:
                                           
Preferred shares
  $ 1   $ 2   $ 3   $   $   $   $ 6  
Common shares
    4     8     17     2             31  
Paid-in capital
    54,776     101,388     406,117     60,872             623,153  
Accumulated deficit
    (15,324 )   (10,080 )   (205,340 )   66,352     (5,862 )   (4,800 )   (175,054 )
   

 

 

 

 

 

 

 
Total Shareholders’ Deficit
  $ 39,457   $ 91,318   $ 200,797   $ 127,226   $ (5,862 ) $ (4,800 ) $ 448,136  
   

 

 

 

 

 

 

 

Details of the exchange by individual debt instrument are as follows:

Senior Notes at 6.75% interest, due November 15, 2005 (“2005 Senior Notes”) — The Company exchanged approximately 434,788 common shares, approximately 82,430 preferred shares and $141,471 principal amount of Senior Notes at 10.359% due September 15, 2011 (“2011 Senior Notes”) for $188,628 of 2005 Senior Notes. This resulted in a pretax charge of $15,324, comprised of a non-cash loss on the exchange of $13,283 (including a premium on the 2011 Senior Notes of $5,659), transaction-related costs of $1,825 and the write-off of unamortized issuance costs of $216. The Company recorded the $5,659 premium since the fair value of the 2011 Senior Notes was determined to be 104% of principal. The Company also capitalized $750 of issuance costs on the 2011 Senior Notes.

Subordinated Robbins Facility Exit Funding Obligations (“Robbins Bonds”) — The Company exchanged approximately 808,327 common shares and approximately 152,520 preferred shares for $93,721 of Robbins Bonds. The Company recorded a pretax charge of $10,080, including a non-cash loss on the exchange of $7,676 and transaction-related costs of $2,404.

Convertible Subordinated Notes at 6.50% interest, due 2007 (“Convertible Notes”) — The Company exchanged approximately 1,661,648 common shares and approximately 313,913 preferred shares for $206,930 of Convertible Notes. As a result of the exchange, the Company recorded a pretax charge of $205,340, including non-cash conversion expense of $202,616 as required by SFAS No. 84, “Induced

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

7. Equity-for-Debt Exchange — (Continued)

Conversions of Convertible Debt,” and transaction-related costs of $2,724. Additionally, the Company charged unamortized issuance costs of $3,409 against paid-in capital.

Mandatorily Redeemable Preferred Securities (“Trust Securities”) — The Company exchanged approximately 157,811 common shares, approximately 51,081 preferred shares and warrants to purchase approximately 6,994,059 common shares for $103,823 of Trust Securities. In conjunction with the exchange, the Company recorded a pretax gain of $66,352, including a non-cash gain on exchange of $74,075 less transaction-related costs of $4,244 and the write-off of unamortized issuance costs of $3,479.

Senior Credit Facility (Term Loan and Revolving Credit Portions) — Concurrent with the exchange offer, the Company also completed a $120,000 private offering of 10.359% Senior Notes due 2011, Series B. The proceeds of the private offering were used to repay the amounts outstanding under the term loan and revolving credit portions of the previous Senior Credit Facility totaling $115,869. In conjunction with this transaction, the Company recorded a non-cash pretax charge of $5,862, including the write-off of unamortized issuance costs of $1,599 and unamortized bank fees of $4,263. The Company also recorded a premium of $4,800 since the 2011 Senior Notes-Series B fair value was determined to be 104% of principal. Finally, the Company capitalized $966 of issuance costs on the 2011 Senior Notes-Series B.

As of December 31, 2004, after reflecting the results of the exchange offer, the Company had aggregate indebtedness of $570,073. See Note 8 for further information relating to the Company’s indebtedness.

The following table summarizes the capital share activity associated with the exchange offer:

    Units   Common Share
Equivalents
 
   

 

 
Capital Share Activity
             
Pre-exchange balance
    2,038,578     2,038,578  
Common shares issued in conjunction with exchange offer
    3,062,574     3,062,574  
Preferred shares issued in conjunction with exchange offer
    599,944     38,996,342  
Warrants to purchase common shares issued to Trust Preferred Security holders
    4,152,914     6,994,059  
Warrants to purchase common shares distributed to existing common shareholders
    40,771,560     2,947,233  
         
 
Post-exchange balance
          54,038,786  
         
 

The Company issued approximately 3,062,574 common shares and approximately 599,944 preferred shares in connection with the exchange offer. Each preferred share is convertible into 65 common shares. See Note 13 for information regarding the preferred shares.

The Company issued 4,152,914 Class A stock purchase warrants to Trust Preferred Security holders that tendered into the exchange offer. In addition, the Company also distributed 40,771,560 Class B stock purchase warrants to the holders of record of the Company’s common shares at the close of business on September 23, 2004. See Note 16 for information regarding the stock purchase warrants.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

8. Long-term Debt

The following table shows the components of long-term debt:

    December 31, 2004

  December 26, 2003

 
    Current   Long-term   Total   Current   Long-term   Total  
   

 

 

 

 

 

 
Senior Credit Facility (average interest rate: 2004 — n/a; 2003 — 7.16%)
  $   $   $   $   $ 128,163   $ 128,163  
Senior Notes at 6.75% interest, due November 15, 2005
    11,372         11,372         200,000     200,000  
Senior Notes at 10.359% interest, due September 15, 2011
        271,643     271,643              
Convertible Subordinated Notes at 6.50% interest, due 2007
        3,070     3,070         210,000     210,000  
Subordinated Robbins Facility Exit Funding Obligations:
                                     
1999C Bonds at 7.25% interest, due October 15, 2009
    14     69     83     1,690     10,440     12,130  
1999C Bonds at 7.25% interest, due October 15, 2024
        20,491     20,491         77,155     77,155  
1999D Bonds at 7% interest, due October 15, 2009
        233     233         23,994     23,994  
Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures
                    175,000     175,000  
Subordinated Deferrable Interest Debentures
        71,177     71,177              
Special-Purpose Project Debt:
                                     
Martinez Cogen Limited Partnership
    7,280     7,980     15,260     6,627     15,260     21,887  
Foster Wheeler Coque Verde, L.P.
    2,975     32,151     35,126     2,656     35,126     37,782  
Camden County Energy Recovery Associates
    8,959     59,936     68,895     8,613     68,895     77,508  
Capital Lease Obligations
    990     66,297     67,287     1,322     62,373     63,695  
Other
    3,624     1,812     5,436     192     5,566     5,758  
   

 

 

 

 

 

 
Total
  $ 35,214   $ 534,859   $ 570,073   $ 21,100   $ 1,011,972   $ 1,033,072  
   

 

 

 

 

 

 

Senior Credit Facility — In August of 2002, the Company negotiated a Senior Credit Facility that was comprised of a $71,000 term loan, a $69,000 revolving credit facility and a $149,900 letter of credit facility having an April 30, 2005 maturity date. The term loan and borrowings under the revolving credit facility bear interest at the Company’s option of (a) LIBOR plus 6% or (b) the Base Rate plus 5.00%. The “Base Rate” refers to the higher of (i) the Bank of America prime rate or (ii) the Federal Funds rate plus 0.5%.

In connection with the equity-for-debt exchange, the Company repaid in full the term loan and amounts outstanding under the revolving credit facility. Accordingly, there were no borrowings outstanding under the term loan and revolving credit facility as of December 31, 2004. The Company had letters of credit outstanding of $90,018 as of December 31, 2004. In March 2005, the Company replaced the Senior Credit Facility with a new 5-year Senior Credit Agreement.

The Company obtained amendments to the Senior Credit Facility to provide covenant relief and to allow for the equity-for-debt exchange. These amendments are described below.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

8. Long-term Debt — (Continued)

The Senior Credit Facility required prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. The Company retained the first $77,000 of such amounts before retaining a 50% share of the balance. The $77,000 threshold was exceeded during the second quarter of 2003 and principal repayments of $14,100 were made on the term loan in 2003 and 2004.

Amendment No. 1 to the Senior Credit Facility, obtained on November 8, 2002, provided for the exclusion of certain gross pretax charges recorded by the Company in the third quarter of 2002 for covenant calculation purposes. The amendment further provided that certain pretax charges related to specific contingencies may be excluded from the covenant calculation through December 31, 2003, if incurred.

Amendment No. 2 to the Senior Credit Facility, entered into on March 24, 2003, modified (i) certain definitions of financial measures utilized in the calculation of the financial covenants and (ii) the Minimum EBITDA and Senior Debt Ratio, as specified in section 6.01 of the Credit Agreement. In connection with this amendment, the Company made a prepayment of principal in the aggregate amount of $10,000 in March 2003.

Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modified certain affirmative and negative covenants to permit the equity-for-debt exchange, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. The terms of the amendment called for the Company to pay a fee equal to 5% of the lenders’ credit exposure since it had not made a required prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004. The Company paid the required fee of $13,600 on March 31, 2004. The annual interest rate on borrowings under the Senior Credit Facility increased each quarter until the term loan and revolving credit facility were repaid as part of the equity-for-debt exchange.

Amendment No. 4 to the Senior Credit Facility, entered into on October 30, 2003, modified certain definitions and representations to allow for the maintenance and administration of certain bank accounts of the Company.

Amendment No. 5 to the Senior Credit Facility, entered into on May 14, 2004, amended and waived certain affirmative and negative covenants necessary to permit the equity-for-debt exchange as well as to allow for a reduction of $25,000 in the letter of credit facility. In consideration for the amendments and waivers obtained in this amendment, the Company was obligated to pay a fee equal to 1.25% of the lenders’ outstanding letter of credit exposure as of November 30, 2004 and a further fee equal to 0.75% of the lenders’ outstanding letter of credit exposure for each additional month thereafter through the expiration date of the Senior Credit Facility of April 30, 2005. As noted above, the Company voluntarily terminated the facility in March 2005. The Company paid fees totaling $4,375 related to the letters of credit outstanding for the period November 30, 2004 through February 2005.

New Senior Credit Agreement — In March 2005, the Senior Credit Facility was replaced with a new 5-year $250,000 Senior Credit Agreement. The new Senior Credit Agreement includes a $75,000 sub-limit for borrowings at a rate equal to LIBOR plus a spread. Standby letters of credit issued under the new Senior Credit Agreement will carry a fixed price throughout the life of the facility. The Senior Credit Agreement is collateralized by the assets and/or the stock of certain of the Company’s domestic subsidiaries and certain of its foreign subsidiaries. The Company paid up-front fees to the lender of approximately $8,225 in conjunction with the execution of the Senior Credit Agreement. Such fees, paid predominately in the first quarter of 2005, have been deferred and will be amortized to expense over the life of the agreement.

The new Senior Credit Agreement requires the Company to maintain certain ratios, including a leverage ratio, a fixed charge coverage ratio and a minimum liquidity level. Compliance with the first two covenants is measured quarterly. The leverage ratio compares total indebtedness, as defined in the new Senior Credit Agreement, to EBITDA, as defined. The leverage ratio must be less than the levels specified in the new

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

8. Long-term Debt — (Continued)

Senior Credit Agreement. The fixed charge coverage ratio compares EBITDA to total fixed charges, as defined and must be greater than the levels specified in the new Senior Credit Agreement. The Company must be in compliance with the minimum liquidity level covenant at any time. Management’s 2005 forecast indicates that the Company will be in compliance with the financial covenants contained in the new Senior Credit Agreement.

The Senior Credit Agreement also requires the Company to prepay the facility in certain circumstances from proceeds of assets sales and the issuance of debt.

2005 Senior Notes — The Company, through its subsidiary Foster Wheeler LLC, issued $200,000 of 2005 Senior Notes in the public market, bearing interest at a fixed rate of 6.75% per annum, payable semi-annually, and maturing on November 15, 2005. The 2005 Senior Notes were issued under an indenture between the Company and BNY Midwest Trust Company. The 2005 Senior Notes are not redeemable prior to maturity and are not subject to any sinking fund requirements.

As part of the equity-for-debt exchange consummated in 2004, the Company exchanged common shares, preferred shares and $141,471 principal amount of 2011 Senior Notes for $188,628 of 2005 Senior Notes. After giving effect to the exchange, $11,372 of 2005 Senior Notes remains outstanding as of December 31, 2004. Such notes mature on November 15, 2005. Also, in connection with the exchange, the holders of the 2005 Senior Notes agreed to amend the indenture governing these notes to effectively eliminate the security interest previously held by the 2005 Senior Notes. See Note 7 for further details of the equity-for-debt exchange.

2011 Senior Notes — As noted above, the Company exchanged common shares, preferred shares and $141,471 principal amount of 2011 Senior Notes for $188,628 of 2005 Senior Notes as part of the equity-for-debt exchange. In conjunction with the issuance of the 2011 Senior Notes, the Company recorded a premium of $5,659 since the fair value of the 2011 Senior Notes was 104% of principal. See Note 7 for further details of the equity-for-debt exchange.

The 2011 Senior Notes bear interest at 10.359% per annum, payable semi-annually in arrears on March 15 and September 15, commencing March 15, 2005. As a result of the premium, the effective interest rate on the 2011 Senior Notes is 9.5602%. Holders of the 2011 Senior Notes have a security interest in the stock, debt and assets of certain of Foster Wheeler Ltd.’s subsidiaries. The 2011 Senior Notes contain incurrence covenants that must be met should the Company choose to undertake certain actions including incurring debt, making certain payments and investments, granting liens, selling assets and entering into specific intercompany transactions, among others. Management monitors these covenants to ensure the Company remains in compliance with the indenture.

Concurrent with the equity-for-debt exchange, the Company completed a $120,000 private offering of Senior Notes at 10.359% due September 2011, Series B (the “Private Notes”). The proceeds of the Private Notes offering were used to repay the amounts outstanding under the term loan and revolving credit portions of the Senior Credit Facility totaling $115,869. The Company recorded a premium of $4,800 on the offering since the fair value of the Private Notes was 104% of principal. As a result of the premium, the effective interest rate on the Private Notes is 9.5602%.

Subsequently, the Company exchanged all Private Notes for registered 2011 Senior Notes. As of December 31, 2004, there were $271,643 of 2011 Senior Notes outstanding, including $10,172 of unamortized premium.

Convertible Notes — In May and June 2001, the Company issued Convertible Notes having an aggregate principal amount of $210,000. The Convertible 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.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

8. Long-term Debt — (Continued)

The Convertible Notes are subordinated in right of payment to all existing and future senior indebtedness of the Company.

As part of the equity-for-debt exchange, the Company exchanged common shares and preferred shares for $206,930 of Convertible Notes. After giving effect to the exchange offer, $3,070 of Convertible Notes remain outstanding as of December 31, 2004. The Convertible Notes are convertible into common shares at an initial conversion rate of 3.10655 common shares per $1,000 principal amount, or approximately $321.90 per common share, subject to adjustment under certain circumstances. See Note 7 for further details of the equity-for-debt exchange.

Robbins Bonds — In connection with the restructuring of debt incurred to finance construction of a waste-to-energy facility in the Village of Robbins, Illinois, Foster Wheeler entered into certain subordinated obligations. The subordinated obligations include 1999C Bonds due October 15, 2009 (the “1999C Bonds due 2009”), 1999C Bonds due October 15, 2024 (the “1999C Bonds due 2024”) and 1999D Accretion Bonds due October 15, 2009 (the “1999D Bonds”).

As part of the equity-for-debt exchange, the Company exchanged common shares and preferred shares for $93,721 of Robbins Bonds. After giving effect to the exchange, $83 of 1999C Bonds due 2009, $20,491 of 1999C Bonds due 2024 and $233 of 1999D Bonds remain outstanding as of December 31, 2004. See Note 7 for further details of the equity-for-debt exchange.

The 1999C Bonds due 2009 and the 1999C Bonds due 2024 bear interest at 7.25% and 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. The total amount of 1999D Bonds due on October 15, 2009 is $325.

Trust Securities — FW Preferred Capital Trust I (the “Capital Trust”) is a 100% indirectly owned finance subsidiary of the Company which issued a $175,000 of Trust Securities. The Capital Trust invested the proceeds from the Trust Securities in an equal principal amount of 9.0% junior subordinated deferrable interest debentures (the “Debentures”) of Foster Wheeler LLC.

Prior to December 27, 2003 the Capital Trust was consolidated in the financial statements of the Company and the Trust Securities were reported as Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures in the consolidated financial statements. The accumulated undistributed quarterly distributions were presented on the consolidated balance sheet as Deferred Accrued Mandatorily Redeemable Preferred Security Distributions of Subsidiary Trust. The Mandatorily Redeemable Preferred Security Distributions of Subsidiary Trust were included within interest expense in the consolidated statement of operations and comprehensive loss.

In 2004, the Company adopted FIN 46 for variable interest entities formed prior to February 1, 2003. In accordance with the provisions of FIN 46, the Company determined that (i) the Capital Trust is a variable interest entity and (ii) the Company is not the primary beneficiary. Accordingly, the Company de-consolidated the Capital Trust as of December 27, 2003. The Company’s consolidated financial statements now reflect Foster Wheeler LLC’s obligations to the Capital Trust as Subordinated Deferrable Interest Debentures and Deferred Accrued Interest on Subordinated Deferrable Interest Debentures. The interest expense on the Debentures is presented in the consolidated statement of operations and comprehensive loss as interest expense.

Foster Wheeler Ltd. and Foster Wheeler LLC fully and unconditionally guarantee the Trust Securities. These 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

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

8. Long-term Debt — (Continued)

at 9.0%. In accordance with this provision, the Company has deferred all quarterly distributions beginning with the distribution due on January 15, 2002. The maturity date is January 15, 2029. Foster Wheeler can redeem these Trust Securities on or after January 15, 2004. The new Senior Credit Agreement requires the approval of the lenders to make payments on the Trust Securities to the extent such payments are not contractually required by the underlying Trust Securities agreements.

As part of the equity-for-debt exchange, the Company issued common shares, preferred shares and warrants to purchase common shares in exchange for Trust Securities. In conjunction with the exchange, the Capital Trust recorded a $103,823 reduction in the Trust Securities and a $31,128 reduction in Deferred Accrued Mandatorily Redeemable Preferred Security Distributions Payable. The Capital Trust also recorded a corresponding reduction in the Debentures and accrued interest receivable. After giving effect to the exchange, $71,177 of Trust Securities remains outstanding as of December 31, 2004. See Note 7 for further details of the equity-for-debt exchange.

Special-Purpose Project Debt —Special-purpose project debt represents debt incurred to finance the construction of cogeneration facilities or waste-to-energy projects, which are majority-owned by the Company. 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.

The Martinez Cogen Limited Partnership debt of $15,260 represents a note under a bank credit facility to a limited partnership whose general partner is a special-purpose subsidiary. The interest on the note, which varies based on one of several money market rates, is due semi-annually through July 30, 2006. The note matures on July 30, 2006. The project is located in California.

The Foster Wheeler Coque Verde debt of $35,126 represents senior secured notes. The notes bear interest at 11.443%, due annually April 15, 2004 through 2015, and mature on April 15, 2015. The notes are collateralized by certain revenues and assets of a special- purpose subsidiary, which is the indirect owner of the project in Chile.

The Camden County Energy Recovery Associates debt of $68,895 represents Solid Waste Disposal and Resource Recovery System Revenue Bonds. The bonds bear interest at rates varying between 7.125% and 7.5%, due annually December 1, 2004 through 2010, and mature on December 1, 2010. The bonds are collateralized by a pledge of certain revenues and assets of the project, but not the plant. The project is located in New Jersey.

Capital Leases — During 2002, the Company entered into sale-leaseback transactions for office buildings in both Finland and the United States. The transactions qualified as capital leases. In 2004, the Company entered into a capital lease for an office building in South Africa. Assets under capital leases are summarized as follows:

      December 31,
2004
    December 26,
2003
 
   

 

 
Buildings and improvements
  $ 45,306   $ 38,522  
Less: accumulated amortization
    5,222     1,276  
   

 

 
Net assets under capital leases
  $ 40,084   $ 37,246  
   

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

8. Long-term Debt — (Continued)

The following are the minimum lease payments to be made in each of the years indicated for the capital leases in effect as of December 31, 2004:

Fiscal year:
       
2005
  $ 7,529  
2006
    7,954  
2007
    7,519  
2008
    7,678  
2009
    7,943  
Thereafter
    126,147  
Less: Interest
    (97,483 )
Net minimum lease payments under capital leases
    67,287  
   

 
Less: current portion of net minimum lease payments
    990  
   

 
Long-term net minimum lease payments
  $ 66,297  
   

 

Other — On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provided for up to $45,000 of additional revolving loans available to provide working capital. As of December 31, 2004, the facility remained undrawn. In December 2004, the U.K. subsidiaries gave notice canceling the revolving credit facility effective January 24, 2005.

Interest Costs — Interest costs incurred in 2004, 2003, and 2002 were $94,622, $95,791 and $84,396, respectively, of which $0, $307 and $1,368, respectively, were capitalized.

Aggregate Maturities — Aggregate principal repayments and sinking fund requirements of long-term debt, excluding payments on capital lease obligations and premium amortization on the 2011 Senior Notes of $10,172, over the next five years as of December 31, 2004 are as follows:

Fiscal year:
       
2005
  $ 34,224  
2006
    22,250  
2007
    16,059  
2008
    13,810  
2009
    14,841  
Thereafter
    391,430  
   

 
Total
  $ 492,614  
   

 

9. Pensions and Other Postretirement Benefits

Pension Benefits — Domestic and certain 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 cash balance program was established for the domestic plan. The pension benefit under the previous formulas remain the same for current employees if so elected, however, new employees are 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. 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.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

9. Pensions and Other Postretirement Benefits — (Continued)

The Company also has a non-qualified, unfunded supplemental executive retirement plan (“SERP”) which covers certain employees. In April 2003, the Company froze the SERP and issued letters of credit totaling $2,250 to certain employees to support its obligations under the SERP. As of December 31, 2004, the Company had $870 of such letters of credit outstanding.

On April 10, 2003, the Board of Directors approved changes to the Company’s domestic employee benefits program, including the pension, postretirement medical, and 401(k) plans. The changes were made following an independent review of the Company’s domestic employee benefits which assessed the Company’s benefit program against that of the marketplace and its competitors.

The principal changes consist of the following: the domestic pension plan was frozen as of May 31, 2003, which means participants will not be able to increase the amount earned under the terms of the plan; the postretirement medical plan was frozen and will be available on a subsidized premium basis only to currently active employees who reached the age of 40 on May 31, 2003; and the 401(k) plan was enhanced to increase the level of employer matching contribution. The net effect of these changes improves the financial condition of the Company through reduced costs and reduced cash outflow in future years.

Domestic subsidiaries of the Company have a 401(k) plan for salaried employees. For the years 2004 and 2003, the Company contributed a 100% match of the first 3% and a 50% match of the next 3% of base pay of employee contributions, subject to the annual IRS limit, which amounted to a cost of $3,317 and $4,066 in 2004 and 2003, respectively. For the year 2002, the Company 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 $5,507.

Through the year ended December 31, 2004, the Company recognized a cumulative minimum liability in its financial statements for both domestic and foreign underfunded plans in the amount of $300,590 resulting in a cumulative pretax charge to Other Comprehensive Loss. This represents a reduction in the minimum liability of $11,156 from the prior year, including the impact of foreign currency translation. 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.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

9. Pensions and Other Postretirement Benefits — (Continued)

The following charts contain the disclosures for pension benefits for the years 2004, 2003 and 2002.

    For the Year Ended December 31, 2004   For the Year Ended December 26, 2003  
   
 
 
    United
States
  United
Kingdom
  Canada   Total   United
States
  United
Kingdom
  Canada   Total  
   

 

 

 

 

 

 

 

 
Projected Benefit Obligation (PBO):
                                                 
PBO at beginning of period
  $ 311,102   $ 548,680   $ 20,437   $ 880,219   $ 321,793   $ 470,372   $ 17,362   $ 809,527  
Service cost
        17,859     254     18,113     1,565     12,835     235     14,635  
Interest cost
    17,867     30,365     1,222     49,454     19,062     26,622     1,177     46,861  
Plan participants’ contributions
        8,107         8,107         7,147         7,147  
Plan amendments
                        1,961         1,961  
Actuarial loss/(gain)
    17,451     (632 )   903     17,722     31,350     (36 )   194     31,508  
Benefits paid
    (21,847 )   (23,360 )   (1,681 )   (46,888 )   (22,166 )   (20,618 )   (1,454 )   (44,238 )
Curtailments
                    (35,719 )           (35,719 )
Special termination benefits/other
    (1,942 )   778         (1,164 )   (4,783 )   993         (3,790 )
Foreign currency exchange rate changes
        49,306     2,039     51,345         49,404     2,923     52,327  
   

 

 

 

 

 

 

 

 
PBO at end of period
  $ 322,631   $ 631,103   $ 23,174   $ 976,908   $ 311,102   $ 548,680   $ 20,437   $ 880,219  
   

 

 

 

 

 

 

 

 
Plan Assets:
                                                 
Fair value of plan assets at beginning of period
  $ 194,035   $ 396,062   $ 17,927   $ 608,024   $ 166,381   $ 294,975   $ 15,302   $ 476,658  
Actual return on plan assets
    24,712     47,272     1,395     73,379     38,467     50,151     1,561     90,179  
Employer contributions
    29,245     28,510         57,755     13,688     26,721         40,409  
Plan participants’ contributions
        8,107         8,107         7,147         7,147  
Benefits paid
    (21,847 )   (23,360 )   (1,681 )   (46,888 )   (22,166 )   (20,618 )   (1,454 )   (44,238 )
Other
    (2,647 )   867     (70 )   (1,850 )   (2,335 )   2,855     (53 )   467  
Foreign currency exchange rate changes
        37,344     1,717     39,061         34,831     2,571     37,402  
   

 

 

 

 

 

 

 

 
Fair value of plan assets at end of period
  $ 223,498   $ 494,802   $ 19,288   $ 737,588   $ 194,035   $ 396,062   $ 17,927   $ 608,024  
   

 

 

 

 

 

 

 

 
Funded status:
                                                 
Funded status
  $ (99,133 ) $ (136,301 ) $ (3,886 ) $ (239,320 ) $ (117,067 ) $ (152,618 ) $ (2,510 ) $ (272,195 )
Unrecognized net actuarial loss
    117,426     246,371     7,170     370,967     111,637     259,783     6,149     377,569  
Unrecognized prior service cost
        7,623     1,050     8,673         8,686     1,046     9,732  
Adjustment for the minimum liability
    (117,426 )   (175,486 )   (7,678 )   (300,590 )   (111,637 )   (193,635 )   (6,474 )   (311,746 )
   

 

 

 

 

 

 

 

 
Accrued benefit cost
  $ (99,133 ) $ (57,793 ) $ (3,344 ) $ (160,270 ) $ (117,067 ) $ (77,784 ) $ (1,789 ) $ (196,640 )
   

 

 

 

 

 

 

 

 
    For the Year Ended
December 31, 2004
  For the Year Ended
December 26, 2003
  For the Year Ended
December 27, 2002
 
   
 
 
 
    United
States
  United
Kingdom
  Canada   Total   United
States
  United
Kingdom
  Canada   Total   United
States
  United
Kingdom
  Canada   Total  
   

 

 

 

 

 

 

 

 

 

 

 

 
Net Periodic Benefit Cost:
                                                                         
Service cost
  $   $ 17,859   $ 254   $ 18,113   $ 1,565   $ 12,835   $ 236   $ 14,636   $ 12,154   $ 12,161   $ 213   $ 24,528  
Interest cost
    17,867     30,365     1,222     49,454     19,062     26,622     1,177     46,861     20,372     19,408     1,094     40,874  
Expected return on plan assets
    (15,603 )   (31,081 )   (1,315 )   (47,999 )   (14,356 )   (23,179 )   (1,301 )   (38,836 )   (16,943 )   (24,261 )   (1,496 )   (42,700 )
Amortization of transition asset
        (68 )   76     8             71     71             63     63  
Amortization of prior service cost
        1,686     15     1,701     182     1,446     15     1,643     458     1,339     13     1,810  
Other
    4,059     17,705     430     22,194     11,795     19,886     425     32,106     7,113     8,279     61     15,453  
   

 

 

 

 

 

 

 

 

 

 

 

 
SFAS No. 87 net periodic benefit cost
    6,323     36,466     682     43,471     18,248     37,610     623     56,481     23,154     16,926     (52 )   40,028  
SFAS No. 88 cost*
    1,390             1,390     1,108             1,108     1,908             1,908  
   

 

 

 

 

 

 

 

 

 

 

 

 
Total net periodic benefit cost
  $ 7,713   $ 36,466   $ 682   $ 44,861   $ 19,356   $ 37,610   $ 623   $ 57,589   $ 25,062   $ 16,926   $ (52 ) $ 41,936  
   

 

 

 

 

 

 

 

 

 

 

 

 
Weighted Average Assumptions-Net
                                                                         
Periodic Benefit Cost:
                                                                         
Discount rate
    6.00 %   5.45 %   6.00 %         6.00 %   5.60 %   6.25 %         7.40 %   5.75 %   7.00 %      
Long-term rate of return
    8.00 %   7.34 %   8.00 %         8.50 %   7.50 %   8.00 %         8.50 %   8.00 %   9.00 %      
Salary scale
    0.00 %   3.04 %   5.00 %         0.00 %   3.30 %   5.00 %         4.00 %   4.00 %   5.00 %      
Weighted Average Assumptions-Benefit Obligations:
                                                                         
Discount rate
    5.48 %   5.43 %   6.00 %         6.00 %   5.40 %   6.00 %         6.60 %   5.60 %   6.25 %      
Salary scale
    0.00 %   3.32 %   4.00 %         4.00 %   3.00 %   5.00 %         5.00 %   3.30 %   5.00 %      

* Charges were recorded in accordance with the provisions of SFAS No. 88, “Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” related to (i)

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

9. Pensions and Other Postretirement Benefits — (Continued)

the settlement in 2004 of obligations to former executives under the Supplemental Executive Retirement Plan of $1,390; (ii) the impact in 2003 of the freezing of the domestic pension plans, the mothballing of a domestic manufacturing facility of $900 and employee terminations as part of the workforce reduction of $100; and (iii) the retirement in 2002 of the Company’s Vice President of Human Resources of approximately $900.

Plan measurement date

The measurement date for all of the Company’s defined benefit plans is December 31 of each year for both plan assets and obligations.

Accumulated benefit obligation

The accumulated benefit obligation (“ABO”) for the Company’s plans totaled approximately $902,800 and $811,800 at year-end 2004 and 2003, respectively. As previously discussed, the Company has recorded a net cumulative charge to other comprehensive loss for the years 2000 through 2004 due to the ABO exceeding the fair value of plan assets.

Investment policy

Each of the Company’s plans is governed by a written investment policy.

The investment policy of the U.S. plans allocates assets in accordance with the policy guidelines. The asset mix target for the plans is 72.5% equities and 27.5% fixed-income securities. The investment policy is currently undergoing a review by the Company to ensure investment strategy is aligned with plan liabilities, considering the changes to the domestic benefits program made in 2004.

The investment policy of the U.K. plans are designed to improve the ongoing funding level of the plan while gradually, over time, changing the mix of investment allocation between equities and bonds to more fully match the liabilities of the plan. The bond and equity allocations range from 40% bonds and 60% equities to 50% bonds and 50% equities, depending on the funding level.

The investment policy of the Canadian plan uses a balanced approach and allocates investments in pooled funds in accordance with the policy’s asset mix guidelines. These guidelines identify target, maximum and minimum allocations by asset class. The target allocation is 45% bonds, 50% equities and 5% cash. The minimum and maximum allocations are: 42.5% to 57.5% equities; 40% to 50% bonds; and 2.5% to 7.5% cash.

Long-term rate of return assumptions

The expected long-term rate of return on plan assets is developed using a weighted-average methodology, blending the expected returns on each class of investment in the plans’ portfolio. The expected returns by asset class are developed considering both past performance and future considerations. The long-term rate of return is reviewed annually by the Company for its funded plans and adjusted, if required. The weighted-average expected long-term rate of return on plan assets has declined from 8.2% to 7.5% over the past three years.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

9. Pensions and Other Postretirement Benefits — (Continued)

    2004   2003  
   

 

 
Plan Asset Allocation:
             
U.S. Plans
             
U.S. equities
    53 %   47 %
Non-U.S. equities
    26 %   25 %
U.S. fixed-income securities
    20 %   23 %
Non-U.S. fixed-income securities
    0 %   0 %
Other
    1 %   5 %
   

 

 
Total
    100 %   100 %
   

 

 
U.K. Plans
             
U.K. equities
    60 %   38 %
Non-U.K. equities
    1 %   25 %
U.K. fixed-income securities
    36 %   32 %
Non-U.K. fixed-income securities
    0 %   0 %
Other
    3 %   5 %
   

 

 
Total
    100 %   100 %
   

 

 
Canada Plan
             
Canadian equities
    23 %   23 %
Non-Canadian equities
    29 %   26 %
Canadian fixed-income securities
    43 %   44 %
Non-Canadian fixed-income securities
    0 %   0 %
Other
    5 %   7 %
   

 

 
Total
    100 %   100 %
   

 

 
 
Contributions

The Company expects to contribute a total of approximately $20,400 to its domestic pension plans and approximately $30,700 to its foreign pension plans in 2005. The contributions to the domestic pension plans are expected to approximate $22,100 in 2006, $16,400 in 2007, $7,900 in 2008, $1,800 in 2009 and zero each year thereafter.

Estimated future benefit payments

The following benefit payments, which reflect expected future service, are expected to be paid on the defined benefit plans.

    United
States
  United
Kingdom
  Canada   Total  
   

 

 

 

 
2005
  $ 19,934   $ 24,465   $ 1,634   $ 46,033  
2006
    19,944     26,381     1,711     48,036  
2007
    19,983     26,817     1,739     48,539  
2008
    20,360     31,315     1,759     53,434  
2009
    20,600     36,038     1,760     58,398  
2010-2014
    104,858     223,671     8,382     336,911  

Other Postretirement Benefits — In addition to providing pension benefits, some of the Company’s subsidiaries provide certain health care and life insurance benefits for retired employees (“other postretirement benefits”). Employees may become eligible for these other postretirement benefits if they

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

9. Pensions and Other Postretirement Benefits — (Continued)

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. Additionally, some of the Company’s subsidiaries also have a plan, which provides coverage for an employee’s beneficiary upon the death of the employee.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) became law in the United States. The Medicare Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In May 2004, the FASB issued a FASB Staff Position (“FSP”) No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP 106-2 provides guidance on accounting for the effects of the Medicare Act for employers that sponsor postretirement healthcare plans that provide prescription drug benefits. The provisions of FSP No. 106-2 were effective for the Company’s interim period ending September 24, 2004. Based upon the proposed regulations of the Medicare Act, the Company concluded that the benefits provided by the plan were actuarially equivalent to Medicare Part D under the Medicare Act. Accordingly, the Company reflected the impact of the Medicare Act prospectively as of the start of the third quarter 2004. The impact of the Medicare Act resulted in decreases in the accumulated postretirement benefit obligation of approximately $9,100 and in the annual net periodic postretirement benefit costs for 2004 of approximately $900. On January 21, 2005, final regulations related to the Medicare Act were issued. The Company has not yet determined the effect of the final regulations on the Company’s accumulated postretirement benefit obligation and net periodic postretirement benefit costs.

The following chart contains the disclosures for other postretirement benefit plans for the years 2004, 2003 and 2002.

    For the Year Ended

 
    December 31, 2004   December 26, 2003  
   

 

 
Accumulated Postretirement Benefit Obligation (APBO):
             
APBO at beginning of period
  $ 94,906   $ 133,392  
Service cost
    323     741  
Interest cost
    5,119     9,205  
Plan participants’ contributions
    2,707      
Plan amendments
        (55,201 )
Actuarial (gain)/loss
    (6,479 )   21,277  
Benefits paid
    (10,369 )   (11,910 )
Curtailments
        (2,598 )
Other
    983      
Foreign currency exchange rate changes
    86      
   

 

 
APBO at end of period
  $ 87,276   $ 94,906  
   

 

 
Plan Assets:
             
Fair value of plan assets beginning of period
  $   $  
Employer contributions
    10,369     11,910  
Benefits paid
    (10,369 )   (11,910 )
   

 

 
Fair value of plan assets at end of period
  $   $  
   

 

 
Funded Status:
             
Funded status
  $ (87,276 ) $ (94,906 )
Unrecognized net actuarial loss
    38,743     47,614  
Unrecognized prior service cost
    (57,824 )   (62,453 )
   

 

 
Accrued benefit cost
  $ (106,357 ) $ (109,745 )
   

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

9. Pensions and Other Postretirement Benefits — (Continued)

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Net Periodic Postretirement Benefit Cost:
                   
Service cost
  $ 323   $ 741   $ 2,785  
Interest cost
    5,119     9,205     8,255  
Amortization of prior service cost
    (4,745 )   (1,485 )   (2,853 )
Other
    2,244     (3,340 )   (5,013 )
   

 

 

 
Net periodic postretirement benefit cost
  $ 2,941   $ 5,121   $ 3,174  
   

 

 

 
Weighted-Average Assumptions—
                   
  Net Periodic Postretirement Benefit Cost:
                   
Discount rate
    6.00 %   6.63 %   7.40 %
Weighted-Average Assumptions—
                   
  Accumulated Postretirement Benefit Obligation:
                   
Discount rate
    5.31 %   6.00 %   6.63 %
                     
Health-care cost trend:
  Pre-Medicare Eligible   Medicare Eligible  
   

 

 
2004
    9.50 %   11.00 %
2005
    9.00 %   10.50 %
Decline to 2016
    5.50 %   5.00 %

Assumed health-care cost trend rates have a significant effect on the amounts reported for the other postretirement benefit plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

    One-Percentage
Point Increase
  One-Percentage
Point Decrease
 
   

 

 
Effect on total of service and interest cost components
  $ 278   $ (244 )
Effect on accumulated postretirement benefit obligations
  $ 5,412   $ (4,694 )
 
Plan measurement date

The measurement date for the Company’s other postretirement benefit plans is December 31 of each year for obligations.

Contributions

The Company expects to contribute a total of approximately $7,719 to its other postretirement benefit plans in 2005.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

9. Pensions and Other Postretirement Benefits — (Continued)

Estimated future benefit payments

The following other postretirement benefit payments, which reflect expected future service, are expected to be paid.

    Other Benefits   Health Care Subsidy   Other Benefits, Net of Subsidy  
   

 

 

 
2005
  $ 7,719   $   $ 7,719  
2006
    7,933     948     6,985  
2007
    8,039     971     7,068  
2008
    8,081     994     7,087  
2009
    8,103     1,018     7,085  
2010-2014
    38,705     5,310     33,395  

Other Benefits — Certain of the Company’s foreign subsidiaries participate in government-mandated indemnity and postretirement programs for their employees. Liabilities of $32,650 and $24,326 were recorded at December 31, 2004 and December 26, 2003, respectively, related to such benefits. The Company also has a benefit plan, the Survivor Income Plan, accounted for under SFAS No. 112, “Employer’s Accounting for Postemployment Benefits,” which was designed to provide coverage for an employee’s beneficiary upon the death of the employee; this plan has been closed to new entrants since 1988. Total liabilities under this plan were $23,572 and $24,146 as of December 31, 2004 and December 26, 2003, respectively. Benefit assets reflecting primarily the cash surrender value of insurance policies purchased to cover obligations under the Survivor Income Plan totaled $6,351 and $7,240 as of December 31, 2004 and December 26, 2003, respectively.

10. Guarantees and Warranties

The Company has provided indemnifications to third parties relating to businesses and/or assets the Company previously owned. Such indemnifications relate primarily to potential environmental and tax exposures for activities conducted by the Company prior to the sale.

    Maximum
Potential Payment
  Carrying Amount of
Liability as of
December 31, 2004
  Carrying Amount of
Liability as of
December 26, 2003
 
   

 

 

 
Environmental indemnifications
    No limit   $ 5,300   $ 5,300  
Tax indemnifications
    No limit   $   $  

The Company provides for project execution and warranty reserves on certain of its long-term contracts. Generally, these reserves are accrued over the life of the contract so that a sufficient balance is maintained to cover the exposures at the conclusion of the contract.

    For the Year Ended

 
    December 31, 2004   December 26, 2003   December 27, 2002  
   

 

 

 
Balance at beginning of year
  $ 131,600   $ 81,900   $ 52,700  
Accruals
    25,800     72,800     45,600  
Settlements
    (32,800 )   (13,800 )   (8,600 )
Adjustments to provisions
    (30,100 )   (9,300 )   (7,800 )
   

 

 

 
Balance at end of year
  $ 94,500   $ 131,600   $ 81,900  
   

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

11. 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.

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 “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies) (see Notes 2 and 19).

Carrying Amounts and Fair Values — The estimated fair values of the Company’s financial instruments are as follows:

    December 31, 2004

  December 26, 2003

 
    Carrying Amount   Fair Value   Carrying Amount   Fair Value  
   

 

 

 

 
Nonderivatives:
                         
Cash and short-term investments
  $ 317,342   $ 317,342   $ 377,485   $ 377,485  
Restricted cash
    72,844     72,844     52,685     52,685  
Long-term debt
    (570,073 )   (573,319 )   (1,033,072 )   (591,201 )
                           
Derivatives:
                         
Foreign currency contracts
    419     419     3,315     3,315  

In the ordinary course of business, the Company is contingently liable for performance under standby letters of credit, bank guarantees and surety bonds totaling $559,900 and $609,000 as of December 31, 2004 and December 26, 2003, respectively. These balances include the standby letters of credit issued under the Senior Credit Facility discussed in Note 8. 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 31, 2004, the Company had $46,275 of foreign currency contracts outstanding. These foreign currency contracts mature in 2005. The contracts have been established by various international subsidiaries to sell a variety of currencies, and 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 31, 2004 and December 26, 2003, the Company had no significant concentrations of credit risk. The Company had issued a third-party financial guarantee totaling $2,750 at December 31, 2004 and December 26, 2003 with respect to a partnership interest in a commercial real estate project.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

12. Capital Share Alterations

In connection with the equity-for-debt exchange, the Company and certain holders of the Company’s debt securities and trust securities entered into a lockup agreement dated July 30, 2004. Pursuant to the lockup agreement, the holders agreed to tender their securities in the exchange and the Company agreed to submit certain capital share alteration matters to shareholders for approval. Accordingly, on November 29, 2004, shareholders approved the following capital share alterations:

 
Reduction to the Par Value of Authorized Common and Preferred Share Capital — shareholders approved a reduction to the par value of the authorized common share and preferred share capital from $1.00 to $0.01 per share. As a result of the par value reduction, the Company’s financial statements were adjusted to move the paid up amount of $0.99 in respect of each issued common share and each issued preferred share from share capital to paid-in capital.
     
 
Increase in the Number of Authorized Common Shares — shareholders approved an increase in the number of authorized common shares from 160,000,000 to 1,475,908,957. The increase in the number of authorized common shares enabled the Company to issue all of the common shares issuable upon conversion of the preferred shares, and permits the Company to issue common shares rather than preferred shares upon the exercise of the warrants issued in the equity-for-debt exchange offer.
     
 
Consolidation of the Authorized Common Share Capital — the shareholders approved a consolidation of the authorized common share capital at a ratio of one-for-twenty (“reverse stock split”), followed by a reduction in the par value of the common shares from $0.20 to $0.01 per share. As a result of the reverse stock split, each shareholder of common shares holds one common share for every 20 common shares held before the reverse stock split. The conversion ratio for the preferred shares, and the terms of the Company’s issued options and warrants to purchase common shares were adjusted accordingly. As a result of the par value reduction, the Company’s financial statements were adjusted to move the paid up amount of $0.19 in respect of each issued common share from share capital to paid-in capital.

As a result of the aforementioned capital share alterations, all references to share capital, the number of shares, per share amounts, cash dividends, and any other reference to shares in the consolidated financial statements, unless otherwise noted, have been adjusted to reflect such capital share alterations on a retroactive basis.

The following table displays the effects of these proposals on the Company’s capital shares and does not reflect subsequent conversions of preferred shares to common shares:

    Before
Capital
Alterations
  After
Capital
Alterations
 
   

 

 
Par value per preferred share
  $ 1.00   $ 0.01  
   

 

 
Par value per common share
  $ 1.00   $ 0.01  
   

 

 
Preferred shares
  $ 599   $ 6  
Common shares
    129,060     64  
Paid-in capital
    753,913     883,502  
   

 

 
Total
  $ 883,572   $ 883,572  
   

 

 
Preferred shares authorized
    1,500,000     1,500,000  
Common shares authorized
    160,000,000     73,795,448  
Preferred shares issued
    599,944     599,944  
Common shares issued
    129,059,955     6,452,998  

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

13. Preferred Shares

The Company issued approximately 599,944 preferred shares in connection with the equity-for-debt exchange, which was consummated in 2004. Each preferred share is optionally convertible into 65 common shares. As of December 31, 2004, 75,484 preferred shares remained outstanding.

The preferred shareholders have no voting rights except in certain limited circumstances. The preferred shares have the right to receive dividends and other distributions, including liquidating distributions, on an as-converted basis if declared by the Company and paid on the common shares. The preferred shares have a $0.01 liquidation preference.

14. Restricted Stock Plan

On October 6, 2004, management was issued 1,883,745 restricted common share awards in accordance with the Company’s Management Restricted Stock Plan, of which 1,351,846 were in the form of restricted shares and 531,899 were in the form of restricted share units. The restricted shares have immediate voting rights and the restricted share units will give the holders voting rights upon vesting. The restricted awards provide that issued shares may not be sold or otherwise transferred until restrictions lapse. One third of the restricted awards vest in the fourth quarter of 2005 and the balance vest during the fourth quarter of 2006. The grant date fair value of restricted common share awards issued to management was $9.20 per share.

On November 29, 2004, the Company’s shareholders approved the grant of 18,065 restricted share units to non-employee directors. The restricted share units awarded to non-employee directors will vest on December 31, 2005. The grant date fair value of restricted common share awards issued to non-employee directors was $15.40 per share.

Upon issuance of the restricted common share awards, unearned compensation equivalent to the market value of the common shares on the date of grant was recorded as a part of shareholders’ deficit, with a corresponding offset to common shares and paid-in capital. Unearned compensation will be amortized to compensation expense over the appropriate vesting period of each grant. The total unearned compensation recorded upon issuance of the restricted awards was $17,609 and the related compensation expense recorded in 2004 was $1,712.

15. Stock Option Programs

On September 10, 2004, the Board of Directors adopted the 2004 Stock Option Plan (the “2004 Plan”) which reserves 56,421 preferred shares for issuance. The options granted under the 2004 Plan expire up to a maximum of ten years from the date granted. On October 6, 2004, management was issued options under the 2004 Plan to purchase 43,103 preferred shares at an exercise price of $9.378 per common share issuable. Such options expire on October 5, 2007. One third of the options issued to management vest in the fourth quarter of 2005, and the balance vest during the fourth quarter of 2006. The issuance of the options to management did not result in an unearned compensation charge since the exercise price of the options was greater than the market price of the underlying shares on the date of grant.

On November 29, 2004, the Company’s shareholders approved the grant of options under the 2004 Plan to purchase 413 preferred shares to the Company’s non-employee directors at an exercise price of $9.378 per common share issuable. Such options expire on October 5, 2007. The non-employee director options vest on December 31, 2005. Upon shareholder approval of the option grant to the non-employee directors, unearned compensation of $162 was recorded since the exercise price of the options ($9.378 per share) was less than the market price of the underlying shares ($15.40 per share). The unearned compensation charge, which is equivalent to the difference between the market value of the underlying shares and the exercise price of the options, was recorded as a part of shareholders’ deficit, with a corresponding increase to paid-in capital.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

15. Stock Option Programs — (Continued)

Unearned compensation will be amortized to compensation expense over the appropriate vesting period of each grant. The related compensation expense recorded in 2004 was $12.

On November 29, 2004, each option under the 2004 Plan to purchase preferred shares granted to management and the non-employee directors mandatorily converted to an option to purchase 65 common shares at an exercise price of $9.378 per common share issuable.

Under the 1995 Stock Option Plan approved by the shareholders in April 1995 and amended in April 1999 and May 2002, the total number of shares of common stock that may be granted is 265,000. 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 20,000 shares of common stock to non-employee directors of the Company, who will automatically receive an option to acquire 150 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. 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 65,000 inducement options in 2001 to its chief executive officer in connection with an employment agreement and a further 50,000 options in 2002 based upon an amendment to his employment agreement. The 2001 options vest 20% each year over the term of the agreement, while the 2002 options vest one-forty-eighth (1/48) on the date of grant and 1/48 on the first day of each successive month thereafter. The Company granted 12,750 inducement options to its president and chief executive officer of Foster Wheeler North America Corp. (formerly known as “Foster Wheeler Power Group, Inc.”) in connection with his employment agreement in 2002 and granted a further 5,000 inducement options to him in 2003. The 2002 options vest ratably over five years, while the 2003 options vest ratably over four years. The price of the options granted pursuant to these agreements was fair market value on the date of the grant. The options granted under these agreements expire ten years from the date granted.

Information regarding these option plans for the years 2004, 2003, and 2002 is as follows (presented in actual number of shares):

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

15. Stock Option Programs — (Continued)

    For the Year Ended  
   
 
    December 31, 2004   December 26, 2003   December 27, 2002  
   
 
 
 
    Shares   Weighted-
Average
Exercise
Price
  Shares   Weighted-
Average
Exercise
Price
  Shares   Weighted-
Average
Exercise
Price
 
   

 

 

 

 

 

 
Options outstanding, beginning of year
    405,733   $ 203.40     422,255   $ 203.40     247,881   $ 335.00  
Options exercised
                         
Options granted
    2,828,570     9.38     6,907     27.00     181,368     32.80  
Options cancelled or expired
    (13,177 )   283.51     (23,429 )   151.80     (6,994 )   445.20  
   
       
       
       
Options outstanding, end of year
    3,221,126   $ 31.86     405,733   $ 203.40     422,255   $ 203.40  
   
       
       
       
Option price range at end of year
  $ 9.38     to   $ 23.40     to   $ 29.20     to  
    $ 913.75         $ 913.75         $ 913.75        
Options available for grant at end of year
    876,373           29,742           27,703        
   
       
       
       
Weighted-average fair value of options granted during the year where exercise price was equal to stock price on grant-date
  $ 3.30         $ 18.80         $ 22.20        
   
       
       
       
Weighted-average fair value of options granted during the year where exercise price was less than stock price on grant-date
  $ 8.28         $         $        
   
       
       
       
Options exercisable at end of year
    295,740           240,745           177,788        
   
       
       
       
Weighted-average price of exercisable options at end of year
  $ 237.34         $ 304.40         $ 407.00        
   
       
       
       

The following table summarizes information about fixed-price stock options outstanding as of December 31, 2004:

    Options Outstanding

  Options Exercisable

 
Range of
Exercise Prices
  Number
Outstanding
at 12/31/04
  Weighted-
Average
Remaining
Contractual Life
  Weighted-
Average
Exercise Price
  Number
Exercisable
at 12/31/04
  Weighted-
Average
Exercise Price
 

 
 
 
 
 
 
                                 
$    9.38 to $    9.38
    2,828,570     9.77 years   $ 9.38       $  
    23.40 to     33.00
    166,806     7.79 years     32.08     102,290     32.27  
    43.40 to     43.40
    1,050     8.32 years     43.40     1,050     43.40  
    99.70 to   127.50
    98,337     6.49 years     105.24     72,337     107.23  
  163.13 to   232.00
    25,600     5.25 years     188.39     19,300     184.60  
  270.00 to   301.25
    30,950     4.14 years     282.92     30,950     282.92  
  550.00 to   745.00
    57,134     1.75 years     629.45     57,134     629.45  
  843.75 to   913.75
    12,679     1.06 years     852.34     12,679     852.34  
   

 

 

 

 

 
$    9.38 to $913.75
    3,221,126     9.30 years   $ 31.86     295,740   $ 237.34  
   

 

 

 

 

 

16. Stock Purchase Warrants

In connection with the exchange offer consummated in 2004, the Company issued 4,152,914 Class A common stock purchase warrants (“Class A”) and 40,771,560 Class B common stock purchase warrants (“Class B”). Each Class A warrant entitles its owner to purchase 1.6841 common shares at an exercise price

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

16. Stock Purchase Warrants — (Continued)

of $9.378 per common share issuable thereunder. The Class A warrants are exercisable only after September 24, 2005 and on or before September 24, 2009. The number of common shares issuable upon the exercise of Class A warrants is approximately 6,994,059.

Each Class B warrant entitles its owner to purchase 0.0723 common shares at an exercise price of $9.378 per common share issuable thereunder. The Class B warrants are exercisable only after September 24, 2005 and on or before September 24, 2007. The number of common shares issuable upon the exercise of Class B warrants is approximately 2,947,233.

The holders of the Class A and Class B warrants are not entitled to vote, to receive dividends or to exercise any of the rights of common shareholders for any purpose until such warrants have been duly exercised. The Company plans to file and maintain, at all times during which the warrants are exercisable, a “shelf” registration statement relating to the issuance of common shares underlying the warrants for the benefit of the warrant holders. The expiration date of the warrants will be extended for a period equal to the aggregate time during which a registration statement is not available to the holders of the warrants once they become exercisable.

17. Preferred Share Purchase Rights

In 1987, the Company adopted a Rights Agreement which granted holders of Preferred Share Purchase Rights (“Rights”) the ability to purchase one one-hundredth of a share of a new series of preferred stock of the Company at an exercise price of $175 in certain limited circumstances. The Rights were due to expire on May 20, 2011. On September 23, 2004, the Board of Directors passed a resolution which authorized Foster Wheeler Ltd. to enter into Amendment No. 1 to the Rights Agreement and amend Section 7 of the Rights Agreement to change the expiration date from May 20, 2011 to September 23, 2004. Amendment No. 1 to the Rights Agreement was executed on September 23, 2004, and the Rights Agreement was terminated on September 23, 2004.

18. Income Taxes

The components of loss before income taxes for the years 2004, 2003 and 2002 were taxed under the following jurisdictions:

    2004   2003   2002  
   

 

 

 
Domestic
  $ (269,755 ) $ (155,538 ) $ (506,639 )
Foreign
    37,583     45,901     (3,923 )
   

 

 

 
Total
  $ (232,172 ) $ (109,637 ) $ (510,562 )
   

 

 

 

The provision for income taxes on those earnings was as follows:

    2004   2003   2002  
   

 

 

 
Current tax expense:
                   
Domestic
  $ (7,597 ) $ (14,939 ) $ (5,931)  
Foreign
    (47,616 )   (31,887 )   (10,978 )
   

 

 

 
Total current
    (55,213 )   (46,826 )   (16,909 )
   

 

 

 
Deferred tax benefit/(expense):
                   
Domestic
    (569 )   84      
Foreign
    2,660     (684 )   2,252  
   

 

 

 
Total deferred
    2,091     (600 )   2,252  
   

 

 

 
Total provision for income taxes
  $ (53,122 ) $ (47,426 ) $ (14,657 )
   

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

18. Income Taxes — (Continued)

Deferred tax assets (liabilities) consist of the following:

    2004   2003  
   

 

 
Difference between book and tax depreciation
  $ (2,717 ) $ (12,181 )
Pensions
    41,771     46,173  
Capital lease transactions
        263  
Revenue recognition
    11,716     14,191  
   

 

 
Gross deferred tax assets (liabilities)
    50,770     48,446  
   

 

 
Current taxability of estimated costs to complete long-term contracts
    20,658     19,039  
Income currently taxable deferred for financial reporting
    17,416     1,706  
Expenses not currently deductible for tax purposes
    33,348     200,084  
Investment tax credit carry forwards
        20,538  
Postretirement benefits other than pensions
    36,269     62,369  
Asbestos claims
    33,077     40,328  
Minimum tax credits
    6,399     17,917  
Foreign tax credits
    19,440     28,178  
Net operating loss carryforwards
    64,283     117,001  
Effect of write-downs and restructuring reserves
    7,685     11,234  
Other
    9,890     40,956  
Valuation allowance
    (234,432 )   (534,790 )
   

 

 
      14,033     24,560  
   

 

 
Net deferred tax assets
  $ 64,803   $ 73,006  
   

 

 

Foreign tax credit carryforwards are recognized based on their potential utilization and, if not used, will expire in the years 2011 and 2012. 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. Certain components of the deferred tax assets for 2003 shown above have changed from the amounts originally reported in 2003. In all cases, any such adjustment was offset by a corresponding adjustment to the valuation allowance for 2003 such that the reported net deferred tax assets (liabilities) for 2003 did not change. The reduction in the valuation allowance of $300,358 was primarily due to the consummation of the equity-for-debt exchange offer as discussed below. A valuation allowance is required under SFAS No. 109, “Accounting for Income Taxes,” when there is evidence of losses from operations in the three most recent fiscal years. For statutory purposes, the majority of deferred tax assets for which a valuation allowance is provided do not begin expiring until 2024 and beyond, based on the current tax laws.

As a result of the recently consummated equity-for-debt exchange offer discussed in Note 7, the Company will be subject to substantial limitations on the use of pre-exchange period losses and credits to offset U.S. federal taxable income in any post-exchange period. Since a valuation allowance had already been reflected to offset these losses and credits, this limitation did not result in a material write-off by the Company.

As part of the overall reorganization that took place in May 2001, the Company transferred in December 2000, certain intangible rights to one of its subsidiaries. The gain on the transfer was reported as an intercompany deferred gain and is therefore eliminated in consolidation; for GAAP purposes, however, the

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

18. Income Taxes — (Continued)

transfer was subject to tax in the U.S. As required under SFAS No. 109, the U.S. tax charge on the gain was reported in the consolidated financial statements as a deferred charge which is being amortized to tax expense over 35 years.

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:

    2004   2003   2002  
   

 

 

 
Tax benefit at U.S. statutory rate
    (35.0 )%   (35.0 )%   (35.0 )%
State income taxes, net of Federal income tax benefit
    1.7     6.8     0.4  
Adjustment to deferred tax assets — equity-for-debt exchange
    154.5          
Valuation allowance
    (140.9 )   52.9     34.4  
Difference in estimated income taxes on foreign income and losses, net of previously provided amounts
    13.7     15.1     2.0  
Deferred charge
    0.8     1.7     0.4  
Nondeductible loss
    26.7          
Other
    1.4     1.8     0.7  
   

 

 

 
      22.9 %   43.3 %   2.9 %
   

 

 

 

19. Derivative Financial Instruments

The Company operates on a worldwide basis. The Company’s activities expose it to risks related to the effect of changes in foreign-currency exchange rates. The Company maintains a foreign-currency risk-management strategy that uses derivative instruments to protect it from unanticipated fluctuations in cash flows that may arise from volatility in currency exchange rates. The Company utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” At December 31, 2004, December 26, 2003 and December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded pretax losses in 2004 and 2003 of $2,900 and $5,160, respectively, and recorded a pretax gain of $8,470 in 2002. These amounts were recorded as reductions in cost of operating revenues on the consolidated statement of operations and comprehensive loss. Amounts receivable (gains) or payable (losses) under foreign exchange contracts 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 is exposed to credit loss in the event of non-performance by the counterparties. All of these counterparties are significant financial institutions that are primarily rated “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies). As of December 31, 2004, approximately $31,700 was owed to the Company by counterparties and $14,600 was owed by the Company to counterparties. A $3,834 net of tax gain was recorded in other comprehensive loss as of December 28, 2001. This amount was reclassified to earnings in 2002 as the Company no longer qualified for deferral under SFAS No. 133.

The maximum term over which the Company is hedging exposure to the variability of cash flows is 12 months.

20. Business Segments — Data

The Company operates through two business groups which also constitute separate reportable segments: the Engineering and Construction Group (the “E&C Group”) and the Global Power Group. The E&C Group designs, engineers, and constructs upstream oil and gas processing facilities, oil refining, chemical and

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

20. Business Segments — Data — (Continued)

petrochemical, pharmaceutical, natural gas liquefaction (LNG) facilities and receiving terminals, and related infrastructure, including power generation and distribution facilities. The E&C Group provides engineering, project management and construction management services, and purchases equipment, materials and services from third-party suppliers and subcontractors. The E&C Group owns industry leading technology in delayed coking, solvent de-asphalting, and hydrogen production processes used in oil refineries and has access to numerous technologies owned by others. The E&C Group also provides international environmental remediation services, together with related technical, engineering, design and regulatory services. The E&C Group generates revenues from engineering and construction activities pursuant to long-term contracts spanning up to four years in duration.

The Global Power Group designs, manufactures, and erects steam generating and auxiliary equipment for electric power generating stations and industrial markets worldwide. Steam generating equipment includes a full range of fluidized bed and conventional boilers firing coal, oil, gas, biomass and municipal solid waste, waste wood, and low-Btu gases. Auxiliary equipment includes feedwater heaters, steam condensers, heat-recovery equipment, selective non-catalytic recovery units, selective catalytic recovery units and low-NOx burners. The Company provides a broad range of site services relating to these products, including full plant construction, maintenance engineering, plant upgrading and life extension, and plant repowering. The Global Power 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 Global Power Group builds, owns and operates cogeneration, independent power production and waste-to-energy facilities, as well as facilities for the process and petrochemical industries. The Global Power Group generates revenues from long-term engineering activities, supply of equipment and construction contracts, and from operating activities pursuant to the long-term sale of project outputs (i.e., electricity, steam, etc.), operating and maintenance agreements, and from returns on its equity investments in certain production facilities.

The Company has restated its business segment data to reflect the transfer of one of its operating subsidiaries in Canada from the E&C Group to the Global Power Group. The subsidiary’s operations have been consolidated into another subsidiary whose operations have been historically reported as part of the Global Power Group.

The Company conducts its business on a global basis. The E&C Group accounted for the largest portion of the Company’s operating revenues over the last ten years. In 2004, the E&C Group and the Global Power Group accounted for approximately 62% and 38%, respectively, of the operating revenues. The geographic dispersion of these operating revenues for the year ended December 31, 2004 was as follows:

    E&C Group   Global Power Group       Total  
   
 
     
 
    Operating
Revenues
  Percentage of
Operating
Revenues
  Operating
Revenues
  Percentage of
Operating
Revenues
  Corporate and
Financial
Services
and
Eliminations
  Operating
Revenues
  Percentage of
Operating
Revenues
 
   

 

 

 

 

 

 

 
North America
  $ 79,200     4.8 % $ 291,809     29.0 % $ 2,900   $ 373,909     14.0 %
South America
    52,966     3.2 %   123,974     12.3 %   (598 )   176,342     6.6 %
Europe
    976,413     58.8 %   458,755     45.7 %   (4,962 )   1,430,206     53.7 %
Asia
    252,696     15.2 %   82,728     8.2 %   (1,261 )   334,163     12.6 %
Middle East
    131,909     7.9 %   37,770     3.8 %   (585 )   169,094     6.4 %
Other
    168,408     10.1 %   9,816     1.0 %   (614 )   177,610     6.7 %
   

 

 

 

 

 

 

 
Total
  $ 1,661,592     100.0 % $ 1,004,852     100.0 % $ (5,120 ) $ 2,661,324     100.0 %
   

 

 

 

 

 

 

 

Management uses several financial metrics to measure the performance of the Company’s business segments. EBITDA is the primary earnings measure used by the Company’s chief decision makers.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

20. Business Segments — Data — (Continued)

Export revenues account for 4% of operating revenues. No single customer represented 10% or more of operating revenues for 2004, 2003, or 2002.

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.

    Total   Engineering
and
Construction
  Global
Power
Group
  Corporate
and
Financial
Services (1)
 
   

 

 

 

 
For the Year Ended December 31, 2004
                         
Third party revenues
  $ 2,661,324   $ 1,658,151   $ 1,002,561   $ 612  
Intercompany revenues
        3,441     2,291     (5,732 )
   

 

 

 

 
Operating revenues
  $ 2,661,324   $ 1,661,592   $ 1,004,852   $ (5,120 )
   

 

 

 

 
EBITDA (2)
  $ (104,795 ) $ 135,709   $ 80,653   $ (321,157 )
         

 

 

 
                           
Less: Interest expense
    (94,622 )                  
Less: Depreciation and amortization
    (32,755 )                  
   
                   
Loss before income taxes
    (232,172 )                  
Tax provision
    (53,122 )                  
   
                   
Net loss
  $ (285,294 )                  
   
                   
Total assets
  $ 2,187,539   $ 1,005,836   $ 1,172,838   $ 8,865  
Capital expenditures
  $ 9,613   $ 5,724   $ 3,847   $ 42  
                           
                           
For the Year Ended December 26, 2003
                         
Third party revenues
  $ 3,723,815   $ 2,271,260   $ 1,452,909   $ (354 )
Intercompany revenues
        857     (574 )   (283 )
   

 

 

 

 
Operating revenues
  $ 3,723,815   $ 2,272,117   $ 1,452,335   $ (637 )
   

 

 

 

 
EBITDA (3)
    21,421   $ 68,699   $ 137,758   $ (185,036 )
         

 

 

 
                           
Less: Interest expense
    (95,484 )                  
Less: Depreciation and amortization
    (35,574 )                  
   
                   
Loss before income taxes
    (109,637 )                  
Tax provision
    (47,426 )                  
   
                   
Net loss
  $ (157,063 )                  
   
                   
Total assets
  $ 2,506,530   $ 1,022,342   $ 1,227,105   $ 257,083  
Capital expenditures
  $ 12,870   $ 5,677   $ 6,593   $ 600  
                           
For the Year Ended December 27, 2002
                         
Third party revenues
  $ 3,519,177   $ 1,974,235   $ 1,545,692   $ (750 )
Intercompany revenues
        1,248     27,705     (28,953 )
   

 

 

 

 
Operating revenues
  $ 3,519,177   $ 1,975,483   $ 1,573,397   $ (29,703 )
   

 

 

 

 
EBITDA (4)(5)
  $ (219,209 ) $ (35,598 ) $ (29,807 ) $ (153,804 )
         

 

 

 
Less: Interest expense
    (83,028 )                  
Less: Depreciation and amortization
    (57,825 )                  
   
                   
Loss before income taxes and cumulative effect of a change in accounting principle for goodwill
    (360,062 )                  
Tax provision
    (14,657 )                  
   
                   
Net loss prior to cumulative effect of a change in accounting principle for goodwill
    (374,719 )                  
Cumulative effect on prior years of a change in accounting principle for goodwill
    (150,500 )                  
   
                   
Net loss
  $ (525,219 )                  
   
                   
Capital expenditures
  $ 53,395   $ 9,874   $ 9,350   $ 34,171  

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

20. Business Segments — Data — (Continued)


 
(1)
Includes general corporate income and expense, the Company’s captive insurance operation and eliminations.
(2)
Includes in 2004: a gain of $19,200 in E&C on the sales of minority equity interests in special-purpose companies established to develop power plant projects in Europe; a loss of $(3,300) in E&C on the sale of 10% of the Company’s equity interest in a waste-to-energy project in Italy; the reevaluation of contract costs estimates of $58,000: $98,700 in E&C and $(40,700) in Global Power; a charge of $(75,800) in C&F on the revaluation of asbestos insurance assets as a result of an adverse court decision in asbestos coverage allocation litigation; a net gain of $15,200 in C&F on the settlement of coverage litigation with certain asbestos insurance carriers; restructuring and credit agreement costs of $(17,200) in C&F; a net charge of $(175,100) in C&F recorded in conjunction with the equity-for-debt exchange; and charges for severance cost of $(5,700): $(2,900) in E&C, $(1,900) in Global Power and $(900) in C&F.
(3)
Includes in 2003: an impairment loss of $(15,100) in C&F on the anticipated sale of domestic corporate office building; a gain of $16,700 in E&C on the sale of Foster Wheeler Environmental Corporation; a gain of $4,300 in Global Power on sale of waste-to-energy plant; the reevaluation of project claim estimates and contract cost estimates of $(30,800): $(33,900) in E&C and $3,100 in Global Power; a provision for asbestos claims of $(68,100) in C&F; restructuring and credit agreement costs of $(42,600) in C&F and $(1,000) in E&C; and charges for severance cost of $(15,900): $(6,600) in E&C, $(6,700) in Global Power and $(2,600) in C&F.
(4)
Includes in 2002: a loss recognized in anticipation of sales of assets of $(54,500) in Global Power; reevaluation of project claim estimates and contract cost estimates of $(216,700): $(121,650) in E&C, $(86,450) in Global Power and $(8,600) in C&F; a provision of $(26,200) in C&F for asbestos claims; a provision of $(18,700) in Global Power for a domestic plant impairment; restructuring and credit agreement costs of $(37,100) in C&F; and charges for severance cost of $(7,700): $(500) in E&C, $(4,300) in Global Power and $(2,900) in C&F.
(5)
Excludes the cumulative effect in 2002 of change in accounting principle related to goodwill of $(48,700) in E&C and $(101,800) in Global Power.
    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Equity earnings in unconsolidated subsidiaries were as follows:
                   
Engineering and Construction Group
  $ 16,885   $ 12,911   $ 9,443  
Global Power Group
    9,041     7,950     6,414  
Corporate and Financial Services
    (316 )   (407 )    
   

 

 

 
Total
  $ 25,610   $ 20,454   $ 15,857  
   

 

 

 
                     
    As of  
   
 
    December 31,
2004
  December 26,
2003
 
   

 

 
Investments and advances in unconsolidated subsidiaries were as follows:
             
Engineering and Construction Group
  $ 93,318   $ 73,656  
Global Power Group
    61,410     65,274  
Corporate and Financial Services
    3,596     3,629  
   

 

 
Total
  $ 158,324   $ 142,559  
   

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

20. Business Segments — Data — (Continued)

    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Geographic concentration of operating revenues:
                   
United States
  $ 525,614   $ 976,818   $ 1,522,135  
Europe
    1,900,889     2,491,680     1,638,938  
Canada
    35,895     67,459     135,399  
Asia
    165,416     173,946     206,113  
South America
    38,630     14,549     46,295  
Corporate and Financial Services, including eliminations
    (5,120 )   (637 )   (29,703 )
   

 

 

 
Total
  $ 2,661,324   $ 3,723,815   $ 3,519,177  
   

 

 

 
                     
    As of  
   
 
    December 31,
2004
  December 26,
2003
 
   

 

 
Long-lived assets:
             
United States
  $ 245,985   $ 258,261  
Europe
    188,810     213,961  
Canada
    887     1,255  
Asia
    23,012     23,058  
South America
    60,582     62,023  
Corporate and Financial Services, including eliminations
    40,855     16,305  
   

 

 
Total
  $ 560,131   $ 574,863  
   

 

 

Revenues and long-lived assets are based on the country in which the contracting subsidiary is located.

Operating revenues by industry segment were as follows:

    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Power
  $ 1,164,672   $ 1,731,339   $ 1,647,135  
Oil and gas/refinery
    990,209     1,254,052     922,267  
Pharmaceutical
    335,363     300,507     404,825  
Chemical
    171,091     204,738     156,606  
Environmental*
    78,891     124,724     353,981  
Power production
    112,526     167,594     130,843  
Eliminations and other
    (191,428 )   (59,139 )   (96,480 )
   

 

 

 
Total Operating Revenues
  $ 2,661,324   $ 3,723,815   $ 3,519,177  
   

 

 

 
                     

 
*
The decline in operating revenues in the environmental industry segment resulted from the sale of certain assets of Environmental on March 7, 2003. The operating revenues in this segment from Environmental for 2004, 2003 and 2002 were $22,800, $68,100 and $303,700, respectively.

21. Sale of Certain Business Assets

In 2002, the Company recorded losses of $35,500 in anticipation of a sale of its Hudson Falls waste-to-energy facility. This facility was sold in October 2003. A loss of $19,000 was also recorded in 2002 on the

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

21. Sale of Certain Business Assets — (Continued)

Charleston waste-to-energy facility. This facility was sold in October 2002. These losses were recorded in other deductions on the consolidated statement of operations and comprehensive loss.

During the third quarter of 2002, management of the Global Power Group approved a plan to convert the use of its domestic manufacturing facility to focus on the after-market service business and wind down the facility’s fabrication of new power generation equipment due to cost competitive considerations. The plan was subject to discussions with the local labor unions. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the facility was tested for impairment using estimated future cash flows based on the revised use of the facility. The review indicated impairment in the facility’s carrying value of $13,400. The Company recorded the impairment loss in the third quarter of 2002 and the impairment is reflected in the cost of operating revenues as depreciation in the accompanying consolidated statement of operations and comprehensive loss. During the fourth quarter of 2002, the Company decided to mothball the facility. Additional charges of $5,300 were recorded in December 2002 and the facility has ceased operations.

On March 7, 2003, the Company sold certain assets of its wholly owned subsidiary, Foster Wheeler Environmental Corporation, for sales proceeds then approximating $72,000. The Company recognized a gain of $15,300 on the sale, which was recorded in other income in the first quarter of 2003. The Company also retained approximately $8,000 of cash on hand at the time of the asset sale. The sales proceeds were subject to adjustment based on a net worth calculation to be finalized subsequent to the sale. During the third quarter 2003, the Company and the buyer agreed on a final net worth calculation that resulted in the Company returning $4,500 of the sales proceeds to the buyer over a six-month time period. A total of $3,000 was returned by year-end 2003 and $1,500 was paid in February 2004. The net worth agreement had no impact on the pretax gain previously disclosed. With the payment in February, all transactions related to the sale have been concluded.

On March 31, 2003, the Company sold its interest in a corporate office building for net proceeds of approximately $7,900, which approximated the value of the Company’s investment. With the completion of this transaction, $1,445 of the net proceeds was used to prepay principal outstanding under the Senior Credit Facility in accordance with the terms of the facility as described in Note 8.

In 2004, the Company sold a domestic corporate office building for net cash proceeds of approximately $16,400, which approximated carrying value. Of this amount, 50% was prepaid to the Senior Credit Facility’s lenders in the second quarter of 2004. The Company previously recorded an impairment loss of $15,100 on this building in 2003 in anticipation of a sale, in accordance with SFAS No. 144. The loss was recorded in other deductions on the consolidated statement of operations and comprehensive loss. The carrying value of the building was included in land, buildings and equipment on the consolidated balance sheet as of December 26, 2003.

In 2004, the Company sold minority equity interests in special-purpose companies established to develop power plant projects in Europe. The Company recorded an aggregate gain on the sales of $19,200 in 2004, which was recorded in other income on the consolidated statement of operations and comprehensive loss.

In 2004, the Company also entered into a binding agreement to sell 10% of its equity interest in a waste-to-energy project in Italy. The Company recorded a loss on the sale of $3,300 in 2004, which was recorded in other income on the consolidated statement of operations and comprehensive loss.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

22. Operating Leases

The Company and certain of its subsidiaries are obligated under operating lease agreements primarily for office space. Rental expense for these leases total approximately $34,048 in 2004, $34,117 in 2003 and $37,465 in 2002. Future minimum rental commitments on non-cancelable leases are as follows:

Fiscal year:
       
2005
  $ 33,132  
2006
    27,540  
2007
    23,439  
2008
    21,147  
2009
    20,622  
Thereafter
    240,698  
   

 
    $ 366,578  
   

 

The Company entered into sale/leaseback transactions for an office building in Spain in 2000 and an office building in the U.K. in 1999. In connection with these transactions, the Company recorded deferred gains, which are being amortized to income over the term of the respective leases. The amortization was $4,135, $3,622 and $3,197, for the years ended December 31, 2004, December 26, 2003 and December 27, 2002, respectively. As of December 31, 2004 and December 26, 2003, the balance of the deferred gains was $76,383 and $74,151, respectively, and is included in other long-term liabilities on the accompanying consolidated balance sheet. The year-over-year increase in the deferred gain balance was primarily due to a change in foreign currency translation rates.

23. Litigation and Uncertainties

     Asbestos

Some of the Company’s U.S. and U.K. subsidiaries are defendants in numerous asbestos-related lawsuits and out-of-court informal claims pending in the United States and United Kingdom. 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’s subsidiaries during the 1970s and prior.

          United States

A summary of U.S. claim activity for the three years ended December 31, 2004 is as follows:

    Number of Claims  
   
 
    2004   2003   2002  
   

 

 

 
Balance at beginning of year
    170,860     139,800     110,700  
New claims
    17,870     48,260     45,200  
Claims resolved
    (20,970 )   (17,200 )   (16,100 )
   

 

 

 
Balance at end of year
    167,760 *   170,860 *   139,800  
   

 

 

 
                     

 
*
Includes claims on inactive court dockets of 22,300 and 24,500 at year-end 2004 and year-end 2003, respectively.

The overall average combined indemnity and defense cost per closed claim since 1993 was approximately $2.0. In view of the many uncertainties associated with asbestos bodily injury claims, the Company believes that the average cost will increase in the future.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

23. Litigation and Uncertainties — (Continued)

The amount spent on asbestos litigation defense and case resolution, substantially all of which was reimbursed from insurance coverage, was $100,200 in 2004, $73,600 in 2003 and $57,200 in 2002. The payments in 2004 were funded from settlements with insurance companies, as discussed below.

At December 31, 2004, the Company has recorded total liabilities of $480,000 comprised of an estimated liability relating to open (outstanding) claims of $257,000 and an estimated liability relating to future unasserted claims of $223,000. Of the total, $75,000 is recorded in accrued expenses and $405,000 is recorded in asbestos-related liability on the consolidated balance sheet. These estimates are based upon the following information and/or assumptions: number of open claims; forecasted number of future claims; estimated average cost per claim by disease type (i.e., mesothelioma vs. non-mesothelioma); and the breakdown of known and future claims into disease type (i.e., mesothelioma vs. non-mesothelioma). Claims that have not been settled and are six or more years old are considered abandoned and are no longer valued in the estimated liability. There were approximately 9,100 such cases at December 31, 2004. The total estimated liability includes both the estimate of forecasted indemnity amounts and forecasted defense expenses. Total estimated defense costs and indemnity payments are estimated to be incurred through the year 2019, during which period new claims are expected to decline from year to year. Recently received claims also suggest that the percentage of claims to be closed without payment of indemnity costs should increase as claims are resolved during the next few years. The Company believes that it is likely that there will be new claims filed after 2019, but in light of uncertainties inherent in long-term forecasts, the Company does not believe that it can reasonably estimate defense and/or indemnity costs, which might be incurred after 2019. Historically, defense costs have represented approximately 21% of total defense and indemnity costs. Through December 31, 2004, total indemnity costs paid, prior to insurance recoveries, were approximately $443,700 and total defense costs paid were approximately $119,900.

As of December 31, 2004, the Company has recorded assets of $385,500 relating to actual and probable insurance recoveries, of which $95,000 is recorded in accounts and notes receivables, and $290,500 is recorded as asbestos-related insurance recovery receivable on the consolidated balance sheet. The asset includes an estimate of recoveries from insurers based upon assumptions relating to cost allocation and resolution of pending legal proceedings with certain insurers, as well as recoveries under settlements with other insurers.

As of December 31, 2004, $165,200 was contested by the subsidiaries’ insurers in ongoing litigation. The litigation relates to the proper allocation of the coverage liability among the subsidiaries’ various insurers and the subsidiaries as self-insurers. The Company believes that any amounts that its subsidiaries might be allocated as self-insurer would be immaterial.

The Company’s subsidiaries have entered into several settlement agreements calling for insurers to make lump-sum payments, as well as payments over time, for use by the subsidiaries to fund asbestos-related indemnity and defense costs and, in certain cases, for reimbursement for a portion of out-of-pocket costs previously incurred. The Company intends to negotiate additional settlements in order to minimize the amount of future costs the Company will be required to fund out of working capital.

The Company projects that it will not be required to fund any asbestos liabilities from its cash flow before 2010, although it may be required to fund a portion of such liabilities from its own cash thereafter. This forecast assumes that the Company will be able to successfully resolve certain outstanding insurance coverage issues. An adverse outcome in the insurance litigation on these coverage issues could materially limit the Company’s insurance recoveries. In this regard, on January 10, 2005, a New York state trial court entered an order finding that New York, rather than New Jersey, law applies in the litigation described above regarding the allocation of liability for asbestos-related personal injury claims among the Foster Wheeler entities and their various insurers. Since the inception of this litigation, the Company has calculated estimated insurance recoveries applying New Jersey law. However, the application of New York, rather than New

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

23. Litigation and Uncertainties — (Continued)

Jersey, law would result in the Company’s subsidiaries realizing lower insurance recoveries. Thus, as a result of this decision, the Company recorded a charge to earnings in the fourth quarter of 2004 of approximately $76,000 and reduced the year-end carrying value of its probable insurance recoveries by a similar amount. Unless this decision is reversed on appeal, the Company expects that it will be required to fund a portion of its asbestos liabilities from its own cash beginning in 2010. The amount and timing of these funding requirements will be dependent upon, among other things, litigated or negotiated resolution of the various disputes between the Company and the insurers with whom it has not yet settled. On February 16, 2005, the Company’s subsidiaries filed separate motions seeking (i) the re-argument of this decision and (ii) an appeal of this decision to a higher court. There can be no assurances as to the timing or the outcome of these motions.

In addition, even if these coverage issues are resolved in a manner favorable to the Company, the Company may not be able to collect all of the amounts due under its insurance policies. The Company’s recoveries will be limited by insolvencies among its insurers. The Company is aware of at least two of its significant insurers which are currently insolvent. Other insurers may become insolvent in the future and the Company’s insurers may also fail to reimburse amounts owed to the Company on a timely basis. If the Company does not receive timely payment from its insurers, it may be unable to make required payments under settlement agreements with asbestos plaintiffs or to fund amounts required to be posted with the court in order to appeal trial judgments. If the Company is unable to file such appeals, the Company’s subsidiaries may be ordered to pay large damage awards arising from adverse jury verdicts, and such awards may exceed available cash. Any failure to realize expected insurance recoveries, and any delays in receiving from its insurers amounts owed to the subsidiaries, will reduce cash flow and adversely affect liquidity and could have a material adverse effect on the Company’s financial condition.

The pending litigation and negotiations with other insurers is continuing.

It should be noted that the estimate of the assets and liabilities related to asbestos claims and recoveries is subject to a number of uncertainties that may result in significant changes in the current estimates. Among these are uncertainties as to the ultimate number of claims filed, the amounts of claim costs, the impact of bankruptcies of other companies with asbestos claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, as well as potential legislative changes. Increases in the number of claims filed 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, results of operations, and cash flows.

          United Kingdom

Subsidiaries of the Company in the U.K. have also received claims alleging personal injury arising from exposure to asbestos. To date 446 claims have been brought against the U.K. subsidiaries of which 255 remain open at December 31, 2004. None of the settled claims has resulted in material costs to the Company.

At December 31, 2004 the Company recorded the estimated U.S. dollar equivalent for the total U.K. asbestos liabilities of $44,300. Of the total, $1,900 is recorded in accrued expenses and $42,400 is recorded in asbestos-related liability on the consolidated balance sheet. The estimated U.S. dollar equivalent liability for open (outstanding) U.K. asbestos claims is $5,800 and the estimated liability for future unasserted U.K. asbestos claims is $38,500. An asset in an equal amount was recorded for the expected U.K. asbestos-related insurance recoveries, of which $1,900 is recorded in accounts and notes receivables, and $42,400 is recorded as asbestos-related insurance recovery receivable on the consolidated balance sheet.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

23. Litigation and Uncertainties — (Continued)

     Project Claims

In the ordinary course of business, the Company and its subsidiaries are parties to litigation involving clients and subcontractors arising out of project contracts. Such litigation includes claims and counterclaims by the Company for additional costs incurred in excess of current contract provisions, as well as for back charges for alleged breaches of warranty and other contract commitments. If the Company were found to be liable for any of the claims/counterclaims against it, the Company would have to incur a write-down or charge against earnings to the extent a reserve has not been established for the matter in its accounts. Amounts ultimately realized on claims/counterclaims by the Company could differ materially from the balances included in the Company’s financial statements, resulting in a charge against earnings to the extent profit has already been accrued on a project contract. Such charges could have a material adverse impact on the Company’s liquidity and financial condition. The Company believes, after consultation with counsel, that such litigation should not have a material adverse effect upon the Company’s financial position or liquidity, after giving effect to the provisions already recorded.

In addition to the matters described above, an arbitration has been commenced against the Company arising out of a compact circulating fluidized-bed boiler that the Company engineered, supplied and erected for a client in Asia. In addition to claims for damages for breach of contract, the client is seeking to rescind the contract based upon alleged material misrepresentations by the Company. If such relief were granted, the Company could be compelled to reimburse the client for the purchase price paid (approximately $25,700), in addition to other damages, which have not yet been quantified. The Company is vigorously defending the case and has counterclaimed for unpaid receivables (approximating $5,200), plus interest, for various breaches and non-performance by the client. (Due to its age, a reserve for the full amount of the receivable was taken prior to the arbitration.) The case is in the initial stages of discovery and a final award is not expected until 2007. Based upon the Company’s investigation and the proceedings to date, there appear to be valid defenses to the claim. However, it is premature to predict the outcome of this proceeding.

The Company has been notified of a claim by its client with respect to a thermal electric power plant in South America that the Company designed, supplied and erected as a member of a consortium with other parties. The plant’s concrete foundations have experienced cracking, allegedly due to out-of-specification materials used in the concrete poured by the consortium’s subcontractor. The client has adopted a plan to repair the foundations and is seeking reimbursement of its costs (approximating $11,000) from the consortium. Additional damages could be alleged if the matter proceeds to an adversary proceeding. The Company is investigating the claim, as well as any rights that it may have to seek reimbursement for the damages from third parties. Valid legal defenses to the claim appear to exist. However, it is premature to predict the outcome of this matter.

     Camden County Waste-to-Energy Project

One of the Company’s project subsidiaries, Camden County Energy Recovery Associates, LP (“CCERA”), owns and operates a waste-to-energy facility in Camden County, New Jersey (the “Project”). In 1997, the United States Supreme Court effectively invalidated New Jersey’s long-standing municipal solid waste flow rules and regulations, eliminating the guaranteed supply of municipal solid waste to the Project with its corresponding tipping fee revenue. As a result, tipping fees have been reduced to market rate in order to provide a steady supply of fuel to the Project. Since the ruling, those market-based revenues have not been, and are not expected to be, sufficient to service the debt on outstanding bonds, which were issued by the Pollution Control Finance Authority of Camden County (“PCFA”) to finance the construction of the Project and to acquire a landfill for Camden County’s use.

In 1998, the CCERA filed suit against the PCFA and other parties seeking, among other things, to void the applicable contracts and agreements governing the Project (Camden County Energy Recovery Assoc. v.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

23. Litigation and Uncertainties — (Continued)

N.J. Department of Environmental Protection, et al., Superior Court of New Jersey, Mercer County, L-268-98). Since 1999, the State of New Jersey has provided subsidies sufficient to ensure the payment of each of the Project’s debt service payments as they became due. The bonds outstanding on the Camden Project were issued by the PCFA, not the Company or CCERA, and the bonds are not guaranteed by the Company or CCERA. Pursuant to the loan agreement between PCFA and CCERA, proceeds from the bonds were used to finance the construction of the facility and accordingly these proceeds were recorded as debt on CCERA’s balance sheet and therefore are included in the Company’s consolidated balance sheet. CCERA’s obligation to service the debt obtained pursuant to the loan agreement is limited to depositing all tipping fees and electric revenues received with the trustee of the PCFA bonds. The trustee is required to pay CCERA its service fees prior to servicing PCFA bonds. CCERA has no further debt repayment obligations under the loan agreement with the PCFA. In the litigation, the defendants have asserted, among other things, that an equitable portion of the outstanding debt on the Project should be allocated to CCERA even though CCERA did not guarantee the bonds. At this time, management cannot determine the ultimate outcome of the foregoing and the potential effects on CCERA and the Project. If the State were to fail to subsidize the debt service, and there were to be a default on a debt service payment, the bondholders might proceed to attempt to exercise their remedies, by among other things, seizing the collateral securing the bonds. The Company does not believe this collateral includes CCERA’s plant.

     Long-Term Government Contract

The Company retained a long-term contract with a government agency in connection with the Foster Wheeler Environmental Corporation sale. The contract is scheduled to be completed in four phases. The first phase was for the initial design, permitting and licensing of a spent fuel facility. The first phase of this project was profitable.

The second phase of the contract, which is currently being executed, is billed on a cost-plus-fee basis and was expected to conclude in 2004. In this phase, the Company must license the facility with the NRC, respond to any questions regarding the initial design included in phase one and complete final design. Technical specification and detailed guidance from the government agency regarding government agency-directed changes to the project scope remain outstanding. Resolution of the outstanding issues will be required before the second phase of the contract can be completed.

Phase three is for the construction, start-up and testing of the facility for a fixed contractual price of $114,000, subject to escalation. The actual commencement of this phase will be delayed as a result of the significant delay in the issuance of the NRC license for the facility which was received on November 30, 2004. This delay will also result in substantial additional facility costs. The third phase would begin with the purchase of long-lead items followed by the construction activities. Construction is expected to last two years and requires that a subsidiary of the Company fund the construction cost. Foster Wheeler USA Corporation, the parent company of Foster Wheeler Environmental Corporation, provided a performance guarantee on the project. In addition, a surety bond for the full contract price is required. The cost of the facility is expected to be recovered in the first nine months of operations under phase four, during which a subsidiary of the Company will operate the facility at fixed rates, subject to escalation, for approximately four years. The Company and the government agency have engaged in discussions about possibly restructuring or terminating subsequent phases of the contract. If the project were to proceed, the Company intends to seek third-party financing to fund the majority of the construction costs, but there can be no assurance that the Company will secure such financing on acceptable terms, or at all. There also can be no assurance that the Company will be able to obtain the required surety bond. If the Company cannot successfully restructure the contract and cannot obtain third-party financing or the required surety bond, the Company’s ability to perform its obligations under the contract is unlikely. This could have a material adverse effect on the Company’s financial condition, results of operations, and cash flow. No claims have been raised by the government

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

23. Litigation and Uncertainties — (Continued)

agency against the Company. The ultimate potential liability to the Company would arise in the event that the government agency terminates the contract (for example, due to the Company’s inability to continue with the contract) and re-bids the contract under its exact terms and the resulting cost to the government agency is greater than it would have been under the existing terms with the Company. The Company does not believe a claim is probable and is unable to estimate the possible loss that could occur as a result of any claims. Additionally, the Company believes that it has a variety of potential legal defenses should the government agency decide to pursue any such action.

     Environmental Matters

Under U.S. federal statutes, such as the Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”), the Clean Water Act and the Clean Air Act, 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 in excess of those for which reserves have been established.

The Company also may receive claims, pursuant to indemnity obligations from owners of recently sold facilities, which may require the Company to incur costs for investigation and/or remediation. Based on the available information, the Company does not believe that such costs will be materially in excess of those reserves which it has established. No assurance can be provided that the Company will not discover environmental conditions at its currently owned or operated properties, or that additional claims will not be made with respect to formerly owned properties, requiring the Company to incur material expenditures to investigate and/or remediate such conditions.

The Company 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 off-site facilities as to which it has received a notice of potential liability will exceed $500 in the aggregate.

In February 1988, one of the Company’s subsidiaries, Foster Wheeler Energy Corporation (“FWEC”), entered into a Consent Agreement and Order (“Order”) with the United States Environmental Protection Agency (“USEPA”) and the Pennsylvania Department of Environmental Protection (“PADEP”) regarding its former manufacturing facility in Mountaintop, Pennsylvania. The Order essentially required FWEC to investigate and remediate as necessary contaminants, including trichloroethylene (“TCE”), in the soil and groundwater at the facility. Pursuant to the Order, FWEC in 1993 installed a “pump and treat” system to

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

23. Litigation and Uncertainties — (Continued)

remove TCE from the groundwater. It is not possible at the present time to predict how long FWEC will be required to operate and maintain the system. The annual cost of operating and maintaining the system has not been material.

In September 2004, FWEC sampled the domestic water supply of approximately 16 residences in Mountaintop, and it received validated testing data regarding that sampling in October 2004. The residences are located approximately one mile to the southwest of the historic source of the TCE at FWEC’s former facility, and it is believed the residences use private wells for domestic water. The results of this sampling indicated that TCE was present in the water at several of the residences at levels in excess of Safe Drinking Water Act standards. Since the initial round of testing in September 2004, FWEC has tested more wells. As of February 2005, the number of wells in the area containing TCE in excess of the standards is approximately 30, and FWEC believes the boundaries of the affected area have been delineated.

The source of the TCE in the wells has not yet been determined. FWEC is working closely with the appropriate regulatory authorities in responding to this situation. FWEC first provided the affected residences with temporary replacement water and then arranged to have filters installed on the residences’ water system to remove the TCE. FWEC has also arranged to have the filters periodically tested and maintained. The cost of the foregoing is not expected to be material. If the source of the TCE is determined to be from a third-party, FWEC will evaluate its options regarding the recovery of the costs it has incurred, which options could include seeking to recover those costs from those determined to be the source. The agencies have incurred over $500 of costs responding to the situation, which they may seek to recover from those determined to be the source(s) of the TCE. The Company and the agencies are reviewing the technical and economic feasibility of extending a public water line that exists at one end of the effected area to the other end of the effected area. Given the preliminary stage of the investigations, FWEC is unable to estimate the potential financial impact of the foregoing on FWEC.

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 as these are subject to change as events evolve and as additional information becomes available during the administration and litigation process. Increases in the number of claims filed or costs to resolve those claims will cause the Company to increase further the estimates of the costs associated with such claims and could have a material adverse effect on the business, financial condition, results of operations, and cash flows.

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 the financial position, results of operations or cash flows in excess of amounts previously provided in the accounts.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

24. Quarterly Financial Data (Unaudited)

    Three Months Ended

 
    March 26   June 25   Sept. 24   Dec. 31  
   

 

 

 

 
2004
                         
Operating revenues
  $ 666,359   $ 635,019   $ 720,554   $ 639,392  
Contract profit
    75,212     106,025     47,067     51,051  
Net income (loss)
    (4,298 )   29,835     (215,470 )   (95,361 )
Income (loss) per share:
                         
Basic
  $ (2.09 ) $ 14.53   $ (103.23 ) $ (7.38 )
Diluted
  $ (2.09 ) $ 12.28   $ (103.23 ) $ (7.38 )
Shares outstanding:
                         
Weighted-average number of shares outstanding
    2,052,762     2,052,774     2,087,274     12,922,076  
Effect of stock options and convertible notes
    *     654,704     *     *  
   

 

 

 

 
Total diluted weighted-average number of shares outstanding
    2,052,762     2,707,478     2,087,274     12,922,076  
   

 

 

 

 
    Three Months Ended

 
    March 28   June 27   Sept. 26   Dec. 26  
   

 

 

 

 
2003
                         
Operating revenues
  $ 784,092   $ 922,238   $ 886,573   $ 1,130,912  
Contract profit
    56,963     63,023     80,079     88,024  
Net loss
    (19,820 )   (29,338 )   (26,897 )   (81,008 )
Loss per share:
                         
Basic
  $ (9.66 ) $ (14.30 ) $ (13.11 ) $ (39.46 )
Diluted
  $ (9.66 ) $ (14.30 ) $ (13.11 ) $ (39.46 )
Shares outstanding:
                         
Weighted-average number of shares outstanding
    2,051,767     2,052,175     2,052,057     2,052,915  
Effect of stock options and convertible notes
    *     *     *     *  
   

 

 

 

 
Total diluted weighted-average number of shares outstanding
    2,051,767     2,052,175     2,052,057     2,052,915  
   

 

 

 

 
                           

 
*
The effect of the stock options and convertible notes were not included in the calculation of diluted earnings per share due to their antidilutive effect.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information

A. 2005 Senior Notes

As a result of the reorganization on May 25, 2001, Foster Wheeler LLC, as successor to Foster Wheeler Corporation, became obligor for the Senior Notes at 6.75% interest, due November 15, 2005 (“2005 Senior Notes”). Foster Wheeler Ltd. and the following companies have issued guarantees in favor of the holders of the 2005 Senior Notes: Equipment Consultants, Inc., Foster Wheeler Holdings Ltd. (formerly known as “Foreign Holdings Ltd.”), Foster Wheeler Asia Limited, Foster Wheeler Constructors, Inc., Foster Wheeler Development Corporation, Foster Wheeler Energy Corporation, Foster Wheeler Energy Manufacturing, Inc., Foster Wheeler Energy Services, Inc., Foster Wheeler Environmental Corporation, Foster Wheeler Facilities Management, Inc., Foster Wheeler Inc., Foster Wheeler International Corporation, Foster Wheeler International Holdings, Inc., Foster Wheeler North America Corp. (formerly known as “Foster Wheeler Power Group, Inc.”), Foster Wheeler Power Systems, Inc., Foster Wheeler Pyropower, Inc., Foster Wheeler Real Estate Development Corporation, Foster Wheeler Realty Services, Inc., Foster Wheeler USA Corporation, Foster Wheeler Virgin Islands, Inc., Foster Wheeler Zack, Inc., HFM International, Inc., Process Consultants, Inc., Pyropower Operating Services Company, Inc., and Perryville III Trust. Each of the guarantees is full and unconditional and joint and several. Foster Wheeler LLC and each of the subsidiary guarantors are 100% owned, directly or indirectly, by Foster Wheeler Ltd. The summarized consolidating financial information is presented in lieu of separate financial statements and other related disclosures of the subsidiary guarantors and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors. None of the subsidiary guarantors are restricted from making distributions to the Company.

In 2004, the Company completed an equity-for-debt exchange in which it issued common shares, preferred shares and new 2011 Senior Notes in exchange for a portion of the 2005 Senior Notes. See Note 7 for further details regarding the exchange including the amount of 2005 Senior Notes exchanged.

The following represents summarized condensed consolidating financial information as of December 31, 2004 and December 26, 2003 with respect to the financial position, and for each of the three years in the period ended December 31, 2004 for results of operations and for cash flows.

The Foster Wheeler Ltd. column presents the parent company’s financial information. Foster Wheeler Ltd. is also a guarantor. The Foster Wheeler LLC column presents the issuer’s financial information. The Guarantor Subsidiaries column presents the financial information of all guarantors excluding that of Foster Wheeler Ltd., which is separately presented. The guarantor subsidiaries include the results of Foster Wheeler Holdings Ltd., the parent of Foster Wheeler LLC. Foster Wheeler LLC owns, directly or indirectly, the other guarantor subsidiaries and non-guarantor subsidiaries.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

A. 2005 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2004

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Assets
                                     
Cash and cash equivalents
  $   $   $ 48,782   $ 242,785   $   $ 291,567  
Accounts and notes receivable, net
    416,260     184,449     202,579     672,205     (968,997 )   506,496  
Contracts in process and inventories
            47,243     126,830     4     174,077  
Investment and advances
            1,247         (1,247 )    
Other current assets
            3,482     73,676         77,158  
   

 

 

 

 

 

 
Total current assets
    416,260     184,449     303,333     1,115,496     (970,240 )   1,049,298  
Investments in subsidiaries and others
    (1,140,764 )   (711,205 )   (133,432 )   158,457     1,985,268     158,324  
Land, buildings & equipment, net
            45,961     234,344         280,305  
Notes and accounts receivable - long-term
    210,000     487,108     279,861     412,402     (1,382,318 )   7,053  
Intangible assets, net
            98,979     22,523         121,502  
Asbestos-related insurance recovery receivable
        290,494         42,400         332,894  
Other assets
        5,330     79,826     153,007         238,163  
   

 

 

 

 

 

 
TOTAL ASSETS
  $ (514,504 ) $ 256,176   $ 674,528   $ 2,138,629   $ (367,290 ) $ 2,187,539  
   

 

 

 

 

 

 
                                       
Liabilities & Shareholders’
(Deficit)/Equity
                                     
Accounts payable and accrued expenses
  $ (4,239 ) $ 498,673   $ 554,655   $ 517,033   $ (968,994 ) $ 597,128  
Estimated costs to complete long-term contracts
            93,047     365,374         458,421  
Other current liabilities
    (52 )   11,372     5,015     183,237         199,572  
   

 

 

 

 

 

 
Total current liabilities
    (4,291 )   510,045     652,717     1,065,644     (968,994 )   1,255,121  
Long-term debt
    3,070     342,820     66,073     122,896         534,859  
Pension, postretirement and other employee benefits
            201,164     64,705         265,869  
Asbestos-related liability
        405,000         42,400         447,400  
Other long-term liabilities and minority interest
        138,954     895,338     901,391     (1,738,110 )   197,573  
   

 

 

 

 

 

 
TOTAL LIABILITIES
    (1,221 )   1,396,819     1,815,292     2,197,036     (2,707,104 )   2,700,822  
   

 

 

 

 

 

 
Common stock and paid-in capital
    883,573     242,613     242,613     164,817     (650,043 )   883,573  
Accumulated deficit
    (1,096,348 )   (1,098,795 )   (1,098,916 )   (57,215 )   2,254,926     (1,096,348 )
Accumulated other comprehensive loss
    (284,461 )   (284,461 )   (284,461 )   (166,009 )   734,931     (284,461 )
Unearned compensation
    (16,047 )                   (16,047 )
   

 

 

 

 

 

 
TOTAL SHAREHOLDERS’ DEFICIT
    (513,283 )   (1,140,643 )   (1,140,764 )   (58,407 )   2,339,814     (513,283 )
   

 

 

 

 

 

 
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
  $ (514,504 ) $ 256,176   $ 674,528   $ 2,138,629   $ (367,290 ) $ 2,187,539  
   

 

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

A. 2005 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 26, 2003

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Assets
                                     
Cash and cash equivalents
  $   $   $ 34,264   $ 329,831   $   $ 364,095  
Accounts and notes receivable, net
        272,361     123,033     778,637     (617,617 )   556,414  
Contracts in process and inventories
            121,527     60,876     (9,110 )   173,293  
Investment and advances
            88,641         (88,641 )    
Other current assets
            5,121     75,453         80,574  
   

 

 

 

 

 

 
Total current assets
        272,361     372,586     1,244,797     (715,368 )   1,174,376  
Investments in subsidiaries and others
    (872,080 )   (919,588 )   390,261     142,810     1,401,156     142,559  
Land, buildings & equipment, net
            66,218     243,397         309,615  
Notes and accounts receivable - long-term
    210,000     575,118     281,108     458,490     (1,517,940 )   6,776  
Intangible assets, net
            101,664     21,025         122,689  
Asbestos-related insurance recovery receivable
        495,400                 495,400  
Other assets
        28,478     84,149     142,488         255,115  
   

 

 

 

 

 

 
TOTAL ASSETS
  $ (662,080 ) $ 451,769   $ 1,295,986   $ 2,253,007   $ (832,152 ) $ 2,506,530  
   

 

 

 

 

 

 
Liabilities & Shareholders’
(Deficit)/Equity
                                     
Accounts payable and accrued expenses
  $ 412   $ 78,278   $ 722,214   $ 512,485   $ (626,727 ) $ 686,662  
Estimated costs to complete long-term contracts
            162,168     390,586         552,754  
Other current liabilities
    (52 )   (1,085 )   (5,910 )   117,990         110,943  
   

 

 

 

 

 

 
Total current liabilities
    360     77,193     878,472     1,021,061     (626,727 )   1,350,359  
Long-term debt
    210,000     328,163     155,709     318,100         1,011,972  
Pension, postretirement and other employee benefits
            216,281     78,852         295,133  
Asbestos-related liability
        526,200                 526,200  
Other long-term liabilities and minority interest
        392,221     917,604     763,125     (1,877,644 )   195,306  
   

 

 

 

 

 

 
TOTAL LIABILITIES
    210,360     1,323,777     2,168,066     2,181,138     (2,504,371 )   3,378,970  
   

 

 

 

 

 

 
Common stock and paid-in capital
    242,613     242,613     242,613     325,741     (810,967 )   242,613  
Accumulated deficit
    (811,054 )   (810,622 )   (810,694 )   (50,175 )   1,671,491     (811,054 )
Accumulated other comprehensive loss
    (303,999 )   (303,999 )   (303,999 )   (203,697 )   811,695     (303,999 )
   

 

 

 

 

 

 
TOTAL SHAREHOLDERS’ (DEFICIT)/EQUITY
    (872,440 )   (872,008 )   (872,080 )   71,869     1,672,219     (872,440 )
   

 

 

 

 

 

 
TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT)/EQUITY
  $ (662,080 ) $ 451,769   $ 1,295,986   $ 2,253,007   $ (832,152 ) $ 2,506,530  
   

 

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

A. 2005 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME/(LOSS)
For the Year Ended December 31, 2004

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Operating revenues
  $   $   $ 586,991   $ 2,168,358   $ (94,025 ) $ 2,661,324  
Cost of operating revenues
            (479,167 )   (1,996,827 )   94,025     (2,381,969 )
   

 

 

 

 

 

 
Contract profit
            107,824     171,531         279,355  
                                       
Selling, general and administrative expenses
    2,986         (74,044 )   (157,904 )       (228,962 )
Other income
    10,063     53,558     43,993     109,242     (128,473 )   88,383  
Other deductions and minority interest
    (25 )   (391 )   (84,629 )   (19,867 )   3,640     (101,272 )
Interest expense
    (10,096 )   (65,453 )   (71,202 )   (72,704 )   124,833     (94,622 )
Loss on equity-for-debt exchange
        (164,974 )   (10,080 )             (175,054 )
Equity in net loss of subsidiaries
    (288,222 )   (110,913 )   (200,981 )       600,116      
   

 

 

 

 

 

 
Loss before income taxes
    (285,294 )   (288,173 )   (289,119 )   30,298     600,116     (232,172 )
Benefit/(provision) for income taxes
            897     (54,019 )       (53,122 )
   

 

 

 

 

 

 
Net loss
    (285,294 )   (288,173 )   (288,222 )   (23,721 )   600,116     (285,294 )
                                       
Other comprehensive income/(loss):
                                     
Foreign currency translation adjustment
    27,155     27,155     27,155     38,659     (92,969 )   27,155  
Minimum pension liability adjustment, net of $986 tax benefit
    (7,617 )   (7,617 )   (7,617 )   (1,827 )   17,061     (7,617 )
   

 

 

 

 

 

 
Net comprehensive (loss)/income
  $ (265,756 ) $ (268,635 ) $ (268,684 ) $ 13,111   $ 524,208   $ (265,756 )
   

 

 

 

 

 

 

127


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

A. 2005 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE (LOSS)/INCOME
For the Year Ended December 26, 2003

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Operating revenues
  $   $   $ 971,298   $ 2,843,569   $ (91,052 ) $ 3,723,815  
Cost of operating revenues
            (907,987 )   (2,624,291 )   96,552     (3,435,726 )
   

 

 

 

 

 

 
Contract profit
            63,311     219,278     5,500     288,089  
                                       
Selling, general and administrative expenses
            (86,086 )   (119,369 )   (110 )   (205,565 )
Other income
    13,650     54,037     55,104     107,635     (152,933 )   77,493  
Other deductions and minority interest
    (24 )   (198 )   (74,615 )   (109,509 )   10,176     (174,170 )
Interest expense
    (13,719 )   (63,256 )   (61,217 )   (94,659 )   137,367     (95,484 )
Equity in net loss of subsidiaries
    (156,970 )   (147,536 )   (46,673 )       351,179      
   

 

 

 

 

 

 
(Loss)/earnings before income taxes
    (157,063 )   (156,953 )   (150,176 )   3,376     351,179     (109,637 )
Provision for income taxes
            (6,794 )   (40,632 )       (47,426 )
   

 

 

 

 

 

 
Net loss
    (157,063 )   (156,953 )   (156,970 )   (37,256 )   351,179     (157,063 )
                                       
Other comprehensive income:
                                     
Foreign currency translation adjustment
    6,762     6,762     6,762     4,371     (17,895 )   6,762  
Minimum pension liability adjustment, net of tax of $18,886
    58,677     58,677     58,677     44,483     (161,837 )   58,677  
   

 

 

 

 

 

 
Net comprehensive (loss)/income
  $ (91,624 ) $ (91,514 ) $ (91,531 ) $ 11,598   $ 171,447   $ (91,624 )
   

 

 

 

 

 

 

128


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

A. 2005 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
For the Year Ended December 27, 2002

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Operating revenues
  $   $   $ 1,414,447   $ 2,206,447   $ (101,717 ) $ 3,519,177  
Cost of operating revenues
            (1,461,847 )   (2,068,524 )   103,461     (3,426,910 )
   

 

 

 

 

 

 
Contract Profit
            (47,400 )   137,923     1,744     92,267  
                                       
Selling, general and administrative expenses
            (128,003 )   (98,521 )       (226,524 )
Other income
    13,650     50,355     38,186     99,509     (146,340 )   55,360  
Other deductions and minority interest
    (73 )   (4,205 )   (95,721 )   (98,138 )       (198,137 )
Interest expense
    (13,749 )   (52,785 )   (58,369 )   (102,721 )   144,596     (83,028 )
Equity in net loss of subsidiaries
    (374,547 )   (370,193 )   (72,159 )       816,899      
   

 

 

 

 

 

 
Loss before income taxes
    (374,719 )   (376,828 )   (363,466 )   (61,948 )   816,899     (360,062 )
(Provision)/benefit for income taxes
        2,322     (11,081 )   (5,898 )       (14,657 )
   

 

 

 

 

 

 
Net loss prior to cumulative effect of a change in accounting principle
    (374,719 )   (374,506 )   (374,547 )   (67,846 )   816,899     (374,719 )
Cumulative effect on prior years of a change in accounting principle for goodwill, net of $0 tax
    (150,500 )   (150,500 )   (150,500 )   (24,800 )   325,800     (150,500 )
   

 

 

 

 

 

 
Net loss
    (525,219 )   (525,006 )   (525,047 )   (92,646 )   1,142,699     (525,219 )
                                       
Other comprehensive (loss)/income:
                                     
Foreign currency translation adjustments
    22,241     22,241     22,241     20,942     (65,424 )   22,241  
Net (loss)/gain on derivative instruments
    (3,834 )   (3,834 )   (3,834 )   284     7,384     (3,834 )
Minimum pension liability adjustment net of tax benefit of $73,400
    (226,011 )   (226,011 )   (226,011 )   (170,303 )   622,325     (226,011 )
   

 

 

 

 

 

 
Net comprehensive loss
  $ (732,823 ) $ (732,610 ) $ (732,651 ) $ (241,723 ) $ 1,706,984   $ (732,823 )
   

 

 

 

 

 

 

129


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

A. 2005 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2004

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Cash Flows from Operating Activities
                                     
Net cash (used)/provided by operating activities
  $ (58 ) $ (14,675 ) $ (163,493 ) $ 166,063   $ (18,700 ) $ (30,863 )
   

 

 

 

 

 

 
                                       
Cash Flows from Investing Activities
                                     
Change in restricted cash
            (729 )   (17,212 )         (17,941 )
Capital expenditures
            (279 )   (9,334 )         (9,613 )
Proceeds from sale of assets
            16,709     786           17,495  
(Increase)/decrease in investment and advances
            164,753     (164,767 )         (14 )
Increase in short-term investments
                (9,426 )       (9,426 )
   

 

 

 

 

 

 
Net cash provided/(used) by investing activities
            180,454     (199,953 )       (19,499 )
   

 

 

 

 

 

 
                                       
Cash Flows from Financing Activities
                                     
Dividends to shareholders
                (18,700 )   18,700      
Decrease in short-term debt
                (121 )         (121 )
Proceeds from long-term debt
        120,000                   120,000  
Repayment of long-term debt
        (128,163 )   (14 )   (19,545 )         (147,722 )
Other
    58     22,838     (2,408 )   (23,151 )       (2,663 )
   

 

 

 

 

 

 
Net cash provided/(used) by financing activities
             58     14,675     (2,422 )   (61,517 )   18,700     (30,506 )
   

 

 

 

 

 

 
                                       
Effect of exchange rate changes on cash and cash equivalents
            (21 )   8,361         8,340  
   

 

 

 

 

 

 
Increase/(decrease) in cash and cash equivalents
            14,518     (87,046 )       (72,528 )
Cash and cash equivalents, beginning of year
            34,264     329,831         364,095  
   

 

 

 

 

 

 
Cash and cash equivalents, end of year
  $   $   $ 48,782   $ 242,785   $   $ 291,567  
   

 

 

 

 

 

 

130


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

A. 2005 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 26, 2003

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Cash Flows from Operating Activities
                                     
Net cash (used)/provided by operating activities
  $ (93 ) $ 18,811   $ (163,863 ) $ 87,250   $ (4,203 ) $ (62,098 )
   

 

 

 

 

 

 
                                       
Cash Flows from Investing Activities
                                     
Change in restricted cash
            15,524     22,890         38,414  
Capital expenditures
            (1,086 )   (11,784 )       (12,870 )
Proceeds from sale of assets
            79,701     7,458         87,159  
(Increase)/decrease in investment and advances
            274     (274 )        
Increase in short-term investments
                (6,808 )       (6,808 )
   

 

 

 

 

 

 
Net cash provided by investing activities
            94,413     11,482         105,895  
   

 

 

 

 

 

 
                                       
Cash Flows from Financing Activities
                                     
Dividends to shareholders
                (4,203 )   4,203      
Decrease in short-term debt
                (14,826 )       (14,826 )
Repayment of long-term debt
        (11,837 )   (1,580 )   (20,683 )       (34,100 )
Other
    93     (6,974 )   84,352     (80,350 )       (2,879 )
   

 

 

 

 

 

 
Net cash provided/(used) by financing activities
             93     (18,811 )   82,772     (120,062 )   4,203     (51,805 )
   

 

 

 

 

 

 
                                       
Effect of exchange rate changes on cash and cash equivalents
            114     27,684         27,798  
   

 

 

 

 

 

 
Increase in cash and cash equivalents
            13,436     6,354         19,790  
Cash and cash equivalents, beginning of year
            20,828     323,477         344,305  
   

 

 

 

 

 

 
Cash and cash equivalents, end of year
  $   $   $ 34,264   $ 329,831   $   $ 364,095  
   

 

 

 

 

 

 

131


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

A. 2005 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 27, 2002

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Cash Flows from Operating Activities
                                     
Net cash (used)/provided by operating activities
  $ (172 ) $ (15,109 ) $ 196,436   $ (2,430 ) $ (18,360 ) $ 160,365  
   

 

 

 

 

 

 
                                       
Cash Flows from Investing Activities
                                     
Change in restricted cash
            (15,900 )   (68,893 )       (84,793 )
Capital expenditures
            (40,986 )   (12,409 )       (53,395 )
Proceeds from sale of assets
            1,783     4,499         6,282  
(Increase)/decrease in investment and advances
        (350 )   (21,049 )   30,506         9,107  
Decrease in short-term investments
                93         93  
   

 

 

 

 

 

 
Net cash used by investing activities
        (350 )   (76,152 )   (46,204 )       (122,706 )
   

 

 

 

 

 

 
                                       
Cash Flows from Financing Activities
                                     
Dividends to shareholders
                (18,360 )   18,360      
Decrease in short-term debt
                (7,792 )       (7,792 )
Proceeds from long-term debt
        70,000         546         70,546  
Proceeds from lease financing obligation
            44,900             44,900  
Repayment of long-term debt
            (24,440 )   (21,151 )       (45,591 )
Other
    172     (54,541 )   (162,201 )   214,509         (2,061 )
   

 

 

 

 

 

 
Net cash provided/(used) by financing activities
           172     15,459     (141,741 )   167,752     18,360     60,002  
   

 

 

 

 

 

 
                                       
Effect of exchange rate changes on cash and cash equivalents
            245     22,379         22,624  
   

 

 

 

 

 

 
(Decrease)/increase in cash and cash equivalents
            (21,212 )   141,497         120,285  
Cash and cash equivalents, beginning of year
            42,040     181,980         224,020  
   

 

 

 

 

 

 
Cash and cash equivalents, end of year
  $   $   $ 20,828   $ 323,477   $   $ 344,305  
   

 

 

 

 

 

 

132


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes

In May and June 2001, Foster Wheeler Ltd. issued 6.5% Convertible Subordinated Notes (“Convertible Notes”) due in 2007. The Convertible Notes are fully and unconditionally guaranteed by Foster Wheeler LLC, a 100% owned subsidiary of Foster Wheeler Ltd. Foster Wheeler LLC has assumed the obligation to fund the debt service. The following summarized consolidating financial information is presented in lieu of separate financial statements and other related disclosures of Foster Wheeler LLC because management does not believe that such separate financial statements and related disclosures would be material to investors.

In 2004, the Company completed an equity-for-debt exchange in which it issued common shares and preferred shares in exchange for a portion of the Convertible Notes. See Note 7 for further details regarding the exchange including the amount of Convertible Notes exchanged.

The following represents summarized condensed consolidating financial information as of December 31, 2004 and December 26, 2003 with respect to the financial position, and for each of the three years in the period ended December 31, 2004 for results of operations and for cash flows.

The Foster Wheeler Ltd. column presents the financial information of the parent company, who is also the issuer. The Guarantor Subsidiary column presents the financial information of the sole guarantor, Foster Wheeler LLC. The non-guarantor subsidiaries include the results of all direct and indirect non-guarantor subsidiaries of Foster Wheeler Ltd., including Foster Wheeler Holdings Ltd. (previously known as “Foreign Holdings Ltd.”), the parent of Foster Wheeler LLC. Foster Wheeler LLC owns, directly or indirectly, the other non- guarantor subsidiaries.

133


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2004

    Foster Wheeler
Ltd.
  Guarantor
Subsidiary
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 
ASSETS
                               
Cash and cash equivalents
  $   $   $ 291,567   $   $ 291,567  
Accounts and notes receivable, net
    416,260     184,449     881,729     (975,942 )   506,496  
Contracts in process and inventories
            174,077         174,077  
Other current assets
            77,158         77,158  
   

 

 

 

 

 
Total current assets
    416,260     184,449     1,424,531     (975,942 )   1,049,298  
Investments in subsidiaries and others
    (1,140,764 )   (711,205 )   (271,114 )   2,281,407     158,324  
Land, buildings & equipment, net
            280,305         280,305  
Notes and accounts receivable - long-term
    210,000     487,108     7,053     (697,108 )   7,053  
Intangible assets, net
            121,502         121,502  
Asbestos-related insurance recovery receivable
        290,494     42,400         332,894  
Other assets
        5,330     232,833         238,163  
   

 

 

 

 

 
TOTAL ASSETS
  $ (514,504 ) $ 256,176   $ 1,837,510   $ 608,357   $ 2,187,539  
   

 

 

 

 

 
                                 
LIABILITIES & SHAREHOLDERS’ DEFICIT
                               
Accounts payable and accrued expenses
  $ (4,239 ) $ 498,673   $ 1,078,636   $ (975,942 ) $ 597,128  
Estimated costs to complete long-term contracts
            458,421         458,421  
Other current liabilities
    (52 )   11,372     188,252         199,572  
   

 

 

 

 

 
Total current liabilities
    (4,291 )   510,045     1,725,309     (975,942 )   1,255,121  
Long-term debt
    3,070     342,820     188,969         534,859  
Pension, postretirement and other employee benefits
            265,869         265,869  
Asbestos-related liability
        405,000     42,400         447,400  
Other long-term liabilities and minority interest
        138,954     755,727     (697,108 )   197,573  
   

 

 

 

 

 
TOTAL LIABILITIES
    (1,221 )   1,396,819     2,978,274     (1,673,050 )   2,700,822  
   

 

 

 

 

 
Common stock and paid in capital
    883,573     242,613     242,613     (485,226 )   883,573  
Accumulated deficit
    (1,096,348 )   (1,098,795 )   (1,098,916 )   2,197,711     (1,096,348 )
Accumulated other comprehensive loss
    (284,461 )   (284,461 )   (284,461 )   568,922     (284,461 )
Unearned compensation
    (16,047 )               (16,047 )
   

 

 

 

 

 
TOTAL SHAREHOLDERS’ DEFICIT
    (513,283 )   (1,140,643 )   (1,140,764 )   2,281,407     (513,283 )
   

 

 

 

 

 
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
  $ (514,504 ) $ 256,176   $ 1,837,510   $ 608,357   $ 2,187,539  
   

 

 

 

 

 

134


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 26, 2003

    Foster Wheeler
Ltd.
  Guarantor
Subsidiary
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 
ASSETS
                               
Cash and cash equivalents
  $   $   $ 364,095   $   $ 364,095  
Accounts and notes receivable, net
        272,361     497,096     (213,043 )   556,414  
Contracts in process and inventories
            173,293         173,293  
Other current assets
            80,574         80,574  
   

 

 

 

 

 
Total current assets
        272,361     1,115,058     (213,043 )   1,174,376  
Investments in subsidiaries and others
    (872,080 )   (919,588 )   190,139     1,744,088     142,559  
Land, buildings & equipment, net
            309,615         309,615  
Notes and accounts receivable - long-term
    210,000     575,118     181,716     (960,058 )   6,776  
Intangible assets, net
            122,689         122,689  
Asbestos-related insurance recovery receivable
        495,400             495,400  
Other assets
        28,478     226,637         255,115  
   

 

 

 

 

 
TOTAL ASSETS
  $ (662,080 ) $ 451,769   $ 2,145,854   $ 570,987   $ 2,506,530  
   

 

 

 

 

 
                                 
LIABILITIES & SHAREHOLDERS’ DEFICIT
                               
Accounts payable and accrued expenses
  $ 412   $ 78,278   $ 821,015   $ (213,043 ) $ 686,662  
Estimated costs to complete long-term contracts
            552,754         552,754  
Other current liabilities
    (52 )   (1,085 )   112,080         110,943  
   

 

 

 

 

 
Total current liabilities
    360     77,193     1,485,849     (213,043 )   1,350,359  
Long-term debt
    210,000     328,163     473,809         1,011,972  
Pension, postretirement and other employee benefits
            295,133         295,133  
Asbestos-related liability
        526,200             526,200  
Other long-term liabilities and minority interest
        392,221     763,143     (960,058 )   195,306  
   

 

 

 

 

 
TOTAL LIABILITIES
    210,360     1,323,777     3,017,934     (1,173,101 )   3,378,970  
   

 

 

 

 

 
Common stock and paid in capital
    242,613     242,613     242,613     (485,226 )   242,613  
Accumulated deficit
    (811,054 )   (810,622 )   (810,694 )   1,621,316     (811,054 )
Accumulated other comprehensive loss
    (303,999 )   (303,999 )   (303,999 )   607,998     (303,999 )
   

 

 

 

 

 
TOTAL SHAREHOLDERS’ DEFICIT
    (872,440 )   (872,008 )   (872,080 )   1,744,088     (872,440 )
   

 

 

 

 

 
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
  $ (662,080 ) $ 451,769   $ 2,145,854   $ 570,987   $ 2,506,530  
   

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME/(LOSS)
For the Year Ended December 31, 2004

    Foster Wheeler
Ltd.
  Guarantor
Subsidiary
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 
Operating revenues
  $   $   $ 2,661,324   $   $ 2,661,324  
Cost of operating revenues
            (2,381,969 )       (2,381,969 )
   

 

 

 

 

 
Contract profit
            279,355         279,355  
                                 
Selling, general and administrative expenses
    2,986         (231,948 )       (228,962 )
Other income
    10,063     53,558     88,412     (63,650 )   88,383  
Other deductions and minority interest
    (25 )   (391 )   (100,856 )       (101,272 )
Interest expense
    (10,096 )   (65,453 )   (82,723 )   63,650     (94,622 )
Loss on equity-for debt exchange
        (164,974 )   (10,080 )       (175,054 )
Equity in net loss of subsidiaries
    (288,222 )   (110,913 )   (177,260 )   576,395      
   

 

 

 

 

 
Loss before income taxes
    (285,294 )   (288,173 )   (235,100 )   576,395     (232,172 )
Provision for income taxes
            (53,122 )       (53,122 )
   

 

 

 

 

 
Net loss
    (285,294 )   (288,173 )   (288,222 )   576,395     (285,294 )
                                 
Other comprehensive income/(loss):
                               
Foreign currency translation adjustment
    27,155     27,155     27,155     (54,310 )   27,155  
Minimum pension liability adjustment, net of $986 tax benefit
    (7,617 )   (7,617 )   (7,617 )   15,234     (7,617 )
   

 

 

 

 

 
Net comprehensive loss
  $ (265,756 ) $ (268,635 ) $ (268,684 ) $ 537,319   $ (265,756 )
   

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
For the Year Ended December 26, 2003

    Foster Wheeler
Ltd.
  Guarantor
Subsidiary
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 
Operating revenues
  $   $   $ 3,723,815   $   $ 3,723,815  
Cost of operating revenues
            (3,435,726 )       (3,435,726 )
   

 

 

 

 

 
Contract profit
            288,089         288,089  
                                 
Selling, general and administrative expenses
            (205,565 )       (205,565 )
Other income
    13,650     54,037     95,692     (85,886 )   77,493  
Other deductions and minority interest
    (24 )   (198 )   (173,948 )       (174,170 )
Interest expense
    (13,719 )   (63,256 )   (104,395 )   85,886     (95,484 )
Equity in net loss of subsidiaries
    (156,970 )   (147,536 )   (9,417 )   313,923      
   

 

 

 

 

 
Loss before income taxes
    (157,063 )   (156,953 )   (109,544 )   313,923     (109,637 )
Provision for income taxes
            (47,426 )       (47,426 )
   

 

 

 

 

 
Net loss
    (157,063 )   (156,953 )   (156,970 )   313,923     (157,063 )
                                 
Other comprehensive income:
                               
Foreign currency translation adjustments
    6,762     6,762     6,762     (13,524 )   6,762  
Minimum pension liability adjustment, net of tax of $18,886
    58,677     58,677     58,677     (117,354 )   58,677  
   

 

 

 

 

 
Net comprehensive loss
  $ (91,624 ) $ (91,514 ) $ (91,531 ) $ 183,045   $ (91,624 )
   

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
For the Year Ended December 27, 2002

    Foster Wheeler
Ltd.
  Guarantor
Subsidiary
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 
Operating revenues
  $   $   $ 3,519,177   $   $ 3,519,177  
Cost of operating revenues
            (3,426,910 )       (3,426,910 )
   

 

 

 

 

 
Contract Profit
            92,267         92,267  
                                 
Selling, general and administrative expenses
            (226,524 )       (226,524 )
Other income
    13,650     50,355     72,069     (80,714 )   55,360  
Other deductions and minority interest
    (73 )   (4,205 )   (193,859 )       (198,137 )
Interest expense
    (13,749 )   (52,785 )   (97,208 )   80,714     (83,028 )
Equity in net loss of subsidiaries
    (374,547 )   (370,193 )   (4,313 )   749,053      
   

 

 

 

 

 
Loss before income taxes
    (374,719 )   (376,828 )   (357,568 )   749,053     (360,062 )
(Provision)/benefit for income taxes
        2,322     (16,979 )       (14,657 )
   

 

 

 

 

 
Net loss prior to cumulative effect of a change in accounting principle
    (374,719 )   (374,506 )   (374,547 )   749,053     (374,719 )
Cumulative effect on prior years of a change in accounting principle for goodwill, net of $0 tax
    (150,500 )   (150,500 )   (150,500 )   301,000     (150,500 )
   

 

 

 

 

 
Net loss
    (525,219 )   (525,006 )   (525,047 )   1,050,053     (525,219 )
                                 
Other comprehensive (loss)/income:
                               
Foreign currency translation adjustments
    22,241     22,241     22,241     (44,482 )   22,241  
Net loss on derivative instruments
    (3,834 )   (3,834 )   (3,834 )   7,668     (3,834 )
Minimum pension liability adjustment net of tax benefit of $73,400
    (226,011 )   (226,011 )   (226,011 )   452,022     (226,011 )
   

 

 

 

 

 
Net comprehensive loss
  $ (732,823 ) $ (732,610 ) $ (732,651 ) $ 1,465,261   $ (732,823 )
   

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2004

    Foster Wheeler
Ltd.
  Guarantor
Subsidiary
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 
Cash Flows from Operating Activities
                               
Net cash (used)/provided by operating activities
  $ (58 ) $ (14,675 ) $ (204 ) $ (15,926 ) $ (30,863 )
   

 

 

 

 

 
                                 
Cash Flows from Investing Activities
                               
Change in restricted cash
            (17,941 )       (17,941 )
Capital expenditures
            (9,613 )       (9,613 )
Proceeds from sale of assets
            17,495         17,495  
Increase in investment and advances
            (14 )       (14 )
Increase in short-term investments
            (9,426 )       (9,426 )
   

 

 

 

 

 
Net cash used by investing activities
            (19,499 )       (19,499 )
   

 

 

 

 

 
                                 
Cash Flows from Financing Activities
                               
Dividends to shareholders
            (15,926 )   15,926      
Decrease in short-term debt
            (121 )       (121 )
Proceeds from long-term debt
        120,000             120,000  
Repayment of long-term debt
        (128,163 )   (19,559 )       (147,722 )
Other
    58     22,838     (25,559 )       (2,663 )
   

 

 

 

 

 
Net cash provided/(used) by financing activities
             58     14,675     (61,165 )   15,926     (30,506 )
   

 

 

 

 

 
                                 
Effect of exchange rate changes on cash and cash equivalents
            8,340         8,340  
   

 

 

 

 

 
Decrease in cash and cash equivalents
            (72,528 )       (72,528 )
Cash and cash equivalents, beginning of year
            364,095         364,095  
   

 

 

 

 

 
Cash and cash equivalents, end of year
  $   $   $ 291,567   $   $ 291,567  
   

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 26, 2003

    Foster Wheeler
Ltd.
  Guarantor
Subsidiary
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 
Cash Flows from Operating Activities
                               
Net cash used by operating activities
  $ (93 ) $ 18,811   $ (78,576 ) $ (2,240 ) $ (62,098 )
   

 

 

 

 

 
                                 
Cash Flows from Investing Activities
                               
Change in restricted cash
            38,414         38,414  
Capital expenditures
            (12,870 )       (12,870 )
Proceeds from sale of assets
            87,159         87,159  
(Increase)/decrease in investment and advances
                     
Increase in short-term investments
            (6,808 )       (6,808 )
   

 

 

 

 

 
Net cash provided by investing activities
            105,895         105,895  
   

 

 

 

 

 
                                 
Cash Flows from Financing Activities
                               
Dividends to shareholders
            (2,240 )   2,240      
Decrease in short-term debt
            (14,826 )       (14,826 )
Repayment of long-term debt
        (11,837 )   (22,263 )       (34,100 )
Other
    93     (6,974 )   4,002         (2,879 )
   

 

 

 

 

 
Net cash provided/(used) by financing activities
             93     (18,811 )   (35,327 )   2,240     (51,805 )
   

 

 

 

 

 
                                 
Effect of exchange rate changes on cash and cash
equivalents
            27,798         27,798  
   

 

 

 

 

 
Increase in cash and cash equivalents
            19,790         19,790  
Cash and cash equivalents, beginning of period
            344,305         344,305  
   

 

 

 

 

 
Cash and cash equivalents, end of period
  $   $   $ 364,095   $   $ 364,095  
   

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 27, 2002

    Foster Wheeler
Ltd.
  Guarantor
Subsidiary
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 
Cash Flows from Operating Activities
                               
Net cash (used)/provided by operating activities
  $ (172 ) $ (15,109 ) $ 179,036   $ (3,390 ) $ 160,365  
   

 

 

 

 

 
                                 
Cash Flows from Investing Activities
                               
Change in restricted cash
            (84,793 )       (84,793 )
Capital expenditures
            (53,395 )       (53,395 )
Proceeds from sale of assets
            6,282         6,282  
(Increase)/decrease in investment and advances
        (350 )   9,457         9,107  
Decrease in short-term investments
            93         93  
   

 

 

 

 

 
Net cash used by investing activities
        (350 )   (122,356 )       (122,706 )
   

 

 

 

 

 
                                 
Cash Flows from Financing Activities
                               
Dividends to shareholders
            (3,390 )   3,390      
Decrease in short-term debt
            (7,792 )       (7,792 )
Proceeds from long-term debt
        70,000     546         70,546  
Proceeds from lease financing obligation
            44,900         44,900  
Repayment of long-term debt
            (45,591 )       (45,591 )
Other
    172     (54,541 )   52,308         (2,061 )
   

 

 

 

 

 
Net cash provided by financing activities
    172     15,459     40,981     3,390     60,002  
   

 

 

 

 

 
                                 
Effect of exchange rate changes on cash and cash equivalents
            22,624         22,624  
   

 

 

 

 

 
Increase in cash and cash equivalents
            120,285         120,285  
Cash and cash equivalents, beginning of year
            224,020         224,020  
   

 

 

 

 

 
Cash and cash equivalents, end of year
  $   $   $ 344,305   $   $ 344,305  
   

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

C. Trust Preferred Securities

On January 13, 1999, FW Preferred Capital Trust I (the “Capital Trust”), a Delaware Business Trust, which is a 100% indirectly owned finance subsidiary of the Company, consummated a $175,000 public offering of 7,000,000 Trust Preferred Securities (the “Trust Securities”). The Trust Securities, which are fully and unconditionally guaranteed on a joint and several basis by Foster Wheeler Ltd. and Foster Wheeler LLC, accrue cumulative distributions at an annual rate of 9%. The distributions are payable quarterly in arrears on April 15, July 15, October 15 and January 15 of each year. The maturity date of the Trust Securities is January 15, 2029; however, the Capital Trust can redeem the Trust Securities on or after January 15, 2004.

The Capital Trust invested the proceeds from the sale of the Trust Securities in an equal principal amount of 9.0% Junior Subordinated Deferrable Interest Debentures of Foster Wheeler LLC due January 15, 2029 (the “Debentures”). The Company used the net proceeds to pay indebtedness under a revolving credit agreement. The Capital Trust distributes the quarterly cash payments it may receive from Foster Wheeler LLC as interest on the Debentures to the Trust Securities security holders. Foster Wheeler LLC may defer interest on the Debentures for up to 20 consecutive quarterly periods. When this occurs, the Capital Trust also defers distribution payments on the Trust Securities. In accordance with this provision, the Capital Trust has deferred all quarterly distributions beginning with the distribution due on January 15, 2002.

Prior to December 27, 2003 the Capital Trust was consolidated in the financial statements of the Company and the Trust Securities were presented as Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures in the consolidated financial statements. The accumulated undistributed quarterly distributions were presented on the consolidated balance sheet as Deferred Accrued Mandatorily Redeemable Preferred Security Distributions of Subsidiary Trust. The distributions expense on the Trust Securities was presented as interest expense in the consolidated statement of operations and comprehensive loss.

Effective December 27, 2003, the Company adopted FIN No. 46 for variable interest entities formed prior to February 1, 2003. In accordance with the provisions of FIN No. 46, the Company determined that (i) the Capital Trust is a variable interest entity and (ii) the Company is not the primary beneficiary. Accordingly, the Company de-consolidated the Capital Trust as of December 27, 2003. The Company’s consolidated financial statements now reflect Foster Wheeler LLC’s obligations to the Capital Trust as Subordinated Deferrable Interest Debentures and Deferred Accrued Interest on Subordinated Deferrable Interest Debentures. The interest expense on the Debentures is presented on the consolidated statement of operations and comprehensive loss as interest expense.

In 2004, the Company completed an equity-for-debt exchange in which it issued common shares, preferred shares and warrants to purchase common shares in exchange for a portion of the Trust Securities. See Note 7 for further details regarding the exchange including the amount of Trust Securities exchanged.

Summarized below is the condensed financial information of the Capital Trust.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

C. Trust Preferred Securities — (Continued)

Balance Sheet Data:
  December 31, 2004   December 26, 2003  
   

 

 
Non-current assets—subordinated deferrable interest debentures, net of valuation allowance of $154,000 at December 26, 2003
  $ 71,177   $ 21,000  
Non-current assets—accrued interest on subordinated deferrable interest debentures, net of valuation allowance of $17,626 and $38,021, respectively
    5,834      
Long-term liabilities—mandatorily redeemable preferred trust securities
    71,177     175,000  
Long-term liability—deferred accrued mandatorily redeemable preferred security distributions
    23,460     38,021  
Net deficit
    (17,626 )   (192,021 )
               
               
Income Statement Data for the year ended:
  December 31, 2004   December 26, 2003  
   

 

 
Interest income on subordinated deferrable interest debentures
  $   $  
Decrease (increase) in valuation allowance
    151,531     11,550  
Gain on equity-for-debt exchange
    39,430      
Mandatorily redeemable preferred security distributions
    16,566     18,130  
Net earnings/(loss)
    174,395     (6,580 )
               
               
Cash Flow Data for the year ended:
  December 31, 2004   December 26, 2003  
   

 

 
Cash flows from operating activities
  $           —   $           —  
Cash flows from investing activities
         
Cash flows from financing activities
         

SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” states “a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.” SFAS No. 114 requires that the measurement of impairment be based on one of several methods including the loan’s observable market price. The Capital Trust has established a valuation allowance on the subordinated deferrable interest debentures and related interest income receivable from Foster Wheeler LLC based on Foster Wheeler Ltd.’s and Foster Wheeler LLC’s financial condition and the decision to exercise the right to defer payments on the debentures since January 15, 2002. The subordinated deferrable interest debentures and related interest income receivable and the mandatorily redeemable trust preferred securities are the only assets and liabilities of Capital Trust. As a result, the Capital Trust measures loan impairment based on the market price of the mandatorily redeemable trust preferred securities, which is deemed a proxy for the loan’s observable market price. The decrease in the valuation allowance for years ended December 31, 2004 and December 26, 2003, resulted from an increase in the market price of the mandatorily redeemable trust preferred securities. The market price per security of the Trust Securities was $27.05 as of December 31, 2004, $3.00 as of December 26, 2003 and $1.35 as of December 27, 2002.

Additionally, the Capital Trust recorded a gain on the exchange of its mandatorily redeemable preferred trust securities of $39,430 in 2004. The difference between the gain recognized by the Capital Trust of $39,430 and the gain recorded by the Foster Wheeler LLC of $66,352 is due to (1) a $34,646 loss recognized by the Capital Trust on the settlement of 59.3% of the subordinated deferrable interest debentures and the corresponding accrued interest and (2) transaction fees of $4,244 and the write off of unamortized issuance costs of $3,480 borne by Foster Wheeler LLC.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

C. Trust Preferred Securities — (Continued)

The following represents summarized condensed consolidating financial information as of December 31, 2004 with respect to the financial position, and for the year ended December 31, 2004 for results of operations and for cash flows. The following summarized condensed consolidating financial information is presented in lieu of separate financial statements and other related disclosures of the guarantors because management does not believe that such separate financial statements and related disclosures would be material to investors.

The Foster Wheeler Ltd. column presents the parent company’s financial information. Foster Wheeler Ltd. and Foster Wheeler LLC are guarantors. Foster Wheeler LLC is a 100% owned indirect subsidiary of Foster Wheeler Ltd. The guarantees are full and unconditional and joint and several. The non-guarantor subsidiaries include Foster Wheeler Holdings Ltd. (previously known as “Foreign Holdings Ltd.”), the parent of Foster Wheeler LLC. Foster Wheeler LLC owns, directly or indirectly, the other non-guarantor subsidiaries.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

C. Trust Preferred Securities — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2004

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 
Assets
                               
Cash and cash equivalents
  $   $   $ 291,567   $   $ 291,567  
Accounts and notes receivable, net
    416,260     184,449     881,729     (975,942 )   506,496  
Contracts in process and inventories
            174,077         174,077  
Other current assets
            77,158         77,158  
   

 

 

 

 

 
Total current assets
    416,260     184,449     1,424,531     (975,942 )   1,049,298  
Investments in subsidiaries and others
    (1,140,764 )   (711,205 )   (271,114 )   2,281,407     158,324  
Land, buildings & equipment, net
            280,305         280,305  
Notes and accounts receivable—long-term
    210,000     487,108     7,053     (697,108 )   7,053  
Intangible assets, net
            121,502         121,502  
Asbestos-related insurance recovery receivable
        290,494     42,400         332,894  
Other assets
        5,330     232,833         238,163  
   

 

 

 

 

 
TOTAL ASSETS
  $ (514,504 ) $ 256,176   $ 1,837,510   $ 608,357   $ 2,187,539  
   

 

 

 

 

 
                                 
Liabilities & Shareholders’ Deficit
                               
Accounts payable and accrued expenses
  $ (4,239 ) $ 498,673   $ 1,078,636   $ (975,942 ) $ 597,128  
Estimated costs to complete long-term contracts
            458,421         458,421  
Other current liabilities
    (52 )   11,372     188,252         199,572  
   

 

 

 

 

 
Total current liabilities
    (4,291 )   510,045     1,725,309     (975,942 )   1,255,121  
Long-term debt
    3,070     342,820     188,969         534,859  
Pension, postretirement and other employee benefits
            265,869         265,869  
Asbestos-related liability
        405,000     42,400         447,400  
Other long-term liabilities and minority interest
        138,954     755,727     (697,108 )   197,573  
   

 

 

 

 

 
TOTAL LIABILITIES
    (1,221 )   1,396,819     2,978,274     (1,673,050 )   2,700,822  
   

 

 

 

 

 
                                 
Common stock and paid in capital
    883,573     242,613     242,613     (485,226 )   883,573  
Accumulated deficit
    (1,096,348 )   (1,098,795 )   (1,098,916 )   2,197,711     (1,096,348 )
Accumulated other comprehensive loss
    (284,461 )   (284,461 )   (284,461 )   568,922     (284,461 )
Unearned compensation
    (16,047 )               (16,047 )
   

 

 

 

 

 
TOTAL SHAREHOLDERS’ DEFICIT
    (513,283 )   (1,140,643 )   (1,140,764 )   2,281,407     (513,283 )
   

 

 

 

 

 
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
  $ (514,504 ) $ 256,176   $ 1,837,510   $ 608,357   $ 2,187,539  
   

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

C. Trust Preferred Securities — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME/(LOSS)
For the Year Ended December 31, 2004

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 
Operating revenues
  $   $   $ 2,661,324   $   $ 2,661,324  
Cost of operating revenues
            (2,381,969 )       (2,381,969 )
   

 

 

 

 

 
Contract profit
            279,355         279,355  
                                 
Selling, general and administrative expenses
    2,986         (231,948 )       (228,962 )
Other income
    10,063     53,558     88,412     (63,650 )   88,383  
Other deductions and minority interest
    (25 )   (391 )   (100,856 )       (101,272 )
Interest expense
    (10,096 )   (65,453 )   (82,723 )   63,650     (94,622 )
Loss on equity-for debt exchange
        (164,974 )   (10,080 )       (175,054 )
Equity in net loss of subsidiaries
    (288,222 )   (110,913 )   (177,260 )   576,395      
   

 

 

 

 

 
Loss before income taxes
    (285,294 )   (288,173 )   (235,100 )   576,395     (232,172 )
Provision for income taxes
            (53,122 )       (53,122 )
   

 

 

 

 

 
Net loss
    (285,294 )   (288,173 )   (288,222 )   576,395     (285,294 )
Other comprehensive income/(loss):
                               
Foreign currency translation adjustment
    27,155     27,155     27,155     (54,310 )   27,155  
Minimum pension liability adjustment, net of $986 tax benefit
    (7,617 )   (7,617 )   (7,617 )   15,234     (7,617 )
   

 

 

 

 

 
Net comprehensive loss
  $ (265,756 ) $ (268,635 ) $ (268,684 ) $ 537,319   $ (265,756 )
   

 

 

 

 

 

146


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

C. Trust Preferred Securities — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2004

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 
Cash Flows from Operating Activities
                               
Net cash (used)/provided by operating activities
  $ (58 ) $ (14,675 ) $ (204 ) $ (15,926 ) $ (30,863 )
   

 

 

 

 

 
                                 
Cash Flows from Investing Activities
                               
Change in restricted cash
            (17,941 )       (17,941 )
Capital expenditures
            (9,613 )       (9,613 )
Proceeds from sale of assets
            17,495         17,495  
Increase in investment and advances
            (14 )       (14 )
Increase in short-term investments
            (9,426 )       (9,426 )
   

 

 

 

 

 
Net cash used by investing activities
            (19,499 )       (19,499 )
   

 

 

 

 

 
                                 
Cash Flows from Financing Activities
                               
Dividends to shareholders
            (15,926 )   15,926      
Decrease in short-term debt
            (121 )       (121 )
Proceeds from long-term debt
        120,000             120,000  
Repayment of long-term debt
        (128,163 )   (19,559 )       (147,722 )
Other
    58     22,838     (25,559 )       (2,663 )
   

 

 

 

 

 
Net cash provided/(used) by financing activities
    58     14,675     (61,165 )   15,926     (30,506 )
   

 

 

 

 

 
                                 
Effect of exchange rate changes on cash and cash equivalents
            8,340         8,340  
   

 

 

 

 

 
Decrease in cash and cash equivalents
            (72,528 )       (72,528 )
Cash and cash equivalents, beginning of year
            364,095         364,095  
   

 

 

 

 

 
Cash and cash equivalents, end of year
  $           —   $   $ 291,567   $   $ 291,567  
   

 

 

 

 

 

147


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

C. Trust Preferred Securities — (Continued)

As previously noted, the Capital Trust was consolidated in the financial statements of the Company prior to December 27, 2003. Accordingly, the Trust Securities were presented as Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures in the consolidated financial statements. The accumulated undistributed quarterly distributions were presented on the consolidated balance sheet as Deferred Accrued Mandatorily Redeemable Preferred Security Distributions of Subsidiary Trust. The distributions expense on the Trust Securities was presented as Mandatorily Redeemable Preferred Security Distributions of Subsidiary Trust on the consolidated statement of operations and comprehensive loss.

The following represents summarized condensed consolidating financial information as of December 26, 2003 with respect to the financial position, and for each of the two years in the period ended December 26, 2003 for results of operations and for cash flows. The following summarized condensed consolidating financial information is presented in lieu of the financial statements of the 100% indirectly owned subsidiary guarantor and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors.

The Foster Wheeler Ltd. column presents the parent company’s financial information. Foster Wheeler Ltd. is also a guarantor. The FW Preferred Capital Trust column presents the financial information of the issuer. The Guarantor Subsidiary column presents the financial information of Foster Wheeler LLC, but excludes that of Foster Wheeler Ltd., which is separately presented. The guarantees of Foster Wheeler Ltd. and Foster Wheeler LLC are full and unconditional and joint and several. The non-guarantor subsidiaries include Foster Wheeler Holdings Ltd., the parent of Foster Wheeler LLC. Foster Wheeler LLC owns, directly or indirectly, the other non-guarantor subsidiaries.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

C. Trust Preferred Securities — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 26, 2003

    Foster Wheeler
Ltd.
  FW Preferred
Capital Trust (1)
  Guarantor
Subsidiary
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Assets
                                     
Cash and cash equivalents
  $   $   $   $ 364,095   $   $ 364,095  
Accounts and notes receivable, net
            272,361     497,096     (213,043 )   556,414  
Contracts in process and inventories
                173,293         173,293  
Other current assets
                80,574         80,574  
   

 

 

 

 

 

 
Total current assets
            272,361     1,115,058     (213,043 )   1,174,376  
Investments in subsidiaries and others
    (872,080 )       (919,588 )   190,139     1,744,088     142,559  
Land, buildings & equipment, net
                309,615         309,615  
Notes and accounts receivable - long-term
    210,000     175,000     575,118     6,716     (960,058 )   6,776  
Intangible assets, net
                122,689         122,689  
Asbestos-related insurance recovery receivable
            495,400             495,400  
Other assets
            28,478     226,637         255,115  
   

 

 

 

 

 

 
TOTAL ASSETS
  $ (662,080 ) $ 175,000   $ 451,769   $ 1,970,854   $ 570,987   $ 2,506,530  
   

 

 

 

 

 

 
                                       
Liabilities & Shareholders’ Deficit
                                     
Accounts payable and accrued expenses
  $ 412   $   $ 78,278   $ 821,015   $ (213,043 ) $ 686,662  
Estimated costs to complete long-term contracts
                552,754         552,754  
Other current liabilities
    (52 )       (1,085 )   112,080         110,943  
   

 

 

 

 

 

 
Total current liabilities
    360         77,193     1,485,849     (213,043 )   1,350,359  
Long-term debt
    210,000     175,000     328,163     298,809         1,011,972  
Pension, postretirement and other employee benefits
                295,133         295,133  
Asbestos-related liability
            526,200             526,200  
Other long-term liabilities and minority interest
            392,221     763,143     (960,058 )   195,306  
   

 

 

 

 

 

 
TOTAL LIABILITIES
    210,360     175,000     1,323,777     2,842,934     (1,173,101 )   3,378,970  
   

 

 

 

 

 

 
Common stock and paid in capital
    242,613         242,613     242,613     (485,226 )   242,613  
Accumulated deficit
    (811,054 )       (810,622 )   (810,694 )   1,621,316     (811,054 )
Accumulated other comprehensive loss
    (303,999 )       (303,999 )   (303,999 )   607,998     (303,999 )
   

 

 

 

 

 

 
TOTAL SHAREHOLDERS’ DEFICIT
    (872,440 )       (872,008 )   (872,080 )   1,744,088     (872,440 )
   

 

 

 

 

 

 
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
  $ (662,080 ) $ 175,000   $ 451,769   $ 1,970,854   $ 570,987   $ 2,506,530  
   

 

 

 

 

 

 
                                       

 
(1)
For purposes of the condensed consolidated financial information, the FW Preferred Capital Trust has not reflected a valuation allowance on the intercompany note receivable from Foster Wheeler LLC because such allowance is not reflected in the condensed consolidating financial statements of Foster Wheeler Ltd.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

C. Trust Preferred Securities — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
For the Year Ended December 26, 2003

    Foster Wheeler
Ltd.
  FW Preferred
Capital Trust (1)
  Guarantor
Subsidiary
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Operating revenues
  $   $   $   $ 3,723,815   $   $ 3,723,815  
Cost of operating revenues
                (3,435,726 )       (3,435,726 )
   

 

 

 

 

 

 
Contract profit
                288,089         288,089  
                                       
Selling, general and administrative expenses
                (205,565 )       (205,565 )
Other income
    13,650     18,130     54,037     77,562     (85,886 )   77,493  
Other deductions and minority interest
    (24 )       (198 )   (173,948 )       (174,170 )
Interest expense
    (13,719 )   (18,130 )   (63,256 )   (86,265 )   85,886     (95,484 )
Equity in net loss of subsidiaries
    (156,970 )       (147,536 )   (9,417 )   313,923      
   

 

 

 

 

 

 
Loss before income taxes
    (157,063 )       (156,953 )   (109,544 )   313,923     (109,637 )
Provision for income taxes
                (47,426 )       (47,426 )
   

 

 

 

 

 

 
                                       
Net loss
    (157,063 )       (156,953 )   (156,970 )   313,923     (157,063 )
                                       
Other comprehensive income:
                                     
Foreign currency translation adjustments
    6,762         6,762     6,762     (13,524 )   6,762  
Minimum pension liability adjustment, net of tax of $18,886
    58,677         58,677     58,677     (117,354 )   58,677  
   

 

 

 

 

 

 
Net comprehensive loss
  $ (91,624 ) $   $ (91,514 ) $ (91,531 ) $ 183,045   $ (91,624 )
   

 

 

 

 

 

 
                                       

 
(1)
For purposes of the condensed consolidated financial information, the FW Preferred Capital Trust has not reflected a valuation allowance on the intercompany note receivable from Foster Wheeler LLC because such allowance is not reflected in the condensed consolidating financial statements of Foster Wheeler Ltd.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

C. Trust Preferred Securities — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
For the Year Ended December 27, 2002

    Foster Wheeler
Ltd.
  FW Preferred
Capital Trust(1)
  Guarantor
Subsidiary
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Operating revenues
  $   $   $   $ 3,519,177   $   $ 3,519,177  
Cost of operating revenues
                (3,426,910 )       (3,426,910 )
   

 

 

 

 

 

 
Contract Profit
                92,267         92,267  
                                       
Selling, general and administrative expenses
                (226,524 )       (226,524 )
Other income
    13,650     16,610     50,355     55,459     (80,714 )   55,360  
Other deductions and minority interest
    (73 )       (4,205 )   (193,859 )       (198,137 )
Interest expense
    (13,749 )   (16,610 )   (52,785 )   (80,598 )   80,714     (83,028 )
Equity in net loss of subsidiaries
    (374,547 )       (370,193 )   (4,313 )   749,053      
   

 

 

 

 

 

 
Loss before income taxes
    (374,719 )       (376,828 )   (357,568 )   749,053     (360,062 )
(Provision)/benefit for income taxes
            2,322     (16,979 )       (14,657 )
   

 

 

 

 

 

 
Net loss prior to cumulative effect of a change in accounting principle
    (374,719 )       (374,506 )   (374,547 )   749,053     (374,719 )
Cumulative effect on prior years of a change in accounting principle for goodwill, net of $0 tax
    (150,500 )       (150,500 )   (150,500 )   301,000     (150,500 )
   

 

 

 

 

 

 
                                       
Net loss
    (525,219 )       (525,006 )   (525,047 )   1,050,053     (525,219 )
                                       
Other comprehensive (loss)/income:
                                     
Foreign currency translation adjustments
    22,241         22,241     22,241     (44,482 )   22,241  
Net loss on derivative instruments
    (3,834 )       (3,834 )   (3,834 )   7,668     (3,834 )
Minimum pension liability adjustment net of tax benefit of $73,400
    (226,011 )       (226,011 )   (226,011 )   452,022     (226,011 )
   

 

 

 

 

 

 
Net comprehensive loss
  $ (732,823 ) $   $ (732,610 ) $ (732,651 ) $ 1,465,261   $ (732,823 )
   

 

 

 

 

 

 
                                       

 
(1)
For purposes of the condensed consolidated financial information, the FW Preferred Capital Trust has not reflected a valuation allowance on the intercompany note receivable from Foster Wheeler LLC because such allowance is not reflected in the condensed consolidating financial statements of Foster Wheeler Ltd.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

C. Trust Preferred Securities — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 26, 2003

    Foster Wheeler
Ltd.
  FW Preferred
Capital Trust
  Guarantor
Subsidiary
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Cash Flows from Operating Activities
                                     
Net cash used by operating activities
  $ (93 ) $   $ 18,811   $ (78,576 ) $ (2,240 ) $ (62,098 )
   

 

 

 

 

 

 
                                       
Cash Flows from Investing Activities
                                     
Change in restricted cash
                38,414         38,414  
Capital expenditures
                (12,870 )       (12,870 )
Proceeds from sale of assets
                87,159         87,159  
Decrease in investment and advances
                         
Increase in short-term investments
                (6,808 )       (6,808 )
   

 

 

 

 

 

 
Net cash provided by investing activities
                105,895         105,895  
   

 

 

 

 

 

 
                                       
Cash Flows from Financing Activities
                                     
Dividends to shareholders
                (2,240 )   2,240      
Decrease in short-term debt
                (14,826 )       (14,826 )
Repayment of long-term debt
            (11,837 )   (22,263 )       (34,100 )
Other
    93         (6,974 )   4,002         (2,879 )
   

 

 

 

 

 

 
Net cash provided/(used) by financing activities
              93               —     (18,811 )   (35,327 )   2,240     (51,805 )
   

 

 

 

 

 

 
                                       
Effect of exchange rate changes on cash and cash equivalents
                27,798         27,798  
   

 

 

 

 

 

 
Increase in cash and cash equivalents
                19,790         19,790  
Cash and cash equivalents, beginning of period
                344,305         344,305  
   

 

 

 

 

 

 
Cash and cash equivalents, end of period
  $   $   $   $ 364,095   $   $ 364,095  
   

 

 

 

 

 

 

152


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

C. Trust Preferred Securities — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 27, 2002

    Foster Wheeler
Ltd.
  FW Preferred
Capital Trust
  Guarantor
Subsidiary
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Cash Flows from Operating Activities
                                     
Net cash (used)/provided by operating
activities
  $ (172 ) $   $ (15,109 ) $ 179,036   $ (3,390 ) $ 160,365  
   

 

 

 

 

 

 
                                       
Cash Flows from Investing Activities
                                     
Change in restricted cash
                (84,793 )       (84,793 )
Capital expenditures
                (53,395 )       (53,395 )
Proceeds from sale of assets
                6,282         6,282  
(Increase)/decrease in investment and advances
            (350 )   9,457         9,107  
Decrease in short-term investments
                93         93  
   

 

 

 

 

 

 
Net cash used by investing activities
            (350 )   (122,356 )       (122,706 )
   

 

 

 

 

 

 
                                       
Cash Flows from Financing Activities
                                     
Dividends to shareholders
                (3,390 )   3,390      
Decrease in short-term debt
                (7,792 )       (7,792 )
Proceeds from long-term debt
            70,000     546         70,546  
Proceeds from lease financing obligation
                44,900         44,900  
Repayment of long-term debt
                (45,591 )       (45,591 )
Other
    172         (54,541 )   52,308         (2,061 )
   

 

 

 

 

 

 
Net cash provided by financing activities
    172         15,459     40,981     3,390     60,002  
   

 

 

 

 

 

 
                                       
Effect of exchange rate changes on cash and cash equivalents
                22,624         22,624  
   

 

 

 

 

 

 
Increase in cash and cash equivalents
                120,285         120,285  
Cash and cash equivalents, beginning of year
                224,020         224,020  
   

 

 

 

 

 

 
Cash and cash equivalents, end of year
  $           —   $           —   $   $ 344,305   $   $ 344,305  
   

 

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

D. 2011 Senior Notes

In conjunction with the equity-for-debt exchange, Foster Wheeler LLC issued new 2011 Senior Notes in exchange for a portion of its 2005 Senior Notes. See Note 7 for further details regarding the exchange.

The 2011 Senior Notes are fully and unconditionally guaranteed by Foster Wheeler Ltd. and the following companies: Continental Finance Company Ltd., Energy Holdings, Inc., Equipment Consultants, Inc., Financial Services S.a.r.l., Foster Wheeler Holdings, Ltd., Foster Wheeler Asia Limited, Foster Wheeler Caribe Corporation, C.A., Foster Wheeler Constructors, Inc., Foster Wheeler Continental B.V., Foster Wheeler Development Corporation, FW Energie B.V., Foster Wheeler Energy Corporation, Foster Wheeler Energy Manufacturing, Inc., Foster Wheeler Energy Services, Inc., Foster Wheeler Environmental Corporation, Foster Wheeler Europe B.V., Foster Wheeler Europe Limited, Foster Wheeler Facilities Management, Inc., Foster Wheeler Inc., Foster Wheeler Intercontinental Corporation, Foster Wheeler International Corporation, Foster Wheeler International Holdings, Inc., Foster Wheeler Middle East Corporation, Foster Wheeler North America Corp. (formerly known as “Foster Wheeler Power Group, Inc.”), Foster Wheeler Petroleum Services S.A.E., Foster Wheeler Power Company/La Societe D’ Energie Foster Wheeler Ltee., Foster Wheeler Power Corporation, Foster Wheeler Power Systems, Inc., Foster Wheeler Pyropower, Inc., Foster Wheeler Real Estate Development Corporation, Foster Wheeler Realty Services, Inc., Foster Wheeler USA Corporation, Foster Wheeler Virgin Islands, Inc., Foster Wheeler Zack, Inc., FW Gestao E. Servicos, S.A., FW Hungary Licensing Limited Liability Company, FW Management Operations, Ltd., FW Overseas Operations Limited, HFM International, Inc., Manops Limited, P.E. Consultants, Inc., Perryville Service Company Ltd., PGI Holdings, Inc., Process Consultants, Inc., Pyropower Operating Services Company, Inc., Perryville III Trust and Singleton Process Systems GmbH. Each of the guarantees is full and unconditional and joint and several. Foster Wheeler LLC and each of the subsidiary guarantors are 100% owned, directly or indirectly, by Foster Wheeler Ltd. The summarized consolidating financial information is presented in lieu of separate financial statements and other related disclosures of the subsidiary guarantors and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors. The following represents summarized condensed consolidating financial information as of December 31, 2004 and December 26, 2003 with respect to the financial position, and for each of the three years in the period ended December 31, 2004 for results of operations and for cash flows.

The Foster Wheeler Ltd. column presents the parent company’s financial information. Foster Wheeler Ltd. is also a guarantor. The Foster Wheeler LLC column presents the issuer’s financial information. The Guarantor Subsidiaries column presents the financial information of all guarantors excluding that of Foster Wheeler Ltd., which is separately presented. The guarantor subsidiaries include the results of Foster Wheeler Holdings Ltd. (formerly known as “Foreign Holdings Ltd.”), the parent of Foster Wheeler LLC. Foster Wheeler LLC owns, directly or indirectly, the other guarantor subsidiaries and non-guarantor subsidiaries.

Under the terms of the 2011 Senior Notes indenture, the Company had the option to add certain specified wholly owned subsidiaries as guarantors by December 31, 2004, to avoid a 1% increase in the interest rate. The Company added all but one of the additional guarantors by December 31, 2004 with the final guarantor being added in January 2005. Accordingly, the interest rate on the 2011 Senior Notes was 1% higher for that period of time during January 2005 that the Company had not provided the additional guarantor subsidiary.

154


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

D. 2011 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2004

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Assets
                                     
Cash and cash equivalents
  $   $   $ 54,289   $ 237,278   $   $ 291,567  
Accounts and notes receivable, net
    416,260     184,449     187,842     607,847     (889,902 )   506,496  
Contracts in process and inventories
            49,618     124,456     3     174,077  
Investment and advances
            1,247         (1,247 )    
Other current assets
            3,711     73,895     (448 )   77,158  
   

 

 

 

 

 

 
Total current assets
    416,260     184,449     296,707     1,043,476     (891,594 )   1,049,298  
Investments in subsidiaries and others
    (1,140,764 )   (711,205 )   (213,783 )   245,701     1,978,375     158,324  
Land, buildings & equipment, net
            46,005     234,300         280,305  
Notes and accounts receivable - long-term
    210,000     487,108     94,252     16,426     (800,733 )   7,053  
Intangible assets, net
            98,979     22,523         121,502  
Asbestos-related insurance recovery receivable
        290,494         42,400         332,894  
Other assets
        5,330     79,893     152,940         238,163  
   

 

 

 

 

 

 
TOTAL ASSETS
  $ (514,504 ) $ 256,176   $ 402,053   $ 1,757,766   $ 286,048   $ 2,187,539  
   

 

 

 

 

 

 
                                       
Liabilities & Shareholders’ (Deficit)/Equity
                                     
Accounts payable and accrued expenses
  $ (4,239 ) $ 498,673   $ 520,049   $ 472,542   $ (889,897 ) $ 597,128  
Estimated costs to complete long-term contracts
            96,041     362,380         458,421  
Other current liabilities
    (52 )   11,372     11,581     177,119     (448 )   199,572  
   

 

 

 

 

 

 
Total current liabilities
    (4,291 )   510,045     627,671     1,012,041     (890,345 )   1,255,121  
Long-term debt
    3,070     342,820     66,073     122,896         534,859  
Pension, postretirement and other employee benefits
            201,164     64,705         265,869  
Asbestos-related liability
        405,000         42,400         447,400  
Other long-term liabilities and minority interest
        138,954     647,909     224,910     (814,200 )   197,573  
   

 

 

 

 

 

 
TOTAL LIABILITIES
    (1,221 )   1,396,819     1,542,817     1,466,952     (1,704,545 )   2,700,822  
   

 

 

 

 

 

 
Common stock and paid-in capital
    883,573     242,613     242,613     301,293     (786,519 )   883,573  
Accumulated (deficit)/retained earnings
    (1,096,348 )   (1,098,795 )   (1,098,916 )   128,077     2,069,634     (1,096,348 )
Accumulated other comprehensive loss
    (284,461 )   (284,461 )   (284,461 )   (138,556 )   707,478     (284,461 )
Unearned compensation
    (16,047 )                   (16,047 )
   

 

 

 

 

 

 
TOTAL SHAREHOLDERS’ (DEFICIT)/EQUITY
    (513,283 )   (1,140,643 )   (1,140,764 )   290,814     1,990,593     (513,283 )
   

 

 

 

 

 

 
TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT)/EQUITY
  $ (514,504 ) $ 256,176   $ 402,053   $ 1,757,766   $ 286,048   $ 2,187,539  
   

 

 

 

 

 

 

155


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

D. 2011 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 26, 2003

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Assets
                                     
Cash and cash equivalents
  $   $   $ 38,740   $ 325,355   $   $ 364,095  
Accounts and notes receivable, net
        272,361     132,531     740,779     (589,257 )   556,414  
Contracts in process and inventories
            134,158     48,290     (9,155 )   173,293  
Investment and advances
            88,641         (88,641 )    
Other current assets
            5,231     75,343         80,574  
   

 

 

 

 

 

 
Total current assets
        272,361     399,301     1,189,767     (687,053 )   1,174,376  
Investments in subsidiaries and others
    (872,080 )   (919,588 )   303,855     226,093     1,404,279     142,559  
Land, buildings & equipment, net
            66,281     243,334         309,615  
Notes and accounts receivable - long-term
    210,000     575,118     87,979     148,564     (1,014,885 )   6,776  
Intangible assets, net
            101,664     21,025         122,689  
Asbestos-related insurance recovery receivable
        495,400                 495,400  
Subordinated debt
        28,478     84,229     142,408         255,115  
   

 

 

 

 

 

 
TOTAL ASSETS
  $ (662,080 ) $ 451,769   $ 1,043,309   $ 1,971,191   $ (297,659 ) $ 2,506,530  
   

 

 

 

 

 

 
                                       
Liabilities & Shareholders’ (Deficit)/Equity
                                     
Accounts payable and accrued expenses
  $ 412   $ 78,278   $ 705,299   $ 501,085   $ (598,412 ) $ 686,662  
Estimated costs to complete long-term contracts
            164,914     387,840         552,754  
Other current liabilities
    (52 )   (1,085 )   4,891     107,189         110,943  
   

 

 

 

 

 

 
Total current liabilities
    360     77,193     875,104     996,114     (598,412 )   1,350,359  
Long-term debt
    210,000     328,163     155,709     318,100         1,011,972  
Pension, postretirement and other employee benefits
            216,281     78,852         295,133  
Asbestos-related liability
        526,200                 526,200  
Other long-term liabilities and minority interest
        392,221     668,295     163,663     (1,028,873 )   195,306  
   

 

 

 

 

 

 
TOTAL LIABILITIES
    210,360     1,323,777     1,915,389     1,556,729     (1,627,285 )   3,378,970  
   

 

 

 

 

 

 
Common stock and paid-in capital
    242,613     242,613     242,613     466,855     (952,081 )   242,613  
Accumulated (deficit)/retained earnings
    (811,054 )   (810,622 )   (810,694 )   125,203     1,496,113     (811,054 )
Accumulated other comprehensive loss
    (303,999 )   (303,999 )   (303,999 )   (177,596 )   785,594     (303,999 )
   

 

 

 

 

 

 
TOTAL SHAREHOLDERS’ (DEFICIT)/EQUITY
    (872,440 )   (872,008 )   (872,080 )   414,462     1,329,626     (872,440 )
   

 

 

 

 

 

 
TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT)/EQUITY
  $ (662,080 ) $ 451,769   $ 1,043,309   $ 1,971,191   $ (297,659 ) $ 2,506,530  
   

 

 

 

 

 

 

156


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

D. 2011 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME/(LOSS)
For the Year Ended December 31, 2004

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Operating revenues
  $   $   $ 615,260   $ 2,121,571   $ (75,507 ) $ 2,661,324  
Cost of operating revenues
            (515,023 )   (1,942,453 )   75,507     (2,381,969 )
   

 

 

 

 

 

 
Contract profit
            100,237     179,118         279,355  
                                       
Selling, general and administrative expenses
    2,986         (54,320 )   (177,628 )       (228,962 )
Other income
    10,063     53,558     25,967     92,782     (93,987 )   88,383  
Other deductions and minority interest
    (25 )   (391 )   (92,296 )   (15,267 )   6,707     (101,272 )
Interest expense
    (10,096 )   (65,453 )   (89,154 )   (17,199 )   87,280     (94,622 )
Loss on equity-for debt exchange
        (164,974 )   (10,080 )           (175,054 )
Equity in net loss of subsidiaries
    (288,222 )   (110,913 )   (162,670 )       561,805      
   

 

 

 

 

 

 
Loss before income taxes
    (285,294 )   (288,173 )   (282,316 )   61,806     561,805     (232,172 )
Benefit/(provision) for income taxes
            (5,906 )   (47,216 )       (53,122 )
   

 

 

 

 

 

 
Net loss
    (285,294 )   (288,173 )   (288,222 )   14,590     561,805     (285,294 )
                                       
Other comprehensive income/(loss):
                                     
Foreign currency translation adjustment
    27,155     27,155     27,155     40,173     (94,483 )   27,155  
Minimum pension liability adjustment, net of $986 tax benefit
    (7,617 )   (7,617 )   (7,617 )   (1,827 )   17,061     (7,617 )
   

 

 

 

 

 

 
Net comprehensive (loss)/income
  $ (265,756 ) $ (268,635 ) $ (268,684 ) $ 52,936   $ 484,383   $ (265,756 )
   

 

 

 

 

 

 

157


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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

D. 2011 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE (LOSS)/INCOME
For the Year Ended December 26, 2003

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Operating revenues
  $   $   $ 995,137   $ 2,819,730   $ (91,052 ) $ 3,723,815  
Cost of operating revenues
            (920,791 )   (2,611,487 )   96,552     (3,435,726 )
   

 

 

 

 

 

 
Total revenues and other income
            74,346     208,243     5,500     288,089  
                                       
Selling, general and administrative expenses
            (88,028 )   (117,427 )   (110 )   (205,565 )
Other income
    13,650     54,037     55,734     87,589     (133,517 )   77,493  
Other deductions and minority interest
    (24 )   (198 )   (132,366 )   (66,575 )   24,993     (174,170 )
Interest expense
    (13,719 )   (63,256 )   (79,432 )   (42,211 )   103,134     (95,484 )
Equity in net (loss)/earnings of subsidiaries
    (156,970 )   (147,536 )   37,273         267,233      
   

 

 

 

 

 

 
(Loss)/earnings before income taxes
    (157,063 )   (156,953 )   (132,473 )   69,619     267,233     (109,637 )
Provision for income taxes
            (24,497 )   (22,929 )       (47,426 )
   

 

 

 

 

 

 
Net (loss)/earnings
    (157,063 )   (156,953 )   (156,970 )   46,690     267,233     (157,063 )
                                       
Other comprehensive income:
                                     
Foreign currency translation adjustments
    6,762     6,762     6,762     7,051     (20,575 )   6,762  
Minimum pension liability adjustment, net of tax of $18,886
    58,677     58,677     58,677     44,483     (161,837 )   58,677  
   

 

 

 

 

 

 
Net comprehensive (loss)/income
  $ (91,624 ) $ (91,514 ) $ (91,531 ) $ 98,224   $ 84,821   $ (91,624 )
   

 

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

D. 2011 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
For the Year Ended December 27, 2002

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiary
  Non-Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Operating revenues
  $   $   $ 1,497,719   $ 2,117,251   $ (95,793 ) $ 3,519,177  
Cost of operating revenues
            (1,544,240 )   (1,978,463 )   95,793     (3,426,910 )
   

 

 

 

 

 

 
Contract Profit
            (46,521 )   138,788         92,267  
                                       
Selling, general and administrative expenses
            (129,737 )   (96,787 )       (226,524 )
Other income
    13,650     50,355     57,939     63,043     (129,627 )   55,360  
Other deductions and minority interest
    (73 )   (4,205 )   (101,155 )   (119,296 )   26,592     (198,137 )
Interest expense
    (13,749 )   (52,785 )   (71,545 )   (47,984 )   103,035     (83,028 )
Equity in net loss of subsidiaries
    (374,547 )   (370,193 )   (72,502 )       817,242      
   

 

 

 

 

 

 
Loss before income taxes
    (374,719 )   (376,828 )   (363,521 )   (62,236 )   817,242     (360,062 )
(Provision)/benefit for income taxes
        2,322     (11,026 )   (5,953 )       (14,657 )
   

 

 

 

 

 

 
Net loss prior to cumulative effect of a change in accounting principle
    (374,719 )   (374,506 )   (374,547 )   (68,189 )   817,242     (374,719 )
Cumulative effect on prior years of a change in accounting principle for goodwill, net of $0 tax
    (150,500 )   (150,500 )   (150,500 )   (24,800 )   325,800     (150,500 )
   

 

 

 

 

 

 
Net loss
    (525,219 )   (525,006 )   (525,047 )   (92,989 )   1,143,042     (525,219 )
                                       
Other comprehensive (loss)/income:
                                     
Foreign currency translation adjustments
    22,241     22,241     22,241     30,859     (75,341 )   22,241  
Net loss on derivative instruments
    (3,834 )   (3,834 )   (3,834 )   284     7,384     (3,834 )
Minimum pension liability adjustment net of tax benefit of $73,400
    (226,011 )   (226,011 )   (226,011 )   (170,303 )   622,325     (226,011 )
   

 

 

 

 

 

 
Net comprehensive loss
  $ (732,823 ) $ (732,610 ) $ (732,651 ) $ (232,149 ) $ 1,697,410   $ (732,823 )
   

 

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

D. 2011 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2004

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Cash Flows from Operating Activities
                                     
Net cash (used)/provided by operating activities
  $ (58 ) $ (14,675 ) $ (122,545 ) $ 175,732   $ (69,317 ) $ (30,863 )
   

 

 

 

 

 

 
                                       
Cash Flows from Investing Activities
                                     
Change in restricted cash
            (730 )   (17,211 )       (17,941 )
Capital expenditures
            (280 )   (9,333 )       (9,613 )
Proceeds from sale of assets
            16,709     786         17,495  
(Increase)/decrease in investment and advances
            164,701     (164,715 )       (14 )
Increase in short-term investments
                (9,426 )       (9,426 )
   

 

 

 

 

 

 
Net cash provided/(used) by investing activities
            180,400     (199,899 )       (19,499 )
   

 

 

 

 

 

 
                                       
Cash Flows from Financing Activities
                                     
Dividends to shareholders
            (12,419 )   (56,898 )   69,317      
Decrease in short-term debt
                (121 )       (121 )
Proceeds from long-term debt
        120,000                 120,000  
Repayment of long-term debt
        (128,163 )   (14 )   (19,545 )       (147,722 )
Other
    58     22,838     (30,342 )   4,783         (2,663 )
   

 

 

 

 

 

 
Net cash provided/(used) by financing activities
    58     14,675     (42,775 )   (71,781 )   69,317     (30,506 )
   

 

 

 

 

 

 
                                       
Effect of exchange rate changes on cash and cash equivalents
            469     7,871         8,340  
   

 

 

 

 

 

 
Increase/(decrease) in cash and cash equivalents
            15,549     (88,077 )       (72,528 )
Cash and cash equivalents, beginning of year
            38,740     325,355         364,095  
   

 

 

 

 

 

 
Cash and cash equivalents, end of year
  $           —   $   $ 54,289   $ 237,278   $   $ 291,567  
   

 

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

D. 2011 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 26, 2003

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Cash Flows from Operating Activities
                                     
Net cash (used)/provided by operating activities
  $ (93 ) $ 18,811   $ (231,918 ) $ 187,432   $ (36,330 ) $ (62,098 )
   

 

 

 

 

 

 
                                       
Cash Flows from Investing Activities
                                     
Change in restricted cash
            15,569     22,845         38,414  
Capital expenditures
            (1,033 )   (11,837 )       (12,870 )
Proceeds from sale of assets
            79,701     7,458         87,159  
(Increase)/decrease in investment and advances
            200,993     (200,993 )        
Increase in short-term investments
                (6,808 )       (6,808 )
   

 

 

 

 

 

 
Net cash provided by investing activities
            295,230     (189,335 )       105,895  
   

 

 

 

 

 

 
                                       
Cash Flows from Financing Activities
                                     
Dividends to shareholders
                (36,330 )   36,330      
Decrease in short-term debt
                (14,826 )       (14,826 )
Repayment of long-term debt
        (11,837 )   (1,580 )   (20,683 )       (34,100 )
Other
    93     (6,974 )   (48,348 )   52,350         (2,879 )
   

 

 

 

 

 

 
Net cash provided/(used) by financing activities
    93     (18,811 )   (49,928 )   (19,489 )   36,330     (51,805 )
   

 

 

 

 

 

 
                                       
Effect of exchange rate changes on cash and cash equivalents
            (1,502 )   29,300         27,798  
   

 

 

 

 

 

 
Increase in cash and cash equivalents
            11,882     7,908         19,790  
Cash and cash equivalents, beginning of period
            26,858     317,447         344,305  
   

 

 

 

 

 

 
Cash and cash equivalents, end of period
  $           —   $   $ 38,740   $ 325,355   $   $ 364,095  
   

 

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

25. Consolidating Financial Information — (Continued)

D. 2011 Senior Notes — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 27, 2002

    Foster Wheeler
Ltd.
  Foster Wheeler
LLC
  Guarantor
Subsidiaries
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated  
   

 

 

 

 

 

 
Cash Flows from Operating Activities
                                     
Net cash (used)/provided by operating activities
  $ (172 ) $ (15,109 ) $ 189,065   $ 2,086   $ (15,505 ) $ 160,365  
   

 

 

 

 

 

 
                                       
Cash Flows from Investing Activities
                                     
Change in restricted cash
            (16,056 )   (68,737 )       (84,793 )
Capital expenditures
            (41,093 )   (12,302 )       (53,395 )
Proceeds from sale of assets
            1,807     4,475         6,282  
(Increase)/decrease in investment and advances
        (350 )   (252,468 )   261,925         9,107  
Decrease in short-term investments
                93         93  
   

 

 

 

 

 

 
Net cash used by investing activities
        (350 )   (307,810 )   185,454         (122,706 )
   

 

 

 

 

 

 
                                       
Cash Flows from Financing Activities
                                     
Dividends to shareholders
                (15,505 )   15,505      
Decrease in short-term debt
                (7,792 )       (7,792 )
Proceeds from long-term debt
        70,000         546         70,546  
Proceeds from lease financing obligation
            44,900             44,900  
Repayment of long-term debt
            (24,440 )   (21,151 )       (45,591 )
Other
    172     (54,541 )   64,315     (12,007 )       (2,061 )
   

 

 

 

 

 

 
Net cash provided/(used) by financing activities
    172     15,459     84,775     (55,909 )   15,505     60,002  
   

 

 

 

 

 

 
                                       
Effect of exchange rate changes on cash and cash equivalents
            (1,039 )   23,663         22,624  
   

 

 

 

 

 

 
(Decrease)/increase in cash and cash equivalents
            (35,009 )   155,294         120,285  
Cash and cash equivalents, beginning of year
            61,867     162,153         224,020  
   

 

 

 

 

 

 
Cash and cash equivalents, end of year
  $   $   $ 26,858   $ 317,447   $   $ 344,305  
   

 

 

 

 

 

 

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except share data and per share amounts)

26. Related Party Transactions

Mr. Kenneth A. Hiltz served as Chief Financial Officer of Foster Wheeler Ltd. from April 7, 2003 until January 30, 2004 pursuant to an agreement between Foster Wheeler and AP Services, LLC, a subsidiary of AlixPartners to provide financial management and consulting services. Mr. Hiltz is also a principal with AlixPartners, LLC. Mr. Ryan J. Esko, an employee of AlixPartners, served as Treasurer of the Company from November 26, 2002 to January 30, 2004 pursuant to an agreement between Foster Wheeler and AP Services, LLC, a subsidiary of AlixPartners to also provide financial management services to the Company. The Company paid AlixPartners, LLC approximately $743 for Mr. Hiltz’s services and $1,017 for Mr. Esko’s services during 2003, and approximately $172 for Mr. Hiltz’s services and $118 for Mr. Esko’s services through December 2004 based upon the agreement terms. An additional $8,613 in 2003 and $2,952 in 2004 was paid to AlixPartners for financial management and consulting services.

Mr. Victor A. Hebert is an attorney with the law firm of Heller Ehrman White & McAuliffe LLP and served as a director of Foster Wheeler Ltd. during 2003 until his resignation in November 2003. The law firm of Heller Ehrman White & McAuliffe was appointed to serve as the Company’s General Counsel in connection with the retirement of the Company’s general counsel, Thomas R. O’Brien. Mr. Hebert on behalf of Heller Ehrman was selected to lead the Company’s legal team and was the Assistant Secretary until February 10, 2005 when he ceased to be the general counsel and assistant secretary. The Company made payments to Heller Ehrman in the amount of $1,317 during 2004.

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Foster Wheeler Ltd.
Schedule II: Valuation and Qualifying Accounts
(amounts in thousands)

    2004  
   
 
Description
  Balance at
Beginning
of Year
  Additions
Charged
to Costs
and Expenses
  Additions
Charged
to Other
Accounts
  Deductions   Balance
at the End
of the Year
 

 

 

 

 

 

 
                                 
Allowance for insurance claims receivable
  $ 96,969   $ 57,791   $   $ (60,474 ) $ 94,286  
   

 

 

 

 

 
Allowance for doubtful accounts (1)
  $ 37,406   $ 14,713   $ 3,053   $ (31,973 ) $ 23,199  
   

 

 

 

 

 
Tax valuation allowance
  $ 534,790   $ 31,540   $   $ (331,898 ) $ 234,432  
   

 

 

 

 

 
                                 
                                 
    2003  
   
 
Description
  Balance at
Beginning
of Year
  Additions
Charged
to Costs
and Expenses
  Additions
Charged
to Other
Accounts
  Deductions   Balance
at the End
of the Year
 

 

 

 

 

 

 
                                 
Allowance for insurance claims receivable
  $ 37,877   $ 68,081   $   $ (8,989 ) $ 96,969  
   

 

 

 

 

 
Allowance for doubtful accounts (1)
  $ 73,048   $ 26,261   $ 1,457   $ (63,360 ) $ 37,406  
   

 

 

 

 

 
Tax valuation allowance
  $ 444,427   $ 64,074   $   $ 26,289   $ 534,790  
   

 

 

 

 

 
                                 
                                 
    2002  
   
 
Description
  Balance at
Beginning
of Year
  Additions
Charged
to Costs
and Expenses
  Additions
Charged
to Other
Accounts
  Deductions   Balance
at the End
of the Year
 

 

 

 

 

 

 
Allowance for insurance claims receivable
  $ 18,836   $ 26,200   $   $ (7,159 ) $ 37,877  
   

 

 

 

 

 
Allowance for doubtful accounts (1)
  $ 2,988   $ 19,608   $ 56,451   $ (5,999 ) $ 73,048  
   

 

 

 

 

 
Tax valuation allowance
  $ 268,851   $ 162,580   $   $ 12,996   $ 444,427  
   

 

 

 

 

 

 
(1)
Provisions for non-payments of customer balances are normally addressed within the overall profit calculation of the contracts and are not specifically covered by allowances for doubtful accounts. As a result the amount considered to be in the receivable qualifying account (allowance for doubtful accounts) does not represent the full allowance.

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Included on the following pages are the financial statements for certain Foster Wheeler Ltd. indirectly wholly owned subsidiary companies. The Company is required to provide these financial statements under Regulation S-X Rule 3-16, “Financial Statements of Affiliates Whose Securities Collateralize an Issue Registered or Being Registered.” The stock and/or debt of these subsidiaries collateralize the Company’s Senior Notes due 2011 as described in Note 8 of Foster Wheeler Ltd.’s consolidated financial statements appearing in this Item 8.

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FOSTER WHEELER HOLDINGS LTD.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2004

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Foster Wheeler Ltd:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, of cash flows and of changes in shareholder’s deficit present fairly, in all material respects, the financial position of Foster Wheeler Holdings Ltd. (the “Company”), an indirect, wholly-owned subsidiary of Foster Wheeler Ltd. (the “Parent”), at December 31, 2004 and December 26, 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.

As discussed in Note 3 to the consolidated financial statements, effective December 29, 2001, the Company adopted Statement of Financial Accounting Standard No. 142 “Goodwill and Other Tangible Assets.”

The accompanying financial statements have been prepared assuming the Company and the Parent will continue as a going concern. As discussed in Note 2 to the financial statements, the Parent has incurred significant losses in each of the three years in the period ended December 31, 2004 and has a shareholders’ deficit of $513,283,000 at December 31, 2004. The Parent has substantial debt obligations and during 2004 it was required to obtain an additional amendment to its senior credit facility to provide covenant relief by modifying certain definitions of financial measures utilized in the calculation of certain financial covenants. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Parent’s ability to return to profitability, to complete planned restructuring activities, to generate cash flows from operations and collections of receivables to fund its operations, including obligations resulting from asbestos claims, as well as the maintenance of credit facilities and bonding capacity adequate to conduct business. These matters raise substantial doubt about the Company’s and the Parent’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 30, 2005

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands of dollars)

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
                     
Operating revenues
  $ 2,661,324   $ 3,723,815   $ 3,519,177  
Cost of operating revenues
    (2,381,969 )   (3,435,726 )   (3,426,910 )
   

 

 

 
Contract profit
    279,355     288,089     92,267  
                     
                     
Selling, general and administrative expenses
    (231,948 )   (205,565 )   (226,524 )
Other income (including interest:
                   
2004—$ 8,832; 2003—$10,130; 2002—$12,251)
    88,350     77,493     55,360  
Other deductions
    (96,347 )   (168,432 )   (193,083 )
Interest expense
    (94,556 )   (95,415 )   (82,929 )
Minority interest
    (4,900 )   (5,715 )   (4,981 )
Loss on equity-for-debt exchange
    (175,054 )        
   

 

 

 
Loss before income taxes
    (235,100 )   (109,545 )   (359,890 )
Provision for income taxes
    (53,122 )   (47,426 )   (14,657 )
   

 

 

 
Loss prior to cumulative effect of a change in accounting principle
    (288,222 )   (156,971 )   (374,547 )
Cumulative effect of a change in accounting principle for goodwill, net of $0 tax
            (150,500 )
   

 

 

 
Net loss
    (288,222 )   (156,971 )   (525,047 )
Other comprehensive income/(loss):
                   
Change in gain on derivative instruments designated as cash flow hedges
            (3,834 )
Foreign currency translation adjustment
    27,155     6,762     22,241  
Minimum pension liability adjustment (net of tax (provision)/benefits: 2004—$986; 2003—$(18,886); 2002—$73,418)
    (7,617 )   58,677     (226,011 )
   

 

 

 
Net comprehensive loss
  $ (268,684 ) $ (91,532 ) $ (732,651 )
   

 

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands of dollars, except share data and per share amounts)

    December 31, 2004   December 26, 2003  
   

 

 
ASSETS
             
Current Assets:
             
Cash and cash equivalents
  $ 291,567   $ 364,095  
Short-term investments
    25,775     13,390  
Accounts and notes receivable, net:
             
Trade
    388,200     451,010  
Other
    118,766     105,816  
Contracts in process
    166,997     166,503  
Inventories
    7,080     6,790  
Prepaid, deferred and refundable income taxes
    26,144     37,160  
Prepaid expenses
    25,239     30,024  
   

 

 
Total current assets
    1,049,768     1,174,788  
   

 

 
Land, buildings and equipment, net
    280,305     309,615  
Restricted cash
    72,844     52,685  
Notes and accounts receivable—long-term
    7,053     6,776  
Investment and advances
    158,324     142,559  
Goodwill, net
    51,812     51,121  
Other intangible assets, net
    69,690     71,568  
Prepaid pension cost and related benefit assets
    6,351     7,240  
Asbestos-related insurance recovery receivable
    332,894     495,400  
Other assets
    108,254     138,243  
Deferred income taxes
    50,714     56,947  
   

 

 
TOTAL ASSETS
  $ 2,188,009   $ 2,506,942  
   

 

 
               
LIABILITIES AND SHAREHOLDER’S DEFICIT
             
Current Liabilities:
             
Current installments on long-term debt
  $ 35,214   $ 21,100  
Accounts payable
    288,899     305,286  
Accrued expenses
    312,938     381,376  
Estimated costs to complete long-term contracts
    458,421     552,754  
Advance payment by customers
    111,300     50,248  
Income taxes
    53,110     39,647  
   

 

 
Total current liabilities
    1,259,882     1,350,411  
   

 

 
Accounts payable to affiliate
    416,260      
Long-term debt
    531,789     801,972  
Notes payable to affiliate
    210,000     210,000  
Deferred income taxes
    7,948     9,092  
Pension, postretirement and other employee benefits
    265,869     295,133  
Asbestos-related liability
    447,400     526,200  
Other long-term liabilities
    139,113     123,517  
Deferred accrued mandatorily redeemable preferred security distributions of subsidiary trust
        38,021  
Deferred accrued interest on subordinated deferrable interest debentures
    23,460      
Minority interest
    27,052     24,676  
Commitments and contingencies
             
   

 

 
TOTAL LIABILITIES
    3,328,773     3,379,022  
   

 

 
Shareholder’s Deficit:
             
Preferred Stock
Authorized 10,000,000 shares, $0.0001 par value—none outstanding
         
Common stock
$1.00 par value: authorized 12,000 shares; issued: 2003—12,000 and 2002—12,000
    12     12  
Paid-in capital
    242,601     242,601  
Accumulated deficit
    (1,098,916 )   (810,694 )
Accumulated other comprehensive loss
    (284,461 )   (303,999 )
   

 

 
TOTAL SHAREHOLDER’S DEFICIT
    (1,140,764 )   (872,080 )
   

 

 
TOTAL LIABILITIES AND SHAREHOLDER’S DEFICIT
  $ 2,188,009   $ 2,506,942  
   

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER’S DEFICIT
(in thousands of dollars)

    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Common Stock
                   
Balance at beginning of year
  $ 12   $ 12   $ 12  
   

 

 

 
Balance at end of year
  $ 12   $ 12   $ 12  
   

 

 

 
                     
Paid-in Capital
                   
Balance at beginning of year
  $ 242,601   $ 242,478   $ 242,150  
Other
        123     328  
   

 

 

 
Balance at end of year
  $ 242,601   $ 242,601   $ 242,478  
   

 

 

 
                     
Accumulated Deficit
                   
Balance at beginning of year
  $ (810,694 ) $ (653,723 ) $ (128,676 )
Net loss for the year
    (288,222 )   (156,971 )   (525,047 )
   

 

 

 
Balance at end of year
  $ (1,098,916 ) $ (810,694 ) $ (653,723 )
   

 

 

 
                     
Accumulated Other Comprehensive Loss
                   
Balance at beginning of year
  $ (303,999 ) $ (369,438 ) $ (161,834 )
Change in net gain on derivative instruments designated as cash flow hedges
            (3,834 )
Change in accumulated translation adjustment during the year
    27,155     6,762     22,241  
Minimum pension liability (net of tax (provision)/benefits:
2004—$986; 2003—$(18,886); 2002—$73,418)
    (7,617 )   58,677     (226,011 )
   

 

 

 
Balance at end of year
  $ (284,461 ) $ (303,999 ) $ (369,438 )
   

 

 

 
                     
Total Shareholder’s Deficit
  $ (1,140,764 ) $ (872,080 ) $ (780,671 )
   

 

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
CASH FLOWS FROM OPERATING ACTIVITIES
                   
Net loss
  $ (288,222 ) $ (156,971 ) $ (525,047 )
Adjustments to reconcile net loss to cash flows from operating activities:
                   
Cumulative effect of a change in accounting principle
            150,500  
Provision for impairment loss
        15,100     18,700  
Equity-for-debt exchange
    163,857          
Amortization of premium on long-term debt
    (288 )        
Amortization of unearned compensation
    1,724          
Depreciation and amortization
    32,755     35,574     44,425  
Deferred tax
    32,351     19,774     (28,355 )
(Gain)/provision for loss on sale of cogeneration plants
        (4,300 )   54,500  
Provision for asbestos claims, net of settlements
    60,600     68,081     26,200  
Claims (recoveries)/write downs and related contract provisions
        (1,500 )   136,200  
Contract reserves and receivable provisions
    (58,000 )   32,300     80,500  
Mandatorily redeemable preferred security distributions of subsidiary trust
        18,130     16,610  
Interest expense on subordinated deferrable interest debentures
    16,567          
Gain on sale of land, building and equipment
    (15,834 )   (17,970 )   (1,269 )
Earnings on equity interests, net of dividends
    (11,415 )   (9,145 )   (4,262 )
Other equity earnings, net of dividends
    (4,974 )   (3,312 )   (1,850 )
Other noncash items
    7,523     (2,884 )   (14,827 )
Changes in assets and liabilities:
                   
Receivables
    93,540     77,977     192,629  
Contracts in process and inventories
    14,072     47,353     53,361  
Accounts payable and accrued expenses
    (93,117 )   11,265     (153,565 )
Estimated costs to complete long-term contracts
    (67,329 )   (142,914 )   62,870  
Advance payments by customers
    58,922     (38,287 )   18,206  
Income taxes
    (2,215 )   2,499     15,535  
Other assets and liabilities
    28,620     (12,868 )   19,304  
   

 

 

 
Net cash (used)/provided by operating activities
    (30,863 )   (62,098 )   160,365  
   

 

 

 
                     
CASH FLOWS FROM INVESTING ACTIVITIES
                   
Change in restricted cash
    (17,941 )   38,414     (84,793 )
Capital expenditures
    (9,613 )   (12,870 )   (53,395 )
Proceeds from sale of assets
    17,495     87,159     6,282  
(Increase)/decrease in investments and advances
    (14 )       9,107  
(Increase)/decrease in short-term investments
    (9,426 )   (6,808 )   93  
   

 

 

 
Net cash (used)/provided by investing activities
    (19,499 )   105,895     (122,706 )
   

 

 

 
                     
CASH FLOWS FROM FINANCING ACTIVITIES
                   
Distributions to minority shareholder
    (2,663 )   (2,879 )   (2,061 )
Decrease in short-term debt
    (121 )   (14,826 )   (7,792 )
Proceeds from long-term debt
    120,000         70,546  
Proceeds from lease financing obligation
            44,900  
Repayment of long-term debt
    (147,722 )   (34,100 )   (45,591 )
   

 

 

 
Net cash (used)/provided by financing activities
    (30,506 )   (51,805 )   60,002  
   

 

 

 
                     
Effect of exchange rate changes on cash and cash equivalents
    8,340     27,798     22,624  
   

 

 

 
                     
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    (72,528 )   19,790     120,285  
Cash and cash equivalents at beginning of year
    364,095     344,305     224,020  
   

 

 

 
                     
CASH AND CASH EQUIVALENTS AT END OF YEAR
  $ 291,567   $ 364,095   $ 344,305  
   

 

 

 
Cash paid during the year for:
                   
Interest (net of amount capitalized)
  $ 53,952   $ 63,194   $ 60,973  
   

 

 

 
Income taxes
  $ 23,446   $ 17,588   $ 13,508  
   

 

 

 

NONCASH FINANCING ACTIVITIES
In 2004, the Company exchanged $623,190 of notes and accounts payable to Foster Wheeler Ltd. and $147,130 of long-term debt for $593,102 of existing debt and trust securities. See Note 8 for information regarding the equity-for-debt exchange.

See notes to consolidated financial statements.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)

1. Nature of Operations and Relationship to Foster Wheeler Ltd. and Subsidiaries

Foster Wheeler Holdings Ltd. (the “Company” or “Foster Wheeler”) was incorporated on December 18, 2000 under the laws of Bermuda. The Company is a wholly owned subsidiary of Foster Wheeler Ltd. (the “Parent”). Foster Wheeler Holdings Ltd. is a holding company which owns the stock of Foster Wheeler LLC. Pursuant to a reorganization, which occurred on May 25, 2001, Foster Wheeler Corporation was merged into Foster Wheeler LLC and the assets (primarily investments in subsidiaries which design, engineer and construct petroleum, chemical, petrochemical and alternative fuel facilities and related infrastructures and design, manufacture and erect steam generating and auxiliary equipment for power stations and industrial markets worldwide) and liabilities of Foster Wheeler Corporation were recorded by Foster Wheeler LLC at historical cost.

The business of the Company falls within two business groups. The Engineering and Construction Group (the “E&C Group”) designs, engineers, and constructs petroleum processing facilities (upstream and downstream), chemical, petrochemical, pharmaceutical and natural gas liquefaction (LNG) facilities, and related infrastructure, including power generation and distribution facilities, production terminals, pollution control equipment and water treatment facilities. The E&C Group provides direct technical and management services, and purchases equipment, materials and services from third party vendors and subcontractors. The group has industry leading technology in delayed coking, solvent de-asphalting and hydrogen production. The E&C Group also provides a broad range of environmental remediation services, together with related technical, design and regulatory services. The Global Power 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 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 full plant construction, maintenance engineering, plant upgrading and life extension and plant repowering. The Global Power 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 Global Power Group builds, owns and operates cogeneration, independent power production and resource recovery facilities, as well as facilities for the process and petrochemical industries. The Global Power Group generates revenues from construction and operating activities pursuant to long-term sale of project outputs (i.e. electricity contracts), operating and maintenance agreements and from returns on its equity positions. The corporate center, restructuring expenses and certain legacy liabilities (e.g. corporate debt) are included in the Corporate and Finance Group (“C&F”).

2. Going Concern

The accompanying consolidated financial statements are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company may not, however, be able to continue as a going concern. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably, to generate cash flows from operations, collections of receivables to fund its obligations, including those resulting from asbestos-related liabilities, as well as the Company’s ability to maintain credit facilities and bonding capacity adequate to conduct its business. The Company incurred significant operating losses in each of the years in the three-year period ended December 31, 2004, and has a shareholder’s deficit of $1,140,764 as of December 31, 2004.

In 2004, the Company, in conjunction with Foster Wheeler Ltd., consummated an equity-for-debt exchange in which Foster Wheeler Ltd. issued common shares, preferred shares, warrants to purchase common shares and new notes in exchange for certain of its outstanding debt securities and trust securities. After completing the exchange, the Company had outstanding debt obligations of approximately $567,003 as

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Going Concern — (Continued)

of December 31, 2004. (Refer to Notes 8 and 9 for further details of the exchange and information regarding the Company’s outstanding indebtedness.)

In August of 2002, the Company negotiated a Senior Credit Facility that was comprised of a $71,000 term loan, a $69,000 revolving credit facility and a $149,900 letter of credit facility having an April 30, 2005 maturity date. In connection with the equity-for-debt exchange, the Company prepaid the term loan and amounts outstanding under the revolving credit facility. Accordingly, there were no borrowings outstanding under the Senior Credit Facility as of December 31, 2004. Letters of credit of $90,018 remained outstanding under the Senior Credit Facility as of December 31, 2004.

In March 2005, the Senior Credit Facility was replaced with a new 5-year $250,000 Senior Credit Agreement. The new Senior Credit Agreement includes a $75,000 sub-limit for borrowings at a rate equal to LIBOR plus a spread. Standby letters of credit issued under the new Senior Credit Agreement will carry a fixed price throughout the life of the facility. The Senior Credit Agreement is collateralized by the assets
and/or the stock of certain of the Company’s domestic subsidiaries and certain of its foreign subsidiaries. The Company paid up-front fees to the lender of approximately $8,225 in conjunction with the execution of the Senior Credit Agreement. Such fees, paid predominately in the first quarter of 2005, have been deferred and will be amortized to expense over the life of the agreement.

The Company finalized a sale/leaseback arrangement for an office building at its corporate headquarters in the third quarter of 2002. Under this arrangement, the Company leases the facility for an initial non-cancelable period of 20 years. The long-term capital lease obligation of $45,280 as of December 31, 2004 is included in long-term debt in the accompanying consolidated balance sheet.

The new Senior Credit Agreement and the sale/leaseback arrangement have quarterly financial covenant compliance requirements. Management’s forecast indicates that the Company will be in compliance with the financial covenants throughout 2005. The forecast assumes a significant level of new contracts and improved performance on existing contracts. However, there can be no assurance that the Company will comply with the covenants. If the Company violates a covenant under the Senior Credit Agreement or the sale/leaseback arrangement, repayment of amounts outstanding under such agreements could be accelerated and the following borrowings outstanding could also be accelerated: the 2011 Senior Notes, the 2005 Senior Notes, the Convertible Subordinated Notes, the Trust Preferred Securities, the Subordinated Robbins Facility Exit Funding Obligations, and certain of the special-purpose project debt facilities. The total amount of Foster Wheeler Ltd. debt that could be accelerated is $463,563 as of December 31, 2004. The Company would not be able to repay amounts borrowed if the payment dates were accelerated.

Holders of the Company’s new 2011 Senior Notes have a security interest in the stock, debt and assets of certain of Foster Wheeler Ltd.’s subsidiaries. The 2011 Senior Notes contain incurrence covenants that limit the Company’s ability to undertake certain actions including incurring debt, making certain payments and investments, granting liens, selling assets and entering into specific intercompany transactions, among others. Management monitors these covenants to ensure the Company remains in compliance with the indenture.

In connection with the exchange, the holders of the Company’s 2005 Senior Notes agreed to amend the indenture governing these notes to effectively eliminate the security interest previously held by the notes.

On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provided for up to $45,000 of additional revolving loans available to provide working capital. As of December 31, 2004, the facility remained undrawn. In December 2004, the U.K. subsidiaries gave notice canceling the revolving credit facility effective January 24, 2005.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Going Concern — (Continued)

Since January 15, 2002, the Company has exercised its right to defer payments on the Trust Preferred Securities. The aggregate liquidation amount of the Trust Preferred Securities at December 31, 2004 was $71,177 after completing the equity-for-debt exchange. See Note 8 to the consolidated financial statements for further details of the exchange offer. The previous Senior Credit Facility required the Company to defer the payment of the dividends on the Trust Preferred Securities and, accordingly, no dividends were paid during 2004 or 2003. As of December 31, 2004, the amount of dividends deferred plus accrued interest approximates $23,460. The Company intends to continue to defer payment of the dividends on the Trust Preferred Securities until January 15, 2007 — the full term allowed by the underlying agreement. Once the deferred dividend obligation has been satisfied, the Company has the right to defer subsequent dividend payments for an additional 20 consecutive quarters. The new Senior Credit Agreement requires the approval of the lenders to make payments on the Trust Preferred Securities to the extent such payments are not contractually required by the underlying Trust Preferred Securities agreement.

Global Power’s European Power subsidiary in Finland is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. Obligations under both facilities are guaranteed by Foster Wheeler Ltd. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio.

One of the performance bond facilities is dedicated to a specific project and, as of December 31, 2004, had performance bonds outstanding equivalent to $24,522 (none of which has been drawn as of such date). Covenants under this facility are tested quarterly. The second facility is a general performance bond facility and, as of December 31, 2004, had performance bonds outstanding in favor of several clients equivalent to $10,114 (none of which has been drawn).

As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of the Company’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the two performance bond facilities. On August 6, 2004 and August 9, 2004, the Company’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities.

The waiver for the project-specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum equity ratio levels so long as the performance bonds are outstanding. The Company’s subsidiary remained below the minimum equity ratio as of December 31, 2004. On March 15, 2005, the bond expired and the banks funded the client and the Company reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of the Company to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

The waiver for the general performance bond facility is effective through March 31, 2005. As of that date, approximately $4,900 is forecasted to be outstanding under the facility. The Company has provided a standby letter of credit to back up the general performance bond facility and intends to do so until such facility can be permanently replaced or the last performance bond issued thereunder has expired. Therefore, the Company believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio covenant is reflected in the Company’s liquidity forecasts.

Management closely monitors liquidity and updates its U.S. liquidity forecasts weekly. These forecasts cover, among other analyses, existing cash balances, cash flows from operations, cash repatriations and loans

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Going Concern — (Continued)

from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, working capital needs and unused credit line availability. The Company’s cash flow forecasts continue to indicate that sufficient cash will be available to fund the Company’s U.S. and foreign working capital needs throughout 2005.

As of December 31, 2004, the Company had cash and cash equivalents, short-term investments, and restricted cash totalling $390,186, compared to $430,170 as of December 26, 2003. Of the $390,186 total at December 31, 2004, $319,612 was held by foreign subsidiaries. See Note 3 for additional details on cash and restricted cash balances.

The Company’s domestic operating entities are cash flow positive. However they do not generate sufficient cash flow to cover the costs related to the Company’s indebtedness, obligations to fund U.S. pension plans, and corporate overhead expenses. Consequently, the Company requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs and to service its debt. The Company’s current 2005 forecast assumes total cash repatriation from its non-U.S. subsidiaries of approximately $107,000 from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends. In 2004 and 2003, the Company repatriated approximately $77,000 and $100,000, respectively, from its non-U.S. subsidiaries.

There can be no assurance that the forecasted foreign cash repatriation will occur, as the non-U.S. subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of the Company’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. The repatriation of funds may also subject those funds to taxation. As a result of these factors, the Company may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries in the amount forecasted above.

Commercial operations under a domestic contract retained by the Company in connection with the sales of assets of the Foster Wheeler Environmental Corporation (“Environmental”), as described further in Note 18 to the consolidated financial statements, commenced in January 2004. The plant processes low-level nuclear waste for the U.S. Department of Energy (“DOE”). The Company funded the plant’s construction costs and operates the facility. The majority of the Company’s invested capital was recovered during the early stages of processing the first stream of waste materials. This project successfully processed all quantities of the first waste stream of materials ahead of schedule and is currently finalizing the processing line for the second waste stream. In 2004, the project generated net cash flow of approximately $53,300. An additional $17,800 of capital recovery is dependent on the initial processing of the second waste stream of materials. This capital recovery is expected in 2005.

The Company’s inability to operate profitably and to generate cash flows from operations, its reliance on repatriated cash from its foreign subsidiaries to fund its domestic obligations, and its obligations to maintain minimum debt covenants to avoid possible acceleration of its debt, raises substantial doubt about the Company’s ability to continue as a going concern.

3. Summary of Significant Accounting Policies

Principles of Consolidation — The consolidated financial statements include the accounts of Foster Wheeler Holdings Ltd. and all significant domestic and foreign subsidiary companies. 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, 2004 included 53 weeks; 2003 and 2002 included 52 weeks.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

Reclassifications — Certain prior period financial statement amounts have been reclassified to conform with the current year presentation.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the periods 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, customer and vendor claims, depreciation, employee benefit plans, taxes, asbestos litigation and expected recoveries and contingencies, among others.

Revenue Recognition on Long-term Contracts — Revenues and profits on long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress towards completion is measured using physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress toward completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.

Revenues and profits on cost-reimbursable contracts are recorded as the costs are incurred. The Company includes flow-through costs consisting of materials, equipment and subcontractor costs as revenue on cost-reimbursable contracts when the Company is responsible for the engineering specifications and procurement for such costs.

Contracts in process are stated at cost, increased for profits recorded on the completed effort or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. Negative balances are presented as “estimated costs to complete long-term contracts.” The Company has numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. However, current estimates may be revised as additional information becomes available. In accordance with the accounting and disclosure requirements of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”) and Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes,” the Company reviews its contracts monthly. As a result of this process in 2004, 54 individual projects had final estimated profit revisions exceeding $1,000. These revisions resulted from events such as earning project incentive bonuses or the incurrence or forecasted incurrence of contractual liquidated damages for performance or schedule issues, executing services and purchasing third-party materials and equipment at costs differing from previously estimated, and testing of completed facilities which in turn eliminates or incurs completion and warranty-related costs. The net aggregate dollar value of the accrued contract profit resulting from these estimate changes during 2004 amounted to $37,600. 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.

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 SOP 81-1. 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

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

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. 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. As of December 31, 2004, the Company had recorded a commercial claims receivable of $3,946. The claims were recorded in the Company’s European operations. Additionally, the consolidated financial statements assume recovery of $11,000 in requests for equitable adjustment (“REA”) at December 31, 2004, of which $1,200 was recorded in contracts in process. The balance of $9,800 represents costs yet to be incurred. The REA relates primarily to a claim against a U.S. Government agency for a project currently being executed. The Company is currently discussing the details of the REA with the U.S. Government agency. If this claim were to be unsuccessful, the costs would be charged to cost of operating revenues. The Company had no commercial claims receivable or requests for equitable adjustment recorded as of December 26, 2003.

In certain circumstances, the Company may defer pre-contract costs when it is probable that these costs will be recovered under a future contract. Such deferred costs would then be included in contract costs on receipt of the anticipated contract. If it is not probable that pre-contract costs will be recovered under a future contract, then these costs are expensed as incurred. Costs related to anticipated contracts, which are charged to expense because their recovery is not considered probable, are not subsequently reclassified to contract costs on the subsequent receipt of the contract. As of December 31, 2004, no pre-contract costs were deferred.

Certain special-purpose subsidiaries in the Global Power 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.

Cash and Cash Equivalents — Cash and cash equivalents include highly liquid short-term investments purchased with original maturities of three months or less. Cash and cash equivalents of $225,861 are maintained by foreign subsidiaries as of December 31, 2004. These subsidiaries require a substantial portion of these funds to support their liquidity and working capital needs, as well as required minimum capitalization and contractual restrictions. Accordingly, these funds may not be readily available for repatriation to U.S. entities.

Short-term Investments — Short-term investments consist primarily of certificates of deposit and are classified as held to maturity under Financial Accounting Standards Board Statement of Financial Accounting Standard (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.”

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 4. In conformity with industry practice, however, the full amount of accounts receivable, including such amounts withheld, has been included in current assets.

Trade accounts receivable are continually evaluated in accordance with corporate policy. Provisions are established on a project specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues. Customer payment history, trends within the various markets served and general economic trends are also evaluated when considering the necessity of a provision.

Inventories — Inventories, principally materials and supplies, are stated at the lower of cost or market, determined primarily on the average-cost method.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

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 as incurred. 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.

Restricted Cash — The following table details the restricted cash held by the Company:

    December 31, 2004

  December 26, 2003

 
    Foreign   Domestic   Total   Foreign   Domestic   Total  
   

 

 

 

 

 

 
Held by special purpose entities and restricted for debt service payments
  $ 245   $ 3,924   $ 4,169   $ 92   $ 3,884   $ 3,976  
Collateralize letters of credit and bank guarantees
    57,151         57,151     44,895         44,895  
Client escrow funds
    10,580     944     11,524     3,052     762     3,814  
   

 

 

 

 

 

 
Total
  $ 67,976   $ 4,868   $ 72,844   $ 48,039   $ 4,646   $ 52,685  
   

 

 

 

 

 

 

Investments and Advances — The Company uses the equity method of accounting for investment ownership of between 20% and 50% in affiliates unless significant economic considerations indicate that the cost method is appropriate. The equity method is also used for investments in which ownership is greater than 50% when the Company does not have a controlling financial interest. Investment ownership of less than 20% in affiliates is carried at cost. Currently, all of the Company’s significant investments in affiliates that are not consolidated are recorded using the equity method.

Intangible Assets — Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (goodwill), trademarks and patents. Goodwill was allocated to the reporting units based on the original purchase price allocation. Patents and trademarks are being amortized on a straight-line basis over periods of 12 to 40 years.

The Company tests for impairment at the reporting unit level as defined in SFAS No. 142, “Goodwill and Other Intangible Assets.” This test is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. In the fourth quarter of each year, the Company evaluates goodwill on a separate reporting unit basis to assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. SFAS No. 142 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives and reviewed annually for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

As of December 31, 2004 and December 26, 2003, the Company had unamortized goodwill of $51,812 and $51,121, respectively. The increase in goodwill of $691 resulted from foreign currency translation gains. All of the goodwill is related to the Global Power Group. In accordance with SFAS No. 142, the Company is no longer amortizing goodwill, and in 2003 and 2004, the fair value of the reporting units exceeded the carrying amounts. The Company recognized $150,500 of impairment losses in 2002 related to the goodwill as a cumulative effect of a change in accounting principle. Of this total, $24,800 was associated with the Camden, New Jersey waste-to-energy facility and $77,000 was associated with the North American Power

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

unit included in the operations of the Global Power Group. The fair value of the facility and the operating unit were estimated using the expected present value of future cash flows. The remaining $48,700 related to Foster Wheeler Environmental Corporation in the E&C Group. An impairment of the goodwill on this subsidiary was initially determined based upon indications of its market value from potential buyers. Based upon the market value, it was determined under step one that a potential impairment existed. The Company then completed step two and determined that a full write down of the goodwill was required. All of the other reporting units were also subjected to the first step of the goodwill impairment test.

As of December 31, 2004 and December 26, 2003, the Company had unamortized identifiable intangible assets of $69,690 and $71,568, respectively. The following table details amounts relating to those assets.

    As of December 31, 2004

  As of December 26, 2003

 
    Gross Carrying
Amount
  Accumulated
Amortization
  Gross Carrying
Amount
  Accumulated
Amortization
 
   

 

 

 

 
Patents
  $ 37,392   $ (15,622 ) $ 36,703   $ (13,802 )
Trademarks
    63,026     (15,106 )   61,943     (13,276 )
   

 

 

 

 
Total
  $ 100,418   $ (30,728 ) $ 98,646   $ (27,078 )
   

 

 

 

 

Amortization expense related to patents and trademarks for fiscal years 2004, 2003, and 2002 was $3,650, $3,675, and $3,535, respectively. Amortization expense is expected to approximate $3,600 each year in the next five years.

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. In 2003, to the extent such credits were not currently utilized on the Company’s tax return, deferred tax assets, as adjusted for any valuation allowance, were 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 $223,330 as of December 31, 2004. It is not practicable to estimate the additional tax that would be incurred, if any, if these amounts were repatriated.

The Company is in the process of reviewing the foreign earnings repatriation provision of the American Jobs Creation Act of 2004 (the “Act”). The review is not yet complete due to the complexity of the provision as it relates to the structure of the Company’s unrepatriated foreign earnings. Given the effective foreign tax rates applicable to the Company’s unrepatriated earnings as well as certain restrictions in the Act concerning the definitions of extraordinary dividends and U.S. investment, it is currently considered unlikely that the Company will change its existing repatriation practices as a result of the Act. The Company’s evaluation is expected to be completed in the second quarter of 2005.

Restricted Net Assets — Global Power’s European Power subsidiary in Finland is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. Obligations under both facilities are guaranteed by Foster Wheeler Ltd. The covenants include (i) a limitation on the amount of

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio.

One of the performance bond facilities is dedicated to a specific project and, as of December 31, 2004, had performance bonds outstanding equivalent to $24,522 (none of which has been drawn as of such date). Covenants under this facility are tested quarterly. The second facility is a general performance bond facility and, as of December 31, 2004, had performance bonds outstanding in favor of several clients equivalent to $10,114 (none of which has been drawn).

As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of the Company’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the two performance bond facilities. On August 6, 2004 and August 9, 2004, the Company’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities.

The waiver for the project-specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum equity ratio so long as the performance bonds are outstanding. The equity of the Company’s subsidiary remained below the minimum equity ratio as of December 31, 2004. On March 15, 2005, the bond expired and the banks funded the client and the Company reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of the Company to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

The waiver for the general performance bond facility is effective through March 31, 2005. As of that date, approximately $4,900 is forecasted to be outstanding under the facility. The Company has provided a standby letter of credit to back up the general performance bond facility and intends to do so until such facility can be permanently replaced or the last performance bond issued thereunder has expired.

Therefore, the Company believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio covenants is reflected in the Company’s liquidity forecasts.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

Foreign Currency — 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 exchange rates.

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Cumulative translation adjustment at beginning of year
  $ (78,395 ) $ (85,157 ) $ (107,398 )
Current year foreign currency adjustment
    27,155     6,762     22,241  
   

 

 

 
Cumulative translation adjustment at end of year
  $ (51,240 ) $ (78,395 ) $ (85,157 )
   

 

 

 
Foreign currency transaction (loss)/gains
  $ (83 ) $ 1,700   $ 2,900  
   

 

 

 
Foreign currency transaction (loss)/gains, net of tax
  $ (54 ) $ 1,100   $ 1,900  
   

 

 

 

Stock Option Plans — Foster Wheeler Ltd. has three fixed-option plans that reserve shares of common stock for issuance to executives, key employees and directors. Employees of the Company participate in these plans. Foster Wheeler Ltd. and the Company have adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock Based Compensation — Transition and Disclosure.” Foster Wheeler Ltd. and the Company continues to account for stock options granted to employees and directors using the intrinsic value method under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Had compensation costs for the Company’s stock-based compensation plans been accounted for using the fair value method of accounting described by SFAS No. 123, the Company’s net loss and loss per share would have been as follows:

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Net loss — as reported
  $ (288,222 ) $ (156,971 ) $ (525,047 )
Deduct: Total stock-based employee compensation expense determined under fair value based method for awards net of taxes of $210 in 2004, $127 in 2003 and $31 in 2002
    2,651     2,081     1,630  
   

 

 

 
Net loss — pro forma
  $ (290,873 ) $ (159,052 ) $ (526,677 )
   

 

 

 

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:

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Dividend yield
    0.00 %   0.00 %   0.00 %
Expected volatility
    50.00 %   88.23 %   83.62 %
Risk free interest rate
    2.99 %   3.22 %   2.90 %
Expected life (years)
    3     5     5  

Recent Accounting Developments — In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) became law in the United States. The Medicare Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In May 2004, the FASB issued a FASB Staff Position (“FSP”) No. 106-2, “Accounting and Disclosure

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP 106-2 provides guidance on accounting for the effects of the Medicare Act for employers that sponsor postretirement healthcare plans that provide prescription drug benefits. The provisions of FSP No. 106-2 were effective for the Company’s interim period ending September 24, 2004. Based upon the proposed regulations of the Medicare Act, the Company concluded that the benefits provided by the plan were actuarially equivalent to Medicare Part D under the Medicare Act. Accordingly, the Company reflected the impact of the Medicare Act prospectively as of the start of the third quarter 2004. The impact of the Medicare Act resulted in decreases in the accumulated postretirement benefit obligation of approximately $9,100 and in the annual net periodic postretirement benefit costs for 2004 of approximately $900. On January 21, 2005, final regulations related to the Medicare Act were issued. The Company has not yet determined the effect of the final regulations on the Company’s accumulated postretirement benefit obligation and net periodic postretirement benefit costs.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires that all share-based payments to employees, including grants of employee stock options and restricted stock, be recognized in the consolidated statement of operations and comprehensive loss based on their fair values. Prior to SFAS No. 123R, the Company adopted the disclosure-only provisions of SFAS No. 123 and therefore only certain pro forma disclosures of the fair value of share-based payments were required in the notes to the consolidated financial statements. SFAS No. 123R provides for the adoption of the new standard in one of two ways: the modified prospective transition method and the modified retrospective transition method. Using the modified prospective transition method, share-based employee compensation cost would be recognized from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date. Using the modified retrospective method, employee compensation cost would be recognized for periods presented prior to the adoption of the proposed standard in accordance with the original provisions of SFAS No. 123; that is, employee compensation cost would be recognized in the amounts reported in the pro forma disclosures provided in accordance with SFAS No. 123. Adoption of the provisions of SFAS No. 123R is effective as of the beginning of the Company’s quarter ending September 30, 2005. The Company is still evaluating the method of adoption and the impact that the adoption of SFAS No. 123R will have on its consolidated financial position and results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets, which were previously required to be recorded on a carryover basis rather than a fair value basis. Instead, SFAS No. 153 provides that exchanges of nonmonetary assets that do not have commercial substance be reported at carryover basis rather than a fair value basis. A nonmonetary exchange is considered to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the consolidated financial statements of the Company.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Accounts and Notes Receivable

The following table shows the components of trade accounts and notes receivable:

    December 31,
2004
  December 26,
2003
 
   

 

 
From long-term contracts:
             
Amounts billed due within one year
  $ 251,866   $ 332,135  
   

 

 
Retention:
             
Billed:
             
Estimated to be due in:
             
2004
        30,502  
2005
    18,098     21,338  
2006
    6,282     656  
2007
    1,654      
2008
         
2009
    3,417      
   

 

 
Total billed
    29,451     52,496  
   

 

 
Unbilled:
             
Estimated to be due in:
             
2004
        79,937  
2005
    115,046     669  
2006
    954      
2007
        2,699  
2008
    4,019      
   

 

 
Total unbilled
    120,019     83,305  
   

 

 
Total retentions
    149,470     135,801  
   

 

 
Total receivables from long-term contracts
    401,336     467,936  
Other trade accounts and notes receivable
    10,063     20,480  
   

 

 
      411,399     488,416  
Less allowance for doubtful accounts
    23,199     37,406  
   

 

 
Accounts receivable, net
  $ 388,200   $ 451,010  
   

 

 

The following table shows the components of non-trade accounts and notes receivable:

    December 31,
2004
  December 26,
2003
 
   

 

 
Asbestos insurance claims receivable
  $ 96,900   $ 60,000  
Foreign refundable value-added tax
    3,061     13,637  
Other
    18,805     32,179  
   

 

 
Total
  $ 118,766   $ 105,816  
   

 

 

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

5. Contracts in Process and Inventories

The following table shows the elements included in contracts in process as related to long-term contracts:

    December 31,
2004
  December 26,
2003
 
   

 

 
Contracts in Process:
             
Costs plus accrued profits less earned revenues on contracts currently in process
  $ 207,621   $ 238,645  
Less: progress payments
    40,624     72,142  
   

 

 
Net
  $ 166,997   $ 166,503  
   

 

 

Costs of inventories are shown below:

    December 31,
2004
  December 26,
2003
 
   

 

 
Inventories:
             
Materials and supplies
  $ 6,651   $ 5,098  
Finished goods
    429     1,692  
   

 

 
Total
  $ 7,080   $ 6,790  
   

 

 

6. Land, Buildings and Equipment

Land, buildings and equipment are stated at cost and are set forth below:

    December 31,
2004
  December 26,
2003
 
   

 

 
Land and land improvements
  $ 24,052   $ 24,057  
Buildings
    137,346     142,608  
Equipment
    458,356     450,941  
Construction in progress
    1,192     5,123  
   

 

 
Land, buildings and equipment
    620,946     622,729  
Less: accumulated depreciation
    340,641     313,114  
   

 

 
Net book value
  $ 280,305   $ 309,615  
   

 

 

Depreciation expense for the years 2004, 2003, and 2002 was $28,447, $31,214 and $54,492, respectively.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

7. Equity Interests

The Company owns a non-controlling equity interest in two electric power generation projects and one waste-to-energy project in Italy and a refinery/electric power generation project in Chile. Two of the projects in Italy are each 42% owned while the third is 49% owned by the Company. In 2004, the Company entered into a binding agreement to sell 10% of its minority equity interest in the third Italian project. The project in Chile is 85% owned by the Company; however, 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 31, 2004

  December 26, 2003

 
    Italian
Projects
  Chilean
Project
  Italian
Projects
  Chilean
Project
 
   

 

 

 

 
Balance Sheet Data:
                         
Current assets
  $ 149,346   $ 23,456   $ 95,977   $ 23,891  
Other assets (primarily buildings and equipment)
    414,779     175,653     409,267     185,315  
Current liabilities
    41,003     17,179     32,735     17,188  
Other liabilities (primarily long-term debt)
    404,802     113,567     385,047     121,362  
Net assets
    118,320     68,363     87,462     70,656  
                           
    For the Year Ended

 
    December 31, 2004

  December 26, 2003

  December 27, 2002

 
    Italian
Projects
  Chilean
Project
  Italian
Projects
  Chilean
Project
  Italian
Projects
  Chilean
Project
 
   

 

 

 

 

 

 
Income Statement Data:
                                     
Total revenues
  $ 244,225   $ 41,137   $ 219,818   $ 39,114   $ 171,565   $ 38,425  
Gross earnings
    60,108     20,152     56,699     20,739     43,133     20,777  
Income before income taxes
    43,947     11,229     38,405     10,712     31,358     10,087  
Net earnings
    26,664     8,787     23,144     8,891     17,648     8,372  

The Company’s share of the net earnings of equity affiliates, which are recorded within other income on the consolidated statement of operations and comprehensive loss, totaled $20,636, $17,142 and $14,006 for the years ended December 31, 2004, December 26, 2003 and December 27, 2002, respectively. The Company’s investment in the equity affiliates totaled $109,106 and $98,651 as of December 31, 2004 and December 26, 2003, respectively. Dividends of $9,221 and $7,997 were received during the years ended December 31, 2004 and December 26, 2003, respectively.

The Company has guaranteed certain performance obligations of these projects. The Company’s contingent obligations under the guarantees for three of the projects are approximately $1,300 in total. The contingent obligation for the fourth project is capped at approximately $10,300 over the twelve-year life of the project’s financing; to date, no amounts have been paid under this guarantee. The Company has also provided a guarantee of $5,200 representing 49% of the debt service reserve letter of credit providing liquidity should the performance of the fourth project be insufficient to cover the debt service payments. Finally, the Company has provided a $10,000 debt service reserve letter of credit providing liquidity should the performance of the Chilean project be insufficient to cover the debt service payments. No amounts have been drawn under the letter of credit.

The undistributed retained earnings of the Company’s equity investees amounted to approximately $42,087 and $28,765 at December 31, 2004 and December 26, 2003, respectively.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

8. Equity-for-Debt Exchange

In 2004, the Company, in conjunction with Foster Wheeler Ltd., consummated an equity-for-debt exchange in which Foster Wheeler Ltd. issued common shares, preferred shares, warrants to purchase common shares and new senior notes due 2011 in exchange for certain of its outstanding debt securities and trust securities. The Company recorded $623,190 in accounts and notes payable to Foster Wheeler Ltd. which represents the value of the common shares, preferred shares and warrants issued by Foster Wheeler Ltd. The exchange offer resulted in a $175,054 charge to income. The pretax charge, which was substantially non-cash, related primarily to the exchange of Convertible Subordinated Notes tendered in the exchange offer.

     Accounting for the Equity-for-Debt Exchange:

The following table summarizes the impact of the exchange offer:

    2005 Senior
Notes
  Robbins
Bonds
  Convertible
Notes
  Trust
Securities
  Senior Credit
Facility
  2011 Senior
Notes
  Total Change  
   

 

 

 

 

 

 

 
Current Liabilities:
                                           
Current installments on long-term debt
  $   $ (1,676 ) $   $   $ (115,869 ) $   $ (117,545 )
   

 

 

 

 

 

 

 
Total current liabilities
        (1,676 )           (115,869 )       (117,545 )
   

 

 

 

 

 

 

 
Accounts payable to affiliate
    54,783     101,397     199,206     60,874             416,260  
Long-term debt
    (188,628 )   (92,045 )   (206,930 )   (103,823 )       271,930     (319,496 )
Notes payable to affiliate
            206,930                 206,930  
Deferred accrued interest on subordinated deferrable interest debentures
                (31,128 )           (31,128 )
   

 

 

 

 

 

 

 
Total Liabilities
  $ (133,845 ) $ 7,676   $ 199,206   $ (74,077 ) $ (115,869 ) $ 271,930   $ 155,021  
   

 

 

 

 

 

 

 
Shareholder’s Deficit:
                                           
Common shares
  $   $   $   $   $   $   $  
Paid-in capital
                             
Accumulated deficit
    (15,324 )   (10,080 )   (205,340 )   66,352     (5,862 )   (4,800 )   (175,054 )
   

 

 

 

 

 

 

 
Total Shareholder’s Deficit
  $ (15,324 ) $ (10,080 ) $ (205,340 ) $ 66,352   $ (5,862 ) $ (4,800 ) $ (175,054 )
   

 

 

 

 

 

 

 

Details of the exchange by individual debt instrument are as follows:

Senior Notes at 6.75% interest, due November 15, 2005 (“2005 Senior Notes”) — Foster Wheeler Ltd. exchanged approximately 434,788 common shares, approximately 82,430 preferred shares and $141,471 principal amount of Senior Notes at 10.359% due September 15, 2011 (“2011 Senior Notes”) for $188,628 of 2005 Senior Notes. This resulted in a pretax charge of $15,324, comprised of a non-cash loss on the exchange of $13,283 (including a premium on the 2011 Senior Notes of $5,659), transaction-related costs of $1,825 and the write-off of unamortized issuance costs of $216. The Company recorded the $5,659 premium since the fair value of the 2011 Senior Notes was determined to be 104% of principal. The Company also capitalized $750 of issuance costs on the 2011 Senior Notes and established account payable to Foster Wheeler Ltd of $54,783, which represents the value of the common and preferred shares exchanged of Foster Wheeler Ltd.

Subordinated Robbins Facility Exit Funding Obligations (“Robbins Bonds”) — Foster Wheeler Ltd. exchanged approximately 808,327 common shares and approximately 152,520 preferred shares for $93,721 of Robbins Bonds. The Company recorded a pretax charge of $10,080, including a non-cash loss on the exchange of $7,676 and transaction-related costs of $2,404. The Company recorded accounts payable to Foster Wheeler Ltd. in the amount of $101,397 which represents the value of the Foster Wheeler Ltd. common and preferred shares exchanged.

Convertible Subordinated Notes at 6.50% interest, due 2007 (“Convertible Notes”) — Foster Wheeler Ltd. exchanged approximately 1,661,648 common shares and approximately 313,913 preferred shares

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

8. Equity-for-Debt Exchange — (Continued)

for $206,930 of Convertible Notes. The Company, pursuant to an intercompany note and debt assumption and transfer agreement, was responsible for all costs associated with the exchange of the Convertible Notes. As a result of the exchange, the Company recorded a pretax charge of $205,340, including non-cash conversion expense of $202,616 as required by SFAS No. 84, “Induced Conversions of Convertible Debt,” and transaction-related costs of $2,724. Additionally, the Company charged unamortized issuance costs of $3,409 against paid-in capital.

Mandatorily Redeemable Preferred Securities (“Trust Securities”) — Foster Wheeler Ltd. exchanged approximately 157,811 common shares, approximately 51,081 preferred shares and warrants to purchase approximately 6,994,059 common shares for $103,823 of Trust Securities. In conjunction with the exchange, the Company recorded a pretax gain of $66,352, including a non-cash gain on exchange of $74,075 less transaction-related costs of $4,244 and the write-off of unamortized issuance costs of $3,479.

Senior Credit Facility (Term Loan and Revolving Credit Portions) — Concurrent with the exchange offer, the Company also completed a $120,000 private offering of 10.359% Senior Notes due 2011, Series B. The proceeds of the private offering were used to repay the amounts outstanding under the term loan and revolving credit portions of the previous Senior Credit Facility totaling $115,869. In conjunction with this transaction, the Company recorded a non-cash pretax charge of $5,862, including the write-off of unamortized issuance costs of $1,599 and unamortized bank fees of $4,263. The Company also recorded a premium of $4,800 since the 2011 Senior Notes-Series B fair value was determined to be 104% of principal. Finally, the Company capitalized $966 of issuance costs on the 2011 Senior Notes-Series B.

As of December 31, 2004, after reflecting the results of the exchange offer, the Company had aggregate indebtedness of $567,003. See Note 9 for further information relating to the Company’s indebtedness.

The following table summarizes the capital share activity associated with the exchange offer:

    Units   Common Share
Equivalents
 
   

 

 
Capital Share Activity
             
Pre-exchange balance
    2,038,578     2,038,578  
Common shares issued in conjunction with exchange offer
    3,062,574     3,062,574  
Preferred shares issued in conjunction with exchange offer
    599,944     38,996,342  
Warrants to purchase common shares issued to Trust Preferred Security holders
    4,152,914     6,994,059  
Warrants to purchase common shares distributed to existing common shareholders
    40,771,560     2,947,233  
         
 
Post-exchange balance
          54,038,786  
         
 

Foster Wheeler Ltd. issued approximately 3,062,574 common shares and approximately 599,944 preferred shares in connection with the exchange offer. Each preferred share is convertible into 65 common shares.

Foster Wheeler Ltd. issued 4,152,914 Class A stock purchase warrants to Trust Preferred Security holders that tendered into the exchange offer. In addition, Foster Wheeler Ltd. also distributed 40,771,560 Class B stock purchase warrants to the holders of record of its common shares at the close of business on September 23, 2004.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

9. Long-term Debt

The following table shows the components of long-term debt:

    December 31, 2004

  December 26, 2003

 
    Current   Long-term   Total   Current   Long-term   Total  
   

 

 

 

 

 

 
Senior Credit Facility (average interest rate: 2004 — n/a; 2003 — 7.16%)
  $   $   $   $   $ 128,163   $ 128,163  
Senior Notes at 6.75% interest, due
November 15, 2005
    11,372         11,372         200,000     200,000  
Senior Notes at 10.359% interest, due
September 15, 2011
        271,643     271,643              
Subordinated Robbins Facility Exit Funding Obligations:
                                     
1999C Bonds at 7.25% interest, due
October 15, 2009
    14     69     83     1,690     10,440     12,130  
1999C Bonds at 7.25% interest, due
October 15, 2024
        20,491     20,491         77,155     77,155  
1999D Bonds at 7% interest, due October 15, 2009
        233     233         23,994     23,994  
Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures
                    175,000     175,000  
Subordinated Deferrable Interest Debentures
        71,177     71,177              
Special-Purpose Project Debt:
                                     
Martinez Cogen Limited Partnership
    7,280     7,980     15,260     6,627     15,260     21,887  
Foster Wheeler Coque Verde, L.P.
    2,975     32,151     35,126     2,656     35,126     37,782  
Camden County Energy Recovery Associates
    8,959     59,936     68,895     8,613     68,895     77,508  
Capital Lease Obligations
    990     66,297     67,287     1,322     62,373     63,695  
Other
    3,624     1,812     5,436     192     5,566     5,758  
   

 

 

 

 

 

 
Total
  $ 35,214   $ 531,789   $ 567,003   $ 21,100   $ 801,972   $ 823,072  
   

 

 

 

 

 

 

Senior Credit Facility — In August of 2002, the Company negotiated a Senior Credit Facility that was comprised of a $71,000 term loan, a $69,000 revolving credit facility and a $149,900 letter of credit facility having an April 30, 2005 maturity date. The term loan and borrowings under the revolving credit facility bear interest at the Company’s option of (a) LIBOR plus 6% or (b) the Base Rate plus 5.00%. The “Base Rate” refers to the higher of (i) the Bank of America prime rate or (ii) the Federal Funds rate plus 0.5%.

In connection with the equity-for-debt exchange, the Company repaid in full the term loan and amounts outstanding under the revolving credit facility. Accordingly, there were no borrowings outstanding under the term loan and revolving credit facility as of December 31, 2004. The Company had letters of credit outstanding of $90,018 as of December 31, 2004. In March 2005, the Company replaced the Senior Credit Facility with a new 5-year Senior Credit Agreement.

The Company obtained amendments to the Senior Credit Facility to provide covenant relief and to allow for the equity-for-debt exchange. These amendments are described below.

The Senior Credit Facility required prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. The Company retained the first $77,000 of such amounts before retaining a 50% share of the balance. The $77,000 threshold was exceeded during the second quarter of 2003 and principal repayments of $14,100 were made on the term loan in 2003 and 2004.

Amendment No. 1 to the Senior Credit Facility, obtained on November 8, 2002, provided for the exclusion of certain gross pretax charges recorded by the Company in the third quarter of 2002 for covenant

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

9. Long-term Debt — (Continued)

calculation purposes. The amendment further provided that certain pretax charges related to specific contingencies may be excluded from the covenant calculation through December 31, 2003, if incurred.

Amendment No. 2 to the Senior Credit Facility, entered into on March 24, 2003, modified (i) certain definitions of financial measures utilized in the calculation of the financial covenants and (ii) the Minimum EBITDA and Senior Debt Ratio, as specified in section 6.01 of the Credit Agreement. In connection with this amendment, the Company made a prepayment of principal in the aggregate amount of $10,000 in March 2003.

Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modified certain affirmative and negative covenants to permit the equity-for-debt exchange, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. The terms of the amendment called for the Company to pay a fee equal to 5% of the lenders’ credit exposure since it had not made a required prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004. The Company paid the required fee of $13,600 on March 31, 2004. The annual interest rate on borrowings under the Senior Credit Facility increased each quarter until the term loan and revolving credit facility were repaid as part of the equity-for-debt exchange.

Amendment No. 4 to the Senior Credit Facility, entered into on October 30, 2003, modified certain definitions and representations to allow for the maintenance and administration of certain bank accounts of the Company.

Amendment No. 5 to the Senior Credit Facility, entered into on May 14, 2004, amended and waived certain affirmative and negative covenants necessary to permit the equity-for-debt exchange as well as to allow for a reduction of $25,000 in the letter of credit facility. In consideration for the amendments and waivers obtained in this amendment, the Company was obligated to pay a fee equal to 1.25% of the lenders’ outstanding letter of credit exposure as of November 30, 2004 and a further fee equal to 0.75% of the lenders’ outstanding letter of credit exposure for each additional month thereafter through the expiration date of the Senior Credit Facility of April 30, 2005. As noted above, the Company voluntarily terminated the facility in March 2005. The Company paid fees totaling $4,375 related to the letters of credit outstanding for the period November 30, 2004 through February 2005.

New Senior Credit Agreement — In March 2005, the Senior Credit Facility was replaced with a new 5-year $250,000 Senior Credit Agreement. The new Senior Credit Agreement includes a $75,000 sub-limit for borrowings at a rate equal to LIBOR plus a spread. Standby letters of credit issued under the new Senior Credit Agreement will carry a fixed price throughout the life of the facility. The Senior Credit Agreement is collateralized by the assets and/or the stock of certain of the Company’s domestic subsidiaries and certain of its foreign subsidiaries. The Company paid up-front fees to the lender of approximately $8,225 in conjunction with the execution of the Senior Credit Agreement. Such fees, paid predominately in the first quarter of 2005, have been deferred and will be amortized to expense over the life of the agreement.

The new Senior Credit Agreement requires the Company to maintain certain ratios, including a leverage ratio, a fixed charge coverage ratio and a minimum liquidity level. Compliance with the first two covenants is measured quarterly. The Company must be in compliance with the minimum liquidity level covenant at any time. Management’s 2005 forecast indicates that the Company will be in compliance with the financial covenants contained in the new Senior Credit Agreement.

The Senior Credit Agreement also requires the Company to prepay the facility in certain circumstances from proceeds of assets sales and the issuance of debt.

2005 Senior Notes — The Company, through its subsidiary Foster Wheeler LLC, issued $200,000 of 2005 Senior Notes in the public market, bearing interest at a fixed rate of 6.75% per annum, payable semi-

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

9. Long-term Debt — (Continued)

annually, and maturing on November 15, 2005. The 2005 Senior Notes were issued under an indenture between the Company and BNY Midwest Trust Company. The 2005 Senior Notes are not redeemable prior to maturity and are not subject to any sinking fund requirements.

As part of the equity-for-debt exchange consummated in 2004, Foster Wheeler Ltd. exchanged common shares, preferred shares and $141,471 principal amount of 2011 Senior Notes for $188,628 of 2005 Senior Notes. After giving effect to the exchange, $11,372 of 2005 Senior Notes remains outstanding as of December 31, 2004. Such notes mature on November 15, 2005. Also, in connection with the exchange, the holders of the 2005 Senior Notes agreed to amend the indenture governing these notes to effectively eliminate the security interest previously held by the 2005 Senior Notes. See Note 8 for further details of the equity-for-debt exchange.

2011 Senior Notes — As noted above, Foster Wheeler Ltd. exchanged common shares, preferred shares and $141,471 principal amount of 2011 Senior Notes for $188,628 of 2005 Senior Notes as part of the equity-for-debt exchange. In conjunction with the issuance of the 2011 Senior Notes, the Company recorded a premium of $5,659 since the fair value of the 2011 Senior Notes was 104% of principal. See Note 8 for further details of the equity-for-debt exchange.

The 2011 Senior Notes bear interest at 10.359% per annum, payable semi-annually in arrears on March 15 and September 15, commencing March 15, 2005. As a result of the premium, the effective interest rate on the 2011 Senior Notes is 9.5602%. Holders of the 2011 Senior Notes have a security interest in the stock, debt and assets of certain of Foster Wheeler Ltd.’s subsidiaries. The 2011 Senior Notes contain incurrence covenants that must be met should the Company choose to undertake certain actions including incurring debt, making certain payments and investments, granting liens, selling assets and entering into specific intercompany transactions, among others. Management monitors these covenants to ensure the Company remains in compliance with the indenture.

Concurrent with the equity-for-debt exchange, the Company completed a $120,000 private offering of Senior Notes at 10.359% due September 2011, Series B (the “Private Notes”). The proceeds of the Private Notes offering were used to repay the amounts outstanding under the term loan and revolving credit portions of the Senior Credit Facility totaling $115,869. The Company recorded a premium of $4,800 on the offering since the fair value of the Private Notes was 104% of principal. As a result of the premium, the effective interest rate on the Private Notes is 9.5602%.

Subsequently, the Company exchanged all Private Notes for registered 2011 Senior Notes. As of December 31, 2004, there were $271,643 of 2011 Senior Notes outstanding, including $10,172 of unamortized premium.

Notes Payable to Affiliate — In May and June 2001, Foster Wheeler Ltd. issued Convertible Notes having an aggregate principal amount of $210,000. The Convertible 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 proceeds of these securities were loaned to the Company and are included in the caption “Notes payable to affiliate” on the accompanying consolidated financial statements. The Notes payable to affiliate are subordinated in right of payment to all existing and future senior indebtedness of the Company.

As part of the equity-for-debt exchange, Foster Wheeler Ltd. exchanged common shares and preferred shares for $206,930 of Convertible Notes. After giving effect to the exchange offer, $3,070 of Convertible Notes remain outstanding as of December 31, 2004. The Convertible Notes are convertible into common shares at an initial conversion rate of 3.10655 common shares per $1,000 principal amount, or approximately $321.90 per common share, subject to adjustment under certain circumstances. See Note 8 for further details of the equity-for-debt exchange.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

9. Long-term Debt — (Continued)

Robbins Bonds — In connection with the restructuring of debt incurred to finance construction of a waste-to-energy facility in the Village of Robbins, Illinois, Foster Wheeler entered into certain subordinated obligations. The subordinated obligations include 1999C Bonds due October 15, 2009 (the “1999C Bonds due 2009”), 1999C Bonds due October 15, 2024 (the “1999C Bonds due 2024”) and 1999D Accretion Bonds due October 15, 2009 (the “1999D Bonds”).

As part of the equity-for-debt exchange, Foster Wheeler Ltd. exchanged common shares and preferred shares for $93,721 of Robbins Bonds. After giving effect to the exchange, $83 of 1999C Bonds due 2009, $20,491 of 1999C Bonds due 2024 and $233 of 1999D Bonds remain outstanding as of December 31, 2004. See Note 8 for further details of the equity-for-debt exchange.

The 1999C Bonds due 2009 and the 1999C Bonds due 2024 bear interest at 7.25% and 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. The total amount of 1999D Bonds due on October 15, 2009 is $325.

Trust Securities — FW Preferred Capital Trust I (“the Capital Trust”) is a 100% indirectly owned finance subsidiary of the Company which issued a $175,000 of Trust Securities. The Capital Trust invested the proceeds from the Trust Securities in an equal principal amount of 9.0% junior subordinated deferrable interest debentures (the “Debentures”) of Foster Wheeler LLC.

Prior to December 27, 2003 the Capital Trust was consolidated in the financial statements of the Company and the Trust Securities were reported as Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures in the consolidated financial statements. The accumulated undistributed quarterly distributions were presented on the consolidated balance sheet as Deferred Accrued Mandatorily Redeemable Preferred Security Distributions of Subsidiary Trust. The Mandatorily Redeemable Preferred Security Distributions of Subsidiary Trust were included within interest expense in the consolidated statement of operations and comprehensive loss.

In 2004, the Company adopted FIN 46 for variable interest entities formed prior to February 1, 2003. In accordance with the provisions of FIN 46, the Company determined that (i) the Capital Trust is a variable interest entity and (ii) the Company is not the primary beneficiary. Accordingly, the Company de-consolidated the Capital Trust as of December 27, 2003. The Company’s consolidated financial statements now reflect Foster Wheeler LLC’s obligations to the Capital Trust as Subordinated Deferrable Interest Debentures and Deferred Accrued Interest on Subordinated Deferrable Interest Debentures. The interest expense on the Debentures is presented in the consolidated statement of operations and comprehensive loss as interest expense.

Foster Wheeler Ltd. and Foster Wheeler LLC fully and unconditionally guarantee the Trust Securities. These 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 has deferred all quarterly distributions beginning with the distribution due on January 15, 2002. The maturity date is January 15, 2029. Foster Wheeler can redeem these Trust Securities on or after January 15, 2004. The new Senior Credit Agreement requires the approval of the lenders to make payments on the Trust Securities to the extent such payments are not contractually required by the underlying Trust Securities agreements.

As part of the equity-for-debt exchange, Foster Wheeler Ltd. issued common shares, preferred shares and warrants to purchase common shares in exchange for Trust Securities. In conjunction with the exchange, the Capital Trust recorded a $103,823 reduction in the Trust Securities and a $31,128 reduction in Deferred Accrued Mandatorily Redeemable Preferred Security Distributions Payable. The Capital Trust also recorded a

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

9. Long-term Debt — (Continued)

corresponding reduction in the Debentures and accrued interest receivable. After giving effect to the exchange, $71,177 of Trust Securities remains outstanding as of December 31, 2004. See Note 8 for further details of the equity-for-debt exchange.

Special-Purpose Project Debt — Special-purpose project debt represents debt incurred to finance the construction of cogeneration facilities or waste-to-energy projects, which are majority-owned by the Company. 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.

The Martinez Cogen Limited Partnership debt of $15,260 represents a note under a bank credit facility to a limited partnership whose general partner is a special-purpose subsidiary. The interest on the note, which varies based on one of several money market rates, is due semi-annually through July 30, 2006. The note matures on July 30, 2006. The project is located in California.

The Foster Wheeler Coque Verde debt of $35,126 represents senior secured notes. The notes bear interest at 11.443%, due annually April 15, 2004 through 2015, and mature on April 15, 2015. The notes are collateralized by certain revenues and assets of a special- purpose subsidiary, which is the indirect owner of the project in Chile.

The Camden County Energy Recovery Associates debt of $68,895 represents Solid Waste Disposal and Resource Recovery System Revenue Bonds. The bonds bear interest at rates varying between 7.125% and 7.5%, due annually December 1, 2004 through 2010, and mature on December 1, 2010. The bonds are collateralized by a pledge of certain revenues and assets of the project, but not the plant. The project is located in New Jersey.

Capital Leases — During 2002, the Company entered into sale-leaseback transactions for office buildings in both Finland and the United States. The transactions qualified as capital leases. In 2004, the Company entered into a capital lease for an office building in South Africa. Assets under capital leases are summarized as follows:

    December 31,
2004
  December 26,
2003
 
   

 

 
Buildings and improvements
  $ 45,306   $ 38,522  
Less: accumulated amortization
    5,222     1,276  
   

 

 
Net assets under capital leases
  $ 40,084   $ 37,246  
   

 

 

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

9. Long-term Debt — (Continued)

The following are the minimum lease payments to be made in each of the years indicated for the capital leases in effect as of December 31, 2004:

Fiscal year:
       
2005
  $ 7,529  
2006
    7,954  
2007
    7,519  
2008
    7,678  
2009
    7,943  
Thereafter
    126,147  
Less: Interest
    (97,483 )
   

 
Net minimum lease payments under capital leases
    67,287  
Less: current portion of net minimum lease payments
    990  
   

 
Long-term net minimum lease payments
  $ 66,297  
   

 

Other — On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provided for up to $45,000 of additional revolving loans available to provide working capital. As of December 31, 2004, the facility remained undrawn. In December 2004, the U.K. subsidiaries gave notice canceling the revolving credit facility effective January 24, 2005.

Interest Costs — Interest costs incurred in 2004, 2003, and 2002 were $94,556, $95,415 and $82,929, respectively, of which $0, $307 and $1,368, respectively, were capitalized.

Aggregate Maturities — Aggregate principal repayments and sinking fund requirements of long-term debt, excluding payments on capital lease obligations and premium amortization on the 2011 Senior Notes of $10,172, over the next five years as of December 31, 2004 are as follows:

Fiscal year:
       
2005
  $ 34,224  
2006
    22,250  
2007
    16,059  
2008
    13,810  
2009
    14,841  
Thereafter
    391,430  
   

 
Total
  $ 492,614  
   

 

10. Pensions and Other Postretirement Benefits

Pension Benefits — Domestic and certain 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 cash balance program was established for the domestic plan. The pension benefit under the previous formulas remain the same for current employees if so elected, however, new employees are 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. 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.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pensions and Other Postretirement Benefits — (Continued)

The Company also has a non-qualified, unfunded supplemental executive retirement plan (“SERP”) which covers certain employees. In April 2003, the Company froze the SERP and issued letters of credit totaling $2,250 to certain employees to support its obligations under the SERP. As of December 31, 2004, the Company had $870 of such letters of credit outstanding.

On April 10, 2003, the Board of Directors approved changes to the Company’s domestic employee benefits program, including the pension, postretirement medical, and 401(k) plans. The changes were made following an independent review of the Company’s domestic employee benefits which assessed the Company’s benefit program against that of the marketplace and its competitors.

The principal changes consist of the following: the domestic pension plan was frozen as of May 31, 2003, which means participants will not be able to increase the amount earned under the terms of the plan; the postretirement medical plan was frozen and will be available on a subsidized premium basis only to currently active employees who reached the age of 40 on May 31, 2003; and the 401(k) plan was enhanced to increase the level of employer matching contribution. The net effect of these changes improves the financial condition of the Company through reduced costs and reduced cash outflow in future years.

Domestic subsidiaries of the Company have a 401(k) plan for salaried employees. For the years 2004 and 2003, the Company contributed a 100% match of the first 3% and a 50% match of the next 3% of base pay of employee contributions, subject to the annual IRS limit, which amounted to a cost of $3,317 and $4,066 in 2004 and 2003, respectively. For the year 2002, the Company 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 $5,507.

Through the year ended December 31, 2004, the Company recognized a cumulative minimum liability in its financial statements for both domestic and foreign underfunded plans in the amount of $300,590 resulting in a cumulative pretax charge to Other Comprehensive Loss. This represents a reduction in the minimum liability of $11,156 from the prior year, including the impact of foreign currency translation. 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.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pensions and Other Postretirement Benefits — (Continued)

The following charts contain the disclosures for pension benefits for the years 2004, 2003 and 2002.

    For the Year Ended December 31, 2004   For the Year Ended December 26, 2003  
   
 
 
      United
States
    United
Kingdom
    Canada     Total     United
States
    United
Kingdom
    Canada     Total  
   

 

 

 

 

 

 

 

 
Projected Benefit Obligation (PBO):
                                                 
PBO at beginning of period
  $ 311,102   $ 548,680   $ 20,437   $ 880,219   $ 321,793   $ 470,372   $ 17,362   $ 809,527  
Service cost
        17,859     254     18,113     1,565     12,835     235     14,635  
Interest cost
    17,867     30,365     1,222     49,454     19,062     26,622     1,177     46,861  
Plan participants’ contributions
        8,107         8,107         7,147         7,147  
Plan amendments
                        1,961         1,961  
Actuarial loss/(gain)
    17,451     (632 )   903     17,722     31,350     (36 )   194     31,508  
Benefits paid
    (21,847 )   (23,360 )   (1,681 )   (46,888 )   (22,166 )   (20,618 )   (1,454 )   (44,238 )
Curtailments
                    (35,719 )           (35,719 )
Special termination benefits/other
    (1,942 )   778         (1,164 )   (4,783 )   993         (3,790 )
Foreign currency exchange rate changes
        49,306     2,039     51,345         49,404     2,923     52,327  
   

 

 

 

 

 

 

 

 
PBO at end of period
  $ 322,631   $ 631,103   $ 23,174   $ 976,908   $ 311,102   $ 548,680   $ 20,437   $ 880,219  
   

 

 

 

 

 

 

 

 
Plan Assets:
                                                 
Fair value of plan assets at beginning of period
  $ 194,035   $ 396,062   $ 17,927   $ 608,024   $ 166,381   $ 294,975   $ 15,302   $ 476,658  
Actual return on plan assets
    24,712     47,272     1,395     73,379     38,467     50,151     1,561     90,179  
Employer contributions
    29,245     28,510         57,755     13,688     26,721         40,409  
Plan participants’ contributions
        8,107         8,107         7,147         7,147  
Benefits paid
    (21,847 )   (23,360 )   (1,681 )   (46,888 )   (22,166 )   (20,618 )   (1,454 )   (44,238 )
Other
    (2,647 )   867     (70 )   (1,850 )   (2,335 )   2,855     (53 )   467  
Foreign currency exchange rate changes
        37,344     1,717     39,061         34,831     2,571     37,402  
   

 

 

 

 

 

 

 

 
Fair value of plan assets at end of period
  $ 223,498   $ 494,802   $ 19,288   $ 737,588   $ 194,035   $ 396,062   $ 17,927   $ 608,024  
   

 

 

 

 

 

 

 

 
Funded status:
                                                 
Funded status
  $ (99,133 ) $ (136,301 ) $ (3,886 ) $ (239,320 ) $ (117,067 ) $ (152,618 ) $ (2,510 ) $ (272,195 )
Unrecognized net actuarial loss
    117,426     246,371     7,170     370,967     111,637     259,783     6,149     377,569  
Unrecognized prior service cost
        7,623     1,050     8,673         8,686     1,046     9,732  
Adjustment for the minimum liability
    (117,426 )   (175,486 )   (7,678 )   (300,590 )   (111,637 )   (193,635 )   (6,474 )   (311,746 )
   

 

 

 

 

 

 

 

 
Accrued benefit cost
  $ (99,133 ) $ (57,793 ) $ (3,344 ) $ (160,270 ) $ (117,067 ) $ (77,784 ) $ (1,789 ) $ (196,640 )
   

 

 

 

 

 

 

 

 
    For the Year Ended
December 31, 2004
  For the Year Ended
December 26, 2003
  For the Year Ended
December 27, 2002
 
   
 
 
 
    United
States
  United
Kingdom
  Canada   Total   United
States
  United
Kingdom
  Canada   Total   United
States
  United
Kingdom
  Canada   Total  
   

 

 

 

 

 

 

 

 

 

 

 

 
Net Periodic Benefit Cost:
                                                                         
Service cost
  $   $ 17,859   $ 254   $ 18,113   $ 1,565   $ 12,835   $ 236   $ 14,636   $ 12,154   $ 12,161   $ 213   $ 24,528  
Interest cost
    17,867     30,365     1,222     49,454     19,062     26,622     1,177     46,861     20,372     19,408     1,094     40,874  
Expected return on plan assets
    (15,603 )   (31,081 )   (1,315 )   (47,999 )   (14,356 )   (23,179 )   (1,301 )   (38,836 )   (16,943 )   (24,261 )   (1,496 )   (42,700 )
Amortization of transition asset
        (68 )   76     8             71     71             63     63  
Amortization of prior service cost
        1,686     15     1,701     182     1,446     15     1,643     458     1,339     13     1,810  
Other
    4,059     17,705     430     22,194     11,795     19,886     425     32,106     7,113     8,279     61     15,453  
   

 

 

 

 

 

 

 

 

 

 

 

 
SFAS No. 87 net periodic benefit cost
    6,323     36,466     682     43,471     18,248     37,610     623     56,481     23,154     16,926     (52 )   40,028  
SFAS No. 88 cost*
    1,390             1,390     1,108             1,108     1,908             1,908  
   

 

 

 

 

 

 

 

 

 

 

 

 
Total net periodic benefit cost
  $ 7,713   $ 36,466   $ 682   $ 44,861   $ 19,356   $ 37,610   $ 623   $ 57,589   $ 25,062   $ 16,926   $ (52 ) $ 41,936  
   

 

 

 

 

 

 

 

 

 

 

 

 
Weighted Average Assumptions—Net
                                                                         
Periodic Benefit Cost:
                                                                         
Discount rate
    6.00 %   5.45 %   6.00 %         6.00 %   5.60 %   6.25 %         7.40 %   5.75 %   7.00 %      
Long-term rate of return
    8.00 %   7.34 %   8.00 %         8.50 %   7.50 %   8.00 %         8.50 %   8.00 %   9.00 %      
Salary scale
    0.00 %   3.04 %   5.00 %         0.00 %   3.30 %   5.00 %         4.00 %   4.00 %   5.00 %      
Weighted Average Assumptions—Benefit Obligations:                                                                          
Discount rate
    5.48 %   5.43 %   6.00 %         6.00 %   5.40 %   6.00 %         6.60 %   5.60 %   6.25 %      
Salary scale
    0.00 %   3.32 %   4.00 %         4.00 %   3.00 %   5.00 %         5.00 %   3.30 %   5.00 %      

* Charges were recorded in accordance with the provisions of SFAS No. 88, “Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” related to (i) the settlement in 2004 of obligations to former executives under the Supplemental Executive Retirement Plan of $1,390;

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pensions and Other Postretirement Benefits — (Continued)

(ii) the impact in 2003 of the freezing of the domestic pension plans, the mothballing of a domestic manufacturing facility of $900 and employee terminations as part of the workforce reduction of $100; and (iii) the retirement in 2002 of the Company’s Vice President of Human Resources of approximately $900.

Plan measurement date

The measurement date for all of the Company’s defined benefit plans is December 31 of each year for both plan assets and obligations.

Accumulated benefit obligation

The accumulated benefit obligation (“ABO”) for the Company’s plans totaled approximately $902,800 and $811,800 at year-end 2004 and 2003, respectively. As previously discussed, the Company has recorded a net cumulative charge to other comprehensive loss for the years 2000 through 2004 due to the ABO exceeding the fair value of plan assets.

Investment policy

Each of the Company’s plans is governed by a written investment policy.

The investment policy of the U.S. plans allocates assets in accordance with the policy guidelines. The asset mix target for the plans is 72.5% equities and 27.5% fixed-income securities. The investment policy is currently undergoing a review by the Company to ensure investment strategy is aligned with plan liabilities, considering the changes to the domestic benefits program made in 2004.

The investment policy of the U.K. plans are designed to improve the ongoing funding level of the plan while gradually, over time, changing the mix of investment allocation between equities and bonds to more fully match the liabilities of the plan. The bond and equity allocations range from 40% bonds and 60% equities to 50% bonds and 50% equities, depending on the funding level.

The investment policy of the Canadian plan uses a balanced approach and allocates investments in pooled funds in accordance with the policy’s asset mix guidelines. These guidelines identify target, maximum and minimum allocations by asset class. The target allocation is 45% bonds, 50% equities and 5% cash. The minimum and maximum allocations are: 42.5% to 57.5% equities; 40% to 50% bonds; and 2.5% to 7.5% cash.

Long-term rate of return assumptions

The expected long-term rate of return on plan assets is developed using a weighted-average methodology, blending the expected returns on each class of investment in the plans’ portfolio. The expected returns by asset class are developed considering both past performance and future considerations. The long-term rate of return is reviewed annually by the Company for its funded plans and adjusted, if required. The weighted-average expected long-term rate of return on plan assets has declined from 8.2% to 7.5% over the past three years.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pensions and Other Postretirement Benefits — (Continued)

    2004   2003  
   

 

 
Plan Asset Allocation:
             
U.S. Plans
             
U.S. equities
    53 %   47 %
Non-U.S. equities
    26 %   25 %
U.S. fixed-income securities
    20 %   23 %
Non-U.S. fixed-income securities
    0 %   0 %
Other
    1 %   5 %
   

 

 
Total
    100 %   100 %
   

 

 
U.K. Plans
             
U.K. equities
    60 %   38 %
Non-U.K. equities
    1 %   25 %
U.K. fixed-income securities
    36 %   32 %
Non-U.K. fixed-income securities
    0 %   0 %
Other
    3 %   5 %
   

 

 
Total
    100 %   100 %
   

 

 
Canada Plan
             
Canadian equities
    23 %   23 %
Non-Canadian equities
    29 %   26 %
Canadian fixed-income securities
    43 %   44 %
Non-Canadian fixed-income securities
    0 %   0 %
Other
    5 %   7 %
   

 

 
Total
    100 %   100 %
   

 

 
 
Contributions

The Company expects to contribute a total of approximately $20,400 to its domestic pension plans and approximately $30,700 to its foreign pension plans in 2005. The contributions to the domestic pension plans are expected to approximate $22,100 in 2006, $16,400 in 2007, $7,900 in 2008, $1,800 in 2009 and zero each year thereafter.

Estimated future benefit payments

The following benefit payments, which reflect expected future service, are expected to be paid on the defined benefit plans.

    United
States
  United
Kingdom
  Canada   Total  
   

 

 

 

 
2005
  $ 19,934   $ 24,465   $ 1,634   $ 46,033  
2006
    19,944     26,381     1,711     48,036  
2007
    19,983     26,817     1,739     48,539  
2008
    20,360     31,315     1,759     53,434  
2009
    20,600     36,038     1,760     58,398  
2010-2014
    104,858     223,671     8,002     336,531  

Other Postretirement Benefits — In addition to providing pension benefits, some of the Company’s subsidiaries provide certain health care and life insurance benefits for retired employees (“other postretirement benefits”). Employees may become eligible for these other postretirement benefits if they

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pensions and Other Postretirement Benefits — (Continued)

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. Additionally, some of the Company’s subsidiaries also have a plan, which provides coverage for an employee’s beneficiary upon the death of the employee.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) became law in the United States. The Medicare Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In May 2004, the FASB issued a FASB Staff Position (“FSP”) No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP 106-2 provides guidance on accounting for the effects of the Medicare Act for employers that sponsor postretirement healthcare plans that provide prescription drug benefits. The provisions of FSP No. 106-2 were effective for the Company’s interim period ending September 24, 2004. Based upon the proposed regulations of the Medicare Act, the Company concluded that the benefits provided by the plan were actuarially equivalent to Medicare Part D under the Medicare Act. Accordingly, the Company reflected the impact of the Medicare Act prospectively as of the start of the third quarter 2004. The impact of the Medicare Act resulted in decreases in the accumulated postretirement benefit obligation of approximately $9,100 and in the annual net periodic postretirement benefit costs for 2004 of approximately $900. On January 21, 2005, final regulations related to the Medicare Act were issued. The Company has not yet determined the effect of the final regulations on the Company’s accumulated postretirement benefit obligation and net periodic postretirement benefit costs.

The following chart contains the disclosures for other postretirement benefit plans for the years 2004, 2003 and 2002.

    For the Year Ended

 
    December 31, 2004   December 26, 2003  
   

 

 
Accumulated Postretirement Benefit Obligation (APBO):
             
APBO at beginning of period
  $ 94,906   $ 133,392  
Service cost
    323     741  
Interest cost
    5,119     9,205  
Plan participants’ contributions
    2,707      
Plan amendments
        (55,201 )
Actuarial (gain)/loss
    (6,479 )   21,277  
Benefits paid
    (10,369 )   (11,910 )
Curtailments
        (2,598 )
Other
    983      
Foreign currency exchange rate changes
    86      
   

 

 
APBO at end of period
  $ 87,276   $ 94,906  
   

 

 
Plan Assets:
             
Fair value of plan assets beginning of period
  $   $  
Employer contributions
    10,369     11,910  
Benefits paid
    (10,369 )   (11,910 )
   

 

 
Fair value of plan assets at end of period
  $   $  
   

 

 
Funded Status:
             
Funded status
  $ (87,276 ) $ (94,906 )
Unrecognized net actuarial loss
    38,743     47,614  
Unrecognized prior service cost
    (57,824 )   (62,453 )
   

 

 
Accrued benefit cost
  $ (106,357 ) $ (109,745 )
   

 

 

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pensions and Other Postretirement Benefits — (Continued)

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Net Periodic Postretirement Benefit Cost:
                   
Service cost
  $ 323   $ 741   $ 2,785  
Interest cost
    5,119     9,205     8,255  
Amortization of prior service cost
    (4,745 )   (1,485 )   (2,853 )
Other
    2,244     (3,340 )   (5,013 )
   

 

 

 
Net periodic postretirement benefit cost
  $ 2,941   $ 5,121   $ 3,174  
   

 

 

 
Weighted-Average Assumptions-
                   
  Net Periodic Postretirement Benefit Cost:
                   
Discount rate
    6.00 %   6.63 %   7.40 %
Weighted-Average Assumptions-
                   
  Accumulated Postretirement Benefit Obligation:
                   
Discount rate
    5.31 %   6.00 %   6.63 %
                     
Health-care cost trend:
    Pre-Medicare Eligible     Medicare Eligible  
   

 

 
 
2004
    9.50 %   11.00 %
2005
    9.00 %   10.50 %
Decline to 2016
    5.50 %     5.00 %

Assumed health-care cost trend rates have a significant effect on the amounts reported for the other postretirement benefit plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

      One-Percentage
Point Increase
    One-Percentage
Point Decrease
 
   

 

 
 
Effect on total of service and interest cost components
  $ 278   $ (244 )
Effect on accumulated postretirement benefit obligations
  $ 5,412   $ (4,694 )
 
Plan measurement date

The measurement date for the Company’s other postretirement benefit plans is December 31 of each year for obligations.

Contributions

The Company expects to contribute a total of approximately $7,719 to its other postretirement benefit plans in 2005.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pensions and Other Postretirement Benefits — (Continued)

Estimated future benefit payments

The following other postretirement benefit payments, which reflect expected future service, are expected to be paid.

    Other Benefits   Health Care Subsidy   Other Benefits, Net of Subsidy  
   

 

 

 
2005
  $ 7,719   $   $ 7,719  
2006
    7,933     948     6,985  
2007
    8,039     971     7,068  
2008
    8,081     994     7,087  
2009
    8,103     1,018     7,085  
2010-2014
    38,705     5,310     33,395  

Other Benefits — Certain of the Company’s foreign subsidiaries participate in government-mandated indemnity and postretirement programs for their employees. Liabilities of $32,650 and $24,326 were recorded at December 31, 2004 and December 26, 2003, respectively, related to such benefits. The Company also has a benefit plan, the Survivor Income Plan, accounted for under SFAS No. 112, “Employer’s Accounting for Postemployment Benefits,” which was designed to provide coverage for an employee’s beneficiary upon the death of the employee; this plan has been closed to new entrants since 1988. Total liabilities under this plan were $23,572 and $24,146 as of December 31, 2004 and December 26, 2003, respectively. Benefit assets reflecting primarily the cash surrender value of insurance policies purchased to cover obligations under the Survivor Income Plan totaled $6,351 and $7,240 as of December 31, 2004 and December 26, 2003, respectively.

11. Guarantees and Warranties

The Company has provided indemnifications to third parties relating to businesses and/or assets the Company previously owned. Such indemnifications relate primarily to potential environmental and tax exposures for activities conducted by the Company prior to the sale.

    Maximum
Potential Payment
  Carrying Amount of
Liability as of
December 31, 2004
  Carrying Amount of
Liability as of
December 26, 2003
 
   

 

 

 
Environmental indemnifications
    No limit   $ 5,300   $ 5,300  
Tax indemnifications
    No limit   $   $  

The Company provides for project execution and warranty reserves on certain of its long-term contracts. Generally, these reserves are accrued over the life of the contract so that a sufficient balance is maintained to cover the exposures at the conclusion of the contract.

    For the Year Ended

 
    December 31, 2004   December 26, 2003   December 27, 2002  
   

 

 

 
Balance at beginning of year
  $ 131,600   $ 81,900   $ 52,700  
Accruals
    25,800     72,800     45,600  
Settlements
    (32,800 )   (13,800 )   (8,600 )
Adjustments to provisions
    (30,100 )   (9,300 )   (7,800 )
   

 

 

 
Balance at end of year
  $ 94,500   $ 131,600   $ 81,900  
   

 

 

 

12. 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:

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

12. Financial Instruments and Risk Management — (Continued)

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.

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 “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies) (see Notes 3 and 16).

Carrying Amounts and Fair Values — The estimated fair values of the Company’s financial instruments are as follows:

    December 31, 2004

  December 26, 2003

 
    Carrying Amount   Fair Value   Carrying Amount   Fair Value  
   

 

 

 

 
Nonderivatives:
                         
Cash and short-term investments
  $ 317,342   $ 317,342   $ 377,485   $ 377,485  
Restricted cash
    72,844     72,844     52,685     52,685  
Long-term debt
    (567,003 )   (570,586 )   (823,072 )   (530,826 )
Notes payable to affiliate
    (3,070 )   (2,732 )   (210,000 )   (60,375 )
Notes payable to affiliate
    (206,930 )            
                           
Derivatives:
                         
Foreign currency contracts
    419     419     3,315     3,315  

In the ordinary course of business, the Company is contingently liable for performance under standby letters of credit, bank guarantees and surety bonds totaling $559,900 and $609,000 as of December 31, 2004 and December 26, 2003, respectively. These balances include the standby letters of credit issued under the Senior Credit Facility 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. It is not practicable to estimate the fair value of the Company’s intercompany debt of $206,930 at December 31, 2004 and $0 at December 26, 2003 as there is no market value for this type of instrument.

As of December 31, 2004, the Company had $46,275 of foreign currency contracts outstanding. These foreign currency contracts mature in 2005. The contracts have been established by various international subsidiaries to sell a variety of currencies, and 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 31, 2004 and December 26, 2003, the Company had no significant concentrations of credit risk.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

12. Financial Instruments and Risk Management — (Continued)

The Company had issued a third-party financial guarantee totaling $2,750 at December 31, 2004 and December 26, 2003 with respect to a partnership interest in a commercial real estate project.

13. Restricted Stock Plan

On October 6, 2004, management was issued 1,883,745 restricted common share awards in accordance with Foster Wheeler Ltd.’s Management Restricted Stock Plan, of which 1,351,846 were in the form of restricted shares and 531,899 were in the form of restricted share units. The restricted shares have immediate voting rights and the restricted share units will give the holders voting rights upon vesting. The restricted awards provide that issued shares may not be sold or otherwise transferred until restrictions lapse. One third of the restricted awards vest in the fourth quarter of 2005 and the balance vest during the fourth quarter of 2006. The grant date fair value of restricted common share awards issued to management was $9.20 per share.

Upon issuance of the restricted common share awards, unearned compensation equivalent to the market value of the common shares on the date of grant was recorded as a part of Foster Wheeler Ltd. shareholders’ deficit, with a corresponding offset to common shares and paid-in capital. Unearned compensation will be amortized to compensation expense over the appropriate vesting period of each grant. The total unearned compensation recorded upon issuance of the restricted awards was $17,609 and the related compensation expense recorded in 2004 was $1,712.

14. Stock Option Programs

On September 10, 2004, the Board of Directors of Foster Wheeler Ltd. adopted the 2004 Stock Option Plan (the “2004 Plan”) which reserves 56,421 preferred shares for issuance. The options granted under the 2004 Plan expire up to a maximum of ten years from the date granted. On October 6, 2004, management was issued options under the 2004 Plan to purchase 43,103 preferred shares at an exercise price of $9.378 per common share issuable. Such options expire on October 5, 2007. One third of the options issued to management vest in the fourth quarter of 2005, and the balance vest during the fourth quarter of 2006. The issuance of the options to management did not result in an unearned compensation charge since the exercise price of the options was greater than the market price of the underlying shares on the date of grant.

On November 29, 2004, each option under the 2004 Plan to purchase preferred shares granted to management and the non-employee directors mandatorily converted to an option to purchase 65 common shares at an exercise price of $9.378 per common share issuable.

Under the 1995 Stock Option Plan approved by the shareholders of Foster Wheeler Ltd. in April 1995 and amended in April 1999 and May 2002, the total number of shares of common stock that may be granted is 265,000. In April 1990, the shareholders of Foster Wheeler Ltd. approved a Stock Option Plan for Directors of the Company. On April 29, 1997, the shareholders of Foster Wheeler Ltd. approved an amendment of the Directors’ Stock Option Plan, which authorizes the granting of options on 20,000 shares of common stock to non-employee directors of Foster Wheeler Ltd., who will automatically receive an option to acquire 150 shares each year. These plans provide that shares granted come from Foster Wheeler Ltd.’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. 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.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

14. Stock Option Programs — (Continued)

Foster Wheeler Ltd. also granted 65,000 inducement options in 2001 to its chief executive officer in connection with an employment agreement and a further 50,000 options in 2002 based upon an amendment to his employment agreement. The 2001 options vest 20% each year over the term of the agreement, while the 2002 options vest one-forty-eighth (1/48) on the date of grant and 1/48 on the first day of each successive month thereafter. Foster Wheeler Ltd. granted 12,750 inducement options to its president and chief executive officer of Foster Wheeler North America Corp. (formerly known as “Foster Wheeler Power Group, Inc.”) in connection with his employment agreement in 2002 and granted a further 5,000 inducement options to him in 2003. The 2002 options vest ratably over five years, while the 2003 options vest ratably over four years. The price of the options granted pursuant to these agreements was fair market value on the date of the grant. The options granted under these agreements expire ten years from the date granted.

Information regarding these option plans for the years 2004, 2003, and 2002 is as follows (presented in actual number of shares):

    For the Year Ended

 
    December 31, 2004

  December 26, 2003

  December 27, 2002

 
    Shares   Weighted-
Average
Exercise
Price
  Shares   Weighted-
Average
Exercise
Price
  Shares   Weighted-
Average
Exercise
Price
 
   

 

 

 

 

 

 
Options outstanding, beginning of year
    393,383   $ 196.00     410,055   $ 195.20     236,231   $ 325.00  
Options exercised
                           
Options granted
    2,801,704   $ 9.38     5,857     24.00     180,018     32.80  
Options cancelled or expired
    (12,177 ) $ 303.50     (22,529 )   136.00     (6,194 )   433.20  
   
       
       
       
Options outstanding, end of year
    3,182,910   $ 30.71     393,383   $ 196.00     410,055   $ 195.20  
   
       
       
       
Option price range at end of year
  $ 9.38 to         $ 23.40 to         $ 29.20 to        
    $ 881.2500         $ 881.2500         $ 881.2500        
Option price range for exercised shares
                               
Options available for grant at end of year
    869,273           25,342           22,253        
   
       
       
       
Weighted-average fair value of options granted during the year
  $ 3.30         $ 16.80         $ 22.20        
Options exercisable at end of year
    284,390           229,445           166,938        
Weighted-average price of exercisable options at end of year
  $ 230.60         $ 296.00         $ 398.60        

The following table summarizes information about fixed-price stock options outstanding as of December 31, 2004:

    Options Outstanding

  Options Exercisable

 
Range of
Exercise Prices
  Number
Outstanding
at 12/31/04
  Weighted-
Average
Remaining
Contractual Life
  Weighted-
Average
Exercise Price
  Number
Exercisable
at 12/31/04
  Weighted-
Average
Exercise Price
 

 
 
 
 
 
 
                                 
$    9.38 to $    9.38
    2,801,704     9.76 years   $ 9.38       $  
    23.40 to     32.80
    165,456     7.79 years     32.07     100,940     32.23  
    99.70 to   127.50
    98,337     6.49 years     105.24     72,337     107.23  
  163.13 to   200.00
    22,900     5.18 years     186.28     16,600     181.07  
  270.00 to   301.25
    29,600     4.13 years     282.09     29,600     282.09  
  550.00 to   738.75
    53,333     1.73 years     626.43     53,333     626.43  
  843.75 to   881.25
    11,579     1.03 years     846.50     11,579     846.50  
   

 

 

 

 

 
$    9.38 to $881.25
    3,182,909     9.31 years   $ 30.71     284,389   $ 230.60  
   

 

 

 

 

 

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

15. Income Taxes

The components of loss before income taxes for the years 2004, 2003 and 2002 were taxed under the following jurisdictions:

    2004   2003   2002  
   

 

 

 
Domestic
  $ (269,755 ) $ (155,538 ) $ (506,639 )
Foreign
    34,655     45,993     (3,751 )
   

 

 

 
Total
  $ (235,100 ) $ (109,545 ) $ (510,390 )
   

 

 

 

The provision for income taxes on those earnings was as follows:

    2004   2003   2002  
   

 

 

 
Current tax expense:
                   
Domestic
  $ (7,597 ) $ (14,939 ) $ (5,931 )
Foreign
    (47,616 )   (31,887 )   (10,978 )
   

 

 

 
Total current
    (55,213 )   (46,826 )   (16,909 )
   

 

 

 
Deferred tax benefit/(expense):
                   
Domestic
    (569 )   84      
Foreign
    2,660     (684 )   2,252  
   

 

 

 
Total deferred
    2,091     (600 )   2,252  
   

 

 

 
Total provision for income taxes
  $ (53,122 ) $ (47,426 ) $ (14,657 )
   

 

 

 

Deferred tax assets (liabilities) consist of the following:

    2004   2003  
   

 

 
Difference between book and tax depreciation
  $ (2,717 ) $ (12,181 )
Pensions
    41,771     46,173  
Capital lease transactions
        263  
Revenue recognition
    11,716     14,191  
   

 

 
Gross deferred tax assets (liabilities)
    50,770     48,446  
   

 

 
Current taxability of estimated costs to complete long-term contracts
    20,658     19,039  
Income currently taxable deferred for financial reporting
    17,416     1,706  
Expenses not currently deductible for tax purposes
    33,348     200,084  
Investment tax credit carry forwards
        20,538  
Postretirement benefits other than pensions
    36,269     62,369  
Asbestos claims
    33,077     40,328  
Minimum tax credits
    6,399     17,917  
Foreign tax credits
    19,440     28,178  
Net operating loss carry forwards
    64,283     117,001  
Effect of write-downs and restructuring reserves
    7,685     11,234  
Other
    9,890     40,956  
Valuation allowance
    (234,432 )   (534,790 )
   

 

 
      14,033     24,560  
   

 

 
Net deferred tax assets
  $ 64,803   $ 73,006  
   

 

 

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

15. Income Taxes — (Continued)

Foreign tax credit carryforwards are recognized based on their potential utilization and, if not used, will expire in the years 2011 and 2012. 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. Certain components of the deferred tax assets for 2003 shown above have changed from the amounts originally reported in 2003. In all cases, any such adjustment was offset by a corresponding adjustment to the valuation allowance for 2003 such that the reported net deferred tax assets (liabilities) for 2003 did not change. The reduction in the valuation allowance of $300,358 was primarily due to the consummation of the equity-for-debt exchange offer as discussed below. A valuation allowance is required under SFAS No. 109, “Accounting for Income Taxes,” when there is evidence of losses from operations in the three most recent fiscal years. For statutory purposes, the majority of deferred tax assets for which a valuation allowance is provided do not begin expiring until 2024 and beyond, based on the current tax laws.

As a result of the recently consummated equity-for-debt exchange offer discussed in Note 8, the Company will be subject to substantial limitations on the use of pre-exchange period losses and credits to offset U.S. federal taxable income in any post-exchange period. Since a valuation allowance had already been reflected to offset these losses and credits, this limitation did not result in a material write-off by the Company.

As part of the overall reorganization that took place in May 2001, the Company transferred in December 2000, certain intangible rights to one of its subsidiaries. The gain on the transfer was reported as an intercompany deferred gain and is therefore eliminated in consolidation; for GAAP purposes, however, the transfer was subject to tax in the U.S. As required under SFAS No. 109, the U.S. tax charge on the gain was reported in the consolidated financial statements as a deferred charge which is being amortized to tax expense over 35 years.

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:

    2004   2003   2002  
   

 

 

 
Tax benefit at U.S. statutory rate
    (35.0 )%   (35.0 )%   (35.0 )%
State income taxes, net of Federal income tax benefit
    1.7     6.8     0.4  
Adjustment to deferred tax assets — equity-for-debt exchange
    154.5          
Valuation allowance
    (140.9 )   52.9     34.4  
Difference in estimated income taxes on foreign income and losses, net of previously provided amounts
    13.7     15.1     2.0  
Deferred charge
    0.8     1.7     0.4  
Nondeductible loss
    26.7          
Other
    1.4     1.8     0.7  
   

 

 

 
      22.9 %   43.3 %   2.9 %
   

 

 

 

16. Derivative Financial Instruments

The Company operates on a worldwide basis. The Company’s activities expose it to risks related to the effect of changes in foreign-currency exchange rates. The Company maintains a foreign-currency risk-management strategy that uses derivative instruments to protect it from unanticipated fluctuations in cash

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

16. Derivative Financial Instruments — (Continued)

flows that may arise from volatility in currency exchange rates. The Company utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” At December 31, 2004, December 26, 2003 and December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded pretax losses in 2004 and 2003 of $2,900 and $5,160, respectively, and recorded a pretax gain of $8,470 in 2002. These amounts were recorded as reductions in cost of operating revenues on the consolidated statement of operations and comprehensive loss. Amounts receivable (gains) or payable (losses) under foreign exchange contracts 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 is exposed to credit loss in the event of non-performance by the counterparties. All of these counterparties are significant financial institutions that are primarily rated “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies). As of December 31, 2004, approximately $31,700 was owed to the Company by counterparties and $14,600 was owed by the Company to counterparties. A $3,834 net of tax gain was recorded in other comprehensive loss as of December 28, 2001. This amount was reclassified to earnings in 2002 as the Company no longer qualified for deferral under SFAS No. 133.

The maximum term over which the Company is hedging exposure to the variability of cash flows is 12 months.

17. Business Segments — Data

The Company operates through two business groups which also constitute separate reportable segments: the Engineering and Construction Group (the “E&C Group”) and the Global Power Group. The E&C Group designs, engineers, and constructs upstream oil and gas processing facilities, oil refining, chemical and petrochemical, pharmaceutical, natural gas liquefaction (LNG) facilities and receiving terminals, and related infrastructure, including power generation and distribution facilities. The E&C Group provides engineering, project management and construction management services, and purchases equipment, materials and services from third-party suppliers and subcontractors. The E&C Group owns industry leading technology in delayed coking, solvent de-asphalting, and hydrogen production processes used in oil refineries and has access to numerous technologies owned by others. The E&C Group also provides international environmental remediation services, together with related technical, engineering, design and regulatory services. The E&C Group generates revenues from engineering and construction activities pursuant to long-term contracts spanning up to four years in duration.

The Global Power Group designs, manufactures, and erects steam generating and auxiliary equipment for electric power generating stations and industrial markets worldwide. Steam generating equipment includes a full range of fluidized bed and conventional boilers firing coal, oil, gas, biomass and municipal solid waste, waste wood, and low-Btu gases. Auxiliary equipment includes feedwater heaters, steam condensers, heat-recovery equipment, selective non-catalytic recovery units, selective catalytic recovery units and low-NOx burners. The Company provides a broad range of site services relating to these products, including full plant construction, maintenance engineering, plant upgrading and life extension, and plant repowering. The Global Power 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 Global Power Group builds, owns and operates cogeneration, independent power production and waste-to-energy facilities, as well as facilities for the process and petrochemical industries. The Global Power Group generates revenues from long-term engineering activities, supply of equipment and construction contracts, and from operating activities pursuant to the long-term sale of project outputs (i.e., electricity, steam, etc.), operating and maintenance agreements, and from returns on its equity investments in certain production facilities.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

17. Business Segments — Data — (Continued)

The Company has restated its business segment data to reflect the transfer of one of its operating subsidiaries in Canada from the E&C Group to the Global Power Group. The subsidiary’s operations have been consolidated into another subsidiary whose operations have been historically reported as part of the Global Power Group.

The Company conducts its business on a global basis. The E&C Group accounted for the largest portion of the Company’s operating revenues over the last ten years. In 2004, the E&C Group and the Global Power Group accounted for approximately 62% and 38%, respectively, of the operating revenues. The geographic dispersion of these operating revenues for the year ended December 31, 2004 was as follows:

    E&C Group

  Global Power Group

      Total

 
    Operating
Revenues
  Percentage of
Operating
Revenues
  Operating
Revenues
  Percentage of
Operating
Revenues
  Corporate and
Financial Services
and Eliminations
  Operating
Revenues
  Percentage of
Operating
Revenues
 
   

 

 

 

 

 

 

 
North America
  $ 79,200     4.8 % $ 291,809     29.0 % $ 2,900   $ 373,909     14.0 %
South America
    52,966     3.2 %   123,974     12.3 %   (598 )   176,342     6.6 %
Europe
    976,413     58.8 %   458,755     45.7 %   (4,962 )   1,430,206     53.7 %
Asia
    252,696     15.2 %   82,728     8.2 %   (1,261 )   334,163     12.6 %
Middle East
    131,909     7.9 %   37,770     3.8 %   (585 )   169,094     6.4 %
Other
    168,408     10.1 %   9,816     1.0 %   (614 )   177,610     6.7 %
   

 

 

 

 

 

 

 
Total
  $ 1,661,592     100.0 % $ 1,004,852     100.0 % $ (5,120 ) $ 2,661,324     100.0 %
   

 

 

 

 

 

 

 

Management uses several financial metrics to measure the performance of the Company’s business segments. EBITDA is the primary earnings measure used by the Company’s chief decision makers.

Export revenues account for 4% of operating revenues. No single customer represented 10% or more of operating revenues for 2004, 2003, or 2002.

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.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

17. Business Segments — Data — (Continued)

    Total   Engineering
and
Construction
  Global Power Group   Corporate and
Financial Services(1)
 
   

 

 

 

 
For the Year Ended December 31, 2004
                         
Third party revenues
  $ 2,661,324   $ 1,658,151   $ 1,002,561   $ 612  
Intercompany revenues
    (33 )   3,441     2,291     (5,765 )
   

 

 

 

 
Operating revenues
  $ 2,661,291   $ 1,661,592   $ 1,004,852   $ (5,153 )
   

 

 

 

 
EBITDA(2)
  $ (107,789 ) $ 135,709   $ 80,653   $ (324,151 )
         
 
 
 
Less: Interest expense
    (94,556 )                  
Less: Depreciation and amortization
    (32,755 )                  
   
                   
Loss before income taxes
    (235,100 )                  
Tax provision
    (53,122 )                  
   
                   
Net loss
  $ (288,222 )                  
   
                   
Total assets
  $ 2,152,782   $ 970,609   $ 1,172,838   $ 9,335  
Capital expenditures
  $ 9,613   $ 5,724   $ 3,847   $ 42  
                           
For the Year Ended December 26, 2003
                         
Third party revenues
  $ 3,723,815   $ 2,271,260   $ 1,452,909   $ (354 )
Intercompany revenues
        857     (574 )   (283 )
   

 

 

 

 
Operating revenues
  $ 3,723,815   $ 2,272,117   $ 1,452,335   $ (637 )
   

 

 

 

 
EBITDA (3)
    21,444   $ 68,699   $ 137,758   $ (185,013 )
         
 
 
 
Less: Interest expense
    (95,415 )                  
Less: Depreciation and amortization
    (35,574 )                  
   
                   
Loss before income taxes
    (109,545 )                  
Tax provision
    (47,426 )                  
   
                   
Net loss
  $ (156,971 )                  
   
                   
Total assets
  $ 2,507,000   $ 1,022,342   $ 1,227,105   $ 257,553  
Capital expenditures
  $ 12,870   $ 5,677   $ 6,593   $ 600  
                           
For the Year Ended December 27, 2002
                         
Third party revenues
  $ 3,519,177   $ 1,974,235   $ 1,545,692   $ (750 )
Intercompany revenues
        1,248     27,705     (28,953 )
   

 

 

 

 
Operating revenues
  $ 3,519,177   $ 1,975,483   $ 1,573,397   $ (29,703 )
   

 

 

 

 
EBITDA(4)(5)
  $ (219,136 ) $ (35,598 ) $ (29,807 ) $ (153,731 )
Less: Interest expense
    (82,929 )                  
Less: Depreciation and amortization
    (57,825 )                  
   
                   
Loss before income taxes and cumulative effect of a change in accounting principle for goodwill
    (359,890 )                  
Tax provision
    14,657                    
   
                   
Net loss prior to cumulative effect of a change in accounting principle for goodwill
    (374,547 )                  
Cumulative effect on prior years of a change in accounting principle for goodwill
    (150,500 )                  
   
                   
Net loss
  $ (525,047 )                  
   
                   
Capital expenditures
  $ 53,395   $ 9,874   $ 9,350   $ 34,171  
                           

 
(1)
Includes general corporate income and expense, the Company’s captive insurance operation and eliminations.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

17. Business Segments — Data — (Continued)

(2)
Includes in 2004: a gain of $19,200 in E&C on the sales of minority equity interests in special-purpose companies established to develop power plant projects in Europe; a loss of $(3,300) in E&C on the sale of 10% of the Company’s equity interest in a waste-to-energy project in Italy; the reevaluation of contract costs estimates of $58,000: $98,700 in E&C and $(40,700) in Global Power; a charge of $(75,800) in C&F on the revaluation of asbestos insurance assets as a result of an adverse court decision in asbestos coverage allocation litigation; a net gain of $15,200 in C&F on the settlement of coverage litigation with certain asbestos insurance carriers; restructuring and credit agreement costs of $(17,200) in C&F; a net charge of $(175,100) in C&F recorded in conjunction with the equity-for-debt exchange; and charges for severance cost of $(5,700): $(2,900) in E&C, $(1,900) in Global Power and $(900) in C&F.
(3)
Includes in 2003: an impairment loss of $(15,100) in C&F on the anticipated sale of domestic corporate office building; a gain of $16,700 in E&C on the sale of Foster Wheeler Environmental Corporation; a gain of $4,300 in Global Power on sale of waste-to-energy plant; the reevaluation of project claim estimates and contract cost estimates of $(30,800): $(33,900) in E&C and $3,100 in Global Power; a provision for asbestos claims of $(68,100) in C&F; restructuring and credit agreement costs of $(42,600) in C&F and $(1,000) in E&C; and charges for severance cost of $(15,900): $(6,600) in E&C, $(6,700) in Global Power and $(2,600) in C&F.
(4)
Includes in 2002: a loss recognized in anticipation of sales of assets of $(54,500) in Global Power; reevaluation of project claim estimates and contract cost estimates of $(216,700): $(121,650) in E&C, $(86,450) in Global Power and $(8,600) in C&F; a provision of $(26,200) in C&F for asbestos claims; a provision of $(18,700) in Global Power for a domestic plant impairment; restructuring and credit agreement costs of $(37,100) in C&F; and charges for severance cost of $(7,700): $(500) in E&C, $(4,300) in Global Power and $(2,900) in C&F.
(5)
Excludes the cumulative effect in 2002 of change in accounting principle related to goodwill of $(48,700) in E&C and $(101,800) in Global Power.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

17. Business Segments — Data — (Continued)

    For the Year Ended

 
    December 31,   December 26,   December 27,  
    2004   2003   2002  
   

 

 

 
Equity earnings in unconsolidated subsidiaries were as follows:
                   
Engineering and Construction Group
  $ 16,885   $ 12,911   $ 9,443  
Global Power Group
    9,041     7,950     6,414  
Corporate and Financial Services
    (316 )   (407 )    
   

 

 

 
Total
  $ 25,610   $ 20,454   $ 15,857  
   

 

 

 
                     
    As of

 
    December 31,   December 26,  
    2004   2003  
   

 

 
Investments and advances in unconsolidated subsidiaries were as follows:
             
Engineering and Construction Group
  $ 93,318   $ 73,656  
Global Power Group
    61,410     65,274  
Corporate and Financial Services
    3,596     3,629  
   

 

 
Total
  $ 158,324   $ 142,559  
   

 

 
               
    For the Year Ended

 
    December 31,   December 26,   December 27,  
    2004   2003   2002  
   

 

 

 
Geographic concentration of operating revenues:
                   
United States
  $ 525,614   $ 976,818   $ 1,522,135  
Europe
    1,900,889     2,491,680     1,638,938  
Canada
    35,895     67,459     135,399  
Asia
    165,416     173,946     206,113  
South America
    38,630     14,549     46,295  
Corporate and Financial Services, including eliminations
    (5,120 )   (637 )   (29,703 )
   

 

 

 
Total
  $ 2,661,324   $ 3,723,815   $ 3,519,177  
   

 

 

 
                     
    As of

 
    December 31,   December 26,  
    2004   2003  
   

 

 
Long-lived assets:
             
United States
  $ 245,985   $ 258,261  
Europe
    188,810     213,961  
Canada
    887     1,255  
Asia
    23,012     23,058  
South America
    60,582     62,023  
Corporate and Financial Services, including eliminations
    40,855     16,305  
   

 

 
Total
  $ 560,131   $ 574,863  
   

 

 

Revenues and long-lived assets are based on the country in which the contracting subsidiary is located.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

17. Business Segments — Data — (Continued)

Operating revenues by industry segment were as follows:

    For the Year Ended

 
    December 31,   December 26,   December 27,  
    2004   2003   2002  
   

 

 

 
Power
  $ 1,164,672   $ 1,731,339   $ 1,647,135  
Oil and gas/refinery
    990,209     1,254,052     922,267  
Pharmaceutical
    335,363     300,507     404,825  
Chemical
    171,091     204,738     156,606  
Environmental*
    78,891     124,724     353,981  
Power production
    112,526     167,594     130,843  
Eliminations and other
    (191,428 )   (59,139 )   (96,480 )
   

 

 

 
Total Operating Revenues
  $ 2,661,324   $ 3,723,815   $ 3,519,177  
   

 

 

 
                     

 
*
The decline in operating revenues in the environmental industry segment resulted from the sale of certain assets of Environmental on March 7, 2003. The operating revenues in this segment from Environmental for 2004, 2003 and 2002 were $22,800, $68,100 and $303,700, respectively.

18. Sale of Certain Business Assets

In 2002, the Company recorded losses of $35,500 in anticipation of a sale of its Hudson Falls waste-to-energy facility. This facility was sold in October 2003. A loss of $19,000 was also recorded in 2002 on the Charleston waste-to-energy facility. This facility was sold in October 2002. These losses were recorded in other deductions on the consolidated statement of operations and comprehensive loss.

During the third quarter of 2002, management of the Global Power Group approved a plan to convert the use of its domestic manufacturing facility to focus on the after-market service business and wind down the facility’s fabrication of new power generation equipment due to cost competitive considerations. The plan was subject to discussions with the local labor unions. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the facility was tested for impairment using estimated future cash flows based on the revised use of the facility. The review indicated impairment in the facility’s carrying value of $13,400. The Company recorded the impairment loss in the third quarter of 2002 and the impairment is reflected in the cost of operating revenues as depreciation in the accompanying consolidated statement of operations and comprehensive loss. During the fourth quarter of 2002, the Company decided to mothball the facility. Additional charges of $5,300 were recorded in December 2002 and the facility has ceased operations.

On March 7, 2003, the Company sold certain assets of its wholly owned subsidiary, Foster Wheeler Environmental Corporation, for sales proceeds then approximating $72,000. The Company recognized a gain of $15,300 on the sale, which was recorded in other income in the first quarter of 2003. The Company also retained approximately $8,000 of cash on hand at the time of the asset sale. The sales proceeds were subject to adjustment based on a net worth calculation to be finalized subsequent to the sale. During the third quarter 2003, the Company and the buyer agreed on a final net worth calculation that resulted in the Company returning $4,500 of the sales proceeds to the buyer over a six-month time period. A total of $3,000 was returned by year-end 2003 and $1,500 was paid in February 2004. The net worth agreement had no impact on the pretax gain previously disclosed. With the payment in February, all transactions related to the sale have been concluded.

On March 31, 2003, the Company sold its interest in a corporate office building for net proceeds of approximately $7,900, which approximated the value of the Company’s investment. With the completion of

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

18. Sale of Certain Business Assets — (Continued)

this transaction, $1,445 of the net proceeds was used to prepay principal outstanding under the Senior Credit Facility in accordance with the terms of the facility as described in Note 9.

In 2004, the Company sold a domestic corporate office building for net cash proceeds of approximately $16,400, which approximated carrying value. Of this amount, 50% was prepaid to the Senior Credit Facility’s lenders in the second quarter of 2004. The Company previously recorded an impairment loss of $15,100 on this building in 2003 in anticipation of a sale, in accordance with SFAS No. 144. The loss was recorded in other deductions on the consolidated statement of operations and comprehensive loss. The carrying value of the building was included in land, buildings and equipment on the consolidated balance sheet as of December 26, 2003.

In 2004, the Company sold minority equity interests in special-purpose companies established to develop power plant projects in Europe. The Company recorded an aggregate gain on the sales of $19,200 in 2004, which was recorded in other income on the consolidated statement of operations and comprehensive loss.

In 2004, the Company also entered into a binding agreement to sell 10% of its equity interest in a waste-to-energy project in Italy. The Company recorded a loss on the sale of $3,300 in 2004, which was recorded in other income on the consolidated statement of operations and comprehensive loss.

19. Operating Leases

The Company and certain of its subsidiaries are obligated under operating lease agreements primarily for office space. Rental expense for these leases total approximately $34,048 in 2004, $34,117 in 2003 and $37,465 in 2002. Future minimum rental commitments on non-cancelable leases are as follows:

Fiscal year:
       
2005
  $ 33,132  
2006
    27,540  
2007
    23,439  
2008
    21,147  
2009
    20,622  
Thereafter
    240,698  
   

 
    $ 366,578  
   

 

The Company entered into sale/leaseback transactions for an office building in Spain in 2000 and an office building in the U.K. in 1999. In connection with these transactions, the Company recorded deferred gains, which are being amortized to income over the term of the respective leases. The amortization was $4,135, $3,622 and $3,197, for the years ended December 31, 2004, December 26, 2003 and December 27, 2002, respectively. As of December 31, 2004 and December 26, 2003, the balance of the deferred gains was $76,383 and $74,151, respectively, and is included in other long-term liabilities on the accompanying consolidated balance sheet. The year-over-year increase in the deferred gain balance was primarily due to a change in foreign currency translation rates.

20. Litigation and Uncertainties

     Asbestos

Some of the Company’s U.S. and U.K. subsidiaries are defendants in numerous asbestos-related lawsuits and out-of-court informal claims pending in the United States and United Kingdom. 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’s subsidiaries during the 1970s and prior.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

20. Litigation and Uncertainties — (Continued)

          United States

A summary of U.S. claim activity for the three years ended December 31, 2004 is as follows:

    Number of Claims

 
    2004   2003   2002  
   

 

 

 
Balance at beginning of year
    170,860     139,800     110,700  
New claims
    17,870     48,260     45,200  
Claims resolved
    (20,970 )   (17,200 )   (16,100 )
   

 

 

 
Balance at end of year
    167,760 *   170,860 *   139,800  
   

 

 

 
                     

 
*
Includes claims on inactive court dockets of 22,300 and 24,500 at year-end 2004 and year-end 2003, respectively.

The overall average combined indemnity and defense cost per closed claim since 1993 was approximately $2.0. In view of the many uncertainties associated with asbestos bodily injury claims, the Company believes that the average cost will increase in the future.

The amount spent on asbestos litigation defense and case resolution, substantially all of which was reimbursed from insurance coverage, was $100,200 in 2004, $73,600 in 2003 and $57,200 in 2002. The payments in 2004 were funded from settlements with insurance companies, as discussed below.

At December 31, 2004, the Company has recorded total liabilities of $480,000 comprised of an estimated liability relating to open (outstanding) claims of $257,000 and an estimated liability relating to future unasserted claims of $223,000. Of the total, $75,000 is recorded in accrued expenses and $405,000 is recorded in asbestos-related liability on the consolidated balance sheet. These estimates are based upon the following information and/or assumptions: number of open claims; forecasted number of future claims; estimated average cost per claim by disease type (i.e., mesothelioma vs. non-mesothelioma); and the breakdown of known and future claims into disease type (i.e., mesothelioma vs. non-mesothelioma). Claims that have not been settled and are six or more years old are considered abandoned and are no longer valued in the estimated liability. There were approximately 9,100 such cases at December 31, 2004. The total estimated liability includes both the estimate of forecasted indemnity amounts and forecasted defense expenses. Total estimated defense costs and indemnity payments are estimated to be incurred through the year 2019, during which period new claims are expected to decline from year to year. Recently received claims also suggest that the percentage of claims to be closed without payment of indemnity costs should increase as claims are resolved during the next few years. The Company believes that it is likely that there will be new claims filed after 2019, but in light of uncertainties inherent in long-term forecasts, the Company does not believe that it can reasonably estimate defense and/or indemnity costs, which might be incurred after 2019. Historically, defense costs have represented approximately 21% of total defense and indemnity costs. Through December 31, 2004, total indemnity costs paid, prior to insurance recoveries, were approximately $443,700 and total defense costs paid were approximately $119,900.

As of December 31, 2004, the Company has recorded assets of $385,500 relating to actual and probable insurance recoveries, of which $95,000 is recorded in accounts and notes receivables, and $290,500 is recorded as asbestos-related insurance recovery receivable on the consolidated balance sheet. The asset includes an estimate of recoveries from insurers based upon assumptions relating to cost allocation and resolution of pending legal proceedings with certain insurers, as well as recoveries under settlements with other insurers.

As of December 31, 2004, $165,200 was contested by the subsidiaries’ insurers in ongoing litigation. The litigation relates to the proper allocation of the coverage liability among the subsidiaries’ various insurers

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

20. Litigation and Uncertainties — (Continued)

and the subsidiaries as self-insurers. The Company believes that any amounts that its subsidiaries might be allocated as self-insurer would be immaterial.

The Company’s subsidiaries have entered into several settlement agreements calling for insurers to make lump-sum payments, as well as payments over time, for use by the subsidiaries to fund asbestos-related indemnity and defense costs and, in certain cases, for reimbursement for a portion of out-of-pocket costs previously incurred. The Company intends to negotiate additional settlements in order to minimize the amount of future costs the Company will be required to fund out of working capital.

The Company projects that it will not be required to fund any asbestos liabilities from its cash flow before 2010, although it may be required to fund a portion of such liabilities from its own cash thereafter. This forecast assumes that the Company will be able to successfully resolve certain outstanding insurance coverage issues. An adverse outcome in the insurance litigation on these coverage issues could materially limit the Company’s insurance recoveries. In this regard, on January 10, 2005, a New York state trial court entered an order finding that New York, rather than New Jersey, law applies in the litigation described above regarding the allocation of liability for asbestos-related personal injury claims among the Foster Wheeler entities and their various insurers. Since the inception of this litigation, the Company has calculated estimated insurance recoveries applying New Jersey law. However, the application of New York, rather than New Jersey, law would result in the Company’s subsidiaries realizing lower insurance recoveries. Thus, as a result of this decision, the Company recorded a charge to earnings in the fourth quarter of 2004 of approximately $76,000 and reduced the year-end carrying value of its probable insurance recoveries by a similar amount. Unless this decision is reversed on appeal, the Company expects that it will be required to fund a portion of its asbestos liabilities from its own cash beginning in 2010. The amount and timing of these funding requirements will be dependent upon, among other things, litigated or negotiated resolution of the various disputes between the Company and the insurers with whom it has not yet settled. On February 16, 2005, the Company’s subsidiaries filed separate motions seeking (i) the re-argument of this decision and (ii) an appeal of this decision to a higher court. There can be no assurances as to the timing or the outcome of these motions.

In addition, even if these coverage issues are resolved in a manner favorable to the Company, the Company may not be able to collect all of the amounts due under its insurance policies. The Company’s recoveries will be limited by insolvencies among its insurers. The Company is aware of at least two of its significant insurers which are currently insolvent. Other insurers may become insolvent in the future and the Company’s insurers may also fail to reimburse amounts owed to the Company on a timely basis. If the Company does not receive timely payment from its insurers, it may be unable to make required payments under settlement agreements with asbestos plaintiffs or to fund amounts required to be posted with the court in order to appeal trial judgments. If the Company is unable to file such appeals, the Company’s subsidiaries may be ordered to pay large damage awards arising from adverse jury verdicts, and such awards may exceed available cash. Any failure to realize expected insurance recoveries, and any delays in receiving from its insurers amounts owed to the subsidiaries, will reduce cash flow and adversely affect liquidity and could have a material adverse effect on the Company’s financial condition.

The pending litigation and negotiations with other insurers is continuing.

It should be noted that the estimate of the assets and liabilities related to asbestos claims and recoveries is subject to a number of uncertainties that may result in significant changes in the current estimates. Among these are uncertainties as to the ultimate number of claims filed, the amounts of claim costs, the impact of bankruptcies of other companies with asbestos claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, as well as potential legislative changes. Increases in the number of claims filed or costs to resolve those claims will cause the Company to increase further the

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

20. Litigation and Uncertainties — (Continued)

estimates of the costs associated with asbestos claims and could have a material adverse effect on the business, financial condition, results of operations, and cash flows.

          United Kingdom

Subsidiaries of the Company in the U.K. have also received claims alleging personal injury arising from exposure to asbestos. To date 446 claims have been brought against the U.K. subsidiaries of which 255 remain open at December 31, 2004. None of the settled claims has resulted in material costs to the Company.

At December 31, 2004 the Company recorded the estimated U.S. dollar equivalent for the total U.K. asbestos liabilities of $44,300. Of the total, $1,900 is recorded in accrued expenses and $42,400 is recorded in asbestos-related liability on the consolidated balance sheet. The estimated U.S. dollar equivalent liability for open (outstanding) U.K. asbestos claims is $5,800 and the estimated liability for future unasserted U.K. asbestos claims is $38,500. An asset in an equal amount was recorded for the expected U.K. asbestos-related insurance recoveries, of which $1,900 is recorded in accounts and notes receivables, and $42,400 is recorded as asbestos-related insurance recovery receivable on the consolidated balance sheet.

     Project Claims

In the ordinary course of business, the Company and its subsidiaries are parties to litigation involving clients and subcontractors arising out of project contracts. Such litigation includes claims and counterclaims by the Company for additional costs incurred in excess of current contract provisions, as well as for back charges for alleged breaches of warranty and other contract commitments. If the Company were found to be liable for any of the claims/counterclaims against it, the Company would have to incur a write-down or charge against earnings to the extent a reserve has not been established for the matter in its accounts. Amounts ultimately realized on claims/counterclaims by the Company could differ materially from the balances included in the Company’s financial statements, resulting in a charge against earnings to the extent profit has already been accrued on a project contract. Such charges could have a material adverse impact on the Company’s liquidity and financial condition. The Company believes, after consultation with counsel, that such litigation should not have a material adverse effect upon the Company’s financial position or liquidity, after giving effect to the provisions already recorded.

In addition to the matters described above, an arbitration has been commenced against the Company arising out of a compact circulating fluidized-bed boiler that the Company engineered, supplied and erected for a client in Asia. In addition to claims for damages for breach of contract, the client is seeking to rescind the contract based upon alleged material misrepresentations by the Company. If such relief were granted, the Company could be compelled to reimburse the client for the purchase price paid (approximately $25,700), in addition to other damages, which have not yet been quantified. The Company is vigorously defending the case and has counterclaimed for unpaid receivables (approximating $5,200), plus interest, for various breaches and non-performance by the client. (Due to its age, a reserve for the full amount of the receivable was taken prior to the arbitration.) The case is in the initial stages of discovery and a final award is not expected until 2007. Based upon the Company’s investigation and the proceedings to date, there appear to be valid defenses to the claim. However, it is premature to predict the outcome of this proceeding.

The Company has been notified of a claim by its client with respect to a thermal electric power plant in South America that the Company designed, supplied and erected as a member of a consortium with other parties. The plant’s concrete foundations have experienced cracking, allegedly due to out-of-specification materials used in the concrete poured by the consortium’s subcontractor. The client has adopted a plan to repair the foundations and is seeking reimbursement of its costs (approximating $11,000) from the consortium. Additional damages could be alleged if the matter proceeds to an adversary proceeding. The Company is investigating the claim, as well as any rights that it may have to seek reimbursement for the

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

20. Litigation and Uncertainties — (Continued)

damages from third parties. Valid legal defenses to the claim appear to exist. However, it is premature to predict the outcome of this matter.

     Camden County Waste-to-Energy Project

One of the Company’s project subsidiaries, Camden County Energy Recovery Associates, LP (“CCERA”), owns and operates a waste-to-energy facility in Camden County, New Jersey (the “Project”). In 1997, the United States Supreme Court effectively invalidated New Jersey’s long-standing municipal solid waste flow rules and regulations, eliminating the guaranteed supply of municipal solid waste to the Project with its corresponding tipping fee revenue. As a result, tipping fees have been reduced to market rate in order to provide a steady supply of fuel to the Project. Since the ruling, those market-based revenues have not been, and are not expected to be, sufficient to service the debt on outstanding bonds, which were issued by the Pollution Control Finance Authority of Camden County (“PCFA”) to finance the construction of the Project and to acquire a landfill for Camden County’s use.

In 1998, the CCERA filed suit against the PCFA and other parties seeking, among other things, to void the applicable contracts and agreements governing the Project (Camden County Energy Recovery Assoc. v. N.J. Department of Environmental Protection, et al., Superior Court of New Jersey, Mercer County, L-268-98). Since 1999, the State of New Jersey has provided subsidies sufficient to ensure the payment of each of the Project’s debt service payments as they became due. The bonds outstanding on the Camden Project were issued by the PCFA, not the Company or CCERA, and the bonds are not guaranteed by the Company or CCERA. Pursuant to the loan agreement between PCFA and CCERA, proceeds from the bonds were used to finance the construction of the facility and accordingly these proceeds were recorded as debt on CCERA’s balance sheet and therefore are included in the Company’s consolidated balance sheet. CCERA’s obligation to service the debt obtained pursuant to the loan agreement is limited to depositing all tipping fees and electric revenues received with the trustee of the PCFA bonds. The trustee is required to pay CCERA its service fees prior to servicing PCFA bonds. CCERA has no further debt repayment obligations under the loan agreement with the PCFA. In the litigation, the defendants have asserted, among other things, that an equitable portion of the outstanding debt on the Project should be allocated to CCERA even though CCERA did not guarantee the bonds. At this time, management cannot determine the ultimate outcome of the foregoing and the potential effects on CCERA and the Project. If the State were to fail to subsidize the debt service, and there were to be a default on a debt service payment, the bondholders might proceed to attempt to exercise their remedies, by among other things, seizing the collateral securing the bonds. The Company does not believe this collateral includes CCERA’s plant.

     Long-Term Government Contract

The Company retained a long-term contract with a government agency in connection with the Foster Wheeler Environmental Corporation sale. The contract is scheduled to be completed in four phases. The first phase was for the initial design, permitting and licensing of a spent fuel facility. The first phase of this project was profitable.

The second phase of the contract, which is currently being executed, is billed on a cost-plus-fee basis and was expected to conclude in 2004. In this phase, the Company must license the facility with the NRC, respond to any questions regarding the initial design included in phase one and complete final design. Technical specification and detailed guidance from the government agency regarding government agency-directed changes to the project scope remain outstanding. Resolution of the outstanding issues will be required before the second phase of the contract can be completed.

Phase three is for the construction, start-up and testing of the facility for a fixed contractual price of $114,000, subject to escalation. The actual commencement of this phase will be delayed as a result of the

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

20. Litigation and Uncertainties — (Continued)

significant delay in the issuance of the NRC license for the facility which was received on November 30, 2004. This delay will also result in substantial additional facility costs. The third phase would begin with the purchase of long-lead items followed by the construction activities. Construction is expected to last two years and requires that a subsidiary of the Company fund the construction cost. Foster Wheeler USA Corporation, the parent company of Foster Wheeler Environmental Corporation, provided a performance guarantee on the project. In addition, a surety bond for the full contract price is required. The cost of the facility is expected to be recovered in the first nine months of operations under phase four, during which a subsidiary of the Company will operate the facility at fixed rates, subject to escalation, for approximately four years. The Company and the government agency have engaged in discussions about possibly restructuring or terminating subsequent phases of the contract. If the project were to proceed, the Company intends to seek third-party financing to fund the majority of the construction costs, but there can be no assurance that the Company will secure such financing on acceptable terms, or at all. There also can be no assurance that the Company will be able to obtain the required surety bond. If the Company cannot successfully restructure the contract and cannot obtain third-party financing or the required surety bond, the Company’s ability to perform its obligations under the contract is unlikely. This could have a material adverse effect on the Company’s financial condition, results of operations, and cash flow. No claims have been raised by the government agency against the Company. The ultimate potential liability to the Company would arise in the event that the government agency terminates the contract (for example, due to the Company’s inability to continue with the contract) and re-bids the contract under its exact terms and the resulting cost to the government agency is greater than it would have been under the existing terms with the Company. The Company does not believe a claim is probable and is unable to estimate the possible loss that could occur as a result of any claims. Additionally, the Company believes that it has a variety of potential legal defenses should the government agency decide to pursue any such action.

     Environmental Matters

Under U.S. federal statutes, such as the Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”), the Clean Water Act and the Clean Air Act, 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 in excess of those for which reserves have been established.

The Company also may receive claims, pursuant to indemnity obligations from owners of recently sold facilities, which may require the Company to incur costs for investigation and/or remediation. Based on the available information, the Company does not believe that such costs will be materially in excess of those reserves which it has established. No assurance can be provided that the Company will not discover

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

20. Litigation and Uncertainties — (Continued)

environmental conditions at its currently owned or operated properties, or that additional claims will not be made with respect to formerly owned properties, requiring the Company to incur material expenditures to investigate and/or remediate such conditions.

The Company 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 off-site facilities as to which it has received a notice of potential liability will exceed $500 in the aggregate.

In February 1988, one of the Company’s subsidiaries, Foster Wheeler Energy Corporation (“FWEC”), entered into a Consent Agreement and Order (“Order”) with the United States Environmental Protection Agency (“USEPA”) and the Pennsylvania Department of Environmental Protection (“PADEP”) regarding its former manufacturing facility in Mountaintop, Pennsylvania. The Order essentially required FWEC to investigate and remediate as necessary contaminants, including trichloroethylene (“TCE”), in the soil and groundwater at the facility. Pursuant to the Order, FWEC in 1993 installed a “pump and treat” system to remove TCE from the groundwater. It is not possible at the present time to predict how long FWEC will be required to operate and maintain the system. The annual cost of operating and maintaining the system has not been material.

In September 2004, FWEC sampled the domestic water supply of approximately 16 residences in Mountaintop, and it received validated testing data regarding that sampling in October 2004. The residences are located approximately one mile to the southwest of the historic source of the TCE at FWEC’s former facility, and it is believed the residences use private wells for domestic water. The results of this sampling indicated that TCE was present in the water at several of the residences at levels in excess of Safe Drinking Water Act standards. Since the initial round of testing in September 2004, FWEC has tested more wells. As of February 2005, the number of wells in the area containing TCE in excess of the standards is approximately 30, and FWEC believes the boundaries of the affected area have been delineated.

The source of the TCE in the wells has not yet been determined. FWEC is working closely with the appropriate regulatory authorities in responding to this situation. FWEC first provided the affected residences with temporary replacement water and then arranged to have filters installed on the residences’ water system to remove the TCE. FWEC has also arranged to have the filters periodically tested and maintained. The cost of the foregoing is not expected to be material. If the source of the TCE is determined to be from a third-party, FWEC will evaluate its options regarding the recovery of the costs it has incurred, which options could include seeking to recover those costs from those determined to be the source. The agencies have incurred over $500 of costs responding to the situation, which they may seek to recover from those determined to be the source(s) of the TCE. The Company and the agencies are reviewing the technical and economic feasibility of extending a public water line that exists at one end of the effected area to the other end of the effected area. Given the preliminary stage of the investigations, FWEC is unable to estimate the potential financial impact of the foregoing on FWEC.

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 as these are subject to change as events evolve and as additional information becomes available during the administration and litigation process. Increases in the number of claims filed or costs to resolve those claims will cause the Company to increase further the estimates of the costs associated with

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

20. Litigation and Uncertainties — (Continued)

such claims and could have a material adverse effect on the business, financial condition, results of operations, and cash flows.

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 the financial position, results of operations or cash flows in excess of amounts previously provided in the accounts.

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FOSTER WHEELER HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

21. Valuation and Qualifying Accounts

    2004

 
    Balance at
Beginning
of Year
  Additions Charged
to Costs and
Expenses
  Additions
Charged to Other
Accounts
  Deductions   Balance at
the End of
the Year
 
   

 

 

 

 

 
Description
                               
Allowance for insurance claims receivable
  $ 96,969   $ 57,791   $   $ (60,474 ) $ 94,286  
   

 

 

 

 

 
Allowance for doubtful accounts(1)
  $ 37,406   $ 14,713   $ 3,053   $ (31,973 ) $ 23,199  
   

 

 

 

 

 
Tax valuation allowance
  $ 534,790   $ 31,540   $   $ (331,898 ) $ 234,432  
   

 

 

 

 

 
                                 
    2003  
   
 
    Balance at
Beginning
of Year
  Additions Charged
to Costs and
Expenses
  Additions
Charged to Other
Accounts
  Deductions   Balance at
the End of
the Year
 
   

 

 

 

 

 
Description
                               
Allowance for insurance claims receivable
  $ 37,877   $ 68,081   $   $ (8,989 ) $ 96,969  
   

 

 

 

 

 
Allowance for doubtful accounts(1)
  $ 73,048   $ 26,261   $ 1,457   $ (63,360 ) $ 37,406  
   

 

 

 

 

 
Tax valuation allowance
  $ 444,427   $ 64,074   $   $ 26,289   $ 534,790  
   

 

 

 

 

 
                                 
    2002  
   
 
    Balance at
Beginning
of Year
  Additions Charged
to Costs and
Expenses
  Additions
Charged to Other
Accounts
  Deductions   Balance at
the End of
the Year
 
   

 

 

 

 

 
Description
                               
Allowance for insurance claims receivable
  $ 18,836   $ 26,200   $   $ (7,159 ) $ 37,877  
   

 

 

 

 

 
Allowance for doubtful accounts(1)
  $ 2,988   $ 19,608   $ 56,451   $ (5,999)   $ 73,048  
   

 

 

 

 

 
Tax valuation allowance
  $ 268,851   $ 162,580   $   $ 12,996   $ 444,427  
   

 

 

 

 

 
                                 

 
(1)
Provisions for non-payments of customer balances are normally addressed within the overall profit calculation of the contracts and are not specifically covered by allowances for doubtful accounts. As a result the amount considered to be in the receivable qualifying account (allowance for doubtful accounts) does not represent the full allowance.

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FOSTER WHEELER LLC AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2004

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Foster Wheeler Ltd:

In our opinion, the accompanying consolidated statement of financial position and the related consolidated statements of operations and comprehensive loss, of cash flows and of changes in member’s deficit present fairly, in all material respects, the financial position of Foster Wheeler LLC and Subsidiaries (the “Company”), an indirect, wholly-owned subsidiary of Foster Wheeler Ltd. (the “Parent”), at December 31, 2004 and December 26, 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.

As discussed in Note 3 to the consolidated financial statements, effective December 29, 2001, the Company adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.”

The accompanying financial statements have been prepared assuming the Company and the Parent will continue as a going concern. As discussed in Note 2 to the financial statements, the Parent has incurred significant losses in each of the three years in the period ended December 31, 2004 and has a shareholders’ deficit of $513,283,000 at December 31, 2004. The Parent has substantial debt obligations and during 2004 it was required to obtain an additional amendment to its senior credit facility to provide covenant relief by modifying certain definitions of financial measures utilized in the calculation of certain financial covenants. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Parent’s ability to return to profitability, to complete planned restructuring activities, to generate cash flows from operations and collections of receivables to fund its operations, including obligations resulting from asbestos claims, as well as the maintenance of credit facilities and bonding capacity adequate to conduct business. These matters raise substantial doubt about the Company’s and the Parent’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 30, 2005

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FOSTER WHEELER LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands of dollars)

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
               
   

 

 

 
                     
                     
Operating revenues
  $ 2,661,324   $ 3,723,815   $ 3,519,177  
Cost of operating revenues
    (2,381,969 )   (3,435,726 )   (3,426,910 )
   

 

 

 
Contract profit
    279,355     288,089     92,267  
                     
Selling, general and administrative expenses
    (231,948 )   (205,565 )   (226,524 )
Other income (including interest:
                   
2004—$ 8,832; 2003—$10,130; 2002—$12,251)
    88,422     77,493     55,360  
Other deductions
    (96,304 )   (168,416 )   (193,043 )
Interest expense
    (94,622 )   (95,413 )   (82,928 )
Minority interest
    (4,900 )   (5,715 )   (4,981 )
Loss on equity-for-debt exchange
    (175,054 )        
   

 

 

 
Loss before income taxes
    (235,051 )   (109,527 )   (359,849 )
Provision for income taxes
    (53,122 )   (47,426 )   (14,657 )
   

 

 

 
Loss prior to cumulative effect of a change in accounting principle
    (288,173 )   (156,953 )   (374,506 )
Cumulative effect of a change in accounting principle for goodwill, net of $0 tax
            (150,500 )
   

 

 

 
Net loss
    (288,173 )   (156,953 )   (525,006 )
Other comprehensive income/(loss):
                   
Change in gain on derivative instruments designated as cash flow hedges
            (3,834 )
Foreign currency translation adjustment
    27,155     6,762     22,241  
Minimum pension liability adjustment (net of tax (provision)/benefits: 2004—$986; 2003—$(18,886); 2002—$73,418)
    (7,617 )   58,677     (226,011 )
   

 

 

 
Net comprehensive loss
  $ (268,635 ) $ (91,514 ) $ (732,610 )
   

 

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in thousands of dollars)

    December 31, 2004   December 26, 2003  
   

 

 
ASSETS
             
Current Assets:
             
               
Cash and cash equivalents
  $ 291,567   $ 364,095  
Short-term investments
    25,775     13,390  
Accounts and notes receivable, net:
             
Trade
    388,200     451,010  
Other
    118,871     105,889  
Contracts in process
    166,997     166,503  
Inventories
    7,080     6,790  
Prepaid, deferred and refundable income taxes
    26,144     37,160  
Prepaid expenses
    25,239     30,024  
   

 

 
Total current assets
    1,049,873     1,174,861  
   

 

 
Land, buildings and equipment, net
    280,305     309,615  
Restricted cash
    72,844     52,685  
Notes and accounts receivable—long-term
    7,053     6,776  
Investment and advances
    158,324     142,559  
Goodwill, net
    51,812     51,121  
Other intangible assets, net
    69,690     71,568  
Prepaid pension cost and related benefit assets
    6,351     7,240  
Asbestos-related insurance recovery receivable
    332,894     495,400  
Other assets
    108,254     138,243  
Deferred income taxes
    50,714     56,947  
   

 

 
TOTAL ASSETS
  $ 2,188,114   $ 2,507,015  
   

 

 
               
LIABILITIES AND MEMBER’S DEFICIT
             
               
Current Liabilities:
             
               
Current installments on long-term debt
  $ 35,214   $ 21,100  
Accounts payable
    288,899     305,286  
Accrued expenses
    312,915     381,370  
Estimated costs to complete long-term contracts
    458,421     552,754  
Advance payment by customers
    111,300     50,248  
Income taxes
    53,117     39,654  
   

 

 
Total current liabilities
    1,259,866     1,350,412  
   

 

 
Accounts payable to affiliate
    416,260      
Long-term debt
    531,789     801,972  
Notes payable to affiliate
    210,000     210,000  
Deferred income taxes
    7,948     9,092  
Pension, postretirement and other employee benefits
    265,869     295,133  
Asbestos-related liability
    447,400     526,200  
Other long-term liabilities
    139,113     123,517  
Deferred accrued mandatorily redeemable preferred security distributions of subsidiary trust
        38,021  
Deferred accrued interest on subordinated deferrable interest debentures
    23,460      
Minority interest
    27,052     24,676  
Commitments and contingencies
             
   

 

 
TOTAL LIABILITIES
    3,328,757     3,379,023  
   

 

 
Member’s Deficit:
             
Membership interests and contributed capital
    242,613     242,613  
Accumulated deficit
    (1,098,795 )   (810,622 )
Accumulated other comprehensive loss
    (284,461 )   (303,999 )
   

 

 
TOTAL MEMBER’S DEFICIT
    (1,140,643 )   (872,008 )
   

 

 
TOTAL LIABILITIES AND MEMBER’S DEFICIT
  $ 2,188,114   $ 2,507,015  
   

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBER’S DEFICIT
(in thousands of dollars)

    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Membership Interests
                   
Balance at beginning of year
  $ 1   $ 1   $ 1  
   

 

 

 
Balance at end of year
  $ 1   $ 1   $ 1  
   

 

 

 
                     
Contributed Capital
                   
Balance at beginning of year
  $ 242,612   $ 242,489   $ 242,161  
Other
        123     328  
   

 

 

 
Balance at end of year
  $ 242,612   $ 242,612   $ 242,489  
   

 

 

 
                     
Accumulated Deficit
                   
Balance at beginning of year
  $ (810,622 ) $ (653,669 ) $ (128,663 )
Net loss for the year
    (288,173 )   (156,953 )   (525,006 )
Cash dividends paid
                   
   

 

 

 
Balance at end of year
  $ (1,098,795 ) $ (810,622 ) $ (653,669 )
   

 

 

 
                     
Accumulated Other Comprehensive Loss
                   
Balance at beginning of year
  $ (303,999 ) $ (369,438 ) $ (161,834 )
Change in net gain on derivative instruments designated as cash flow hedges
            (3,834 )
Change in accumulated translation adjustment during the year
    27,155     6,762     22,241  
Minimum pension liability (net of tax (provision)/benefits:
                   
2004—$986; 2003—$(18,886); 2002—$73,418)
    (7,617 )   58,677     (226,011 )
   

 

 

 
Balance at end of year
  $ (284,461 ) $ (303,999 ) $ (369,438 )
   

 

 

 
                     
Total Member’s Deficit
  $ (1,140,643 ) $ (872,008 ) $ (780,617 )
   

 

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
CASH FLOWS FROM OPERATING ACTIVITIES
                   
Net loss
  $ (288,173 ) $ (156,953 ) $ (525,006 )
Adjustments to reconcile net loss to cash flows from operating activities:
                   
Cumulative effect of a change in accounting principle
            150,500  
Provision for impairment loss
        15,100     18,700  
Equity-for-debt exchange
    163,857          
Amortization of premium on long-term debt
    (288 )        
Amortization of unearned compensation
    1,724          
Depreciation and amortization
    32,755     35,574     44,425  
Deferred tax
    32,351     19,774     (28,355 )
(Gain)/provision for loss on sale of cogeneration plants
        (4,300 )   54,500  
Provision for asbestos claims, net of settlements
    60,600     68,081     26,200  
Claims (recoveries)/write downs and related contract provisions
        (1,500 )   136,200  
Contract reserves and receivable provisions
    (58,000 )   32,300     80,500  
Mandatorily redeemable preferred security distributions of subsidiary trust
        18,130     16,610  
Interest expense on subordinated deferrable interest debentures
    16,567          
Gain on sale of land, building and equipment
    (15,834 )   (17,970 )   (1,269 )
Earnings on equity interests, net of dividends
    (11,415 )   (9,145 )   (4,262 )
Other equity earnings, net of dividends
    (4,974 )   (3,312 )   (1,850 )
Other noncash items
    7,523     (2,884 )   (14,827 )
Changes in assets and liabilities:
                   
Receivables
    93,491     77,959     192,588  
Contracts in process and inventories
    14,072     47,353     53,361  
Accounts payable and accrued expenses
    (93,117 )   11,265     (153,565 )
Estimated costs to complete long-term contracts
    (67,329 )   (142,914 )   62,870  
Advance payments by customers
    58,922     (38,287 )   18,206  
Income taxes
    (2,215 )   2,499     15,535  
Other assets and liabilities
    28,620     (12,868 )   19,304  
   

 

 

 
Net cash (used)/provided by operating activities
    (30,863 )   (62,098 )   160,365  
   

 

 

 
CASH FLOWS FROM INVESTING ACTIVITIES
                   
Change in restricted cash
    (17,941 )   38,414     (84,793 )
Capital expenditures
    (9,613 )   (12,870 )   (53,395 )
Proceeds from sale of assets
    17,495     87,159     6,282  
(Increase)/decrease in investments and advances
    (14 )       9,107  
(Increase)/decrease in short-term investments
    (9,426 )   (6,808 )   93  
   

 

 

 
Net cash (used)/provided by investing activities
    (19,499 )   105,895     (122,706 )
   

 

 

 
CASH FLOWS FROM FINANCING ACTIVITIES
                   
Distributions to minority shareholder
    (2,663 )   (2,879 )   (2,061 )
Decrease in short-term debt
    (121 )   (14,826 )   (7,792 )
Proceeds from long-term debt
    120,000         70,546  
Proceeds from lease financing obligation
            44,900  
Repayment of long-term debt
    (147,722 )   (34,100 )   (45,591 )
   

 

 

 
Net cash (used)/provided by financing activities
    (30,506 )   (51,805 )   60,002  
   

 

 

 
                     
Effect of exchange rate changes on cash and cash equivalents
    8,340     27,798     22,624  
   

 

 

 
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    (72,528 )   19,790     120,285  
Cash and cash equivalents at beginning of year
    364,095     344,305     224,020  
   

 

 

 
CASH AND CASH EQUIVALENTS AT END OF YEAR
  $ 291,567   $ 364,095   $ 344,305  
   

 

 

 
Cash paid during the year for:
                   
Interest (net of amount capitalized)
  $ 53,952   $ 63,194   $ 60,973  
   

 

 

 
Income taxes
  $ 23,446   $ 17,588   $ 13,508  
   

 

 

 

NONCASH FINANCING ACTIVITIES
In 2004, the Company exchanged $623,190 of notes and accounts payable to Foster Wheeler Ltd. and $147,130 of long-term debt for $593,102 of existing debt and trust securities. See Note 8 for information regarding the equity-for-debt exchange.

See notes to consolidated financial statements.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)

1. Nature of Operations and Relationship to Foster Wheeler Ltd. and Subsidiaries

Foster Wheeler LLC was formed on February 9, 2001 as a Delaware Limited Liability Company. Pursuant to a reorganization, which occurred on May 25, 2001, Foster Wheeler Corporation was merged into Foster Wheeler LLC and the assets (primarily investments in subsidiaries which design, engineer and construct petroleum, chemical, petrochemical and alternative fuel facilities and related infrastructures and design, manufacture and erect steam generating and auxiliary equipment for power stations and industrial markets worldwide) and liabilities of Foster Wheeler Corporation were recorded by Foster Wheeler LLC at historical cost. The Company is a wholly owned subsidiary of Foster Wheeler Holdings Ltd. who, in turn, is a wholly owned subsidiary of Foster Wheeler Ltd. Foster Wheeler LLC is a holding company which owns the stock of substantially all subsidiary companies in the Foster Wheeler group. The terms “Foster Wheeler” or the “Company,” as used herein, include Foster Wheeler LLC and its direct and indirect subsidiaries.

The business of the Company falls within two business groups. The Engineering and Construction Group (the “E&C Group”) designs, engineers, and constructs petroleum processing facilities (upstream and downstream), chemical, petrochemical, pharmaceutical and natural gas liquefaction (LNG) facilities, and related infrastructure, including power generation and distribution facilities, production terminals, pollution control equipment and water treatment facilities. The E&C Group provides direct technical and management services, and purchases equipment, materials and services from third party vendors and subcontractors. The group has industry leading technology in delayed coking, solvent de-asphalting and hydrogen production. The E&C Group also provides a broad range of environmental remediation services, together with related technical, design and regulatory services. The Global Power 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 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 full plant construction, maintenance engineering, plant upgrading and life extension and plant repowering. The Global Power 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 Global Power Group builds, owns and operates cogeneration, independent power production and resource recovery facilities, as well as facilities for the process and petrochemical industries. The Global Power Group generates revenues from construction and operating activities pursuant to long-term sale of project outputs (i.e. electricity contracts), operating and maintenance agreements and from returns on its equity positions. The corporate center, restructuring expenses and certain legacy liabilities (e.g. corporate debt) are included in the Corporate and Finance Group (“C&F”).

2. Going Concern

The accompanying consolidated financial statements are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company may not, however, be able to continue as a going concern. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably, to generate cash flows from operations, collections of receivables to fund its obligations, including those resulting from asbestos-related liabilities, as well as the Company’s ability to maintain credit facilities and bonding capacity adequate to conduct its business. The Company incurred significant operating losses in each of the years in the three-year period ended December 31, 2004, and has a member’s deficit of $1,140,643 as of December 31, 2004.

In 2004, the Company, in conjunction with Foster Wheeler Ltd., consummated an equity-for-debt exchange in which Foster Wheeler Ltd. issued common shares, preferred shares, warrants to purchase common shares and new notes in exchange for certain of its outstanding debt securities and trust securities. After completing the exchange, the Company had outstanding debt obligations of approximately $567,003 as

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Going Concern — (Continued)

of December 31, 2004. (Refer to Notes 8 and 9 for further details of the exchange and information regarding the Company’s outstanding indebtedness.)

In August of 2002, the Company negotiated a Senior Credit Facility that was comprised of a $71,000 term loan, a $69,000 revolving credit facility and a $149,900 letter of credit facility having an April 30, 2005 maturity date. In connection with the equity-for-debt exchange, the Company prepaid the term loan and amounts outstanding under the revolving credit facility. Accordingly, there were no borrowings outstanding under the Senior Credit Facility as of December 31, 2004. Letters of credit of $90,018 remained outstanding under the Senior Credit Facility as of December 31, 2004.

In March 2005, the Senior Credit Facility was replaced with a new 5-year $250,000 Senior Credit Agreement. The new Senior Credit Agreement includes a $75,000 sub-limit for borrowings at a rate equal to LIBOR plus a spread. Standby letters of credit issued under the new Senior Credit Agreement will carry a fixed price throughout the life of the facility. The Senior Credit Agreement is collateralized by the assets and/or the stock of certain of the Company’s domestic subsidiaries and certain of its foreign subsidiaries. The Company paid up-front fees to the lender of approximately $8,225 in conjunction with the execution of the Senior Credit Agreement. Such fees, paid predominately in the first quarter of 2005, have been deferred and will be amortized to expense over the life of the agreement.

The Company finalized a sale/leaseback arrangement for an office building at its corporate headquarters in the third quarter of 2002. Under this arrangement, the Company leases the facility for an initial non-cancelable period of 20 years. The long-term capital lease obligation of $45,280 as of December 31, 2004 is included in long-term debt in the accompanying consolidated statement of financial position.

The new Senior Credit Agreement and the sale/leaseback arrangement have quarterly financial covenant compliance requirements. Management’s forecast indicates that the Company will be in compliance with the financial covenants throughout 2005. The forecast assumes a significant level of new contracts and improved performance on existing contracts. However, there can be no assurance that the Company will comply with the covenants. If the Company violates a covenant under the Senior Credit Agreement or the sale/leaseback arrangement, repayment of amounts outstanding under such agreements could be accelerated and the following borrowings outstanding could also be accelerated: the 2011 Senior Notes, the 2005 Senior Notes, the Convertible Subordinated Notes, the Trust Preferred Securities, the Subordinated Robbins Facility Exit Funding Obligations, and certain of the special-purpose project debt facilities. The total amount of Foster Wheeler Ltd. debt that could be accelerated is $463,563 as of December 31, 2004. The Company would not be able to repay amounts borrowed if the payment dates were accelerated.

Holders of the Company’s new 2011 Senior Notes have a security interest in the stock, debt and assets of certain of Foster Wheeler Ltd.’s subsidiaries. The 2011 Senior Notes contain incurrence covenants that limit the Company’s ability to undertake certain actions including incurring debt, making certain payments and investments, granting liens, selling assets and entering into specific intercompany transactions, among others. Management monitors these covenants to ensure the Company remains in compliance with the indenture.

In connection with the exchange, the holders of the Company’s 2005 Senior Notes agreed to amend the indenture governing these notes to effectively eliminate the security interest previously held by the notes.

On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provided for up to $45,000 of additional revolving loans available to provide working capital. As of December 31, 2004, the facility remained undrawn. In December 2004, the U.K. subsidiaries gave notice canceling the revolving credit facility effective January 24, 2005.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Going Concern — (Continued)

Since January 15, 2002, the Company has exercised its right to defer payments on the Trust Preferred Securities. The aggregate liquidation amount of the Trust Preferred Securities at December 31, 2004 was $71,177 after completing the equity-for-debt exchange. See Note 8 to the consolidated financial statements for further details of the exchange offer. The previous Senior Credit Facility required the Company to defer the payment of the dividends on the Trust Preferred Securities and, accordingly, no dividends were paid during 2004 or 2003. As of December 31, 2004, the amount of dividends deferred plus accrued interest approximates $23,460. The Company intends to continue to defer payment of the dividends on the Trust Preferred Securities until January 15, 2007 — the full term allowed by the underlying agreement. Once the deferred dividend obligation has been satisfied, the Company has the right to defer subsequent dividend payments for an additional 20 consecutive quarters. The new Senior Credit Agreement requires the approval of the lenders to make payments on the Trust Preferred Securities to the extent such payments are not contractually required by the underlying Trust Preferred Securities agreement.

Global Power’s European Power subsidiary in Finland is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. Obligations under both facilities are guaranteed by Foster Wheeler Ltd. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio.

One of the performance bond facilities is dedicated to a specific project and, as of December 31, 2004, had performance bonds outstanding equivalent to $24,522 (none of which has been drawn as of such date). Covenants under this facility are tested quarterly. The second facility is a general performance bond facility and, as of December 31, 2004, had performance bonds outstanding in favor of several clients equivalent to $10,114 (none of which has been drawn).

As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of the Company’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the two performance bond facilities. On August 6, 2004 and August 9, 2004, the Company’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities.

The waiver for the project-specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum equity ratio levels so long as the performance bonds are outstanding. The Company’s subsidiary remained below the minimum equity ratio as of December 31, 2004. On March 15, 2005, the bond expired and the banks funded the client and the Company reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of the Company to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

The waiver for the general performance bond facility is effective through March 31, 2005. As of that date, approximately $4,900 is forecasted to be outstanding under the facility. The Company has provided a standby letter of credit to back up the general performance bond facility and intends to do so until such facility can be permanently replaced or the last performance bond issued thereunder has expired. Therefore, the Company believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio covenant is reflected in the Company’s liquidity forecasts.

Management closely monitors liquidity and updates its U.S. liquidity forecasts weekly. These forecasts cover, among other analyses, existing cash balances, cash flows from operations, cash repatriations and loans

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Going Concern — (Continued)

from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, working capital needs and unused credit line availability. The Company’s cash flow forecasts continue to indicate that sufficient cash will be available to fund the Company’s U.S. and foreign working capital needs throughout 2005.

As of December 31, 2004, the Company had cash and cash equivalents, short-term investments, and restricted cash totalling $390,186, compared to $430,170 as of December 26, 2003. Of the $390,186 total at December 31, 2004, $319,612 was held by foreign subsidiaries. See Note 3 for additional details on cash and restricted cash balances.

The Company’s domestic operating entities are cash flow positive. However they do not generate sufficient cash flow to cover the costs related to the Company’s indebtedness, obligations to fund U.S. pension plans, and corporate overhead expenses. Consequently, the Company requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs and to service its debt. The Company’s current 2005 forecast assumes total cash repatriation from its non-U.S. subsidiaries of approximately $107,000 from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends. In 2004 and 2003, the Company repatriated approximately $77,000 and $100,000, respectively, from its non-U.S. subsidiaries.

There can be no assurance that the forecasted foreign cash repatriation will occur, as the non-U.S. subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of the Company’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. The repatriation of funds may also subject those funds to taxation. As a result of these factors, the Company may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries in the amount forecasted above.

Commercial operations under a domestic contract retained by the Company in connection with the sales of assets of the Foster Wheeler Environmental Corporation (“Environmental”), as described further in Note 18 to the consolidated financial statements, commenced in January 2004. The plant processes low-level nuclear waste for the U.S. Department of Energy (“DOE”). The Company funded the plant’s construction costs and operates the facility. The majority of the Company’s invested capital was recovered during the early stages of processing the first stream of waste materials. This project successfully processed all quantities of the first waste stream of materials ahead of schedule and is currently finalizing the processing line for the second waste stream. In 2004, the project generated net cash flow of approximately $53,300. An additional $17,800 of capital recovery is dependent on the initial processing of the second waste stream of materials. This capital recovery is expected in 2005.

The Company’s inability to operate profitably and to generate cash flows from operations, its reliance on repatriated cash from its foreign subsidiaries to fund its domestic obligations, and its obligations to maintain minimum debt covenants to avoid possible acceleration of its debt, raises substantial doubt about the Company’s ability to continue as a going concern.

3. Summary of Significant Accounting Policies

Principles of Consolidation — The consolidated financial statements include the accounts of Foster Wheeler LLC and all significant domestic and foreign subsidiary companies. 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, 2004 included 53 weeks; 2003 and 2002 included 52 weeks.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

Reclassifications — Certain prior period financial statement amounts have been reclassified to conform with the current year presentation.

      Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the periods 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, customer and vendor claims, depreciation, employee benefit plans, taxes, asbestos litigation and expected recoveries and contingencies, among others.

Revenue Recognition on Long-term Contracts — Revenues and profits on long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress towards completion is measured using physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress toward completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.

Revenues and profits on cost-reimbursable contracts are recorded as the costs are incurred. The Company includes flow-through costs consisting of materials, equipment and subcontractor costs as revenue on cost-reimbursable contracts when the Company is responsible for the engineering specifications and procurement for such costs.

Contracts in process are stated at cost, increased for profits recorded on the completed effort or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. Negative balances are presented as “estimated costs to complete long-term contracts.” The Company has numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. However, current estimates may be revised as additional information becomes available. In accordance with the accounting and disclosure requirements of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”) and Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes,” the Company reviews its contracts monthly. As a result of this process in 2004, 54 individual projects had final estimated profit revisions exceeding $1,000. These revisions resulted from events such as earning project incentive bonuses or the incurrence or forecasted incurrence of contractual liquidated damages for performance or schedule issues, executing services and purchasing third-party materials and equipment at costs differing from previously estimated, and testing of completed facilities which in turn eliminates or incurs completion and warranty-related costs. The net aggregate dollar value of the accrued contract profit resulting from these estimate changes during 2004 amounted to $37,600. 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.

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 SOP 81-1. 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

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

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. 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. As of December 31, 2004, the Company had recorded a commercial claims receivable of $3,946. The claims were recorded in the Company’s European operations. Additionally, the consolidated financial statements assume recovery of $11,000 in requests for equitable adjustment (“REA”) at December 31, 2004, of which $1,200 was recorded in contracts in process. The balance of $9,800 represents costs yet to be incurred. The REA relates primarily to a claim against a U.S. Government agency for a project currently being executed. The Company is currently discussing the details of the REA with the U.S. Government agency. If this claim were to be unsuccessful, the costs would be charged to cost of operating revenues. The Company had no commercial claims receivable or requests for equitable adjustment recorded as of December 26, 2003.

In certain circumstances, the Company may defer pre-contract costs when it is probable that these costs will be recovered under a future contract. Such deferred costs would then be included in contract costs on receipt of the anticipated contract. If it is not probable that pre-contract costs will be recovered under a future contract, then these costs are expensed as incurred. Costs related to anticipated contracts, which are charged to expense because their recovery is not considered probable, are not subsequently reclassified to contract costs on the subsequent receipt of the contract. As of December 31, 2004, no pre-contract costs were deferred.

Certain special-purpose subsidiaries in the Global Power 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.

Cash and Cash Equivalents — Cash and cash equivalents include highly liquid short-term investments purchased with original maturities of three months or less. Cash and cash equivalents of $225,861 are maintained by foreign subsidiaries as of December 31, 2004. These subsidiaries require a substantial portion of these funds to support their liquidity and working capital needs, as well as required minimum capitalization and contractual restrictions. Accordingly, these funds may not be readily available for repatriation to U.S. entities.

Short-term Investments — Short-term investments consist primarily of certificates of deposit and are classified as held to maturity under Financial Accounting Standards Board Statement of Financial Accounting Standard (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.”

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 4. In conformity with industry practice, however, the full amount of accounts receivable, including such amounts withheld, has been included in current assets.

Trade accounts receivable are continually evaluated in accordance with corporate policy. Provisions are established on a project specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues. Customer payment history, trends within the various markets served and general economic trends are also evaluated when considering the necessity of a provision.

Inventories — Inventories, principally materials and supplies, are stated at the lower of cost or market, determined primarily on the average-cost method.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

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 as incurred. 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.

Restricted Cash — The following table details the restricted cash held by the Company:

    December 31, 2004   December 26, 2003  
   
 
 
    Foreign   Domestic   Total   Foreign   Domestic   Total  
   

 

 

 

 

 

 
Held by special purpose entities and restricted for debt service payments
  $ 245   $ 3,924   $ 4,169   $ 92   $ 3,884   $ 3,976  
Collateralize letters of credit and bank guarantees
    57,151         57,151     44,895         44,895  
Client escrow funds
    10,580     944     11,524     3,052     762     3,814  
   

 

 

 

 

 

 
Total
  $ 67,976   $ 4,868   $ 72,844   $ 48,039   $ 4,646   $ 52,685  
   

 

 

 

 

 

 

Investments and Advances — The Company uses the equity method of accounting for investment ownership of between 20% and 50% in affiliates unless significant economic considerations indicate that the cost method is appropriate. The equity method is also used for investments in which ownership is greater than 50% when the Company does not have a controlling financial interest. Investment ownership of less than 20% in affiliates is carried at cost. Currently, all of the Company’s significant investments in affiliates that are not consolidated are recorded using the equity method.

Intangible Assets — Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (goodwill), trademarks and patents. Goodwill was allocated to the reporting units based on the original purchase price allocation. Patents and trademarks are being amortized on a straight-line basis over periods of 12 to 40 years.

The Company tests for impairment at the reporting unit level as defined in SFAS No. 142, “Goodwill and Other Intangible Assets.” This test is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. In the fourth quarter of each year, the Company evaluates goodwill on a separate reporting unit basis to assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. SFAS No. 142 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives and reviewed annually for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

As of December 31, 2004 and December 26, 2003, the Company had unamortized goodwill of $51,812 and $51,121, respectively. The increase in goodwill of $691 resulted from foreign currency translation gains. All of the goodwill is related to the Global Power Group. In accordance with SFAS No. 142, the Company is no longer amortizing goodwill, and in 2003 and 2004, the fair value of the reporting units exceeded the carrying amounts. The Company recognized $150,500 of impairment losses in 2002 related to the goodwill as a cumulative effect of a change in accounting principle. Of this total, $24,800 was associated with the

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

Camden, New Jersey waste-to-energy facility and $77,000 was associated with the North American Power unit included in the operations of the Global Power Group. The fair value of the facility and the operating unit were estimated using the expected present value of future cash flows. The remaining $48,700 related to Foster Wheeler Environmental Corporation in the E&C Group. An impairment of the goodwill on this subsidiary was initially determined based upon indications of its market value from potential buyers. Based upon the market value, it was determined under step one that a potential impairment existed. The Company then completed step two and determined that a full write down of the goodwill was required. All of the other reporting units were also subjected to the first step of the goodwill impairment test.

As of December 31, 2004 and December 26, 2003, the Company had unamortized identifiable intangible assets of $69,690 and $71,568, respectively. The following table details amounts relating to those assets.

    As of December 31, 2004   As of December 26, 2003  
   
 
 
    Gross
Carrying
Amount
  Accumulated
Amortization
  Gross
Carrying
Amount
  Accumulated
Amortization
 
   

 

 

 

 
Patents
  $ 37,392   $ (15,622 ) $ 36,703   $ (13,802 )
Trademarks
    63,026     (15,106 )   61,943     (13,276 )
   

 

 

 

 
Total
  $ 100,418   $ (30,728 ) $ 98,646   $ (27,078 )
   

 

 

 

 

Amortization expense related to patents and trademarks for fiscal years 2004, 2003, and 2002 was $3,650, $3,675, and $3,535, respectively. Amortization expense is expected to approximate $3,600 each year in the next five years.

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. In 2003, to the extent such credits were not currently utilized on the Company’s tax return, deferred tax assets, as adjusted for any valuation allowance, were 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 $223,330 as of December 31, 2004. It is not practicable to estimate the additional tax that would be incurred, if any, if these amounts were repatriated.

The Company is in the process of reviewing the foreign earnings repatriation provision of the American Jobs Creation Act of 2004 (the “Act”). The review is not yet complete due to the complexity of the provision as it relates to the structure of the Company’s unrepatriated foreign earnings. Given the effective foreign tax rates applicable to the Company’s unrepatriated earnings as well as certain restrictions in the Act concerning the definitions of extraordinary dividends and U.S. investment, it is currently considered unlikely that the Company will change its existing repatriation practices as a result of the Act. The Company’s evaluation is expected to be completed in the second quarter of 2005.

Restricted Net Assets — Global Power’s European Power subsidiary in Finland is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. Obligations under

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

both facilities are guaranteed by Foster Wheeler Ltd. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio.

One of the performance bond facilities is dedicated to a specific project and, as of December 31, 2004, had performance bonds outstanding equivalent to $24,522 (none of which has been drawn as of such date). Covenants under this facility are tested quarterly. The second facility is a general performance bond facility and, as of December 31, 2004, had performance bonds outstanding in favor of several clients equivalent to $10,114 (none of which has been drawn).

As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of the Company’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the two performance bond facilities. On August 6, 2004 and August 9, 2004, the Company’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities.

The waiver for the project-specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum equity ratio so long as the performance bonds are outstanding. The equity of the Company’s subsidiary remained below the minimum equity ratio as of December 31, 2004. On March 15, 2005, the bond expired and the banks funded the client and the Company reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of the Company to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

The waiver for the general performance bond facility is effective through March 31, 2005. As of that date, approximately $4,900 is forecasted to be outstanding under the facility. The Company has provided a standby letter of credit to back up the general performance bond facility and intends to do so until such facility can be permanently replaced or the last performance bond issued thereunder has expired.

Therefore, the Company believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio covenants is reflected in the Company’s liquidity forecasts.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

Foreign Currency — 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 exchange rates.

    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Cumulative translation adjustment at beginning of year
  $ (78,395 ) $ (85,157 ) $ (107,398 )
Current year foreign currency adjustment
    27,155     6,762     22,241  
   

 

 

 
Cumulative translation adjustment at end of year
  $ (51,240 ) $ (78,395 ) $ (85,157 )
   

 

 

 
Foreign currency transaction (loss)/gains
  $ (83 ) $ 1,700   $ 2,900  
   

 

 

 
Foreign currency transaction (loss)/gains, net of tax
  $ (54 ) $ 1,100   $ 1,900  
   

 

 

 

Stock Option Plans —Foster Wheeler Ltd. has three fixed-option plans that reserve shares of common stock for issuance to executives, key employees and directors. Employees of the Company participate in these plans. Foster Wheeler Ltd. and the Company have adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock Based Compensation — Transition and Disclosure.” Foster Wheeler Ltd. and the Company continues to account for stock options granted to employees and directors using the intrinsic value method under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Had compensation costs for the Company’s stock-based compensation plans been accounted for using the fair value method of accounting described by SFAS No. 123, the Company’s net loss and loss per share would have been as follows:

    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Net loss — as reported
  $ (288,173 ) $ (156,953 ) $ (525,006 )
Deduct: Total stock-based employee compensation expense determined under fair value based method for awards net of taxes of $210 in 2004, $127 in 2003 and $31 in 2002.
    2,651     2,081     1,630  
   

 

 

 
Net loss — pro forma
  $ (290,824 ) $ (159,034 ) $ (526,636 )
   

 

 

 

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:

    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Dividend yield
    0.00 %   0.00 %   0.00 %
Expected volatility
    50.00 %   88.23 %   83.62 %
Risk free interest rate
    2.99 %   3.22 %   2.90 %
Expected life (years)
    3     5     5  

Recent Accounting Developments — In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) became law in the United States. The Medicare Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In May 2004, the FASB issued a FASB Staff Position (“FSP”) No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

106-2 provides guidance on accounting for the effects of the Medicare Act for employers that sponsor postretirement healthcare plans that provide prescription drug benefits. The provisions of FSP No. 106-2 were effective for the Company’s interim period ending September 24, 2004. Based upon the proposed regulations of the Medicare Act, the Company concluded that the benefits provided by the plan were actuarially equivalent to Medicare Part D under the Medicare Act. Accordingly, the Company reflected the impact of the Medicare Act prospectively as of the start of the third quarter 2004. The impact of the Medicare Act resulted in decreases in the accumulated postretirement benefit obligation of approximately $9,100 and in the annual net periodic postretirement benefit costs for 2004 of approximately $900. On January 21, 2005, final regulations related to the Medicare Act were issued. The Company has not yet determined the effect of the final regulations on the Company’s accumulated postretirement benefit obligation and net periodic postretirement benefit costs.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires that all share-based payments to employees, including grants of employee stock options and restricted stock, be recognized in the consolidated statement of operations and comprehensive loss based on their fair values. Prior to SFAS No. 123R, the Company adopted the disclosure-only provisions of SFAS No. 123 and therefore only certain pro forma disclosures of the fair value of share-based payments were required in the notes to the consolidated financial statements. SFAS No. 123R provides for the adoption of the new standard in one of two ways: the modified prospective transition method and the modified retrospective transition method. Using the modified prospective transition method, share-based employee compensation cost would be recognized from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date. Using the modified retrospective method, employee compensation cost would be recognized for periods presented prior to the adoption of the proposed standard in accordance with the original provisions of SFAS No. 123; that is, employee compensation cost would be recognized in the amounts reported in the pro forma disclosures provided in accordance with SFAS No. 123. Adoption of the provisions of SFAS No. 123R is effective as of the beginning of the Company’s quarter ending September 30, 2005. The Company is still evaluating the method of adoption and the impact that the adoption of SFAS No. 123R will have on its consolidated financial position and results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets, which were previously required to be recorded on a carryover basis rather than a fair value basis. Instead, SFAS No. 153 provides that exchanges of nonmonetary assets that do not have commercial substance be reported at carryover basis rather than a fair value basis. A nonmonetary exchange is considered to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the consolidated financial statements of the Company.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Accounts and Notes Receivable

The following table shows the components of trade accounts and notes receivable:

    December 31,
2004
  December 26,
2003
 
   

 

 
From long-term contracts:
             
Amounts billed due within one year
  $ 251,866   $ 332,135  
   

 

 
Retention:
             
Billed:
             
Estimated to be due in:
             
2004
        30,502  
2005
    18,098     21,338  
2006
    6,282     656  
2007
    1,654      
2008
         
2009
    3,417      
   

 

 
Total billed
    29,451     52,496  
   

 

 
               
Unbilled:
             
Estimated to be due in:
             
2004
        79,937  
2005
    115,046     669  
2006
    954      
2007
        2,699  
2008
    4,019      
   

 

 
Total unbilled
    120,019     83,305  
   

 

 
Total retentions
    149,470     135,801  
   

 

 
Total receivables from long-term contracts
    401,336     467,936  
Other trade accounts and notes receivable
    10,063     20,480  
   

 

 
      411,399     488,416  
Less allowance for doubtful accounts
    23,199     37,406  
   

 

 
Accounts receivable, net
  $ 388,200   $ 451,010  
   

 

 

The following table shows the components of non-trade accounts and notes receivable:

    December 31,
2004
  December 26,
2003
 
   

 

 
Asbestos insurance claims receivable
  $ 96,900   $ 60,000  
Foreign refundable value-added tax
    3,061     13,637  
Other
    18,910     32,252  
   

 

 
Total
  $ 118,871   $ 105,889  
   

 

 

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

5. Contracts in Process and Inventories

The following table shows the elements included in contracts in process as related to long-term contracts:

    December 31,
2004
  December 26,
2003
 
   

 

 
Contracts in Process:
             
Costs plus accrued profits less earned revenues on contracts currently in process
  $ 207,621   $ 238,645  
Less: progress payments
    40,624     72,142  
   

 

 
Net
  $ 166,997   $ 166,503  
   

 

 

Costs of inventories are shown below:

    December 31,
2004
  December 26,
2003
 
   

 

 
Inventories:
             
Materials and supplies
  $ 6,651   $ 5,098  
Finished goods
    429     1,692  
   

 

 
Total
  $ 7,080   $ 6,790  
   

 

 

6. Land, Buildings and Equipment

Land, buildings and equipment are stated at cost and are set forth below:

    December 31,
2004
  December 26,
2003
 
   

 

 
Land and land improvements
  $ 24,052   $ 24,057  
Buildings
    137,346     142,608  
Equipment
    458,356     450,941  
Construction in progress
    1,192     5,123  
   

 

 
Land, buildings and equipment
    620,946     622,729  
Less: accumulated depreciation
    340,641     313,114  
   

 

 
Net book value
  $ 280,305   $ 309,615  
   

 

 

Depreciation expense for the years 2004, 2003, and 2002 was $28,447, $31,214 and $54,492, respectively.

7. Equity Interests

The Company owns a non-controlling equity interest in two electric power generation projects and one waste-to-energy project in Italy and a refinery/electric power generation project in Chile. Two of the projects in Italy are each 42% owned while the third is 49% owned by the Company. In 2004, the Company entered into a binding agreement to sell 10% of its minority equity interest in the third Italian project. The project in Chile is 85% owned by the Company; however, 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.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

7. Equity Interests — (Continued)

    December 31, 2004   December 26, 2003  
   
 
 
    Italian
Projects
  Chilean
Project
  Italian
Projects
  Chilean
Project
 
   

 

 

 

 
Balance Sheet Data:
                         
Current assets
  $ 149,346   $ 23,456   $ 95,977   $ 23,891  
Other assets (primarily buildings and
equipment)
    414,779     175,653     409,267     185,315  
Current liabilities
    41,003     17,179     32,735     17,188  
Other liabilities (primarily long-term debt)
    404,802     113,567     385,047     121,362  
Net assets
    118,320     68,363     87,462     70,656  
                           
    For the Year Ended  
   
 
    December 31, 2004

  December 26, 2003

  December 27, 2002

 
    Italian
Projects
  Chilean
Project
  Italian
Projects
  Chilean
Project
  Italian
Projects
  Chilean
Project
 
   

 

 

 

 

 

 
Income Statement Data:
                                     
Total revenues
  $ 244,225   $ 41,137   $ 219,818   $ 39,114   $ 171,565   $ 38,425  
Gross earnings
    60,108     20,152     56,699     20,739     43,133     20,777  
Income before income taxes
    43,947     11,229     38,405     10,712     31,358     10,087  
Net earnings
    26,664     8,787     23,144     8,891     17,648     8,372  

The Company’s share of the net earnings of equity affiliates, which are recorded within other income on the consolidated statement of operations and comprehensive loss, totaled $20,636, $17,142 and $14,006 for the years ended December 31, 2004, December 26, 2003 and December 27, 2002, respectively. The Company’s investment in the equity affiliates totaled $109,106 and $98,651 as of December 31, 2004 and December 26, 2003, respectively. Dividends of $9,221 and $7,997 were received during the years ended December 31, 2004 and December 26, 2003, respectively.

The Company has guaranteed certain performance obligations of these projects. The Company’s contingent obligations under the guarantees for three of the projects are approximately $1,300 in total. The contingent obligation for the fourth project is capped at approximately $10,300 over the twelve-year life of the project’s financing; to date, no amounts have been paid under this guarantee. The Company has also provided a guarantee of $5,200 representing 49% of the debt service reserve letter of credit providing liquidity should the performance of the fourth project be insufficient to cover the debt service payments. Finally, the Company has provided a $10,000 debt service reserve letter of credit providing liquidity should the performance of the Chilean project be insufficient to cover the debt service payments. No amounts have been drawn under the letter of credit.

The undistributed retained earnings of the Company’s equity investees amounted to approximately $42,087 and $28,765 at December 31, 2004 and December 26, 2003, respectively.

8. Equity-for-Debt Exchange

In 2004, the Company, in conjunction with Foster Wheeler Ltd., consummated an equity-for-debt exchange in which Foster Wheeler Ltd. issued common shares, preferred shares, warrants to purchase common shares and new senior notes due 2011 in exchange for certain of its outstanding debt securities and trust securities. The Company recorded $623,190 in accounts and notes payable to Foster Wheeler Ltd. which represents the value of the common shares, preferred shares and warrants issued by Foster Wheeler Ltd. The exchange offer resulted in a $175,054 charge to income. The pretax charge, which was substantially non-cash, related primarily to the exchange of Convertible Subordinated Notes tendered in the exchange offer.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

8. Equity-for-Debt Exchange — (Continued)

Accounting for the Equity-for-Debt Exchange:

The following table summarizes the impact of the exchange offer:

    2005 Senior
Notes
  Robbins
Bonds
  Convertible
Notes
  Trust
Securities
  Senior Credit
Facility
  2011 Senior
Notes
  Total Change  
   

 

 

 

 

 

 

 
Current Liabilities:
                                           
Current installments on long-term debt
  $   $ (1,676 ) $   $   $ (115,869 ) $   $ (117,545 )
   

 

 

 

 

 

 

 
Total current liabilities
        (1,676 )           (115,869 )       (117,545 )
   

 

 

 

 

 

 

 
Accounts payable to affiliate
    54,783     101,397     199,206     60,874             416,260  
Long-term debt
    (188,628 )   (92,045 )   (206,930 )   (103,823 )       271,930     (319,496 )
Notes payable to affiliate
            206,930                 206,930  
Deferred accrued interest on subordinated deferrable interest debentures
                (31,128 )           (31,128 )
   

 

 

 

 

 

 

 
Total Liabilities
  $ (133,845 ) $ 7,676   $ 199,206   $ (74,077 ) $ (115,869 ) $ 271,930   $ 155,021  
   

 

 

 

 

 

 

 
Member’s Deficit:
                                           
Membership interest and contributed capital
  $   $   $   $   $   $   $  
Accumulated deficit
    (15,324 )   (10,080 )   (205,340 )   66,352     (5,862 )   (4,800 )   (175,054 )
   

 

 

 

 

 

 

 
Total Member’s Deficit
  $ (15,324 ) $ (10,080 ) $ (205,340 ) $ 66,352   $ (5,862 ) $ (4,800 ) $ (175,054 )
   

 

 

 

 

 

 

 

Details of the exchange by individual debt instrument are as follows:

Senior Notes at 6.75% interest, due November 15, 2005 (“2005 Senior Notes”) — Foster Wheeler Ltd. exchanged approximately 434,788 common shares, approximately 82,430 preferred shares and $141,471 principal amount of Senior Notes at 10.359% due September 15, 2011 (“2011 Senior Notes”) for $188,628 of 2005 Senior Notes. This resulted in a pretax charge of $15,324, comprised of a non-cash loss on the exchange of $13,283 (including a premium on the 2011 Senior Notes of $5,659), transaction-related costs of $1,825 and the write-off of unamortized issuance costs of $216. The Company recorded the $5,659 premium since the fair value of the 2011 Senior Notes was determined to be 104% of principal. The Company also capitalized $750 of issuance costs on the 2011 Senior Notes and established account payable to Foster Wheeler Ltd of $54,783, which represents the value of the common and preferred shares exchanged of Foster Wheeler Ltd.

Subordinated Robbins Facility Exit Funding Obligations (“Robbins Bonds”) — Foster Wheeler Ltd. exchanged approximately 808,327 common shares and approximately 152,520 preferred shares for $93,721 of Robbins Bonds. The Company recorded a pretax charge of $10,080, including a non-cash loss on the exchange of $7,676 and transaction-related costs of $2,404. The Company recorded accounts payable to Foster Wheeler Ltd. in the amount of $101,397 which represents the value of the Foster Wheeler Ltd. common and preferred shares exchanged.

Convertible Subordinated Notes at 6.50% interest, due 2007 (“Convertible Notes”) — Foster Wheeler Ltd. exchanged approximately 1,661,648 common shares and approximately 313,913 preferred shares for $206,930 of Convertible Notes. The Company, pursuant to an intercompany note and debt assumption and transfer agreement, was responsible for all costs associated with the exchange of the Convertible Notes. As a result of the exchange, the Company recorded a pretax charge of $205,340, including non-cash conversion expense of $202,616 as required by SFAS No. 84, “Induced Conversions of Convertible Debt,” and transaction-related costs of $2,724. Additionally, the Company charged unamortized issuance costs of $3,409 against paid-in capital.

Mandatorily Redeemable Preferred Securities (“Trust Securities”) — Foster Wheeler Ltd. exchanged approximately 157,811 common shares, approximately 51,081 preferred shares and warrants to purchase

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

8. Equity-for-Debt Exchange — (Continued)

approximately 6,994,059 common shares for $103,823 of Trust Securities. In conjunction with the exchange, the Company recorded a pretax gain of $66,352, including a non-cash gain on exchange of $74,075 less transaction-related costs of $4,244 and the write-off of unamortized issuance costs of $3,479.

Senior Credit Facility (Term Loan and Revolving Credit Portions) — Concurrent with the exchange offer, the Company also completed a $120,000 private offering of 10.359% Senior Notes due 2011, Series B. The proceeds of the private offering were used to repay the amounts outstanding under the term loan and revolving credit portions of the previous Senior Credit Facility totaling $115,869. In conjunction with this transaction, the Company recorded a non-cash pretax charge of $5,862, including the write-off of unamortized issuance costs of $1,599 and unamortized bank fees of $4,263. The Company also recorded a premium of $4,800 since the 2011 Senior Notes-Series B fair value was determined to be 104% of principal. Finally, the Company capitalized $966 of issuance costs on the 2011 Senior Notes-Series B.

As of December 31, 2004, after reflecting the results of the exchange offer, the Company had aggregate indebtedness of $567,003. See Note 9 for further information relating to the Company’s indebtedness.

The following table summarizes the capital share activity associated with the exchange offer:

    Units   Common Share
Equivalents
 
   

 

 
Capital Share Activity
             
Pre-exchange balance
    2,038,578     2,038,578  
Common shares issued in conjunction with exchange offer
    3,062,574     3,062,574  
Preferred shares issued in conjunction with exchange offer
    599,944     38,996,342  
Warrants to purchase common shares issued to Trust Preferred Security holders
    4,152,914     6,994,059  
Warrants to purchase common shares distributed to existing common shareholders
    40,771,560     2,947,233  
         
 
Post-exchange balance
          54,038,786  
         
 

Foster Wheeler Ltd. issued approximately 3,062,574 common shares and approximately 599,944 preferred shares in connection with the exchange offer. Each preferred share is convertible into 65 common shares.

Foster Wheeler Ltd. issued 4,152,914 Class A stock purchase warrants to Trust Preferred Security holders that tendered into the exchange offer. In addition, Foster Wheeler Ltd. also distributed 40,771,560 Class B stock purchase warrants to the holders of record of its common shares at the close of business on September 23, 2004.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

9. Long-term Debt

The following table shows the components of long-term debt:

    December 31, 2004   December 26, 2003  
   
 
 
    Current   Long-term   Total   Current   Long-term   Total  
   

 

 

 

 

 

 
Senior Credit Facility (average interest rate: 2004-n/a; 2003-7.16%)
  $   $   $   $   $ 128,163   $ 128,163  
Senior Notes at 6.75% interest, due November 15, 2005
    11,372         11,372         200,000     200,000  
Senior Notes at 10.359% interest, due September 15, 2011
        271,643     271,643              
Subordinated Robbins Facility Exit Funding Obligations:
                                     
1999C Bonds at 7.25% interest, due October 15, 2009
    14     69     83     1,690     10,440     12,130  
1999C Bonds at 7.25% interest, due October 15, 2024
        20,491     20,491         77,155     77,155  
1999D Bonds at 7% interest, due October 15, 2009
        233     233         23,994     23,994  
Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures
                    175,000     175,000  
Subordinated Deferrable Interest Debentures
        71,177     71,177              
Special-Purpose Project Debt:
                                     
Martinez Cogen Limited Partnership
    7,280     7,980     15,260     6,627     15,260     21,887  
Foster Wheeler Coque Verde, L.P.
    2,975     32,151     35,126     2,656     35,126     37,782  
Camden County Energy Recovery Associates
    8,959     59,936     68,895     8,613     68,895     77,508  
Capital Lease Obligations
    990     66,297     67,287     1,322     62,373     63,695  
Other
    3,624     1,812     5,436     192     5,566     5,758  
   

 

 

 

 

 

 
Total
  $ 35,214   $ 531,789   $ 567,003   $ 21,100   $ 801,972   $ 823,072  
   

 

 

 

 

 

 

Senior Credit Facility — In August of 2002, the Company negotiated a Senior Credit Facility that was comprised of a $71,000 term loan, a $69,000 revolving credit facility and a $149,900 letter of credit facility having an April 30, 2005 maturity date. The term loan and borrowings under the revolving credit facility bear interest at the Company’s option of (a) LIBOR plus 6% or (b) the Base Rate plus 5.00%. The “Base Rate” refers to the higher of (i) the Bank of America prime rate or (ii) the Federal Funds rate plus 0.5%.

In connection with the equity-for-debt exchange, the Company repaid in full the term loan and amounts outstanding under the revolving credit facility. Accordingly, there were no borrowings outstanding under the term loan and revolving credit facility as of December 31, 2004. The Company had letters of credit outstanding of $90,018 as of December 31, 2004. In March 2005, the Company replaced the Senior Credit Facility with a new 5-year Senior Credit Agreement.

The Company obtained amendments to the Senior Credit Facility to provide covenant relief and to allow for the equity-for-debt exchange. These amendments are described below.

The Senior Credit Facility required prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. The Company retained the first $77,000 of such amounts before retaining a 50% share of the balance. The $77,000 threshold was exceeded during the second quarter of 2003 and principal repayments of $14,100 were made on the term loan in 2003 and 2004.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

9. Long-term Debt — (Continued)

Amendment No. 1 to the Senior Credit Facility, obtained on November 8, 2002, provided for the exclusion of certain gross pretax charges recorded by the Company in the third quarter of 2002 for covenant calculation purposes. The amendment further provided that certain pretax charges related to specific contingencies may be excluded from the covenant calculation through December 31, 2003, if incurred.

Amendment No. 2 to the Senior Credit Facility, entered into on March 24, 2003, modified (i) certain definitions of financial measures utilized in the calculation of the financial covenants and (ii) the Minimum EBITDA and Senior Debt Ratio, as specified in section 6.01 of the Credit Agreement. In connection with this amendment, the Company made a prepayment of principal in the aggregate amount of $10,000 in March 2003.

Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modified certain affirmative and negative covenants to permit the equity-for-debt exchange, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. The terms of the amendment called for the Company to pay a fee equal to 5% of the lenders’ credit exposure since it had not made a required prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004. The Company paid the required fee of $13,600 on March 31, 2004. The annual interest rate on borrowings under the Senior Credit Facility increased each quarter until the term loan and revolving credit facility were repaid as part of the equity-for-debt exchange.

Amendment No. 4 to the Senior Credit Facility, entered into on October 30, 2003, modified certain definitions and representations to allow for the maintenance and administration of certain bank accounts of the Company.

Amendment No. 5 to the Senior Credit Facility, entered into on May 14, 2004, amended and waived certain affirmative and negative covenants necessary to permit the equity-for-debt exchange as well as to allow for a reduction of $25,000 in the letter of credit facility. In consideration for the amendments and waivers obtained in this amendment, the Company was obligated to pay a fee equal to 1.25% of the lenders’ outstanding letter of credit exposure as of November 30, 2004 and a further fee equal to 0.75% of the lenders’ outstanding letter of credit exposure for each additional month thereafter through the expiration date of the Senior Credit Facility of April 30, 2005. As noted above, the Company voluntarily terminated the facility in March 2005. The Company paid fees totaling $4,375 related to the letters of credit outstanding for the period November 30, 2004 through February 2005.

New Senior Credit Agreement — In March 2005, the Senior Credit Facility was replaced with a new 5-year $250,000 Senior Credit Agreement. The new Senior Credit Agreement includes a $75,000 sub-limit for borrowings at a rate equal to LIBOR plus a spread. Standby letters of credit issued under the new Senior Credit Agreement will carry a fixed price throughout the life of the facility. The Senior Credit Agreement is collateralized by the assets and/or the stock of certain of the Company’s domestic subsidiaries and certain of its foreign subsidiaries. The Company paid up-front fees to the lender of approximately $8,225 in conjunction with the execution of the Senior Credit Agreement. Such fees, paid predominately in the first quarter of 2005, have been deferred and will be amortized to expense over the life of the agreement.

The new Senior Credit Agreement requires the Company to maintain certain ratios, including a leverage ratio, a fixed charge coverage ratio and a minimum liquidity level. Compliance with the first two covenants is measured quarterly. The Company must be in compliance with the minimum liquidity level covenant at any time. Management’s 2005 forecast indicates that the Company will be in compliance with the financial covenants contained in the new Senior Credit Agreement.

The Senior Credit Agreement also requires the Company to prepay the facility in certain circumstances from proceeds of assets sales and the issuance of debt.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

9. Long-term Debt — (Continued)

2005 Senior Notes — The Company issued $200,000 of 2005 Senior Notes in the public market, bearing interest at a fixed rate of 6.75% per annum, payable semi-annually, and maturing on November 15, 2005. The 2005 Senior Notes were issued under an indenture between the Company and BNY Midwest Trust Company. The 2005 Senior Notes are not redeemable prior to maturity and are not subject to any sinking fund requirements.

As part of the equity-for-debt exchange consummated in 2004, Foster Wheeler Ltd. exchanged common shares, preferred shares and $141,471 principal amount of 2011 Senior Notes for $188,628 of 2005 Senior Notes. After giving effect to the exchange, $11,372 of 2005 Senior Notes remains outstanding as of December 31, 2004. Such notes mature on November 15, 2005. Also, in connection with the exchange, the holders of the 2005 Senior Notes agreed to amend the indenture governing these notes to effectively eliminate the security interest previously held by the 2005 Senior Notes. See Note 8 for further details of the equity-for-debt exchange.

2011 Senior Notes — As noted above, Foster Wheeler Ltd. exchanged common shares, preferred shares and $141,471 principal amount of 2011 Senior Notes for $188,628 of 2005 Senior Notes as part of the equity-for-debt exchange. In conjunction with the issuance of the 2011 Senior Notes, the Company recorded a premium of $5,659 since the fair value of the 2011 Senior Notes was 104% of principal. See Note 8 for further details of the equity-for-debt exchange.

The 2011 Senior Notes bear interest at 10.359% per annum, payable semi-annually in arrears on March 15 and September 15, commencing March 15, 2005. As a result of the premium, the effective interest rate on the 2011 Senior Notes is 9.5602%. Holders of the 2011 Senior Notes have a security interest in the stock, debt and assets of certain of Foster Wheeler Ltd.’s subsidiaries. The 2011 Senior Notes contain incurrence covenants that must be met should the Company choose to undertake certain actions including incurring debt, making certain payments and investments, granting liens, selling assets and entering into specific intercompany transactions, among others. Management monitors these covenants to ensure the Company remains in compliance with the indenture.

Concurrent with the equity-for-debt exchange, the Company completed a $120,000 private offering of Senior Notes at 10.359% due September 2011, Series B (the “Private Notes”). The proceeds of the Private Notes offering were used to repay the amounts outstanding under the term loan and revolving credit portions of the Senior Credit Facility totaling $115,869. The Company recorded a premium of $4,800 on the offering since the fair value of the Private Notes was 104% of principal. As a result of the premium, the effective interest rate on the Private Notes is 9.5602%.

Subsequently, the Company exchanged all Private Notes for registered 2011 Senior Notes. As of December 31, 2004, there were $271,643 of 2011 Senior Notes outstanding, including $10,172 of unamortized premium.

Notes Payable to Affiliate — In May and June 2001, Foster Wheeler Ltd. issued Convertible Notes having an aggregate principal amount of $210,000. The Convertible 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 proceeds of these securities were loaned to the Company and are included in the caption “Notes payable to affiliate” on the accompanying consolidated financial statements. The Notes payable to affiliate are subordinated in right of payment to all existing and future senior indebtedness of the Company.

As part of the equity-for-debt exchange, Foster Wheeler Ltd. exchanged common shares and preferred shares for $206,930 of Convertible Notes. After giving effect to the exchange offer, $3,070 of Convertible Notes remain outstanding as of December 31, 2004. The Convertible Notes are convertible into common shares at an initial conversion rate of 3.10655 common shares per $1,000 principal amount, or approximately

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

9. Long-term Debt — (Continued)

$321.90 per common share, subject to adjustment under certain circumstances. See Note 8 for further details of the equity-for-debt exchange.

Robbins Bonds — In connection with the restructuring of debt incurred to finance construction of a waste-to-energy facility in the Village of Robbins, Illinois, Foster Wheeler entered into certain subordinated obligations. The subordinated obligations include 1999C Bonds due October 15, 2009 (the “1999C Bonds due 2009”), 1999C Bonds due October 15, 2024 (the “1999C Bonds due 2024”) and 1999D Accretion Bonds due October 15, 2009 (the “1999D Bonds”).

As part of the equity-for-debt exchange, Foster Wheeler Ltd. exchanged common shares and preferred shares for $93,721 of Robbins Bonds. After giving effect to the exchange, $83 of 1999C Bonds due 2009, $20,491 of 1999C Bonds due 2024 and $233 of 1999D Bonds remain outstanding as of December 31, 2004. See Note 8 for further details of the equity-for-debt exchange.

The 1999C Bonds due 2009 and the 1999C Bonds due 2024 bear interest at 7.25% and 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. The total amount of 1999D Bonds due on October 15, 2009 is $325.

Trust Securities — FW Preferred Capital Trust I (“the Capital Trust”) is a 100% indirectly owned finance subsidiary of the Company which issued a $175,000 of Trust Securities. The Capital Trust invested the proceeds from the Trust Securities in an equal principal amount of 9.0% junior subordinated deferrable interest debentures (the “Debentures”) of the Company.

      Prior to December 27, 2003 the Capital Trust was consolidated in the financial statements of the Company and the Trust Securities were reported as Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures in the consolidated financial statements. The accumulated undistributed quarterly distributions were presented on the consolidated statement of financial position as Deferred Accrued Mandatorily Redeemable Preferred Security Distributions of Subsidiary Trust. The Mandatorily Redeemable Preferred Security Distributions of Subsidiary Trust were included within interest expense in the consolidated statement of operations and comprehensive loss.

      In 2004, the Company adopted FIN 46 for variable interest entities formed prior to February 1, 2003. In accordance with the provisions of FIN 46, the Company determined that (i) the Capital Trust is a variable interest entity and (ii) the Company is not the primary beneficiary. Accordingly, the Company de-consolidated the Capital Trust as of December 27, 2003. The Company’s consolidated financial statements now reflect its obligations to the Capital Trust as Subordinated Deferrable Interest Debentures and Deferred Accrued Interest on Subordinated Deferrable Interest Debentures. The interest expense on the Debentures is presented in the consolidated statement of operations and comprehensive loss as interest expense.

Foster Wheeler Ltd. and the Company fully and unconditionally guarantee the Trust Securities. These 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 has deferred all quarterly distributions beginning with the distribution due on January 15, 2002. The maturity date is January 15, 2029. Foster Wheeler can redeem these Trust Securities on or after January 15, 2004. The new Senior Credit Agreement requires the approval of the lenders to make payments on the Trust Securities to the extent such payments are not contractually required by the underlying Trust Securities agreements.

As part of the equity-for-debt exchange, Foster Wheeler Ltd. issued common shares, preferred shares and warrants to purchase common shares in exchange for Trust Securities. In conjunction with the exchange, the

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

9. Long-term Debt — (Continued)

Capital Trust recorded a $103,823 reduction in the Trust Securities and a $31,128 reduction in Deferred Accrued Mandatorily Redeemable Preferred Security Distributions Payable. The Capital Trust also recorded a corresponding reduction in the Debentures and accrued interest receivable. After giving effect to the exchange, $71,177 of Trust Securities remains outstanding as of December 31, 2004. See Note 8 for further details of the equity-for-debt exchange.

Special-Purpose Project Debt —Special-purpose project debt represents debt incurred to finance the construction of cogeneration facilities or waste-to-energy projects, which are majority-owned by the Company. 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.

      The Martinez Cogen Limited Partnership debt of $15,260 represents a note under a bank credit facility to a limited partnership whose general partner is a special-purpose subsidiary. The interest on the note, which varies based on one of several money market rates, is due semi-annually through July 30, 2006. The note matures on July 30, 2006. The project is located in California.

      The Foster Wheeler Coque Verde debt of $35,126 represents senior secured notes. The notes bear interest at 11.443%, due annually April 15, 2004 through 2015, and mature on April 15, 2015. The notes are collateralized by certain revenues and assets of a special- purpose subsidiary, which is the indirect owner of the project in Chile.

      The Camden County Energy Recovery Associates debt of $68,895 represents Solid Waste Disposal and Resource Recovery System Revenue Bonds. The bonds bear interest at rates varying between 7.125% and 7.5%, due annually December 1, 2004 through 2010, and mature on December 1, 2010. The bonds are collateralized by a pledge of certain revenues and assets of the project, but not the plant. The project is located in New Jersey.

Capital Leases — During 2002, the Company entered into sale-leaseback transactions for office buildings in both Finland and the United States. The transactions qualified as capital leases. In 2004, the Company entered into a capital lease for an office building in South Africa. Assets under capital leases are summarized as follows:

    December 31,
2004
  December 26,
2003
 
   

 

 
Buildings and improvements
  $ 45,306   $ 38,522  
Less: accumulated amortization
    5,222     1,276  
   

 

 
Net assets under capital leases
  $ 40,084   $ 37,246  
   

 

 

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

9. Long-term Debt — (Continued)

The following are the minimum lease payments to be made in each of the years indicated for the capital leases in effect as of December 31, 2004:

Fiscal year:
       
2005
  $ 7,529  
2006
    7,954  
2007
    7,519  
2008
    7,678  
2009
    7,943  
Thereafter
    126,147  
Less: Interest
    (97,483 )
   

 
Net minimum lease payments under capital leases
    67,287  
Less: current portion of net minimum lease payments
    990  
   

 
Long-term net minimum lease payments
  $ 66,297  
   

 

Other — On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provided for up to $45,000 of additional revolving loans available to provide working capital. As of December 31, 2004, the facility remained undrawn. In December 2004, the U.K. subsidiaries gave notice canceling the revolving credit facility effective January 24, 2005.

Interest Costs — Interest costs incurred in 2004, 2003, and 2002 were $94,622, $95,413 and $82,928, respectively, of which $0, $307 and $1,368, respectively, were capitalized.

Aggregate Maturities — Aggregate principal repayments and sinking fund requirements of long-term debt, excluding payments on capital lease obligations and premium amortization on the 2011 Senior Notes of $10,172, over the next five years as of December 31, 2004 are as follows:

Fiscal year:
       
2005
  $ 34,224  
2006
    22,250  
2007
    16,059  
2008
    13,810  
2009
    14,841  
Thereafter
    391,430  
   

 
Total
  $ 492,614  
   

 

10. Pensions and Other Postretirement Benefits

Pension Benefits — Domestic and certain 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 cash balance program was established for the domestic plan. The pension benefit under the previous formulas remain the same for current employees if so elected, however, new employees are 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. 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.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pensions and Other Postretirement Benefits — (Continued)

The Company also has a non-qualified, unfunded supplemental executive retirement plan (“SERP”) which covers certain employees. In April 2003, the Company froze the SERP and issued letters of credit totaling $2,250 to certain employees to support its obligations under the SERP. As of December 31, 2004, the Company had $870 of such letters of credit outstanding.

On April 10, 2003, the Board of Directors approved changes to the Company’s domestic employee benefits program, including the pension, postretirement medical, and 401(k) plans. The changes were made following an independent review of the Company’s domestic employee benefits which assessed the Company’s benefit program against that of the marketplace and its competitors.

The principal changes consist of the following: the domestic pension plan was frozen as of May 31, 2003, which means participants will not be able to increase the amount earned under the terms of the plan; the postretirement medical plan was frozen and will be available on a subsidized premium basis only to currently active employees who reached the age of 40 on May 31, 2003; and the 401(k) plan was enhanced to increase the level of employer matching contribution. The net effect of these changes improves the financial condition of the Company through reduced costs and reduced cash outflow in future years.

Domestic subsidiaries of the Company have a 401(k) plan for salaried employees. For the years 2004 and 2003, the Company contributed a 100% match of the first 3% and a 50% match of the next 3% of base pay of employee contributions, subject to the annual IRS limit, which amounted to a cost of $3,317 and $4,066 in 2004 and 2003, respectively. For the year 2002, the Company 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 $5,507.

Through the year ended December 31, 2004, the Company recognized a cumulative minimum liability in its financial statements for both domestic and foreign underfunded plans in the amount of $300,590 resulting in a cumulative pretax charge to Other Comprehensive Loss. This represents a reduction in the minimum liability of $11,156 from the prior year, including the impact of foreign currency translation. 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.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pensions and Other Postretirement Benefits — (Continued)

The following charts contain the disclosures for pension benefits for the years 2004, 2003 and 2002.

    For the Year Ended December 31, 2004   For the Year Ended December 26, 2003  
   
 
 
     United
States
   United
Kingdom
   Canada    Total    United
States
   United
Kingdom
   Canada    Total  
   

 

 

 

 

 

 

 

 
Projected Benefit Obligation (PBO):
                                                 
PBO at beginning of period
  $ 311,102   $ 548,680   $ 20,437   $ 880,219   $ 321,793   $ 470,372   $ 17,362   $ 809,527  
Service cost
        17,859     254     18,113     1,565     12,835     235     14,635  
Interest cost
    17,867     30,365     1,222     49,454     19,062     26,622     1,177     46,861  
Plan participants’ contributions
        8,107         8,107         7,147         7,147  
Plan amendments
                        1,961         1,961  
Actuarial loss/(gain)
    17,451     (632 )   903     17,722     31,350     (36 )   194     31,508  
Benefits paid
    (21,847 )   (23,360 )   (1,681 )   (46,888 )   (22,166 )   (20,618 )   (1,454 )   (44,238 )
Curtailments
                    (35,719 )           (35,719 )
Special termination benefits/other
    (1,942 )   778         (1,164 )   (4,783 )   993         (3,790 )
Foreign currency exchange rate changes
        49,306     2,039     51,345         49,404     2,923     52,327  
   

 

 

 

 

 

 

 

 
PBO at end of period
  $ 322,631   $ 631,103   $ 23,174   $ 976,908   $ 311,102   $ 548,680   $ 20,437   $ 880,219  
   

 

 

 

 

 

 

 

 
                                                   
Plan Assets:
                                                 
Fair value of plan assets at beginning of period
  $ 194,035   $ 396,062   $ 17,927   $ 608,024   $ 166,381   $ 294,975   $ 15,302   $ 476,658  
Actual return on plan assets
    24,712     47,272     1,395     73,379     38,467     50,151     1,561     90,179  
Employer contributions
    29,245     28,510         57,755     13,688     26,721         40,409  
Plan participants’ contributions
        8,107         8,107         7,147         7,147  
Benefits paid
    (21,847 )   (23,360 )   (1,681 )   (46,888 )   (22,166 )   (20,618 )   (1,454 )   (44,238 )
Other
    (2,647 )   867     (70 )   (1,850 )   (2,335 )   2,855     (53 )   467  
Foreign currency exchange rate changes
        37,344     1,717     39,061         34,831     2,571     37,402  
   

 

 

 

 

 

 

 

 
Fair value of plan assets at end of period
  $ 223,498   $ 494,802   $ 19,288   $ 737,588   $ 194,035   $ 396,062   $ 17,927   $ 608,024  
   

 

 

 

 

 

 

 

 
                                                   
Funded Status:
                                                 
Funded status
  $ (99,133 ) $ (136,301 ) $ (3,886 ) $ (239,320 ) $ (117,067 ) $ (152,618 ) $ (2,510 ) $ (272,195 )
Unrecognized net actuarial loss
    117,426     246,371     7,170     370,967     111,637     259,783     6,149     377,569  
Unrecognized prior service cost
        7,623     1,050     8,673         8,686     1,046     9,732  
Adjustment for the minimum liability
    (117,426 )   (175,486 )   (7,678 )   (300,590 )   (111,637 )   (193,635 )   (6,474 )   (311,746 )
   

 

 

 

 

 

 

 

 
Accrued benefit cost
  $ (99,133 ) $ (57,793 ) $ (3,344 ) $ (160,270 ) $ (117,067 ) $ (77,784 ) $ (1,789 ) $ (196,640 )
   

 

 

 

 

 

 

 

 
               
    For the Year Ended
December 31, 2004
  For the Year Ended
December 26, 2003
  For the Year Ended
December 27, 2002
 
   
 
 
 
     United
States
   United
Kingdom
   Canada    Total    United
States
   United
Kingdom
   Canada    Total    United
States
   United
Kingdom
   Canada    Total  
   

 

 

 

 

 

 

 

 

 

 

 

 
Net Periodic Benefit Cost:
                                                                         
Service cost
  $   $ 17,859   $ 254   $ 18,113   $ 1,565   $ 12,835   $ 236   $ 14,636   $ 12,154   $ 12,161   $ 213   $ 24,528  
Interest cost
    17,867     30,365     1,222     49,454     19,062     26,622     1,177     46,861     20,372     19,408     1,094     40,874  
Expected return on plan assets
    (15,603 )   (31,081 )   (1,315 )   (47,999 )   (14,356 )   (23,179 )   (1,301 )   (38,836 )   (16,943 )   (24,261 )   (1,496 )   (42,700 )
Amortization of transition asset
        (68 )   76     8             71     71             63     63  
Amortization of prior service cost
        1,686     15     1,701     182     1,446     15     1,643     458     1,339     13     1,810  
Other
    4,059     17,705     430     22,194     11,795     19,886     425     32,106     7,113     8,279     61     15,453  
   

 

 

 

 

 

 

 

 

 

 

 

 
SFAS No. 87 net periodic benefit cost
    6,323     36,466     682     43,471     18,248     37,610     623     56,481     23,154     16,926     (52 )   40,028  
SFAS No. 88 cost*
    1,390             1,390     1,108             1,108     1,908             1,908  
   

 

 

 

 

 

 

 

 

 

 

 

 
Total net periodic benefit cost
  $ 7,713   $ 36,466   $ 682   $ 44,861   $ 19,356   $ 37,610   $ 623   $ 57,589   $ 25,062   $ 16,926   $ (52 ) $ 41,936  
   

 

 

 

 

 

 

 

 

 

 

 

 
                                                                           
Weighted-Average Assumptions—Net Periodic Benefit Cost:
                                                                         
Discount rate
    6.00 %   5.45 %   6.00 %         6.00 %   5.60 %   6.25 %         7.40 %   5.75 %   7.00 %      
Long-term rate of return
    8.00 %   7.34 %   8.00 %         8.50 %   7.50 %   8.00 %         8.50 %   8.00 %   9.00 %      
Salary scale
    0.00 %   3.04 %   5.00 %         0.00 %   3.30 %   5.00 %         4.00 %   4.00 %   5.00 %      
                                                                           
Weighted-Average Assumptions—Benefit Obligations:
                                                                         
Discount rate
    5.48 %   5.43 %   6.00 %         6.00 %   5.40 %   6.00 %         6.60 %   5.60 %   6.25 %      
Salary scale
    0.00 %   3.32 %   4.00 %         4.00 %   3.00 %   5.00 %         5.00 %   3.30 %   5.00 %      

 
*
Charges were recorded in accordance with the provisions of SFAS No. 88, “Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” related to (i) the settlement in 2004 of obligations to former executives under the Supplemental Executive Retirement Plan of $1,390; (ii) the impact in 2003 of the freezing of the domestic pension plans, the mothballing of a domestic manufacturing facility of $900 and employee terminations as part of the workforce reduction of $100; and (iii) the retirement in 2002 of the Company’s Vice President of Human Resources of approximately $900.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pensions and Other Postretirement Benefits — (Continued)

Plan measurement date

The measurement date for all of the Company’s defined benefit plans is December 31 of each year for both plan assets and obligations.

Accumulated benefit obligation

The accumulated benefit obligation (“ABO”) for the Company’s plans totaled approximately $902,800 and $811,800 at year-end 2004 and 2003, respectively. As previously discussed, the Company has recorded a net cumulative charge to other comprehensive loss for the years 2000 through 2004 due to the ABO exceeding the fair value of plan assets.

Investment policy

Each of the Company’s plans is governed by a written investment policy.

The investment policy of the U.S. plans allocates assets in accordance with the policy guidelines. The asset mix target for the plans is 72.5% equities and 27.5% fixed-income securities. The investment policy is currently undergoing a review by the Company to ensure investment strategy is aligned with plan liabilities, considering the changes to the domestic benefits program made in 2004.

The investment policy of the U.K. plans are designed to improve the ongoing funding level of the plan while gradually, over time, changing the mix of investment allocation between equities and bonds to more fully match the liabilities of the plan. The bond and equity allocations range from 40% bonds and 60% equities to 50% bonds and 50% equities, depending on the funding level.

The investment policy of the Canadian plan uses a balanced approach and allocates investments in pooled funds in accordance with the policy’s asset mix guidelines. These guidelines identify target, maximum and minimum allocations by asset class. The target allocation is 45% bonds, 50% equities and 5% cash. The minimum and maximum allocations are: 42.5% to 57.5% equities; 40% to 50% bonds; and 2.5% to 7.5% cash.

Long-term rate of return assumptions

The expected long-term rate of return on plan assets is developed using a weighted-average methodology, blending the expected returns on each class of investment in the plans’ portfolio. The expected returns by asset class are developed considering both past performance and future considerations. The long-term rate of return is reviewed annually by the Company for its funded plans and adjusted, if required. The weighted-average expected long-term rate of return on plan assets has declined from 8.2% to 7.5% over the past three years.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pensions and Other Postretirement Benefits — (Continued)

    2004   2003  
   

 

 
Plan Asset Allocation:
             
               
U.S. Plans
             
U.S. equities
    53 %   47 %
Non-U.S. equities
    26 %   25 %
U.S. fixed-income securities
    20 %   23 %
Non-U.S. fixed-income securities
    0 %   0 %
Other
    1 %   5 %
   

 

 
Total
    100 %   100 %
   

 

 
U.K. Plans
             
U.K. equities
    60 %   38 %
Non-U.K. equities
    1 %   25 %
U.K. fixed-income securities
    36 %   32 %
Non-U.K. fixed-income securities
    0 %   0 %
Other
    3 %   5 %
   

 

 
Total
    100 %   100 %
   

 

 
Canada Plan
             
Canadian equities
    23 %   23 %
Non-Canadian equities
    29 %   26 %
Canadian fixed-income securities
    43 %   44 %
Non-Canadian fixed-income securities
    0 %   0 %
Other
    5 %   7 %
   

 

 
Total
    100 %   100 %
   

 

 
 
Contributions

The Company expects to contribute a total of approximately $20,400 to its domestic pension plans and approximately $30,700 to its foreign pension plans in 2005. The contributions to the domestic pension plans are expected to approximate $22,100 in 2006, $16,400 in 2007, $7,900 in 2008, $1,800 in 2009 and zero each year thereafter.

Estimated future benefit payments

The following benefit payments, which reflect expected future service, are expected to be paid on the defined benefit plans.

    United
States
  United
Kingdom
  Canada   Total  
   

 

 

 

 
2005
  $ 19,934   $ 24,465   $ 1,634   $ 46,033  
2006
    19,944     26,381     1,711     48,036  
2007
    19,983     26,817     1,739     48,539  
2008
    20,360     31,315     1,759     53,434  
2009
    20,600     36,038     1,760     58,398  
2010-2014
    104,858     223,671     8,002     336,531  

Other Postretirement Benefits — In addition to providing pension benefits, some of the Company’s subsidiaries provide certain health care and life insurance benefits for retired employees (“other postretirement benefits”). Employees may become eligible for these other postretirement benefits if they

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pensions and Other Postretirement Benefits — (Continued)

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. Additionally, some of the Company’s subsidiaries also have a plan, which provides coverage for an employee’s beneficiary upon the death of the employee.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) became law in the United States. The Medicare Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In May 2004, the FASB issued a FASB Staff Position (“FSP”) No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP 106-2 provides guidance on accounting for the effects of the Medicare Act for employers that sponsor postretirement healthcare plans that provide prescription drug benefits. The provisions of FSP No. 106-2 were effective for the Company’s interim period ending September 24, 2004. Based upon the proposed regulations of the Medicare Act, the Company concluded that the benefits provided by the plan were actuarially equivalent to Medicare Part D under the Medicare Act. Accordingly, the Company reflected the impact of the Medicare Act prospectively as of the start of the third quarter 2004. The impact of the Medicare Act resulted in decreases in the accumulated postretirement benefit obligation of approximately $9,100 and in the annual net periodic postretirement benefit costs for 2004 of approximately $900. On January 21, 2005, final regulations related to the Medicare Act were issued. The Company has not yet determined the effect of the final regulations on the Company’s accumulated postretirement benefit obligation and net periodic postretirement benefit costs.

The following chart contains the disclosures for other postretirement benefit plans for the years 2004, 2003 and 2002.

    For the Year Ended  
   
 
    December 31, 2004   December 26, 2003  
   

 

 
Accumulated Postretirement Benefit Obligation (APBO):
             
APBO at beginning of period
  $ 94,906   $ 133,392  
Service cost
    323     741  
Interest cost
    5,119     9,205  
Plan participants’ contributions
    2,707      
Plan amendments
        (55,201 )
Actuarial (gain)/loss
    (6,479 )   21,277  
Benefits paid
    (10,369 )   (11,910 )
Curtailments
        (2,598 )
Other
    983      
Foreign currency exchange rate changes
    86      
   

 

 
APBO at end of period
  $ 87,276   $ 94,906  
   

 

 
Plan Assets:
             
Fair value of plan assets beginning of period
  $   $  
Employer contributions
    10,369     11,910  
Benefits paid
    (10,369 )   (11,910 )
   

 

 
Fair value of plan assets at end of period
  $   $  
   

 

 
Funded Status:
             
Funded status
  $ (87,276 ) $ (94,906 )
Unrecognized net actuarial loss
    38,743     47,614  
Unrecognized prior service cost
    (57,824 )   (62,453 )
   

 

 
Accrued benefit cost
  $ (106,357 ) $ (109,745 )
   

 

 

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pensions and Other Postretirement Benefits — (Continued)

    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Net Periodic Postretirement Benefit Cost:
                   
Service cost
  $ 323   $ 741   $ 2,785  
Interest cost
    5,119     9,205     8,255  
Amortization of prior service cost
    (4,745 )   (1,485 )   (2,853 )
Other
    2,244     (3,340 )   (5,013 )
   

 

 

 
Net periodic postretirement benefit cost
  $ 2,941   $ 5,121   $ 3,174  
   

 

 

 
Weighted-Average Assumptions—
                   
Net Periodic Postretirement Benefit Cost:
                   
Discount Rate
    6.00 %   6.63 %   7.40 %
                     
Weighted-Average Assumptions—
                   
Accumulated Postretirement Benefit Obligation:
                   
Discount Rate
    5.31 %   6.00 %   6.63 %
                     
Health-care cost trend:
    Pre-Medicare Eligible     Medicare Eligible  
   

 

 
2004
    9.50 %   11.00 %
2005
    9.00 %   10.50 %
Decline to 2016
    5.50 %   5.00 %

Assumed health-care cost trend rates have a significant effect on the amounts reported for the other postretirement benefit plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

    One-Percentage
Point Increase
  One-Percentage
Point Decrease
 
   

 

 
Effect on total of service and interest cost components
  $ 278   $ (244 )
Effect on accumulated postretirement benefit obligations
  $ 5,412   $ (4,694 )
 
Plan measurement date

The measurement date for the Company’s other postretirement benefit plans is December 31 of each year for obligations.

Contributions

The Company expects to contribute a total of approximately $7,719 to its other postretirement benefit plans in 2005.

Estimated future benefit payments

The following other postretirement benefit payments, which reflect expected future service, are expected to be paid.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pensions and Other Postretirement Benefits — (Continued)

    Other Benefits   Health Care Subsidy   Other Benefits, Net of Subsidy  
   

 

 

 
2005
  $ 7,719   $   $ 7,719  
2006
    7,933     948     6,985  
2007
    8,039     971     7,068  
2008
    8,081     994     7,087  
2009
    8,103     1,018     7,085  
2010-2014
    38,705     5,310     33,395  

Other Benefits — Certain of the Company’s foreign subsidiaries participate in government-mandated indemnity and postretirement programs for their employees. Liabilities of $32,650 and $24,326 were recorded at December 31, 2004 and December 26, 2003, respectively, related to such benefits. The Company also has a benefit plan, the Survivor Income Plan, accounted for under SFAS No. 112, “Employer’s Accounting for Postemployment Benefits,” which was designed to provide coverage for an employee’s beneficiary upon the death of the employee; this plan has been closed to new entrants since 1988. Total liabilities under this plan were $23,572 and $24,146 as of December 31, 2004 and December 26, 2003, respectively. Benefit assets reflecting primarily the cash surrender value of insurance policies purchased to cover obligations under the Survivor Income Plan totaled $6,351 and $7,240 as of December 31, 2004 and December 26, 2003, respectively.

11. Guarantees and Warranties

The Company has provided indemnifications to third parties relating to businesses and/or assets the Company previously owned. Such indemnifications relate primarily to potential environmental and tax exposures for activities conducted by the Company prior to the sale.

    Maximum
Potential Payment
  Carrying Amount of
Liability as of
December 31, 2004
  Carrying Amount of
Liability as of
December 26, 2003
 
   

 

 

 
Environmental indemnifications
    No limit   $ 5,300   $ 5,300  
Tax indemnifications
    No limit   $   $  

The Company provides for project execution and warranty reserves on certain of its long-term contracts. Generally, these reserves are accrued over the life of the contract so that a sufficient balance is maintained to cover the exposures at the conclusion of the contract.

    For the Year Ended  
   
 
    December 31, 2004   December 26, 2003   December 27, 2002  
   

 

 

 
Balance at beginning of year
  $ 131,600   $ 81,900   $ 52,700  
Accruals
    25,800     72,800     45,600  
Settlements
    (32,800 )   (13,800 )   (8,600 )
Adjustments to provisions
    (30,100 )   (9,300 )   (7,800 )
   

 

 

 
Balance at end of year
  $ 94,500   $ 131,600   $ 81,900  
   

 

 

 

12. 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.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

12. Financial Instruments and Risk Management — (Continued)

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.

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 “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies) (see Notes 3 and 16).

Carrying Amounts and Fair Values — The estimated fair values of the Company’s financial instruments are as follows:

    December 31, 2004   December 26, 2003  
   
 
 
    Carrying
Amount
  Fair
Value
  Carrying
Amount
  Fair
Value
 
   

 

 

 

 
Nonderivatives:
                         
Cash and short-term investments
  $ 317,342   $ 317,342   $ 377,485   $ 377,485  
Restricted cash
    72,844     72,844     52,685     52,685  
Long-term debt
    (567,003 )   (570,586 )   (823,072 )   (530,826 )
Notes payable to affiliate
    (3,070 )   (2,732 )   (210,000 )   (60,375 )
Notes payable to affiliate
    (206,930 )            
                           
Derivatives:
                         
Foreign currency contracts
    419     419     3,315     3,315  

In the ordinary course of business, the Company is contingently liable for performance under standby letters of credit, bank guarantees and surety bonds totaling $559,900 and $609,000 as of December 31, 2004 and December 26, 2003, respectively. These balances include the standby letters of credit issued under the Senior Credit Facility 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. It is not practicable to estimate the fair value of the Company’s intercompany debt of $206,930 at December 31, 2004 and $0 at December 26, 2003 as there is no market value for this type of instrument.

As of December 31, 2004, the Company had $46,275 of foreign currency contracts outstanding. These foreign currency contracts mature in 2005. The contracts have been established by various international subsidiaries to sell a variety of currencies, and 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 31, 2004 and December 26, 2003, the Company had no significant concentrations of credit risk. The Company had issued a third-party financial guarantee totaling $2,750 at December 31, 2004 and December 26, 2003 with respect to a partnership interest in a commercial real estate project.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

13. Restricted Stock Plan

On October 6, 2004, management was issued 1,883,745 restricted common share awards in accordance with Foster Wheeler Ltd.’s Management Restricted Stock Plan, of which 1,351,846 were in the form of restricted shares and 531,899 were in the form of restricted share units. The restricted shares have immediate voting rights and the restricted share units will give the holders voting rights upon vesting. The restricted awards provide that issued shares may not be sold or otherwise transferred until restrictions lapse. One third of the restricted awards vest in the fourth quarter of 2005 and the balance vest during the fourth quarter of 2006. The grant date fair value of restricted common share awards issued to management was $9.20 per share.

Upon issuance of the restricted common share awards, unearned compensation equivalent to the market value of the common shares on the date of grant was recorded as a part of Foster Wheeler Ltd. shareholders’ deficit, with a corresponding offset to common shares and paid-in capital. Unearned compensation will be amortized to compensation expense over the appropriate vesting period of each grant. The total unearned compensation recorded upon issuance of the restricted awards was $17,609 and the related compensation expense recorded in 2004 was $1,712.

14. Stock Option Programs

On September 10, 2004, the Board of Directors of Foster Wheeler Ltd. adopted the 2004 Stock Option Plan (the “2004 Plan”) which reserves 56,421 preferred shares for issuance. The options granted under the 2004 Plan expire up to a maximum of ten years from the date granted. On October 6, 2004, management was issued options under the 2004 Plan to purchase 43,103 preferred shares at an exercise price of $9.378 per common share issuable. Such options expire on October 5, 2007. One third of the options issued to management vest in the fourth quarter of 2005, and the balance vest during the fourth quarter of 2006. The issuance of the options to management did not result in an unearned compensation charge since the exercise price of the options was greater than the market price of the underlying shares on the date of grant.

On November 29, 2004, each option under the 2004 Plan to purchase preferred shares granted to management and the non-employee directors mandatorily converted to an option to purchase 65 common shares at an exercise price of $9.378 per common share issuable.

Under the 1995 Stock Option Plan approved by the shareholders of Foster Wheeler Ltd. in April 1995 and amended in April 1999 and May 2002, the total number of shares of common stock that may be granted is 265,000. In April 1990, the shareholders of Foster Wheeler Ltd. approved a Stock Option Plan for Directors of the Company. On April 29, 1997, the shareholders of Foster Wheeler Ltd. approved an amendment of the Directors’ Stock Option Plan, which authorizes the granting of options on 20,000 shares of common stock to non-employee directors of Foster Wheeler Ltd., who will automatically receive an option to acquire 150 shares each year. These plans provide that shares granted come from Foster Wheeler Ltd.’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. 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.

Foster Wheeler Ltd. also granted 65,000 inducement options in 2001 to its chief executive officer in connection with an employment agreement and a further 50,000 options in 2002 based upon an amendment to his employment agreement. The 2001 options vest 20% each year over the term of the agreement, while the 2002 options vest one-forty-eighth (1/48) on the date of grant and 1/48 on the first day of each successive month thereafter. Foster Wheeler Ltd. granted 12,750 inducement options to its president and chief executive officer of Foster Wheeler North America Corp. (formerly known as “Foster Wheeler Power Group, Inc.”) in

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

14. Stock Option Programs — (Continued)

connection with his employment agreement in 2002 and granted a further 5,000 inducement options to him in 2003. The 2002 options vest ratably over five years, while the 2003 options vest ratably over four years. The price of the options granted pursuant to these agreements was fair market value on the date of the grant. The options granted under these agreements expire ten years from the date granted.

Information regarding these option plans for the years 2004, 2003, and 2002 is as follows (presented in actual number of shares):

The following table summarizes information about fixed-price stock options outstanding as of December 31, 2004:

    For the Year Ended  
   
 
    December 31, 2004   December 26, 2003   December 27, 2002  
   
 
 
 
    Shares   Weighted-
Average
Exercise
Price
  Shares   Weighted-
Average
Exercise
Price
  Shares   Weighted-
Average
Exercise
Price
 
   

 

 

 

 

 

 
Options outstanding, beginning of year
    393,383   $ 196.00     410,055   $ 195.20     236,231   $ 325.00  
Options exercised
                           
Options granted
    2,801,704   $ 9.38     5,857     24.00     180,018     32.80  
Options cancelled or expired
    (12,177 ) $ 303.50     (22,529 )   136.00     (6,194 )   433.20  
   
       
       
       
Options outstanding, end of year
    3,182,910   $ 30.71     393,383   $ 196.00     410,055   $ 195.20  
   
       
       
       
Option price range at end of year
  $ 9.38   to       $ 23.40   to       $ 29.20   to      
    $ 881.2500         $ 881.2500         $ 881.2500        
Option price range for exercised shares
                               
Options available for grant at end of year
    869,273           25,342           22,253        
   
       
       
       
Weighted-average fair value of options granted during the year
  $ 3.30         $ 16.80         $ 22.20        
Options exercisable at end of year
    284,390           229,445           166,938        
Weighted-average price of exercisable options at end of year
  $ 230.60         $ 296.00         $ 398.60        

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

14. Stock Option Programs — (Continued)


      Options Outstanding   Options Exercisable  
     
 
 
Range of Exercise Prices   Number
Outstanding
at 12/31/04
  Weighted-
Average
Remaining
Contractual Life
  Weighted-
Average
Exercise Price
  Number
Exercisable
at 12/31/04
  Weighted-
Average
Exercise Price
 

 
 
 
 
 
 
$     9.38
to $9.38     2,801,704     9.76 years   $ 9.38       $  
     23.40
to 32.80     165,456     7.79 years     32.07     100,940     32.23  
     99.70
to 127.50     98,337     6.49 years     105.24     72,337     107.23  
   163.13
to 200.00     22,900     5.18 years     186.28     16,600     181.07  
   270.00
to 301.25     29,600     4.13 years     282.09     29,600     282.09  
   550.00
to 738.75     53,333     1.73 years     626.43     53,333     626.43  
   843.75
to 881.25     11,579     1.03 years     846.50     11,579     846.50  

 
 
 
 
 
 
 
$     9.38
to $881.25     3,182,909     9.31 years   $ 30.71     284,389   $ 230.60  

 
 
 
 
 
 
 

15. Income Taxes

The components of loss before income taxes for the years 2004, 2003 and 2002 were taxed under the following jurisdictions:

    2004   2003   2002  
   

 

 

 
Domestic
  $ (269,755 ) $ (155,538 ) $ (506,639 )
Foreign
    34,704     46,011     (3,710 )
   

 

 

 
Total
  $ (235,051 ) $ (109,527 ) $ (510,349 )
   

 

 

 

The provision for income taxes on those earnings was as follows:

    2004   2003   2002  
   

 

 

 
Current tax expense:
                   
Domestic
  $ (7,597 ) $ (14,939 ) $ (5,931 )
Foreign
    (47,616 )   (31,887 )   (10,978 )
   

 

 

 
Total current
    (55,213 )   (46,826 )   (16,909 )
   

 

 

 
Deferred tax benefit/(expense):
                   
Domestic
    (569 )   84      
Foreign
    2,660     (684 )   2,252  
   

 

 

 
Total deferred
    2,091     (600 )   2,252  
   

 

 

 
Total provision for income taxes
  $   (53,122 ) $   (47,426 ) $   (14,657 )
   

 

 

 

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

15. Income Taxes — (Continued)

Deferred tax assets (liabilities) consist of the following:

    2004   2003  
   

 

 
Difference between book and tax depreciation
  $ (2,717 ) $ (12,181 )
Pensions
    41,771     46,173  
Capital lease transactions
        263  
Revenue recognition
    11,716     14,191  
   

 

 
Gross deferred tax assets (liabilities)
    50,770     48,446  
   

 

 
Current taxability of estimated costs to complete long-term contracts
    20,658     19,039  
Income currently taxable deferred for financial reporting
    17,416     1,706  
Expenses not currently deductible for tax purposes
    33,348     200,084  
Investment tax credit carry forwards
        20,538  
Postretirement benefits other than pensions
    36,269     62,369  
Asbestos claims
    33,077     40,328  
Minimum tax credits
    6,399     17,917  
Foreign tax credits
    19,440     28,178  
Net operating loss carry forwards
    64,283     117,001  
Effect of write-downs and restructuring reserves
    7,685     11,234  
Other
    9,890     40,956  
Valuation allowance
    (234,432 )   (534,790 )
   

 

 
      14,033     24,560  
   

 

 
Net deferred tax assets
  $ 64,803   $ 73,006  
   

 

 

Foreign tax credit carryforwards are recognized based on their potential utilization and, if not used, will expire in the years 2011 and 2012. 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. Certain components of the deferred tax assets for 2003 shown above have changed from the amounts originally reported in 2003. In all cases, any such adjustment was offset by a corresponding adjustment to the valuation allowance for 2003 such that the reported net deferred tax assets (liabilities) for 2003 did not change. The reduction in the valuation allowance of $300,358 was primarily due to the consummation of the equity-for-debt exchange offer as discussed below. A valuation allowance is required under SFAS No. 109, “Accounting for Income Taxes,” when there is evidence of losses from operations in the three most recent fiscal years. For statutory purposes, the majority of deferred tax assets for which a valuation allowance is provided do not begin expiring until 2024 and beyond, based on the current tax laws.

As a result of the recently consummated equity-for-debt exchange offer discussed in Note 8, the Company will be subject to substantial limitations on the use of pre-exchange period losses and credits to offset U.S. federal taxable income in any post-exchange period. Since a valuation allowance had already been reflected to offset these losses and credits, this limitation did not result in a material write-off by the Company.

As part of the overall reorganization that took place in May 2001, the Company transferred in December 2000, certain intangible rights to one of its subsidiaries. The gain on the transfer was reported as an intercompany deferred gain and is therefore eliminated in consolidation; for GAAP purposes, however, the

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

15. Income Taxes — (Continued)

transfer was subject to tax in the U.S. As required under SFAS No. 109, the U.S. tax charge on the gain was reported in the consolidated financial statements as a deferred charge which is being amortized to tax expense over 35 years.

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:

    2004   2003   2002  
   

 

 

 
Tax benefit at U.S. statutory rate
    (35.0 )%   (35.0 )%   (35.0 )%
State income taxes, net of Federal income tax benefit
    1.7     6.8     0.4  
Adjustment to deferred tax assets—equity-for-debt exchange
    154.5          
Valuation allowance
    (140.9 )   52.9     34.4  
Difference in estimated income taxes on foreign income and losses, net of previously provided amounts
    13.7     15.1     2.0  
Deferred charge
    0.8     1.7     0.4  
Nondeductible loss
    26.7          
Other
    1.4     1.8     0.7  
   

 

 

 
      22.9 %   43.3 %   2.9 %
   

 

 

 

16. Derivative Financial Instruments

The Company operates on a worldwide basis. The Company’s activities expose it to risks related to the effect of changes in foreign-currency exchange rates. The Company maintains a foreign-currency risk-management strategy that uses derivative instruments to protect it from unanticipated fluctuations in cash flows that may arise from volatility in currency exchange rates. The Company utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” At December 31, 2004, December 26, 2003 and December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded pretax losses in 2004 and 2003 of $2,900 and $5,160, respectively, and recorded a pretax gain of $8,470 in 2002. These amounts were recorded as reductions in cost of operating revenues on the consolidated statement of operations and comprehensive loss. Amounts receivable (gains) or payable (losses) under foreign exchange contracts 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 is exposed to credit loss in the event of non-performance by the counterparties. All of these counterparties are significant financial institutions that are primarily rated “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies). As of December 31, 2004, approximately $31,700 was owed to the Company by counterparties and $14,600 was owed by the Company to counterparties. A $3,834 net of tax gain was recorded in other comprehensive loss as of December 28, 2001. This amount was reclassified to earnings in 2002 as the Company no longer qualified for deferral under SFAS No. 133.

The maximum term over which the Company is hedging exposure to the variability of cash flows is 12 months.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

17. Business Segments — Data

The Company operates through two business groups which also constitute separate reportable segments: the Engineering and Construction Group (the “E&C Group”) and the Global Power Group. The E&C Group designs, engineers, and constructs upstream oil and gas processing facilities, oil refining, chemical and petrochemical, pharmaceutical, natural gas liquefaction (LNG) facilities and receiving terminals, and related infrastructure, including power generation and distribution facilities. The E&C Group provides engineering, project management and construction management services, and purchases equipment, materials and services from third-party suppliers and subcontractors. The E&C Group owns industry leading technology in delayed coking, solvent de-asphalting, and hydrogen production processes used in oil refineries and has access to numerous technologies owned by others. The E&C Group also provides international environmental remediation services, together with related technical, engineering, design and regulatory services. The E&C Group generates revenues from engineering and construction activities pursuant to long-term contracts spanning up to four years in duration.

The Global Power Group designs, manufactures, and erects steam generating and auxiliary equipment for electric power generating stations and industrial markets worldwide. Steam generating equipment includes a full range of fluidized bed and conventional boilers firing coal, oil, gas, biomass and municipal solid waste, waste wood, and low-Btu gases. Auxiliary equipment includes feedwater heaters, steam condensers, heat-recovery equipment, selective non-catalytic recovery units, selective catalytic recovery units and low-NOx burners. The Company provides a broad range of site services relating to these products, including full plant construction, maintenance engineering, plant upgrading and life extension, and plant repowering. The Global Power 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 Global Power Group builds, owns and operates cogeneration, independent power production and waste-to-energy facilities, as well as facilities for the process and petrochemical industries. The Global Power Group generates revenues from long-term engineering activities, supply of equipment and construction contracts, and from operating activities pursuant to the long-term sale of project outputs (i.e., electricity, steam, etc.), operating and maintenance agreements, and from returns on its equity investments in certain production facilities.

The Company has restated its business segment data to reflect the transfer of one of its operating subsidiaries in Canada from the E&C Group to the Global Power Group. The subsidiary’s operations have been consolidated into another subsidiary whose operations have been historically reported as part of the Global Power Group.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

17. Business Segments — Data — (Continued)

The Company conducts its business on a global basis. The E&C Group accounted for the largest portion of the Company’s operating revenues over the last ten years. In 2004, the E&C Group and the Global Power Group accounted for approximately 62% and 38%, respectively, of the operating revenues. The geographic dispersion of these operating revenues for the year ended December 31, 2004 was as follows:

    E&C Group   Global Power Group       Total  
   
 
     
 
    Operating
Revenues
  Percentage of
Operating
Revenues
  Operating
Revenues
  Percentage of
Operating
Revenues
  Corporate and
Financial Services
and Eliminations
  Operating
Revenues
  Percentage of
Operating
Revenues
 
   

 

 

 

 

 

 

 
North America
  $ 79,200     4.8 % $ 291,809     29.0 % $ 2,900   $ 373,909     14.0 %
South America
    52,966     3.2 %   123,974     12.3 %   (598 )   176,342     6.6 %
Europe
    976,413     58.8 %   458,755     45.7 %   (4,962 )   1,430,206     53.7 %
Asia
    252,696     15.2 %   82,728     8.2 %   (1,261 )   334,163     12.6 %
Middle East
    131,909     7.9 %   37,770     3.8 %   (585 )   169,094     6.4 %
Other
    168,408     10.1 %   9,816     1.0 %   (614 )   177,610     6.7 %
   

 

 

 

 

 

 

 
Total
  $ 1,661,592     100.0 % $ 1,004,852     100.0 % $ (5,120 ) $ 2,661,324     100.0 %
   

 

 

 

 

 

 

 

Management uses several financial metrics to measure the performance of the Company’s business segments. EBITDA is the primary earnings measure used by the Company’s chief decision makers.

Export revenues account for 4% of operating revenues. No single customer represented 10% or more of operating revenues for 2004, 2003, or 2002.

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.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

17. Business Segments — Data — (Continued)

    Total   Engineering
and Construction
  Global
Power Group
  Corporate and
Financial Services (1)
 
   

 

 

 

 
For the Year Ended December 31, 2004
                         
Third party revenues
  $ 2,661,324   $ 1,658,151   $ 1,002,561   $ 612  
Intercompany revenues
    39     3,441     2,291     (5,693 )
   

 

 

 

 
Operating revenues
  $ 2,661,363   $ 1,661,592   $ 1,004,852   $ (5,081 )
   

 

 

 

 
EBITDA (2)
  $ (107,674 ) $ 135,709   $ 80,653   $ (324,036 )
         
 
 
 
Less: Interest expense
    (94,622 )                  
Less: Depreciation and amortization
    (32,755 )                  
   
                   
Loss before income taxes
    (235,051 )                  
Tax provision
    (53,122 )                  
   
                   
Net loss
  $ (288,173 )                  
   
                   
Total assets
  $ 2,188,114   $ 1,005,836   $ 1,172,838   $ 9,440  
Capital expenditures
  $ 9,613   $ 5,724   $ 3,847   $ 42  
                           
For the Year Ended December 26, 2003
                         
Third party revenues
  $ 3,723,815   $ 2,271,260   $ 1,452,909   $ (354 )
Intercompany revenues
        857     (574 )   (283 )
   

 

 

 

 
Operating revenues
  $ 3,723,815   $ 2,272,117   $ 1,452,335   $ (637 )
   

 

 

 

 
EBITDA (3)
    21,460   $ 68,699   $ 137,758   $ (184,997 )
         
 
 
 
Less: Interest expense
    (95,413 )                  
Less: Depreciation and amortization
    (35,574 )                  
   
                   
Loss before income taxes
    (109,527 )                  
Tax provision
    (47,426 )                  
   
                   
Net loss
  $ (156,953 )                  
   
                   
Total assets
  $ 2,507,015   $ 1,022,342   $ 1,227,105   $ 257,568  
Capital expenditures
  $ 12,870   $ 5,677   $ 6,593   $ 600  
                           
For the Year Ended December 27, 2002
                         
Third party revenues
  $ 3,519,177   $ 1,974,235   $ 1,545,692   $ (750 )
Intercompany revenues
        1,248     27,705     (28,953 )
   

 

 

 

 
Operating revenues
  $ 3,519,177   $ 1,975,483   $ 1,573,397   $ (29,703 )
   

 

 

 

 
EBITDA (4)(5)
  $ (219,096 ) $ (35,598 ) $ (29,807 ) $ (153,691 )
         
 
 
 
Less: Interest expense
    (82,928 )                  
Less: Depreciation and amortization
    (57,825 )                  
   
                   
Loss before income taxes and cumulative effect of a change in accounting principle for goodwill
    (359,849 )                  
Tax provision
    (14,657 )                  
   
                   
Net loss prior to cumulative effect of a change in accounting principle for goodwill
    (374,506 )                  
Cumulative effect on prior years of a change in accounting principle for goodwill
    (150,500 )                  
   
                   
Net loss
  $ (525,006 )                  
   
                   
Capital expenditures
  $ 53,395   $ 9,874   $ 9,350   $ 34,171  
                           

 
(1)
Includes general corporate income and expense, the Company’s captive insurance operation and eliminations.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

17. Business Segments — Data — (Continued)

(2)
Includes in 2004: a gain of $19,200 in E&C on the sales of minority equity interests in special-purpose companies established to develop power plant projects in Europe; a loss of $(3,300) in E&C on the sale of 10% of the Company’s equity interest in a waste-to-energy project in Italy; the reevaluation of contract costs estimates of $58,000: $98,700 in E&C and $(40,700) in Global Power; a charge of $(75,800) in C&F on the revaluation of asbestos insurance assets as a result of an adverse court decision in asbestos coverage allocation litigation; a net gain of $15,200 in C&F on the settlement of coverage litigation with certain asbestos insurance carriers; restructuring and credit agreement costs of $(17,200) in C&F; a net charge of $(175,100) in C&F recorded in conjunction with the equity-for-debt exchange; and charges for severance cost of $(5,700): $(2,900) in E&C, $(1,900) in Global Power and $(900) in C&F.
(3)
Includes in 2003: an impairment loss of $(15,100) in C&F on the anticipated sale of domestic corporate office building; a gain of $16,700 in E&C on the sale of Foster Wheeler Environmental Corporation; a gain of $4,300 in Global Power on sale of waste-to-energy plant; the reevaluation of project claim estimates and contract cost estimates of $(30,800): $(33,900) in E&C and $3,100 in Global Power; a provision for asbestos claims of $(68,100) in C&F; restructuring and credit agreement costs of $(42,600) in C&F and $(1,000) in E&C; and charges for severance cost of $(15,900): $(6,600) in E&C, $(6,700) in Global Power and $(2,600) in C&F.
(4)
Includes in 2002: a loss recognized in anticipation of sales of assets of $(54,500) in Global Power; reevaluation of project claim estimates and contract cost estimates of $(216,700): $(121,650) in E&C, $(86,450) in Global Power and $(8,600) in C&F; a provision of $(26,200) in C&F for asbestos claims; a provision of $(18,700) in Global Power for a domestic plant impairment; restructuring and credit agreement costs of $(37,100) in C&F; and charges for severance cost of $(7,700): $(500) in E&C, $(4,300) in Global Power and $(2,900) in C&F.
(5)
Excludes the cumulative effect in 2002 of change in accounting principle related to goodwill of $(48,700) in E&C and $(101,800) in Global Power.

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

17. Business Segments — Data — (Continued)

    For the Year Ended  
   
 
Equity earnings in unconsolidated subsidiaries were as follows:
  December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Engineering and Construction Group
  $ 16,885   $ 12,911   $ 9,443  
Global Power Group
    9,041     7,950     6,414  
Corporate and Financial Services
    (316 )   (407 )    
   

 

 

 
Total
  $      25,610   $      20,454   $      15,857  
   

 

 

 
                     
    As of  
   
 
Investments and advances in unconsolidated subsidiaries were as follows:
  December 31,
2004
  December 26,
2003
 
   

 

 
Engineering and Construction Group
  $ 93,318   $ 73,656  
Global Power Group
    61,410     65,274  
Corporate and Financial Services
    3,596     3,629  
   

 

 
Total
  $    158,324   $    142,559  
   

 

 
               
    For the Year Ended  
   
 
Geographic concentration of operating revenues:
  December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
United States
  $ 525,614   $ 976,818   $ 1,522,135  
Europe
    1,900,889     2,491,680     1,638,938  
Canada
    35,895     67,459     135,399  
Asia
    165,416     173,946     206,113  
South America
    38,630     14,549     46,295  
Corporate and Financial Services, including eliminations
    (5,120 )   (637 )   (29,703 )
   

 

 

 
Total
  $ 2,661,324   $ 3,723,815   $ 3,519,177  
   

 

 

 
                     
    As of  
   
 
Long-lived assets:
  December 31,
2004
  December 26,
2003
 
   

 

 
United States
  $ 245,985   $ 258,261  
Europe
    188,810     213,961  
Canada
    887     1,255  
Asia
    23,012     23,058  
South America
    60,582     62,023  
Corporate and Financial Services, including eliminations
    40,855     16,305  
   

 

 
Total
  $    560,131   $    574,863  
   

 

 

Revenues and long-lived assets are based on the country in which the contracting subsidiary is located.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

17. Business Segments — Data — (Continued)

Operating revenues by industry segment were as follows:

    For the Year Ended  
   
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Power
  $ 1,164,672   $ 1,731,339   $ 1,647,135  
Oil and gas/refinery
    990,209     1,254,052     922,267  
Pharmaceutical
    335,363     300,507     404,825  
Chemical
    171,091     204,738     156,606  
Environmental*
    78,891     124,724     353,981  
Power production
    112,526     167,594     130,843  
Eliminations and other
    (191,428 )   (59,139 )   (96,480 )
   

 

 

 
Total Operating Revenues
  $ 2,661,324   $ 3,723,815   $ 3,519,177  
   

 

 

 
                     

 
*
The decline in operating revenues in the environmental industry segment resulted from the sale of certain assets of Environmental on March 7, 2003. The operating revenues in this segment from Environmental for 2004, 2003 and 2002 were $22,800, $68,100 and $303,700, respectively.

18. Sale of Certain Business Assets

In 2002, the Company recorded losses of $35,500 in anticipation of a sale of its Hudson Falls waste-to-energy facility. This facility was sold in October 2003. A loss of $19,000 was also recorded in 2002 on the Charleston waste-to-energy facility. This facility was sold in October 2002. These losses were recorded in other deductions on the consolidated statement of operations and comprehensive loss.

During the third quarter of 2002, management of the Global Power Group approved a plan to convert the use of its domestic manufacturing facility to focus on the after-market service business and wind down the facility’s fabrication of new power generation equipment due to cost competitive considerations. The plan was subject to discussions with the local labor unions. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the facility was tested for impairment using estimated future cash flows based on the revised use of the facility. The review indicated impairment in the facility’s carrying value of $13,400. The Company recorded the impairment loss in the third quarter of 2002 and the impairment is reflected in the cost of operating revenues as depreciation in the accompanying consolidated statement of operations and comprehensive loss. During the fourth quarter of 2002, the Company decided to mothball the facility. Additional charges of $5,300 were recorded in December 2002 and the facility has ceased operations.

On March 7, 2003, the Company sold certain assets of its wholly owned subsidiary, Foster Wheeler Environmental Corporation, for sales proceeds then approximating $72,000. The Company recognized a gain of $15,300 on the sale, which was recorded in other income in the first quarter of 2003. The Company also retained approximately $8,000 of cash on hand at the time of the asset sale. The sales proceeds were subject to adjustment based on a net worth calculation to be finalized subsequent to the sale. During the third quarter 2003, the Company and the buyer agreed on a final net worth calculation that resulted in the Company returning $4,500 of the sales proceeds to the buyer over a six-month time period. A total of $3,000 was returned by year-end 2003 and $1,500 was paid in February 2004. The net worth agreement had no impact on the pretax gain previously disclosed. With the payment in February, all transactions related to the sale have been concluded.

On March 31, 2003, the Company sold its interest in a corporate office building for net proceeds of approximately $7,900, which approximated the value of the Company’s investment. With the completion of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

18. Sale of Certain Business Assets — (Continued)

this transaction, $1,445 of the net proceeds was used to prepay principal outstanding under the Senior Credit Facility in accordance with the terms of the facility as described in Note 9.

In 2004, the Company sold a domestic corporate office building for net cash proceeds of approximately $16,400, which approximated carrying value. Of this amount, 50% was prepaid to the Senior Credit Facility’s lenders in the second quarter of 2004. The Company previously recorded an impairment loss of $15,100 on this building in 2003 in anticipation of a sale, in accordance with SFAS No. 144. The loss was recorded in other deductions on the consolidated statement of operations and comprehensive loss. The carrying value of the building was included in land, buildings and equipment on the consolidated statement of financial position as of December 26, 2003.

In 2004, the Company sold minority equity interests in special-purpose companies established to develop power plant projects in Europe. The Company recorded an aggregate gain on the sales of $19,200 in 2004, which was recorded in other income on the consolidated statement of operations and comprehensive loss.

In 2004, the Company also entered into a binding agreement to sell 10% of its equity interest in a waste-to-energy project in Italy. The Company recorded a loss on the sale of $3,300 in 2004, which was recorded in other income on the consolidated statement of operations and comprehensive loss.

19. Operating Leases

The Company and certain of its subsidiaries are obligated under operating lease agreements primarily for office space. Rental expense for these leases total approximately $34,048 in 2004, $34,117 in 2003 and $37,465 in 2002. Future minimum rental commitments on non-cancelable leases are as follows:

Fiscal year:
       
2005
  $ 33,132  
2006
    27,540  
2007
    23,439  
2008
    21,147  
2009
    20,622  
Thereafter
    240,698  
   

 
    $ 366,578  
   

 

The Company entered into sale/leaseback transactions for an office building in Spain in 2000 and an office building in the U.K. in 1999. In connection with these transactions, the Company recorded deferred gains, which are being amortized to income over the term of the respective leases. The amortization was $4,135, $3,622 and $3,197, for the years ended December 31, 2004, December 26, 2003 and December 27, 2002, respectively. As of December 31, 2004 and December 26, 2003, the balance of the deferred gains was $76,383 and $74,151, respectively, and is included in other long-term liabilities on the accompanying consolidated statement of financial position. The year-over-year increase in the deferred gain balance was primarily due to a change in foreign currency translation rates.

20. Litigation and Uncertainties

     Asbestos

Some of the Company’s U.S. and U.K. subsidiaries are defendants in numerous asbestos-related lawsuits and out-of-court informal claims pending in the United States and United Kingdom. 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’s subsidiaries during the 1970s and prior.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

20. Litigation and Uncertainties — (Continued)

          United States

A summary of U.S. claim activity for the three years ended December 31, 2004 is as follows:

    Number of Claims  
   
 
    2004   2003   2002  
   

 

 

 
Balance at beginning of year
    170,860     139,800     110,700  
New claims
    17,870     48,260     45,200  
Claims resolved
    (20,970 )   (17,200 )   (16,100 )
   

 

 

 
Balance at end of year
    167,760 *   170,860 *   139,800  
   

 

 

 
                     

 
*
Includes claims on inactive court dockets of 22,300 and 24,500 at year-end 2004 and year-end 2003, respectively.

The overall average combined indemnity and defense cost per closed claim since 1993 was approximately $2.0. In view of the many uncertainties associated with asbestos bodily injury claims, the Company believes that the average cost will increase in the future.

The amount spent on asbestos litigation defense and case resolution, substantially all of which was reimbursed from insurance coverage, was $100,200 in 2004, $73,600 in 2003 and $57,200 in 2002. The payments in 2004 were funded from settlements with insurance companies, as discussed below.

At December 31, 2004, the Company has recorded total liabilities of $480,000 comprised of an estimated liability relating to open (outstanding) claims of $257,000 and an estimated liability relating to future unasserted claims of $223,000. Of the total, $75,000 is recorded in accrued expenses and $405,000 is recorded in asbestos-related liability on the consolidated statement of financial position. These estimates are based upon the following information and/or assumptions: number of open claims; forecasted number of future claims; estimated average cost per claim by disease type (i.e., mesothelioma vs. non-mesothelioma); and the breakdown of known and future claims into disease type (i.e., mesothelioma vs. non-mesothelioma). Claims that have not been settled and are six or more years old are considered abandoned and are no longer valued in the estimated liability. There were approximately 9,100 such cases at December 31, 2004. The total estimated liability includes both the estimate of forecasted indemnity amounts and forecasted defense expenses. Total estimated defense costs and indemnity payments are estimated to be incurred through the year 2019, during which period new claims are expected to decline from year to year. Recently received claims also suggest that the percentage of claims to be closed without payment of indemnity costs should increase as claims are resolved during the next few years. The Company believes that it is likely that there will be new claims filed after 2019, but in light of uncertainties inherent in long-term forecasts, the Company does not believe that it can reasonably estimate defense and/or indemnity costs, which might be incurred after 2019. Historically, defense costs have represented approximately 21% of total defense and indemnity costs. Through December 31, 2004, total indemnity costs paid, prior to insurance recoveries, were approximately $443,700 and total defense costs paid were approximately $119,900.

As of December 31, 2004, the Company has recorded assets of $385,500 relating to actual and probable insurance recoveries, of which $95,000 is recorded in accounts and notes receivables, and $290,500 is recorded as asbestos-related insurance recovery receivable on the consolidated statement of financial position. The asset includes an estimate of recoveries from insurers based upon assumptions relating to cost allocation and resolution of pending legal proceedings with certain insurers, as well as recoveries under settlements with other insurers.

As of December 31, 2004, $165,200 was contested by the subsidiaries’ insurers in ongoing litigation. The litigation relates to the proper allocation of the coverage liability among the subsidiaries’ various insurers

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

20. Litigation and Uncertainties — (Continued)

and the subsidiaries as self-insurers. The Company believes that any amounts that its subsidiaries might be allocated as self-insurer would be immaterial.

The Company’s subsidiaries have entered into several settlement agreements calling for insurers to make lump-sum payments, as well as payments over time, for use by the subsidiaries to fund asbestos-related indemnity and defense costs and, in certain cases, for reimbursement for a portion of out-of-pocket costs previously incurred. The Company intends to negotiate additional settlements in order to minimize the amount of future costs the Company will be required to fund out of working capital.

The Company projects that it will not be required to fund any asbestos liabilities from its cash flow before 2010, although it may be required to fund a portion of such liabilities from its own cash thereafter. This forecast assumes that the Company will be able to successfully resolve certain outstanding insurance coverage issues. An adverse outcome in the insurance litigation on these coverage issues could materially limit the Company’s insurance recoveries. In this regard, on January 10, 2005, a New York state trial court entered an order finding that New York, rather than New Jersey, law applies in the litigation described above regarding the allocation of liability for asbestos-related personal injury claims among the Foster Wheeler entities and their various insurers. Since the inception of this litigation, the Company has calculated estimated insurance recoveries applying New Jersey law. However, the application of New York, rather than New Jersey, law would result in the Company’s subsidiaries realizing lower insurance recoveries. Thus, as a result of this decision, the Company recorded a charge to earnings in the fourth quarter of 2004 of approximately $76,000 and reduced the year-end carrying value of its probable insurance recoveries by a similar amount. Unless this decision is reversed on appeal, the Company expects that it will be required to fund a portion of its asbestos liabilities from its own cash beginning in 2010. The amount and timing of these funding requirements will be dependent upon, among other things, litigated or negotiated resolution of the various disputes between the Company and the insurers with whom it has not yet settled. On February 16, 2005, the Company’s subsidiaries filed separate motions seeking (i) the re-argument of this decision and (ii) an appeal of this decision to a higher court. There can be no assurances as to the timing or the outcome of these motions.

In addition, even if these coverage issues are resolved in a manner favorable to the Company, the Company may not be able to collect all of the amounts due under its insurance policies. The Company’s recoveries will be limited by insolvencies among its insurers. The Company is aware of at least two of its significant insurers which are currently insolvent. Other insurers may become insolvent in the future and the Company’s insurers may also fail to reimburse amounts owed to the Company on a timely basis. If the Company does not receive timely payment from its insurers, it may be unable to make required payments under settlement agreements with asbestos plaintiffs or to fund amounts required to be posted with the court in order to appeal trial judgments. If the Company is unable to file such appeals, the Company’s subsidiaries may be ordered to pay large damage awards arising from adverse jury verdicts, and such awards may exceed available cash. Any failure to realize expected insurance recoveries, and any delays in receiving from its insurers amounts owed to the subsidiaries, will reduce cash flow and adversely affect liquidity and could have a material adverse effect on the Company’s financial condition.

The pending litigation and negotiations with other insurers is continuing.

It should be noted that the estimate of the assets and liabilities related to asbestos claims and recoveries is subject to a number of uncertainties that may result in significant changes in the current estimates. Among these are uncertainties as to the ultimate number of claims filed, the amounts of claim costs, the impact of bankruptcies of other companies with asbestos claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, as well as potential legislative changes. Increases in the number of claims filed or costs to resolve those claims will cause the Company to increase further the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

20. Litigation and Uncertainties — (Continued)

estimates of the costs associated with asbestos claims and could have a material adverse effect on the business, financial condition, results of operations, and cash flows.

          United Kingdom

Subsidiaries of the Company in the U.K. have also received claims alleging personal injury arising from exposure to asbestos. To date 446 claims have been brought against the U.K. subsidiaries of which 255 remain open at December 31, 2004. None of the settled claims has resulted in material costs to the Company.

At December 31, 2004 the Company recorded the estimated U.S. dollar equivalent for the total U.K. asbestos liabilities of $44,300. Of the total, $1,900 is recorded in accrued expenses and $42,400 is recorded in asbestos-related liability on the consolidated statement of financial position. The estimated U.S. dollar equivalent liability for open (outstanding) U.K. asbestos claims is $5,800 and the estimated liability for future unasserted U.K. asbestos claims is $38,500. An asset in an equal amount was recorded for the expected U.K. asbestos- related insurance recoveries, of which $1,900 is recorded in accounts and notes receivables, and $42,400 is recorded as asbestos-related insurance recovery receivable on the consolidated statement of financial position.

     Project Claims

In the ordinary course of business, the Company and its subsidiaries are parties to litigation involving clients and subcontractors arising out of project contracts. Such litigation includes claims and counterclaims by the Company for additional costs incurred in excess of current contract provisions, as well as for back charges for alleged breaches of warranty and other contract commitments. If the Company were found to be liable for any of the claims/counterclaims against it, the Company would have to incur a write-down or charge against earnings to the extent a reserve has not been established for the matter in its accounts. Amounts ultimately realized on claims/counterclaims by the Company could differ materially from the balances included in the Company’s financial statements, resulting in a charge against earnings to the extent profit has already been accrued on a project contract. Such charges could have a material adverse impact on the Company’s liquidity and financial condition. The Company believes, after consultation with counsel, that such litigation should not have a material adverse effect upon the Company’s financial position or liquidity, after giving effect to the provisions already recorded.

In addition to the matters described above, an arbitration has been commenced against the Company arising out of a compact circulating fluidized-bed boiler that the Company engineered, supplied and erected for a client in Asia. In addition to claims for damages for breach of contract, the client is seeking to rescind the contract based upon alleged material misrepresentations by the Company. If such relief were granted, the Company could be compelled to reimburse the client for the purchase price paid (approximately $25,700), in addition to other damages, which have not yet been quantified. The Company is vigorously defending the case and has counterclaimed for unpaid receivables (approximating $5,200), plus interest, for various breaches and non-performance by the client. (Due to its age, a reserve for the full amount of the receivable was taken prior to the arbitration.) The case is in the initial stages of discovery and a final award is not expected until 2007. Based upon the Company’s investigation and the proceedings to date, there appear to be valid defenses to the claim. However, it is premature to predict the outcome of this proceeding.

The Company has been notified of a claim by its client with respect to a thermal electric power plant in South America that the Company designed, supplied and erected as a member of a consortium with other parties. The plant’s concrete foundations have experienced cracking, allegedly due to out-of-specification materials used in the concrete poured by the consortium’s subcontractor. The client has adopted a plan to repair the foundations and is seeking reimbursement of its costs (approximating $11,000) from the consortium. Additional damages could be alleged if the matter proceeds to an adversary proceeding. The

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(in thousands of dollars)

20. Litigation and Uncertainties — (Continued)

Company is investigating the claim, as well as any rights that it may have to seek reimbursement for the damages from third parties. Valid legal defenses to the claim appear to exist. However, it is premature to predict the outcome of this matter.

     Camden County Waste-to-Energy Project

One of the Company’s project subsidiaries, Camden County Energy Recovery Associates, LP (“CCERA”), owns and operates a waste-to-energy facility in Camden County, New Jersey (the “Project”). In 1997, the United States Supreme Court effectively invalidated New Jersey’s long-standing municipal solid waste flow rules and regulations, eliminating the guaranteed supply of municipal solid waste to the Project with its corresponding tipping fee revenue. As a result, tipping fees have been reduced to market rate in order to provide a steady supply of fuel to the Project. Since the ruling, those market-based revenues have not been, and are not expected to be, sufficient to service the debt on outstanding bonds, which were issued by the Pollution Control Finance Authority of Camden County (“PCFA”) to finance the construction of the Project and to acquire a landfill for Camden County’s use.

In 1998, the CCERA filed suit against the PCFA and other parties seeking, among other things, to void the applicable contracts and agreements governing the Project (Camden County Energy Recovery Assoc. v. N.J. Department of Environmental Protection, et al., Superior Court of New Jersey, Mercer County, L-268-98). Since 1999, the State of New Jersey has provided subsidies sufficient to ensure the payment of each of the Project’s debt service payments as they became due. The bonds outstanding on the Camden Project were issued by the PCFA, not the Company or CCERA, and the bonds are not guaranteed by the Company or CCERA. Pursuant to the loan agreement between PCFA and CCERA, proceeds from the bonds were used to finance the construction of the facility and accordingly these proceeds were recorded as debt on CCERA’s balance sheet and therefore are included in the Company’s consolidated balance sheet. CCERA’s obligation to service the debt obtained pursuant to the loan agreement is limited to depositing all tipping fees and electric revenues received with the trustee of the PCFA bonds. The trustee is required to pay CCERA its service fees prior to servicing PCFA bonds. CCERA has no further debt repayment obligations under the loan agreement with the PCFA. In the litigation, the defendants have asserted, among other things, that an equitable portion of the outstanding debt on the Project should be allocated to CCERA even though CCERA did not guarantee the bonds. At this time, management cannot determine the ultimate outcome of the foregoing and the potential effects on CCERA and the Project. If the State were to fail to subsidize the debt service, and there were to be a default on a debt service payment, the bondholders might proceed to attempt to exercise their remedies, by among other things, seizing the collateral securing the bonds. The Company does not believe this collateral includes CCERA’s plant.

     Long-Term Government Contract

The Company retained a long-term contract with a government agency in connection with the Foster Wheeler Environmental Corporation sale. The contract is scheduled to be completed in four phases. The first phase was for the initial design, permitting and licensing of a spent fuel facility. The first phase of this project was profitable.

The second phase of the contract, which is currently being executed, is billed on a cost-plus-fee basis and was expected to conclude in 2004. In this phase, the Company must license the facility with the NRC, respond to any questions regarding the initial design included in phase one and complete final design. Technical specification and detailed guidance from the government agency regarding government agency-directed changes to the project scope remain outstanding. Resolution of the outstanding issues will be required before the second phase of the contract can be completed.

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(in thousands of dollars)

20. Litigation and Uncertainties — (Continued)

Phase three is for the construction, start-up and testing of the facility for a fixed contractual price of $114,000, subject to escalation. The actual commencement of this phase will be delayed as a result of the significant delay in the issuance of the NRC license for the facility which was received on November 30, 2004. This delay will also result in substantial additional facility costs. The third phase would begin with the purchase of long-lead items followed by the construction activities. Construction is expected to last two years and requires that a subsidiary of the Company fund the construction cost. Foster Wheeler USA Corporation, the parent company of Foster Wheeler Environmental Corporation, provided a performance guarantee on the project. In addition, a surety bond for the full contract price is required. The cost of the facility is expected to be recovered in the first nine months of operations under phase four, during which a subsidiary of the Company will operate the facility at fixed rates, subject to escalation, for approximately four years. The Company and the government agency have engaged in discussions about possibly restructuring or terminating subsequent phases of the contract. If the project were to proceed, the Company intends to seek third-party financing to fund the majority of the construction costs, but there can be no assurance that the Company will secure such financing on acceptable terms, or at all. There also can be no assurance that the Company will be able to obtain the required surety bond. If the Company cannot successfully restructure the contract and cannot obtain third-party financing or the required surety bond, the Company’s ability to perform its obligations under the contract is unlikely. This could have a material adverse effect on the Company’s financial condition, results of operations, and cash flow. No claims have been raised by the government agency against the Company. The ultimate potential liability to the Company would arise in the event that the government agency terminates the contract (for example, due to the Company’s inability to continue with the contract) and re-bids the contract under its exact terms and the resulting cost to the government agency is greater than it would have been under the existing terms with the Company. The Company does not believe a claim is probable and is unable to estimate the possible loss that could occur as a result of any claims. Additionally, the Company believes that it has a variety of potential legal defenses should the government agency decide to pursue any such action.

     Environmental Matters

Under U.S. federal statutes, such as the Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”), the Clean Water Act and the Clean Air Act, 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 in excess of those for which reserves have been established.

The Company also may receive claims, pursuant to indemnity obligations from owners of recently sold facilities, which may require the Company to incur costs for investigation and/or remediation. Based on the

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(in thousands of dollars)

20. Litigation and Uncertainties — (Continued)

available information, the Company does not believe that such costs will be materially in excess of those reserves which it has established. No assurance can be provided that the Company will not discover environmental conditions at its currently owned or operated properties, or that additional claims will not be made with respect to formerly owned properties, requiring the Company to incur material expenditures to investigate and/or remediate such conditions.

The Company 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 off-site facilities as to which it has received a notice of potential liability will exceed $500 in the aggregate.

In February 1988, one of the Company’s subsidiaries, Foster Wheeler Energy Corporation (“FWEC”), entered into a Consent Agreement and Order (“Order”) with the United States Environmental Protection Agency (“USEPA”) and the Pennsylvania Department of Environmental Protection (“PADEP”) regarding its former manufacturing facility in Mountaintop, Pennsylvania. The Order essentially required FWEC to investigate and remediate as necessary contaminants, including trichloroethylene (“TCE”), in the soil and groundwater at the facility. Pursuant to the Order, FWEC in 1993 installed a “pump and treat” system to remove TCE from the groundwater. It is not possible at the present time to predict how long FWEC will be required to operate and maintain the system. The annual cost of operating and maintaining the system has not been material.

In September 2004, FWEC sampled the domestic water supply of approximately 16 residences in Mountaintop, and it received validated testing data regarding that sampling in October 2004. The residences are located approximately one mile to the southwest of the historic source of the TCE at FWEC’s former facility, and it is believed the residences use private wells for domestic water. The results of this sampling indicated that TCE was present in the water at several of the residences at levels in excess of Safe Drinking Water Act standards. Since the initial round of testing in September 2004, FWEC has tested more wells. As of February 2005, the number of wells in the area containing TCE in excess of the standards is approximately 30, and FWEC believes the boundaries of the affected area have been delineated.

The source of the TCE in the wells has not yet been determined. FWEC is working closely with the appropriate regulatory authorities in responding to this situation. FWEC first provided the affected residences with temporary replacement water and then arranged to have filters installed on the residences’ water system to remove the TCE. FWEC has also arranged to have the filters periodically tested and maintained. The cost of the foregoing is not expected to be material. If the source of the TCE is determined to be from a third-party, FWEC will evaluate its options regarding the recovery of the costs it has incurred, which options could include seeking to recover those costs from those determined to be the source. The agencies have incurred over $500 of costs responding to the situation, which they may seek to recover from those determined to be the source(s) of the TCE. The Company and the agencies are reviewing the technical and economic feasibility of extending a public water line that exists at one end of the effected area to the other end of the effected area. Given the preliminary stage of the investigations, FWEC is unable to estimate the potential financial impact of the foregoing on FWEC.

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 as these are subject to change as events evolve and as additional information becomes available during the administration and litigation process. Increases in the number of claims filed or costs to

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(in thousands of dollars)

20. Litigation and Uncertainties — (Continued)

resolve those claims will cause the Company to increase further the estimates of the costs associated with such claims and could have a material adverse effect on the business, financial condition, results of operations, and cash flows.

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 the financial position, results of operations or cash flows in excess of amounts previously provided in the accounts.

21. Valuation and Qualifying Accounts

    2004  
   
 
    Balance at
Beginning
of Year
  Additions
Charged to
Costs and
Expenses
  Additions
Charged to
Other
Accounts
  Deductions   Balance at
the End
of Year
 
   

 

 

 

 

 
Description
                               
Allowance for insurance claims receivable
  $ 96,969   $ 57,791   $   $ (60,474 ) $ 94,286  
   

 

 

 

 

 
Allowance for doubtful accounts (1)
  $ 37,406   $ 14,713   $   3,053   $ (31,973 ) $ 23,199  
   

 

 

 

 

 
Tax valuation allowance
  $ 534,790   $   31,540   $   $ (331,898 ) $ 234,432  
   

 

 

 

 

 
                                 
    2003  
   
 
    Balance at
Beginning
of Year
  Additions
Charged to
Costs and
Expenses
  Additions
Charged to
Other
Accounts
  Deductions   Balance at
the End
of Year
 
   

 

 

 

 

 
Description
                               
Allowance for insurance claims receivable
  $ 37,877   $ 68,081   $   $ (8,989 ) $ 96,969  
   

 

 

 

 

 
Allowance for doubtful accounts (1)
  $ 73,048   $ 26,261   $   1,457   $   (63,360 ) $ 37,406  
   

 

 

 

 

 
Tax valuation allowance
  $ 444,427   $   64,074   $   $ 26,289   $ 534,790  
   

 

 

 

 

 

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FOSTER WHEELER LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

21. Valuation and Qualifying Accounts — (Continued)

    2002  
   
 
    Balance at
Beginning
of Year
  Additions
Charged to
Costs and
Expenses
  Additions
Charged to
Other
Accounts
  Deductions   Balance at
the End
of Year
 
   

 

 

 

 

 
Description
                               
Allowance for insurance claims receivable
  $ 18,836   $ 26,200   $   $ (7,159 ) $ 37,877  
   

 

 

 

 

 
Allowance for doubtful accounts (1)
  $ 2,988   $ 19,608   $ 56,451   $     (5,999 ) $ 73,048  
   

 

 

 

 

 
Tax valuation allowance
  $ 268,851   $ 162,580   $   $ 12,996   $ 444,427  
   

 

 

 

 

 
                                 

 
(1)
Provisions for non-payments of customer balances are normally addressed within the overall profit calculation of the contracts and are not specifically covered by allowances for doubtful accounts. As a result the amount considered to be in the receivable qualifying account (allowance for doubtful accounts) does not represent the full allowance.

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2004

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Foster Wheeler Ltd:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income/(loss), of cash flows and of changes in shareholder’s deficit present fairly, in all material respects, the financial position of Foster Wheeler International Holdings, Inc. and Subsidiaries (the “Company”), an indirect, wholly-owned subsidiary of Foster Wheeler Ltd. (the “Parent”), at December 31, 2004 and December 31, 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 and the Parent will continue as a going concern. As discussed in Note 2 to the financial statements, the Parent has incurred significant losses in each of the three years in the period ended December 31, 2004 and has a shareholders’ deficit of $513,283,000 at December 31, 2004. The Parent has substantial debt obligations and during 2004 it was required to obtain an additional amendment to its senior credit facility to provide covenant relief by modifying certain definitions of financial measures utilized in the calculation of certain financial covenants. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Parent’s ability to return to profitability, to complete planned restructuring activities, to generate cash flows from operations and collections of receivables to fund its operations, including obligations resulting from asbestos claims, as well as the maintenance of credit facilities and bonding capacity adequate to conduct business. These matters raise substantial doubt about the Company’s and the Parent’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 30, 2005

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
(in thousands of dollars)

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Revenues:
                   
Operating revenues
  $ 1,611,229   $ 2,082,018   $ 1,593,594  
Cost of operating revenues
    (1,463,463 )   (1,994,210 )   (1,561,074 )
   

 

 

 
Contract Profit
    147,766     87,808     32,520  
                     
Selling, general and administrative expenses
    (109,107 )   (78,963 )   (65,986 )
Interest income (including $3,744 in 2004, $4,816 in 2003 and $6,293 in 2002 with affiliates)
    9,075     8,810     11,278  
Other income
    56,200     41,907     33,812  
Interest expense (including $(3,486) in 2004, $(4,105) in 2003 and $(5,899) in 2002 with affiliates)
    (5,208 )   (4,575 )   (6,686 )
Other deductions
    (15,903 )   (34,772 )   (28,819 )
   

 

 

 
Earnings/(loss) before income taxes
    82,823     20,215     (23,881 )
Provision for income taxes
    (33,806 )   (18,073 )   (6,613 )
   

 

 

 
Net earnings/(loss)
    49,017     2,142     (30,494 )
Other comprehensive income/(loss):
                   
Change in net loss on derivative instruments designated as cash flow hedges (net of taxes of $(279) in 2002)
            517  
Change in accumulated translation adjustment during the year
    36,260     (13,510 )   24,224  
Minimum pension liability adjustment (net of tax (provision)/benefits: $986 in 2004, $(18,886) in 2003 and $73,400 in 2002)
    (1,826 )   44,483     (170,303 )
   

 

 

 
Comprehensive income/(loss)
  $ 83,451   $ 33,115   $ (176,056 )
   

 

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands of dollars, except share data and per share amounts)

    December 31, 2004   December 26, 2003  
   

 

 
ASSETS
             
Current Assets:
             
Cash and cash equivalents
  $ 163,473   $ 178,050  
Accounts and notes receivable:
             
Trade, net
    229,824     214,968  
Other (including $16,249 in 2004 and $18,658 in 2003 with affiliates)
    28,380     45,259  
Intercompany notes
    1,265     564  
Contracts in process
    13,801     28,628  
Inventories
    898     897  
Prepaid, deferred and refundable income taxes
    22,260     30,033  
Prepaid expenses
    7,477     7,466  
   

 

 
Total current assets
    467,378     505,865  
   

 

 
Land, buildings and equipment
    132,355     124,713  
Less accumulated depreciation
    104,861     96,094  
   

 

 
Net book value
    27,494     28,619  
   

 

 
Restricted cash
    45,387     21,123  
Notes and accounts receivable - long-term
    1,535     1,654  
Intercompany notes receivable - long-term
    25,883     25,883  
Investment and advances
    140,912     117,272  
Deferred income taxes
    50,169     56,334  
Asbestos-related insurance recovery receivable
    42,400      
Other assets
    10,373     9,537  
   

 

 
TOTAL ASSETS
  $ 811,531   $ 766,287  
   

 

 
LIABILITIES AND SHAREHOLDER’S DEFICIT
             
Current Liabilities:
             
Current installments on capital lease obligations
  $ 643   $ 440  
Accounts payable (including $30,202 in 2004 and $49,439 in 2003 with affiliates)
    165,546     182,792  
Accrued expenses
    109,320     123,702  
Intercompany notes payable
    6,604     9,891  
Estimated costs to complete long-term contracts
    200,742     257,339  
Advance payments by customers
    64,580     32,380  
Income taxes
    30,220     26,174  
   

 

 
Total current liabilities
    577,655     632,718  
   

 

 
Capital lease obligation
    2,415     983  
Intercompany notes payable - long-term
    129,283     129,283  
Deferred income taxes
    4,900     5,438  
Pension, postretirement and other employee benefits
    64,705     78,210  
Deferred gain
    76,383     74,152  
Asbestos-related liability
    42,400      
Other long-term liabilities and minority interest
    16,140     80  
Commitment and contingencies
             
   

 

 
TOTAL LIABILITIES
    913,881     920,864  
   

 

 
Shareholder’s Deficit:
             
Common stock, no par value, 1,000 shares authorized, 25 shares issued and outstanding
    1     1  
Capitalization of intercompany notes
    (99,964 )   (65,151 )
Paid-in capital
    4,703     4,703  
Retained earnings
    147,013     94,407  
Accumulated other comprehensive loss
    (154,103 )   (188,537 )
   

 

 
TOTAL SHAREHOLDER’S DEFICIT
    (102,350 )   (154,577 )
   

 

 
TOTAL LIABILITIES AND SHAREHOLDER’S DEFICIT
  $ 811,531   $ 766,287  
   

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER’S DEFICIT
(in thousands of dollars)

    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Common Stock
                   
Balance at beginning and end of year
  $ 1   $ 1   $ 1  
   

 

 

 
                     
Capitalization of Intercompany Notes
                   
Balance at beginning of year
    (65,151 )   (10,539 )   10,859  
Current year activity
    (34,813 )   (54,612 )   (21,398 )
   

 

 

 
Balance at end of year
    (99,964 )   (65,151 )   (10,539 )
   

 

 

 
                     
Paid-in Capital
                   
Balance at beginning and end of year
    4,703     4,703     4,703  
   

 

 

 
                     
Retained Earnings
                   
Balance at beginning of year
    94,407     92,265     123,345  
Net earnings/(loss) for the year
    49,017     2,142     (30,494 )
Adjustment for Foster Wheeler Energia S.A. (see Note 3)
    3,589          
Dividends paid to parent
            (586 )
   

 

 

 
Balance at end of year
    147,013     94,407     92,265  
   

 

 

 
                     
Accumulated Other Comprehensive Loss
                   
Balance at beginning of year
    (188,537 )   (219,510 )   (73,948 )
Change in net loss on derivative instruments designated as cash flow hedges (net of taxes of $279 in 2002)
            517  
Change in accumulated translation adjustment during the year
    36,260     (13,510 )   24,224  
Minimum pension liability adjustment (net of tax (provision)/ benefits: $986 in 2004, $(18,886) in 2003 and $73,400 in 2002)
    (1,826 )   44,483     (170,303 )
   

 

 

 
Balance at end of year
    (154,103 )   (188,537 )   (219,510 )
   

 

 

 
                     
Total Shareholder’s Deficit
  $ (102,350 ) $ (154,577 ) $ (133,080 )
   

 

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)

    For the Year Ended  
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
CASH FLOWS FROM OPERATING ACTIVITIES
                   
Net earnings/(loss)
  $ 49,017   $ 2,142   $ (30,494 )
Adjustments to reconcile net earnings/(loss) to cash flows from operating activities:
                   
Depreciation and amortization
    8,389     9,294     9,404  
Provision for losses on accounts receivable
    6,109     7,631     19,019  
Deferred tax
    13,447     18,515     561  
Net loss/(gain) on asset sales
    13     (28 )   (3,260 )
Net gain on investments
    (15,915 )        
Equity earnings, net of dividends
    (11,292 )   (12,911 )   (9,443 )
Other noncash items
    29     (1,030 )   (6,508 )
Changes in assets and liabilities:
Receivables
    12,086     18,606     33,617  
Contracts in process and inventories
    16,516     31,745     18,095  
Accounts payable and accrued expenses
    (15,234 )   (3,935 )   4,221  
Estimated costs to complete long-term contracts
    (61,226 )   45,233     42,326  
Advance payments by customers
    31,571     (36,905 )   29,376  
Income taxes
    10,700     (250 )   (2,794 )
Other assets and liabilities
    (10,655 )   6,196     (4,318 )
   

 

 

 
Net cash provided by operating activities
    33,555     84,303     99,855  
   

 

 

 
CASH FLOWS FROM INVESTING ACTIVITIES
                   
Change in restricted cash
    (22,037 )   11,214     (30,169 )
Capital expenditures
    (2,645 )   (5,586 )   (6,716 )
Proceeds from sale of properties
    259     375     526  
Decrease/(increase) in investments and advances
    359     (1,391 )   (6,007 )
Proceeds from sale of Foster Wheeler Energia S.A. (see Note 3)
    3,589          
Decrease in short-term investments
        41     6,280  
   

 

 

 
Net cash (used)/provided by investing activities
    (20,475 )   4,653     (36,086 )
   

 

 

 
CASH FLOWS FROM FINANCING ACTIVITIES
                   
Capitalization of intercompany notes
    (34,813 )   (54,611 )   (21,398 )
Dividends paid to parent
            (586 )
Change in notes with affiliates
    3,718     (7,115 )   15,093  
Payments of long-term debt
    (14 )   (5 )   (619 )
Payments of capital lease obigations
    (521 )        
Decrease in bank loans
        (13,739 )   (2,133 )
   

 

 

 
Net cash used by financing activities
    (31,630 )   (75,470 )   (9,643 )
   

 

 

 
Effect of exchange rate changes on cash and cash equivalents
    3,973     9,532     4,744  
   

 

 

 
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    (14,577 )   23,018     58,870  
Cash and cash equivalents at beginning of year
    178,050     155,032     96,162  
   

 

 

 
CASH AND CASH EQUIVALENTS AT END OF YEAR
  $ 163,473   $ 178,050   $ 155,032  
   

 

 

 

NONCASH INVESTING AND FINANCING ACTIVITIES: In 2004, land, building and equipment increased by $2.7 million with a corresponding increase to capital lease obligations.

See notes to consolidated financial statements.

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)

1.   Nature of Operations and Relationship to Foster Wheeler Ltd. and Subsidiaries

Foster Wheeler International Holdings, Inc. and Subsidiaries (the “Company”) is a wholly owned subsidiary of Foster Wheeler LLC (“FWLLC”), which is an indirectly wholly owned subsidiary of Foster Wheeler Ltd. The principal operations of the Company are to design, engineer, and construct petroleum processing facilities (upstream and downstream), chemical, petrochemical, pharmaceutical and natural gas liquefaction (LNG) facilities, and related infrastructure, including power generation and distribution facilities, production terminals and pollution control equipment. The Company operates primarily outside of the United States with operations in the United Kingdom, Italy, France, Turkey, Spain, Singapore, Thailand, Malaysia, South Africa, and Canada.

The Company has transactions and relationships with Foster Wheeler Ltd. and its affiliates. The financial position, results of operations, and the cash flows of the Company have been impacted by these transactions and relationships as discussed in Notes 2, 3, 9, 18 and 19.

2.   Liquidity and Going Concern

The accompanying consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s ability to continue as a going concern is largely dependent on Foster Wheeler Ltd.’s ability to continue as a going concern. Foster Wheeler Ltd. and the Company may not, however, be able to continue as a going concern. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, Foster Wheeler Ltd.’s and the Company’s ability to operate profitably, to generate cash flows from operations, collections of receivables to fund its obligations, including those resulting from asbestos-related liabilities, as well as Foster Wheeler Ltd.’s ability to maintain credit facilities and bonding capacity adequate to conduct its business. Foster Wheeler Ltd. incurred significant operating losses in each of the years in the three-year period ended December 31, 2004, and has a shareholders’ deficit of $513,283 as of December 31, 2004.

In 2004, Foster Wheeler Ltd. consummated an equity-for-debt exchange in which it issued common shares, preferred shares, warrants to purchase common shares and new notes in exchange for certain of its outstanding debt securities and trust securities. The exchange offer reduced Foster Wheeler Ltd.’s existing debt (excluding a reduction in deferred accrued interest of $31,128) by $437,041, improved the shareholders’ deficit by $448,136 and when combined with the proceeds from the issuance of the new notes that were used to repay amounts that were outstanding under a previous Senior Credit Facility, eliminated substantially all material scheduled corporate debt maturities prior to 2011. After completing the exchange, Foster Wheeler Ltd. had outstanding debt obligations of approximately $570,073 as of December 31, 2004.

In August of 2002, Foster Wheeler Ltd. negotiated a Senior Credit Facility that was comprised of a $71,000 term loan, a $69,000 revolving credit facility and a $149,900 letter of credit facility having an April 30, 2005 maturity date. In connection with the equity-for-debt exchange, Foster Wheeler Ltd. prepaid the term loan and amounts outstanding under the revolving credit facility. Accordingly, there were no borrowings outstanding under the Senior Credit Facility as of December 31, 2004. Letters of credit of $90,018 remained outstanding under the Senior Credit Facility as of December 31, 2004.

In March 2005, the Senior Credit Facility was replaced with a new 5-year $250,000 Senior Credit Agreement. The new Senior Credit Agreement includes a $75,000 sub-limit for borrowings at a rate equal to LIBOR plus a spread. Standby letters of credit issued under the new Senior Credit Agreement will carry a fixed price throughout the life of the facility. The Senior Credit Agreement is collateralized by the assets and/or the stock of certain of Foster Wheeler Ltd.’s domestic subsidiaries and certain of its foreign subsidiaries. Foster Wheeler Ltd. paid up-front fees to the lender of approximately $8,225 in conjunction with the execution of the Senior Credit Agreement. Such fees, paid predominately in the first quarter of 2005, have been deferred and will be amortized to expense over the life of the agreement.

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

2.   Liquidity and Going Concern — (Continued)

Foster Wheeler Ltd. finalized a sale/leaseback arrangement for an office building at its corporate headquarters in the third quarter of 2002. Under this arrangement, Foster Wheeler Ltd. leases the facility for an initial non-cancelable period of 20 years. The long-term capital lease obligation of $45,280 as of December 31, 2004 is included in long-term debt in Foster Wheeler Ltd.’s consolidated balance sheet.

The new Senior Credit Agreement and the sale/leaseback arrangement have quarterly financial covenant compliance requirements. Management’s forecast indicates that Foster Wheeler Ltd. will be in compliance with the financial covenants throughout 2005. The forecast assumes a significant level of new contracts and improved performance on existing contracts. However, there can be no assurance that Foster Wheeler Ltd. will comply with the covenants. If Foster Wheeler Ltd. violates a covenant under the Senior Credit Agreement or the sale/leaseback arrangement, repayment of amounts outstanding under such agreements could be accelerated and the following borrowings outstanding could also be accelerated: the 2011 Senior Notes, the 2005 Senior Notes, the Convertible Subordinated Notes, the Trust Preferred Securities, the Subordinated Robbins Facility Exit Funding Obligations, and certain of the special-purpose project debt facilities. The total amount of Foster Wheeler Ltd. debt that could be accelerated is $463,563 as of December 31, 2004. Foster Wheeler Ltd. would not be able to repay amounts borrowed if the payment dates were accelerated.

Holders of Foster Wheeler Ltd.’s new 2011 Senior Notes have a security interest in the stock, debt and assets of certain of Foster Wheeler Ltd.’s subsidiaries. The 2011 Senior Notes contain incurrence covenants that limit Foster Wheeler Ltd.’s ability to undertake certain actions including incurring debt, making certain payments and investments, granting liens, selling assets and entering into specific intercompany transactions, among others. Management monitors these covenants to ensure Foster Wheeler Ltd. remains in compliance with the indenture.

In connection with the exchange, the holders of Foster Wheeler Ltd.’s 2005 Senior Notes agreed to amend the indenture governing these notes to effectively eliminate the security interest previously held by the notes.

On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provided for up to $45,000 of additional revolving loans available to provide working capital. As of December 31, 2004, the facility remained undrawn. In December 2004, the U.K. subsidiaries gave notice canceling the revolving credit facility effective January 24, 2005.

Since January 15, 2002, Foster Wheeler Ltd. has exercised its right to defer payments on the Trust Preferred Securities. The aggregate liquidation amount of the Trust Preferred Securities at December 31, 2004 was $71,177 after completing the equity-for-debt exchange. The previous Senior Credit Facility required Foster Wheeler Ltd. to defer the payment of the dividends on the Trust Preferred Securities and, accordingly, no dividends were paid during 2004 or 2003. As of December 31, 2004, the amount of dividends deferred plus accrued interest approximates $23,460. Foster Wheeler Ltd. intends to continue to defer payment of the dividends on the Trust Preferred Securities until January 15, 2007 - the full term allowed by the underlying agreement. Once the deferred dividend obligation has been satisfied, Foster Wheeler Ltd. has the right to defer subsequent dividend payments for an additional 20 consecutive quarters. The new Senior Credit Agreement requires the approval of the lenders to make payments on the Trust Preferred Securities to the extent such payments are not contractually required by the underlying Trust Preferred Securities agreements.

Foster Wheeler Ltd.’s European Power subsidiary in Finland is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. Obligations under both facilities are guaranteed by Foster Wheeler Ltd. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

2.   Liquidity and Going Concern — (Continued)

restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio.

One of the performance bond facilities is dedicated to a specific project and, as of December 31, 2004, had performance bonds outstanding equivalent to $24,522 (none of which has been drawn as of such date). Covenants under this facility are tested quarterly. The second facility is a general performance bond facility and, as of December 31, 2004, had performance bonds outstanding in favor of several clients equivalent to $10,114 (none of which has been drawn).

As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of Foster Wheeler Ltd.’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the two performance bond facilities. On August 6, 2004 and August 9, 2004, Foster Wheeler Ltd.’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities.

The waiver for the project-specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum equity ratio levels so long as the performance bonds are outstanding. Foster Wheeler Ltd.’s subsidiary remained below the minimum equity ratio as of December 31, 2004. On March 15, 2005, the bond expired and the banks funded the client and Foster Wheeler Ltd. reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of Foster Wheeler Ltd. to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

The waiver for the general performance bond facility is effective through March 31, 2005. As of that date, approximately $4,900 is forecasted to be outstanding under the facility. Foster Wheeler Ltd. has provided a standby letter of credit to back up the general performance bond facility and intends to do so until such facility can be permanently replaced or the last performance bond issued thereunder has expired. Therefore, Foster Wheeler Ltd. believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio covenant is reflected in Foster Wheeler Ltd.’s liquidity forecasts.

Management closely monitors liquidity and updates its U.S. liquidity forecasts weekly. These forecasts cover, among other analyses, existing cash balances, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, working capital needs and unused credit line availability. Foster Wheeler Ltd.’s cash flow forecasts continue to indicate that sufficient cash will be available to fund Foster Wheeler Ltd.’s U.S. and foreign working capital needs throughout 2005.

As of December 31, 2004, Foster Wheeler Ltd. had cash and cash equivalents, short-term investments, and restricted cash totaling $390,186, compared to $430,170 as of December 26, 2003. Of the $390,186 total at December 31, 2004, $319,612 was held by foreign subsidiaries.

Foster Wheeler Ltd.’s domestic operating entities are cash flow positive. However they do not generate sufficient cash flow to cover the costs related to Foster Wheeler Ltd.’s indebtedness, obligations to fund U.S. pension plans, and corporate overhead expenses. Consequently, Foster Wheeler Ltd. requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs and to service its debt. Foster Wheeler Ltd.’s current 2005 forecast assumes total cash repatriation from its non-U.S. subsidiaries of approximately $107,000 from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends. In 2004 and 2003, Foster Wheeler Ltd. repatriated approximately $77,000 and $100,000, respectively, from its non-U.S. subsidiaries.

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

2.   Liquidity and Going Concern — (Continued)

There can be no assurance that the forecasted foreign cash repatriation will occur, as the non-U.S. subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of Foster Wheeler Ltd.’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. The repatriation of funds may also subject those funds to taxation. As a result of these factors, Foster Wheeler Ltd. may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries in the amount forecasted above.

Commercial operations under a domestic contract retained by Foster Wheeler Ltd. in connection with the sales of assets of the Foster Wheeler Environmental Corporation (“Environmental”), commenced in January 2004. The plant processes low-level nuclear waste for the U.S. Department of Energy (“DOE”). Foster Wheeler Ltd. funded the plant’s construction costs and operates the facility. The majority of Foster Wheeler Ltd.’s invested capital was recovered during the early stages of processing the first stream of waste materials. This project successfully processed all quantities of the first waste stream of materials ahead of schedule and is currently finalizing the processing line for the second waste stream. In 2004, the project generated net cash flow of approximately $53,300. An additional $17,800 of capital recovery is dependent on the initial processing of the second waste stream of materials. This capital recovery is expected in 2005.

Foster Wheeler Ltd.’s inability to operate profitably and to generate cash flows from operations, its reliance on repatriated cash from its foreign subsidiaries to fund its domestic obligations, and its obligations to maintain minimum debt covenants to avoid possible acceleration of its debt, raises substantial doubt about Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern.

3.   Sale of Investment in Foster Wheeler Energia S.A.

In October 2003, pursuant to a Stock Purchase Agreement dated October 10, 2003 (“SPA”), the Company sold its investment in Foster Wheeler Energia S.A., a wholly owned subsidiary of Foster Wheeler Europe Limited, for proceeds of approximately $30,675. The subsidiary was sold to a wholly owned affiliate of Foster Wheeler Ltd. The sales price approximated the carrying value. The Company has reflected this transaction as a reorganization of companies under common control. Accordingly, the 2002 financial statements were revised to eliminate the activity of Foster Wheeler Energia S.A. from the consolidated statements of operations and cash flows. In May 2004, pursuant to the SPA, an additional payment of $3,589 was made to the Company. The payment could not be estimated at the time of purchase, and was therefore not accrued. The payment received by the Company was recorded as a decrease in accumulated deficit in 2004.

4.   Summary of Significant Accounting Policies

Principles of Consolidation — The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of Foster Wheeler International Holdings, Inc. and all significant 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 companies and December 31 for foreign companies. For domestic companies the year 2004 included 53 weeks and the years 2003 and 2002 included 52 weeks.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

4.   Summary of Significant Accounting Policies — (Continued)

that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the periods 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 and contingencies, among others.

Revenue Recognition on Long-term Contracts — Revenues and profits on long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress toward completion is measured using physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress towards completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.

Revenues and profits on cost-reimbursable contracts are recorded as the costs are incurred. The Company includes flow-through costs consisting of materials, equipment and subcontractor costs as revenue on cost-reimbursable contracts when the Company is responsible for the engineering specifications and procurement for such costs.

Contracts in progress are stated at cost, increased for profits recorded on the completed effort or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. Negative balances are presented as “estimated costs to complete long-term contracts.” The Company has numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. However, current estimates may be revised as additional information becomes available. In accordance with the accounting and disclosure requirements of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”) and Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes,” the Company reviews its contracts monthly. As a result of this reevaluation process, in 2004 27 individual projects had final estimated profit revisions exceeding $1,000. These revisions resulted from events such as earning project incentive bonuses or the incurrence or forecasted incurrence of contractual liquidated damages for performance or schedule issues, executing services and purchasing third party materials and equipment at costs differing from previously estimated, and testing of completed facilities which in turn eliminates or incurs completion and warranty-related costs. The net aggregate dollar value of the accrued contract profit resulting from these estimate changes during 2004 amounted to a net increase of $76,500. 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.

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 SOP 81-1. 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. Costs attributable to claims are treated as costs of contract performance as

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

4.   Summary of Significant Accounting Policies — (Continued)

incurred. Such claims are currently in various stages of negotiation, arbitration and other legal proceedings. As of December 31, 2004, the Company had recorded a commercial claims receivable of $544.

Cash and Cash Equivalents — Cash and cash equivalents include liquid short-term investments purchased with original maturities of three months or less. The Company requires a substantial portion of these funds to support their liquidity and working capital needs. Accordingly, these funds may not be readily available for repatriation to its parent.

Restricted Cash — Restricted cash consists of approximately $34,800 at December 31, 2004 that was required to collateralize letters of credit and bank guarantees, and approximately $10,600 of client escrow funds.

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 might not be received within a one-year period. However, in conformity with industry practice, the full amount of accounts receivable, including such amounts withheld, has been included in current assets.

Trade accounts receivable are continually evaluated in accordance with corporate policy. Provisions are established on a project specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues. Customer payment history, trends within the various markets served and general economic trends are also considered when evaluating the necessity of a provision.

Accounts and Notes Receivable Other — Non-trade accounts and notes receivable consist primarily of receivables from affiliated companies of $16,249 at December 31, 2004, and $18,658 at December 26, 2003, foreign refundable value-added tax and accrued interest receivable.

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 as incurred. 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.

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 due to a lack of a controlling financial interest. Investment ownership of less than 20% in affiliates is carried at cost.

Income Taxes — Income tax expense in the Company’s statement of operations has been calculated on a separate company basis for its subsidiaries that file tax returns in their foreign jurisdictions. 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.

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

4.   Summary of Significant Accounting Policies — (Continued)

Foreign Currency — Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at month-end exchange rates and income and expenses and cash flows at monthly weighted-average rates.

    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Cumulative translation adjustment at beginning of year
  $ (62,897 ) $ (49,257 ) $ (73,277 )
Current year foreign currency adjustment
    36,260     (13,640 )   24,020  
   

 

 

 
Cumulative translation adjustment at end of year
  $ (26,637 ) $ (62,897 ) $ (49,257 )
   

 

 

 

For the year ended December 31, 2004, the Company recorded an after-tax net foreign currency transaction loss of $2,560. For the year ended December 31, 2003, the Company recorded an after-tax net foreign currency transaction gain of $4,701, and in the year ended December 31, 2002, recorded after-tax net foreign currency transaction loss of $1,918.

Contracts in Process and Estimated Costs to Complete Long-term Contracts — In accordance with terms of long-term contracts, amounts recorded in contracts in process and estimated costs to complete long-term contracts may not be realized or paid, respectively, within a one-year period. In conformity with industry practice, however, the full amount of contracts in process and estimated costs to complete long-term contracts have been included in current assets and current liabilities, respectively.

Inventories — Inventories, principally materials and supplies, are stated at the lower of cost or market, determined primarily on the average-cost method.

Stock Option Plans — Foster Wheeler Ltd. has fixed option plans which reserve common shares for issuance to executives, key employees, and directors. Employees of the Company participate in these plans. Foster Wheeler Ltd. and the Company have adopted the disclosure-only provision of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148 “Accounting for Stock Based Compensation — Transition and Disclosure.” Foster Wheeler Ltd. and the Company continue to account for stock options granted to employees and directors using the intrinsic value method under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Had compensation costs for the stock-based compensation plans been accounted for using the fair value method of accounting described by SFAS No. 123, the Company’s net earnings/(loss) would have been as follows:

    December 31, 2004   December 26, 2003   December 27, 2002  
   

 

 

 
Net earnings/(loss) — as reported
  $ 49,017   $ 2,142   $ (30,494 )
                     
Deduct: Total stock-based employee compensation expense determined under fair value based method for awards net of taxes of $174 in 2004 and $92 in 2003 and $23 in 2002
    (348 )   (186 )   (46 )
   

 

 

 
Net earnings/(loss) — pro forma
  $ 48,669   $ 1,956   $ (30,540 )
   

 

 

 

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:

    December 31, 2004   December 26, 2003   December 27, 2002  
   

 

 

 
Dividend yield
    0.00 %   0.00 %   0.00 %
Expected volatility
    50.00 %   88.23 %   83.62 %
Risk-free interest rate
    2.99 %   3.22 %   2.90 %
Expected life (years)
    3.0     5.0     5.0  

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

4.   Summary of Significant Accounting Policies — (Continued)

On September 10, 2004, the Board of Directors adopted the 2004 Stock Option Plan (the “2004 Plan”) which reserves 56,421 preferred shares for issuance. The options granted under the 2004 Plan expire up to a maximum of ten years from the date granted. On October 6, 2004, management was issued options under the 2004 Plan to purchase 43,103 preferred shares at an exercise price of $9.378 per common share issuable. Such options expire on October 5, 2007. One third of the options issued to management vest in the fourth quarter of 2005, and the balance vest during the fourth quarter of 2006.

Under Foster Wheeler Ltd.’s 1995 Stock Option Plan approved by that company’s shareholders in April 1995 and amended in April 1999 and May 2002, the total number of shares of common stock that may be granted is 265,000.

These plans provide that shares granted be issued from Foster Wheeler Ltd.’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 of grant.

The Foster Wheeler Ltd. shareholders approved several capital share alterations at the November 29, 2004 meeting. Among them was a one-for-twenty reverse stock split. Please note that all stock option amounts reflect post reverse stock split amounts.

Information as of and for the years ended December 31, 2004, 2003 and 2002 relating to options granted to Company personnel and options available for grant is as follows (presented in actual number of shares):

    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   
 
 
 
    Shares   Weighted
Average
Exercise
Price
  Shares   Weighted
Average
Exercise
Price
  Shares   Weighted
Average
Exercise
Price
 
   

 

 

 

 

 

 
Options outstanding, beginning of year
    69,419   $ 179.08     69,249   $ 180.08     31,785   $ 356.66  
Options exercised
                               
Options granted
    746,475     9.38     857     23.40     37,827     32.80  
Options cancelled or expired
    (888 )   187.69     (687 )   71.49     (363 )   199.60  
   
       
       
       
Options outstanding, end of year
    815,006   $ 23.65     69,419   $ 179.08     69,249   $ 180.08  
   
       
       
       
Option price range at end of year
    $9.38 – $843.75           $23.40 – $843.75           $32.80 – $843.75        
Options available for grant at end of year
    869,273           25,342           22,253        
   
       
       
       
Weighted-average fair value of options granted during the year
  $ 3.30         $ 15.80         $ 22.20        
Options exercisable at end of year
    56,089           40,972           31,322        
Weighted-average price of exercisable options at end of year
  $ 211.54         $ 275.63         $ 358.42        

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

4.   Summary of Significant Accounting Policies — (Continued)

The following table summarizes information about fixed-price stock options outstanding as of December 31, 2004:

    Options Outstanding   Options Exercisable  
   
 
 
Range of Exercise Prices
  Number
Outstanding
at 12/31/2004
  Weighted-
Averaged
Remaining
Contractual Life
  Weighted-
Averaged
Exercise Price
  Number
Exercisable
at 12/31/2004
  Weighted-
Averaged
Exercise Price
 

 

 

 

 

 

 
$9.38
    746,475     9.8 years   $ 9.38       $  
$23.40 to $32.80
    38,184     7.8 years     32.59     25,742     32.49  
$113.75
    7,475     6.0 years     113.75     7,475     113.75  
$180.00
    2,700     5.0 years     180.00     2,700     180.00  
$270.00 to $301.25
    8,888     4.2 years     285.60     8,888     285.60  
$552.50 to $738.75
    10,555     1.9 years     619.50     10,555     619.50  
$843.75
    729     1.4 years     843.75     729     843.75  
   
             
       
      815,006                 56,089        
   
             
       

Recent Accounting Developments — On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires that all share-based payments to employees, including grants of employee stock options and restricted stock, be recognized in the consolidated statement of operations and comprehensive loss based on their fair values. Prior to SFAS No. 123R, the Company adopted the disclosure-only provisions of SFAS No. 123 and therefore only certain pro forma disclosures of the fair value of share-based payments were required in the notes to the consolidated financial statements. SFAS No. 123R provides for the adoption of the new standard in one of two ways: the modified prospective transition method and the modified retrospective transition method. Using the modified prospective transition method, share-based employee compensation cost would be recognized from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date. Using the modified retrospective method, employee compensation cost would be recognized for periods presented prior to the adoption of the proposed standard in accordance with the original provisions of SFAS No. 123; that is, employee compensation cost would be recognized in the amounts reported in the pro forma disclosures provided in accordance with SFAS No. 123. Adoption of the provisions of SFAS No. 123R is effective as of the beginning of the Company’s quarter ending September 30, 2005. The Company is still evaluating the method of adoption and the impact that the adoption of SFAS No. 123R will have on its consolidated financial position and results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets, which were previously required to be recorded on a carryover basis rather than a fair value basis. Instead, SFAS No. 153 provides that exchanges of nonmonetary assets that do not have commercial substance be reported at carryover basis rather than a fair value basis. A nonmonetary exchange is considered to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the consolidated financial statements of the Company.

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

5.   Accounts and Notes Receivable — Trade

The following table shows the components of trade accounts and notes receivable:

    December 31, 2004   December 26, 2003  
   

 

 
From long-term contracts:
             
Amounts billed due within one year
  $ 147,116   $ 171,603  
Retention — Billed:
             
Estimated to be due in:
             
2004
        2,868  
2005
    5,006     128  
2006
    30     656  
2007
    570      
   

 

 
Total billed
    5,606     3,652  
   

 

 
Retention — Unbilled:
             
Estimated to be due in:
             
2004
        51,731  
2005
    87,836     234  
2006
         
2007
        2,698  
2008
    4,019      
   

 

 
Total unbilled
    91,855     54,663  
   

 

 
Total retentions
    97,461     58,315  
   

 

 
Total receivables from long-term contracts
    244,577     229,918  
Other trade accounts and notes receivable
        56  
   

 

 
      244,577     229,974  
Less: allowance for doubtful accounts
    14,752     15,006  
   

 

 
Net Trade Accounts and Notes Receivable
  $ 229,825   $ 214,968  
   

 

 

Unbilled amounts are billed in accordance with contract provisions that include monthly, milestone and other billing criteria.

Changes in the allowance for doubtful accounts during the years ended December 31, 2002 through 2004 are presented below.

    2004   2003   2002  
   

 

 

 
Balance at beginning of year
  $ 15,006   $ 14,399   $ 2,988  
Additions
    6,109     7,631     19,019  
(Deductions)/amounts recovered
    (6,363 )   (7,024 )   (7,608 )
   

 

 

 
Balance at end of year
  $ 14,752   $ 15,006   $ 14,399  
   

 

 

 

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

6.   Contracts in Process and Inventories

The following table shows the elements included in contracts in process as related to long-term contracts:

    December 31, 2004   December 26, 2003  
   

 

 
Contracts in Process
             
Costs plus accrued profits less earned revenues on contracts currently in process
  $ 18,055   $ 32,501  
Less: progress payments
    4,254     3,873  
   

 

 
Net
  $ 13,801   $ 28,628  
   

 

 

Costs of inventories are shown below:

    December 31, 2004   December 26, 2003  
   

 

 
Inventories
             
Materials and supplies
  $ 518   $ 510  
Finished goods
    361     387  
Other
    19      
   

 

 
Total
  $ 898   $ 897  
   

 

 

7.   Land, Buildings and Equipment

Land, buildings and equipment are stated at cost and are set forth below:

    December 31, 2004   December 26, 2003  
   

 

 
Land and land improvements
  $ 35   $ 32  
Buildings
    27,420     22,791  
Equipment
    104,900     101,890  
   

 

 
Total
  $ 132,355   $ 124,713  
   

 

 

Depreciation and amortization expenses for the years 2004, 2003 and 2002 was $8,360, $7,440 and $9,257, respectively.

8.   Investments, Advances and Equity Interests

The Company owns a non-controlling equity interest in two electric power generation projects and one waste-to-energy project in Italy. Two of the projects in Italy are each 42% owned while the third is 49% owned by the Company. In 2004, the Company entered into a binding agreement to sell 10% of its minority equity interest in the third Italian project. Following is summarized financial information for the Company’s equity affiliates combined, as well as the Company’s interest in the affiliated.

    2004   2003  
   

 

 
Balance Sheet Data:
             
Current assets
  $ 147,625   $ 94,525  
Other assets (primarily buildings and equipment)
    414,779     409,267  
Current liabilities
    39,445     31,445  
Other liabilities (primarily long-term debt)
    404,802     385,047  
   

 

 
Net assets
  $ 118,157   $ 87,300  
   

 

 

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

8.   Investments, Advances and Equity Interests — (Continued)

    For the Year Ended  
   
 
    2004   2003   2002  
   

 

 

 
Income Statement Data:
                   
Total revenues
  $ 240,228   $ 216,006   $ 168,421  
Gross earnings
    59,760     56,355     42,819  
Income before taxes
    43,599     38,062     31,013  
Net earnings
    26,317     22,802     17,303  

The Company’s share of the net earnings of equity affiliates, included in other income, totaled $11,292, $9,738 and $7,334 for the years ended December 31, 2004, 2003 and 2002, respectively. The Company’s investment in the equity affiliates totaled $48,458 and $36,681 as of December 31, 2004 and 2003, respectively. The Company has guaranteed certain performance obligations of these projects. The Company’s contingent obligations under the guarantees for two of the projects are approximately $1,000 in total. The contingent obligation for the third project is capped at approximately $10,300 over the twelve-year life of the project’s financing; to date, no amounts have been paid under this guarantee. The Company has also provided a guarantee of $5,200 representing 49% of the debt service reserve letter of credit providing liquidity should the performance of the third project be insufficient to cover the debt service payments.

The undistributed retained earnings of the Company’s equity investees amounted to approximately $42,000 and $28,500 at December 31, 2004 and December 26, 2003, respectively.

Additionally, at December 31, 2004, the Company held investments in unconsolidated affiliates of $56,819 carried at cost since the Company does not hold a controlling financial interest. The Company has made advances of approximately $34,800 to its third-party equity investees.

9.   Income Taxes

The Company’s earnings/(losses) before income taxes for the years 2004, 2003 and 2002 were taxed under the following jurisdictions.

    2004   2003   2002  
   

 

 

 
Domestic
  $ 20,898   $ 17,954   $ 13,761  
Foreign
    61,925     2,261     (37,642 )
   

 

 

 
Earnings/(loss) before income taxes
  $ 82,823   $ 20,215   $ (23,881 )
   

 

 

 

The provision for income taxes on those earnings/(losses) was as follows:

    2004   2003   2002  
   

 

 

 
Current tax expense:
                   
Domestic
  $ (1,304 ) $ (5,000 ) $ (1,646 )
Foreign
    (35,713 )   (22,481 )   (14,643 )
   

 

 

 
Total current
    (37,017 )   (27,481 )   (16,289 )
   

 

 

 
Deferred tax benefit:
                   
Domestic
             
Foreign
    3,211     9,408     9,676  
   

 

 

 
Total deferred
    3,211     9,408     9,676  
   

 

 

 
Total provision for incomes taxes
  $ (33,806 ) $ (18,073 ) $ (6,613 )
   

 

 

 

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

9.   Income Taxes — (Continued)

Deferred tax assets (liabilities) consist of the following:

    2004   2003  
   

 

 
Net operating loss carryforwards
  $ 16,176   $ 15,357  
Valuation allowance
    (57,519 )   (57,018 )
Fixed assets and operating leases
    30,655     27,718  
Pension
    18,568     25,852  
Other
    9,299     12,819  
Difference between book and tax recognition of income
    167     (87 )
Tax credit carryforwards
    25,839     25,773  
Contract and bonus reserve
    21,944     21,797  
   

 

 
Net deferred tax assets (liabilities)
  $ 65,129   $ 72,211  
   

 

 

As reflected above, the Company has recorded various deferred tax assets/(liabilities). Realization is dependent on generating sufficient taxable income. 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. Certain components of the deferred tax assets for 2003 shown above have changed from the amounts originally reported in 2003. In all cases, any such adjustment was offset by a corresponding adjustment to the valuation allowance for 2003 such that the reported net deferred tax assets (liabilities) for 2003 did not change. The valuation allowance increased by $501 in 2004. A valuation allowance is required under SFAS No. 109, “Accounting for Income Taxes” when there is an evidence of losses from operations in the three most recent 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 2011 and beyond, based on the current tax laws.

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to earnings/(loss) before income taxes, as a result of the following:

    2004   2003   2002  
   

 

 

 
Tax provision/(benefit) at U.S. statutory rate
    35.0  %   35.0  %   (35.0 )%
Permanent differences/Non-deductible expenses/other
    10.0  %   32.6  %   126.4  %
Nontaxable Income
    (3.3 )%    %    %
Alternative minimum tax
    2.6  %   18.6  %   5.1  %
Valuation allowance
    (2.6 )%   15.0  %   23.2  %
Foreign rate differential
    2.9  %   21.9  %   (6.8 )%
Foreign tax credit utilized
    (6.9 )%   (32.8 )%   (89.9 )%
Other
    3.1  %   (1.0 )%   4.8  %
   

 

 

 
      40.8  %   89.3  %   27.8  %
   

 

 

 

10.   Pension and Other Postretirement Benefits

Pension Benefits — The Company’s subsidiaries in the United Kingdom and Canada have pension plans which cover all full-time employees. Under the plans, retirement benefits are primarily a function of both years of service and level of compensation. At December 31, 2004, the Company recognized a cumulative minimum liability in its consolidated financial statements for the underfunded amount of $183,164 pretax, resulting in a cumulative pretax charge to other comprehensive income/(loss). This represents a decrease in the minimum liability of $16,945 from the prior year, including the impact of foreign currency translation.

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

10.   Pension and Other Postretirement Benefits — (Continued)

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.

Other Postretirement Benefits — In addition to providing pension benefits, the Company’s subsidiary in Canada provides certain health care and life insurance benefits for retired employees (“other benefits”). Employees may become eligible for these other 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.

The following chart contains the disclosures for the pension and the other benefits plans for the years 2004, 2003 and 2002.

    Pension Benefits   Other Benefits  
   
 
 
    December 31,
2004
  December 26,
2003
  December 31,
2004
  December 26,
2003
 
   

 

 

 

 
Projected Benefit Obligation (PBO):
                         
PBO at beginning of period
  $ 569,117   $ 487,734   $ 983   $ 697  
Service cost
    18,113     13,070     18     11  
Interest cost
    31,587     27,799     59     48  
Plan participants’ contributions
    8,107     7,147          
Plan amendments
        1,961          
Actuarial (gain)/loss
    271     158     (134 )   149  
Benefits paid
    (25,041 )   (22,072 )   (66 )   (47 )
Special termination benefits/other
    778     993          
Foreign currency exchange rate changes
    51,345     52,327     87     125  
   

 

 

 

 
PBO at end of period
    654,277     569,117     947     983  
   

 

 

 

 
Plan Assets:
                         
Fair value of plan assets at beginning of period
    413,989     310,277          
Actual return on plan assets
    48,667     51,712          
Employer contributions
    28,510     26,721     66     47  
Plan participants’ contributions
    8,107     7,147          
Benefits paid
    (25,041 )   (22,072 )   (66 )   (47 )
Other
    797     2,802          
Foreign currency exchange rate changes
    39,061     37,402          
   

 

 

 

 
Fair value of plan assets at end of period
    514,090     413,989          
   

 

 

 

 
Funded Status:
                         
Funded Status
    (140,187 )   (155,128 )   (947 )   (983 )
Unrecognized net actuarial loss
    253,541     265,932     119     249  
Unrecognized prior service cost
    8,673     9,894     (116 )   (119 )
Unrecognized transition (asset) obligation
        (162 )        
Adjustment for the minimum liability
    (183,164 )   (200,109 )        
   

 

 

 

 
Accrued benefit cost
  $ (61,137 ) $ (79,573 ) $ (944 ) $ (853 )
   

 

 

 

 

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

10.   Pension and Other Postretirement Benefits — (Continued)

    Pension Benefits   Other Benefits  
   
 
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
  December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 

 

 

 
Net Periodic Benefit Cost:
                                     
Service cost
  $ 18,113   $ 13,071   $ 12,374   $ 18   $ 11   $ 15  
Interest cost
    31,587     27,799     20,502     59     48     67  
Expected return on plan assets
    (32,396 )   (24,480 )   (25,757 )            
Amortization of transition
    8     71     63             (18 )
Amortization of prior service cost
    1,701     1,461     1,352              
Recognized actuarial loss - other
    18,135     20,311     8,340     (4 )   (13 )    
   

 

 

 

 

 

 
Total SFAS No. 87 net periodic pension cost
  $ 37,148   $ 38,233   $ 16,874   $ 73   $ 46   $ 64  
   

 

 

 

 

 

 
                                       
 
  Pension Benefits   Other Benefits  
   
 
 
    December 31,
2004
  December 26,
2003
  December 27,
2002
  December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 

 

 

 
Assumptions:
Periodic Benefit Cost
                                     
Discount rate
    5.46 %   5.61 %   5.75 %   6.00 %   6.25 %   6.25 %
Long-term rate of return
    7.35 %   7.51 %   8.00 %                  
Salary scale
    3.08 %   3.33 %   4.00 %                  
                                       
Benefit Obligations
                                     
Discount rate
    5.45 %   5.42 %         6.00 %   6.00 %      
Salary scale
    3.34 %   3.07 %                        
Health-care cost trend:
2004     15.00%  
Decline to 2014     4.00%  

Assumed health-care cost trend rates have a significant effect on the amounts reported for the other postretirement benefit plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

    One-Percentage
Point Increase
  One-Percentage
Point Decrease
 
   
 
 
Effect on total of service and interest cost components   $ 2   $ (2 )
Effect on accumulated postretirement benefit obligations   $ 14   $ (2 )

Plan measurement date — The measurement date for all of the Company’s pension and other benefits plans is December 31 of each year for both plan assets and obligations.

Accumulated benefit obligation — The accumulated benefit obligation (ABO) for the Company’s pension plans totaled approximately $580,000 and $500,000 at year end 2004 and 2003, respectively. As previously discussed, the Company recorded charges to other comprehensive income/(loss) in each of the years 2000 through 2004, due to the ABO exceeding the fair value of plan assets.

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

10.   Pension and Other Postretirement Benefits — (Continued)

Investment policy — Each of the Company’s plans is governed by a written investment policy.

The investment policy of the U.K. pension plan is designed to improve the ongoing funding level of the plan while gradually, over time, changing the mix of investment allocation between equities and bonds to more fully match the liabilities of the plan. The bond and equity allocations range from 40% bonds and 60% equities to 50% bonds and 50% equities, depending on the funding level.

The investment policy of the Canadian pension plan uses a balances approach and allocates investments in pooled funds in accordance with the policy’s asset mix guidelines. These guidelines identify target, maximum and minimum allocations by asset class. The target allocation is 45% bonds, 50% equities and 5% cash. The minimum and maximum allocations are: 42.5% to 57.5% equities; 40% to 50% bonds; and 2.5% to 7.5% cash.

Long-term rate of return assumptions — The expected long-term rate of return on pension plan assets is developed using a weighted-average methodology, blending the expected returns on each class of investment in the pension plans’ portfolio. The expected returns by asset class are developed considering both past performance and future considerations. The long-term rate of return is reviewed annually by the Company for its funded plans and adjusted, if required. The weighted-average expected long-term rate of return on plan assets has declined from 8.0% to 7.3% over the past three years.

Plan Asset Allocations:
 
    2004   2003  
   

 

 
U.K. Plans
             
U.K. equities
    60 %   38 %
Non-U.K. equities
    1 %   25 %
U.K. fixed income securities
    36 %   32 %
Non-U.K. fixed income securities
    0 %   0 %
Other
    3 %   5 %
   

 

 
Total
    100 %   100 %
   

 

 
Canada Plan
             
Canadian equities
    23 %   23 %
Non-Canadian equities
    29 %   26 %
Canadian fixed income securities
    43 %   44 %
Non-Canadian fixed income securities
    0 %   0 %
Other
    5 %   7 %
   

 

 
Total
    100 %   100 %
   

 

 

Contributions — The Company expects to contribute approximately $30,700 to its pension plans and $79 to its other benefits plan in 2005.

Estimated future benefit payments — The following benefit payments, which reflect expected future service, are expected to be paid.

    Pension Benefits   Other Benefits  
   

 

 
2005
  $ 26,099   $ 79  
2006
    28,092     88  
2007
    28,556     98  
2008
    33,074     107  
2009
    37,798     117  
2010-2014
    231,673     724  

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

10.   Pension and Other Postretirement Benefits — (Continued)

Other Employee Benefits — The Company’s subsidiaries in Italy participate in a government-mandated indemnity program for its employees. Accordingly, the Company accrues one month’s salary per employee for each year of the employee’s service, payable when the employee leaves the Company. In 2004, 2003 and 2002, the Company recorded an expense of approximately $4,050, $3,700 and $3,300, respectively. A liability of $27,623 in 2004 and $25,176 in 2003 related to the Company’s obligation in connection with this program is included in pension, postretirement and other employee benefits obligation on the consolidated balance sheet.

11.   Sale/leaseback Transactions

The Company entered into sale/leaseback transactions for an office building in Spain in 2000 and an office building in the U.K. in 1999. In connection with these transactions, the Company recorded deferred gains which are being amortized to income over the term of the respective leases. The amortization was $4,135, $3,622 and $3,197, for the years ended 2004, 2003 and 2002, respectively. As of December 31, 2004 and December 26, 2003, the balance of the deferred gains was $76,383 and $74,151, respectively, and is included in other long-term liabilities on the accompanying consolidated balance sheet. The year-over-year increase in the deferred gain balance was primarily due to a change in foreign currency translation rates.

12.   Operating Leases

The Company and certain of its subsidiaries are obligated under operating lease agreements primarily for office space. Rental expense for these leases totaled $23,711 in 2004, $19,588 in 2003 and $16,084 in 2002. Future minimum rental commitments on non-cancelable leases are as follows:

Fiscal year:
       
2005
  $ 24,654  
2006
    20,764  
2007
    17,532  
2008
    15,281  
2009
    14,857  
Thereafter
    232,135  
   

 
    $ 325,223  
   

 

13.   Capital Leases

Assets under capital leases are summarized as follows:

    December 31,
2004
  December 26,
2003
 
   

 

 
Buildings and improvements
  $ 4,692   $ 1,716  
Less accumulated amortization
    1,450     548  
   

 

 
Net assets under capital leases
  $ 3,242   $ 1,168  
   

 

 

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

13.   Capital Leases — (Continued)

The following are the minimum lease payments to be made in each of the years indicated for the capital leases in effect as of December 31, 2004:

Fiscal year:
       
2005
  $ 816  
2006
    977  
2007
    542  
2008
    411  
2009
    385  
Thereafter
    770  
Less: interest
    (843 )
   

 
Net minimum lease payments under capital leases
    3,058  
Less: current portion of net minimum lease payments
    643  
   

 
Long-term net minimum lease payments
  $ 2,415  
   

 

14.   Derivative Financial Instruments

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 cash flows that may arise from volatility in currency exchange rates. The Company utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS No. 133. At December 31, 2004, December 26, 2003 and December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the year ended December 31, 2004 a pretax loss on derivative instruments of $189, recorded in the year ended December 26, 2003 a pretax gain on derivative instruments of $617, and in the year ended December 27, 2002 a pretax loss of $402, which were recorded in cost of operating revenues on the consolidated statement of operations and comprehensive income/(loss). Amounts receivable (gains) or payable (losses) under foreign exchange contracts 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 is exposed to credit loss in the event of non-performance by the counterparties. All of these counterparties are significant financial institutions that are primarily rated “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies). As of December 31, 2004, approximately $7,300 was owed to the Company by counterparties and approximately $21,200 was owed by the Company to counterparties. A $517 after-tax loss was recorded in other comprehensive income as of December 28, 2001. This amount was reclassified to earnings in 2002 as the Company no longer qualified for deferral under SFAS No. 133.

The maximum term over which the Company is hedging exposure to the variability of cash flows is 12 months.

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

15.   Warranty Reserves

The Company provides for make good/warranty reserves on certain of its long-term contracts. Generally, these reserves are accrued over the life of the contract so that a sufficient balance is maintained to cover the exposures at the conclusion of the contract.

Balance as of December 27, 2002
  $ 25,500  
Accruals
    26,000  
Settlements
    (1,900 )
Adjustments to provisions
    (600 )
   

 
Balance as of December 26, 2003
    49,000  
Accruals
    13,100  
Settlements
    (3,800 )
Adjustments to provisions
    (22,900 )
   

 
Balance as of December 31, 2004
  $ 35,400  
   

 

16.   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. Additionally, the Company evaluates its non-contract exposures and records accruals as necessary. 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.

Subsidiaries of the Company in the U.K. have received a number of claims alleging personal injury arising from exposure to asbestos. To date 446 claims have been brought against the U.K. subsidiaries of which 255 remain open at December 31, 2004. None of the settled claims has resulted in material costs to the Company.

At December 31, 2004, the Company recorded the estimated U.S. dollar equivalent for the total U.K. asbestos liabilities of $44,300. An identical asset was recorded for the expected U.K. asbestos-related insurance recoveries. The estimated U.S. dollar equivalent liability for open (outstanding) U.K. asbestos claims is $5,800 and the estimated liability to future unasserted U.K. asbestos claims is $38,500. The current portion of $1,900 is recorded as Accounts receivable – other and Accrued expenses.

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 as these are subject to change as events evolve and as additional information becomes available during the administration and litigation process. Increases in the number of claims filed or costs to resolve those claims will cause the Company to increase further the estimates of the costs associated with such claims and could have a material adverse effect on the business, financial condition, results of operations, and cash flows.

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

17.   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 third-party 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. It is not practicable to estimate the fair value of the Company’s intercompany debt as there is no market for this type of debt instrument.

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 “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies) (see Notes 4 and 14).

Carrying Amounts and Fair Values — The estimated fair values of the Company’s financial instruments are as follows:

    December 31, 2004

  December 26, 2003

 
    Carrying
Amount
  Fair Value   Carrying
Amount
  Fair Value  
   

 

 

 

 
Nonderivatives:
                         
Cash and short-term investments
  $ 163,473   $ 163,473   $ 178,050   $ 178,050  
Restricted cash
    45,387     45,387     21,123     21,123  
Third-party debt
    3,058     3,058     1,423     1,423  
Intercompany notes receivable — current
    1,265         564      
Intercompany notes receivable — long-term
    25,883         25,883      
Intercompany notes payable — current
    6,604         7,488      
Intercompany notes payable — long-term
    129,283         129,283      
Derivatives:
                         
Foreign currency contracts
    (31 )   (31 )   215     215  

In the ordinary course of business, the Company is contingently liable for performance under letters of credit, bank guarantees and surety bonds totaling $186,830 and $159,298 as of December 31, 2004 and December 26, 2003, respectively. 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 31, 2004, the Company had $28,519 of foreign currency contracts outstanding. These foreign currency contracts mature during 2005. 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

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

17.   Financial Instruments and Risk Management — (Continued)

Company’s customer base and their dispersion across different business and geographic areas. As of December 31, 2004 and December 26, 2003, the Company had no significant concentrations of credit risk.

18.   Related Party Transactions

The Company enters into long-term contracts as a subcontractor and/or performs subcontracting work for certain Foster Wheeler affiliates. Included in the consolidated statement of operations and comprehensive income/(loss) for 2004, 2003 and 2002 related to these contracts and intercompany borrowings is the following:

    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Operating revenue
  $ 5,550   $ 4,272   $ 8,882  
Cost of operating revenue
    49,968     10,757     29,926  
Interest income
    3,744     4,816     6,293  
Interest expense
    3,486     4,105     5,899  

Costs incurred by Foster Wheeler Ltd. and certain of its affiliates on behalf of the Company are charged to the Company through a management fee. These fees represent management’s estimation of a reasonable allocation of the Company’s share of such costs. These costs, plus royalty fees, are included in costs and expenses and totaled $24,980, $18,886 and $23,146 in 2004, 2003 and 2002, respectively.

Included in the consolidated balance sheet for 2004 and 2003 related to long-term contract activity and intercompany borrowings with Foster Wheeler affiliates is the following:

    December 31,
2004
  December 26,
2003
 
   

 

 
Accounts and notes receivable — other
  $ 16,249   $ 18,658  
Intercompany notes receivable
    27,148     26,447  
Accounts payable
    30,202     49,439  
Intercompany notes payable
    135,887     136,771  

Intercompany notes payable includes $103,400 which bears interest at LIBOR plus .375% and $25,883 which bears interest at 2.0%.

Also reflected in the balance sheet, due to the uncertainty of collection based on the going concern issues addressed in Note 2, the Company reduced intercompany notes receivable and charged shareholder’s deficit for its notes receivable from U.S. affiliates. The year-over-year change is reflected in the Consolidated Statement of Changes in Shareholder’s Deficit and the Consolidated Statement of Cash Flows. The impact on shareholder’s deficit was a reduction of $99,408 and $65,151 at December 31, 2004 and December 26, 2003, respectively.

Additionally, at December 31, 2004 and December 26, 2003, the Company held investments in unconsolidated affiliates of $57,687 and $51,544 at cost, respectively.

All of the related party transactions discussed above are eliminated in the Foster Wheeler Ltd. and Subsidiaries Consolidated Financial Statements for the years ended December 31, 2004, December 26, 2003, and December 27, 2002.

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FOSTER WHEELER INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands of dollars)

19.   Sale of Certain Business Assets

In 2004, the Company sold minority equity interests in special-purpose companies established to develop power plant projects in Europe. The Company recorded an aggregate gain on the sales of $19,200 in 2004, which was recorded in other income on the consolidated statement of operations and comprehensive income/(loss).

In 2004, the Company also entered into a binding agreement to sell 10% of its equity interest in a waste-to energy project in Italy. The Company recorded a loss on the sale of $3,300 in 2004, which was recorded in other income on the consolidated statement of operations and comprehensive income/(loss).

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FOSTER WHEELER INTERNATIONAL CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2004

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Foster Wheeler Ltd:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income/(loss), of cash flows and of changes in shareholder’s deficit present fairly, in all material respects, the financial position of Foster Wheeler International Corporation, Inc. and Subsidiaries (the “Company”), an indirect, wholly-owned subsidiary of Foster Wheeler Ltd. (the “Parent”), at December 31, 2004 and December 31, 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 and the Parent will continue as a going concern. As discussed in Note 2 to the financial statements, the Parent has incurred significant losses in each of the three years in the period ended December 31, 2004 and has a shareholders’ deficit of $513,283,000 at December 31, 2004. The Parent has substantial debt obligations and during 2004 it was required to obtain an additional amendment to its senior credit facility to provide covenant relief by modifying certain definitions of financial measures utilized in the calculation of certain financial covenants. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Parent’s ability to return to profitability, to complete planned restructuring activities, to generate cash flows from operations and collections of receivables to fund its operations, including obligations resulting from asbestos claims, as well as the maintenance of credit facilities and bonding capacity adequate to conduct business. These matters raise substantial doubt about the Company’s and the Parent’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 30, 2005

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
(in thousands of dollars)

    For the Year Ended

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Revenues:
                   
Operating revenues
  $ 1,611,229   $ 2,082,018   $ 1,593,594  
Cost of operating revenues
    (1,463,463 )   (1,994,210 )   (1,561,074 )
   

 

 

 
Contract Profit
    147,766     87,808     32,520  
Selling, general and administrative expenses
    (109,107 )   (78,963 )   (65,986 )
Interest income (including $3,744 in 2004, $4,816 in 2003 and $6,293 in 2002 with affiliates)
    9,075     8,810     11,278  
Other income
    56,200     41,907     33,812  
Interest expense (including $(3,486) in 2004, $(4,105) in 2003 and $(5,899) in 2002 with affiliates)
    (5,208 )   (4,545 )   (6,600 )
Other deductions
    (15,903 )   (34,772 )   (28,819 )
   

 

 

 
Earnings/(loss) before income taxes
    82,823     20,245     (23,795 )
Provision for income taxes
    (33,806 )   (18,073 )   (6,613 )
   

 

 

 
Net earnings/(loss)
    49,017     2,172     (30,408 )
Other comprehensive income/(loss):
                   
Change in net loss on derivative instruments designated as cash flow hedges (net of taxes of $(279) in 2002)
            517  
Change in accumulated translation adjustment during the year
    36,260     (13,640 )   24,020  
Minimum pension liability adjustment (net of tax (provision)/benefits: $986 in 2004, $(18,886) in 2003 and $73,400 in 2002)
    (1,826 )   44,483     (170,303 )
   

 

 

 
Comprehensive income/(loss)
  $ 83,451   $ 33,015   $ (176,174 )
   

 

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands of dollars, except share data and per share amounts)

    December 31, 2004   December 26, 2003  
   

 

 
ASSETS
             
Current Assets:
             
Cash and cash equivalents
  $ 163,473   $ 178,050  
Accounts and notes receivable:
             
Trade, net
    229,825     214,968  
Other (including $16,249 in 2004 and $18,658 in 2003 with affiliates)
    28,380     45,259  
Intercompany notes
    1,265     564  
Contracts in process
    13,801     28,628  
Inventories
    898     897  
Prepaid, deferred and refundable income taxes
    22,260     30,033  
Prepaid expenses
    7,477     7,466  
   

 

 
Total current assets
    467,379     505,865  
   

 

 
Land, buildings and equipment
    132,355     124,713  
Less accumulated depreciation
    104,861     96,094  
   

 

 
Net book value
    27,494     28,619  
   

 

 
Restricted cash
    45,387     21,123  
Notes and accounts receivable — long-term
    1,535     1,654  
Intercompany notes receivable — long-term
    25,883     25,883  
Investment and advances
    140,912     117,272  
Deferred income taxes
    50,169     56,334  
Asbestos-related insurance recovery receivable
    42,400      
Other assets
    10,372     9,537  
   

 

 
TOTAL ASSETS
  $ 811,531   $ 766,287  
   

 

 
LIABILITIES AND SHAREHOLDER’S DEFICIT
             
Current Liabilities:
             
Current installments on capital lease obligations
  $ 643   $ 440  
Accounts payable (including $30,202 in 2004 and $49,439 in 2003 with affiliates)
    167,878     185,125  
Accrued expenses
    109,320     123,702  
Intercompany notes payable
    6,604     7,488  
Estimated costs to complete long-term contracts
    200,742     257,339  
Advance payments by customers
    64,580     32,380  
Income taxes
    30,249     28,962  
   

 

 
Total current liabilities
    580,016     635,436  
   

 

 
Capital lease obligation
    2,415     983  
Intercompany notes payable - long-term
    129,283     129,283  
Deferred income taxes
    4,900     5,438  
Pension, postretirement and other employee benefits
    64,705     78,210  
Deferred gain
    76,383     74,151  
Asbestos-related liability
    42,400      
Other long-term liabilities and minority interest
    16,140     80  
Commitment and contingencies
             
   

 

 
TOTAL LIABILITIES
    916,242     923,581  
   

 

 
Shareholder’s Deficit:
             
Common stock, no par value, 1,000 shares authorized, 25 shares issued and outstanding
    20     20  
Capitalization of intercompany notes
    (99,408 )   (65,151 )
Paid-in capital
    2,351     2,351  
Retained earnings
    146,429     94,023  
Accumulated other comprehensive loss
    (154,103 )   (188,537 )
   

 

 
TOTAL SHAREHOLDER’S DEFICIT
    (104,711 )   (157,294 )
   

 

 
TOTAL LIABILITIES AND SHAREHOLDER’S DEFICIT
  $ 811,531   $ 766,287  
   

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER’S DEFICIT
(in thousands of dollars)

    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Common Stock
                   
Balance at beginning and end of year
  $ 20   $ 20   $ 20  
   

 

 

 
                     
Capitalization of Intercompany Notes
                   
Balance at beginning of year
    (65,151 )   (10,539 )   10,859  
Current year activity
    (34,257 )   (54,612 )   (21,398 )
   

 

 

 
                     
Balance at end of year
    (99,408 )   (65,151 )   (10,539 )
   

 

 

 
                     
Paid-in Capital
                   
Balance at beginning and end of year
    2,351     2,351     2,351  
   

 

 

 
                     
Retained Earnings
                   
Balance at beginning of year
    94,023     92,251     123,245  
Net earnings/(loss) for the year
    49,017     2,172     (30,408 )
Adjustment for Foster Wheeler Energia S.A. (see Note 3)
    3,589          
Dividends paid to parent
    (200 )   (400 )   (586 )
   

 

 

 
Balance at end of year
    146,429     94,023     92,251  
   

 

 

 
                     
Accumulated Other Comprehensive Loss
                   
Balance at beginning of year
    (188,537 )   (219,380 )   (73,614 )
Change in net loss on derivative instruments designated as cash flow hedges (net of taxes of $279 in 2002)
            517  
Change in accumulated translation adjustment during the year
    36,260     (13,640 )   24,020  
Minimum pension liability adjustment (net of tax (provision)/benefits: $986 in 2004, $(18,886) in 2003 and $73,400 in 2002)
    (1,826 )   44,483     (170,303 )
   

 

 

 
Balance at end of year
    (154,103 )   (188,537 )   (219,380 )
   

 

 

 
                     
Total Shareholder’s Deficit
  $ (104,711 ) $ (157,294 ) $ (135,297 )
   

 

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)

    For the Year Ended  
    December 31,
2004
   December 26,
2003
   December 27,
2002
 
   

 

 

 
CASH FLOWS FROM OPERATING ACTIVITIES
                   
Net earnings/(loss)
  $ 49,017   $ 2,172   $ (30,408 )
Adjustments to reconcile net earnings/(loss) to cash flows from operating activities:
                   
Depreciation and amortization
    8,389     9,294     9,404  
Provision for losses on accounts receivable
    6,109     7,631     19,019  
Deferred tax
    13,447     18,515     561  
Net loss/(gain) on asset sales
    13     (28 )   (3,260 )
Net gain on investments
    (15,915 )        
Equity earnings, net of dividends
    (11,292 )   (12,911 )   (9,443 )
Other noncash items
    29     (1,030 )   (6,508 )
Changes in assets and liabilities:
                   
Receivables
    12,086     18,606     33,617  
Contracts in process and inventories
    16,516     31,745     18,095  
Accounts payable and accrued expenses
    15,234     (6,267 )   4,221  
Estimated costs to complete long-term contracts
    (61,226 )   45,233     42,326  
Advance payments by customers
    31,571     (36,905 )   29,376  
Income taxes
    7,941     2,288     (2,742 )
Other assets and liabilities
    (10,655 )   6,196     (4,318 )
   

 

 

 
Net cash provided by operating activities
    30,796     84,539     99,940  
   

 

 

 
CASH FLOWS FROM INVESTING ACTIVITIES
                   
Change in restricted cash
    (22,037 )   11,214     (30,169 )
Capital expenditures
    (2,645 )   (5,586 )   (6,716 )
Proceeds from sale of properties
    259     375     526  
Decrease/(increase) in investments and advances
    359     940     (6,007 )
Proceeds from sale of Foster Wheeler Energia S.A. (see Note 3)
    3,589          
Decrease in short-term investments
        41     6,280  
   

 

 

 
Net cash (used)/provided by investing activities
    (20,475 )   6,984     (36,086 )
   

 

 

 
CASH FLOWS FROM FINANCING ACTIVITIES
                   
Capitalization of intercompany notes
    (34,257 )   (54,611 )   (21,398 )
Dividends paid to parent
    (200 )   (400 )   (586 )
Change in notes with affiliates
    6,121     (9,283 )   15,008  
Payments of long-term debt
    (14 )   (5 )   (619 )
Payments of capital lease obligations
    (521 )        
Decrease in bank loans
        (13,739 )   (2,133 )
   

 

 

 
Net cash used by financing activities
    (28,871 )   (78,038 )   (9,728 )
   

 

 

 
Effect of exchange rate changes on cash and cash equivalents
    3,973     9,533     4,744  
   

 

 

 
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    (14,577 )   23,018     58,870  
Cash and cash equivalents at beginning of year
    178,050     155,032     96,162  
   

 

 

 
CASH AND CASH EQUIVALENTS AT END OF YEAR
  $ 163,473   $ 178,050   $ 155,032  
   

 

 

 

NONCASH INVESTING AND FINANCING ACTIVITIES: In 2004, land, building and equipment increased by $2.7 million with a corresponding increase to capital lease obligations.

See notes to consolidated financial statements.

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)

1. Nature of Operations and Relationship to Foster Wheeler Ltd. and Subsidiaries

Foster Wheeler International Corporation (the “Company”) is a wholly owned subsidiary of Foster Wheeler International Holdings, which is an indirectly wholly owned subsidiary of Foster Wheeler Ltd. The principal operations of the Company are to provide design, engineer, and construct petroleum processing facilities (upstream and downstream), chemical, petrochemical, pharmaceutical and natural gas liquefaction (LNG) facilities, and related infrastructure, including power generation and distribution facilities, production terminals and pollution control equipment. The Company principally operates under one segment, primarily outside of the United States, with operations in the United Kingdom, Italy, France, Turkey, Spain, Singapore, Thailand, Malaysia, South Africa and Canada.

The Company has transactions and relationships with Foster Wheeler Ltd. and its affiliates. The financial position, results of operations, and the cash flows of the Company have been impacted by these transactions and relationships as discussed in Notes 2, 3, 9, 18 and 19.

2. Liquidity and Going Concern

The accompanying consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s ability to continue as a going concern is largely dependent on Foster Wheeler Ltd.’s ability to continue as a going concern. Foster Wheeler Ltd. and the Company may not, however, be able to continue as a going concern. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, Foster Wheeler Ltd.’s and the Company’s ability to operate profitably, to generate cash flows from operations, collections of receivables to fund its obligations, including those resulting from asbestos-related liabilities, as well as Foster Wheeler Ltd.’s ability to maintain credit facilities and bonding capacity adequate to conduct its business. Foster Wheeler Ltd. incurred significant operating losses in each of the years in the three-year period ended December 31, 2004, and has a shareholders’ deficit of $513,283 as of December 31, 2004.

In 2004, Foster Wheeler Ltd. consummated an equity-for-debt exchange in which it issued common shares, preferred shares, warrants to purchase common shares and new notes in exchange for certain of its outstanding debt securities and trust securities. The exchange offer reduced Foster Wheeler Ltd.’s existing debt (excluding a reduction in deferred accrued interest of $31,128) by $437,041, improved the shareholders’ deficit by $448,136 and when combined with the proceeds from the issuance of the new notes that were used to repay amounts that were outstanding under a previous Senior Credit Facility, eliminated substantially all material scheduled corporate debt maturities prior to 2011. After completing the exchange, Foster Wheeler Ltd. had outstanding debt obligations of approximately $570,073 as of December 31, 2004.

In August of 2002, Foster Wheeler Ltd. negotiated a Senior Credit Facility that was comprised of a $71,000 term loan, a $69,000 revolving credit facility and a $149,900 letter of credit facility having an April 30, 2005 maturity date. In connection with the equity-for-debt exchange, Foster Wheeler Ltd. prepaid the term loan and amounts outstanding under the revolving credit facility. Accordingly, there were no borrowings outstanding under the Senior Credit Facility as of December 31, 2004. Letters of credit of $90,018 remained outstanding under the Senior Credit Facility as of December 31, 2004.

In March 2005, the Senior Credit Facility was replaced with a new 5-year $250,000 Senior Credit Agreement. The new Senior Credit Agreement includes a $75,000 sub-limit for borrowings at a rate equal to LIBOR plus a spread. Standby letters of credit issued under the new Senior Credit Agreement will carry a fixed price throughout the life of the facility. The Senior Credit Agreement is collateralized by the assets and/or the stock of certain of Foster Wheeler Ltd.’s domestic subsidiaries and certain of its foreign subsidiaries. Foster Wheeler Ltd. paid up-front fees to the lender of approximately $8,225 in conjunction with the execution of the Senior Credit Agreement. Such fees, paid predominately in the first quarter of 2005, have been deferred and will be amortized to expense over the life of the agreement.

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

Foster Wheeler Ltd. finalized a sale/leaseback arrangement for an office building at its corporate headquarters in the third quarter of 2002. Under this arrangement, Foster Wheeler Ltd. leases the facility for an initial non-cancelable period of 20 years. The long-term capital lease obligation of $45,280 as of December 31, 2004 is included in long-term debt in Foster Wheeler Ltd.’s consolidated balance sheet.

The new Senior Credit Agreement and the sale/leaseback arrangement have quarterly financial covenant compliance requirements. Management’s forecast indicates that Foster Wheeler Ltd. will be in compliance with the financial covenants throughout 2005. The forecast assumes a significant level of new contracts and improved performance on existing contracts. However, there can be no assurance that Foster Wheeler Ltd. will comply with the covenants. If Foster Wheeler Ltd. violates a covenant under the Senior Credit Agreement or the sale/leaseback arrangement, repayment of amounts outstanding under such agreements could be accelerated and the following borrowings outstanding could also be accelerated: the 2011 Senior Notes, the 2005 Senior Notes, the Convertible Subordinated Notes, the Trust Preferred Securities, the Subordinated Robbins Facility Exit Funding Obligations, and certain of the special-purpose project debt facilities. The total amount of Foster Wheeler Ltd. debt that could be accelerated is $463,563 as of December 31, 2004. Foster Wheeler Ltd. would not be able to repay amounts borrowed if the payment dates were accelerated.

Holders of Foster Wheeler Ltd.’s new 2011 Senior Notes have a security interest in the stock, debt and assets of certain of Foster Wheeler Ltd.’s subsidiaries. The 2011 Senior Notes contain incurrence covenants that limit Foster Wheeler Ltd.’s ability to undertake certain actions including incurring debt, making certain payments and investments, granting liens, selling assets and entering into specific intercompany transactions, among others. Management monitors these covenants to ensure Foster Wheeler Ltd. remains in compliance with the indenture.

In connection with the exchange, the holders of Foster Wheeler Ltd.’s 2005 Senior Notes agreed to amend the indenture governing these notes to effectively eliminate the security interest previously held by the notes.

On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provided for up to $45,000 of additional revolving loans available to provide working capital. As of December 31, 2004, the facility remained undrawn. In December 2004, the U.K. subsidiaries gave notice canceling the revolving credit facility effective January 24, 2005.

Since January 15, 2002, Foster Wheeler Ltd. has exercised its right to defer payments on the Trust Preferred Securities. The aggregate liquidation amount of the Trust Preferred Securities at December 31, 2004 was $71,177 after completing the equity-for-debt exchange. The previous Senior Credit Facility required Foster Wheeler Ltd. to defer the payment of the dividends on the Trust Preferred Securities and, accordingly, no dividends were paid during 2004 or 2003. As of December 31, 2004, the amount of dividends deferred plus accrued interest approximates $23,460. Foster Wheeler Ltd. intends to continue to defer payment of the dividends on the Trust Preferred Securities until January 15, 2007 - the full term allowed by the underlying agreement. Once the deferred dividend obligation has been satisfied, Foster Wheeler Ltd. has the right to defer subsequent dividend payments for an additional 20 consecutive quarters. The new Senior Credit Agreement requires the approval of the lenders to make payments on the Trust Preferred Securities to the extent such payments are not contractually required by the underlying Trust Preferred Securities agreements.

Foster Wheeler Ltd.’s European Power subsidiary in Finland is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. Obligations under both facilities are guaranteed by Foster Wheeler Ltd. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio.

One of the performance bond facilities is dedicated to a specific project and, as of December 31, 2004, had performance bonds outstanding equivalent to $24,522 (none of which has been drawn as of such date). Covenants under this facility are tested quarterly. The second facility is a general performance bond facility and, as of December 31, 2004, had performance bonds outstanding in favor of several clients equivalent to $10,114 (none of which has been drawn).

As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of Foster Wheeler Ltd.’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the two performance bond facilities. On August 6, 2004 and August 9, 2004, Foster Wheeler Ltd.’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities.

The waiver for the project-specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum equity ratio levels so long as the performance bonds are outstanding. Foster Wheeler Ltd.’s subsidiary remained below the minimum equity ratio as of December 31, 2004. On March 15, 2005, the bond expired and the banks funded the client and Foster Wheeler Ltd. reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of Foster Wheeler Ltd. to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

The waiver for the general performance bond facility is effective through March 31, 2005. As of that date, approximately $4,900 is forecasted to be outstanding under the facility. Foster Wheeler Ltd. has provided a standby letter of credit to back up the general performance bond facility and intends to do so until such facility can be permanently replaced or the last performance bond issued there under has expired. Therefore, Foster Wheeler Ltd. believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio covenant is reflected in Foster Wheeler Ltd.’s liquidity forecasts.

Management closely monitors liquidity and updates its U.S. liquidity forecasts weekly. These forecasts cover, among other analyses, existing cash balances, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, working capital needs and unused credit line availability. Foster Wheeler Ltd.’s cash flow forecasts continue to indicate that sufficient cash will be available to fund Foster Wheeler Ltd.’s U.S. and foreign working capital needs throughout 2005.

As of December 31, 2004, Foster Wheeler Ltd. had cash and cash equivalents, short-term investments, and restricted cash totaling $390,186, compared to $430,170 as of December 26, 2003. Of the $390,186 total at December 31, 2004, $319,612 was held by foreign subsidiaries.

Foster Wheeler Ltd.’s domestic operating entities are cash flow positive. However they do not generate sufficient cash flow to cover the costs related to Foster Wheeler Ltd.’s indebtedness, obligations to fund U.S. pension plans, and corporate overhead expenses. Consequently, Foster Wheeler Ltd. requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs and to service its debt. Foster Wheeler Ltd.’s current 2005 forecast assumes total cash repatriation from its non-U.S. subsidiaries of approximately $107,000 from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends. In 2004 and 2003, Foster Wheeler Ltd. repatriated approximately $77,000 and $100,000, respectively, from its non-U.S. subsidiaries.

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

There can be no assurance that the forecasted foreign cash repatriation will occur, as the non-U.S. subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of Foster Wheeler Ltd.’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. The repatriation of funds may also subject those funds to taxation. As a result of these factors, Foster Wheeler Ltd. may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries in the amount forecasted above.

Commercial operations under a domestic contract retained by Foster Wheeler Ltd. in connection with the sales of assets of the Foster Wheeler Environmental Corporation (“Environmental”), commenced in January 2004. The plant processes low-level nuclear waste for the U.S. Department of Energy (“DOE”). Foster Wheeler Ltd. funded the plant’s construction costs and operates the facility. The majority of Foster Wheeler Ltd.’s invested capital was recovered during the early stages of processing the first stream of waste materials. This project successfully processed all quantities of the first waste stream of materials ahead of schedule and is currently finalizing the processing line for the second waste stream. In 2004, the project generated net cash flow of approximately $53,300. An additional $17,800 of capital recovery is dependent on the initial processing of the second waste stream of materials. This capital recovery is expected in 2005.

Foster Wheeler Ltd.’s inability to operate profitably and to generate cash flows from operations, its reliance on repatriated cash from its foreign subsidiaries to fund its domestic obligations, and its obligations to maintain minimum debt covenants to avoid possible acceleration of its debt, raises substantial doubt about Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern.

3. Sale of Investment in Foster Wheeler Energia S.A.

In October 2003, pursuant to a Stock Purchase Agreement dated October 10, 2003 (“SPA”), the Company sold its investment in Foster Wheeler Energia S.A., a wholly owned subsidiary of Foster Wheeler Europe Limited, for proceeds of approximately $30,675. The subsidiary was sold to a wholly owned affiliate of Foster Wheeler Ltd. The sales price approximated the carrying value. The Company has reflected this transaction as a reorganization of companies under common control. Accordingly, the 2002 financial statements were revised to eliminate the activity of Foster Wheeler Energia S.A. from the consolidated statements of operations and cash flows. In May 2004, pursuant to the SPA, an additional payment of $3,589 was made to the Company. The payment could not be estimated at the time of purchase, and was therefore not accrued. The payment received by the Company was recorded as a decrease in accumulated deficit in 2004.

4. Summary of Significant Accounting Policies

Principles of Consolidation — The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of Foster Wheeler International Corporation and all significant 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 companies and December 31 for foreign companies. For domestic companies, the year 2004 included 53 weeks and the years 2003 and 2002 included 52 weeks.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the periods 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 and contingencies, among others.

Revenue Recognition on Long-term Contracts — Revenues and profits on long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress toward completion is measured using physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress towards completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.

Revenues and profits on cost-reimbursable contracts are recorded as the costs are incurred. The Company includes flow-through costs consisting of materials, equipment and subcontractor costs as revenue on cost-reimbursable contracts when the Company is responsible for the engineering specifications and procurement for such costs.

Contracts in progress are stated at cost, increased for profits recorded on the completed effort or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. Negative balances are presented as “estimated costs to complete long-term contracts.” The Company has numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. However, current estimates may be revised as additional information becomes available. In accordance with the accounting and disclosure requirements of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”) and Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes,” the Company reviews its contracts monthly. As a result of this reevaluation process, in 2004 27 individual projects had final estimated profit revisions exceeding $1,000. These revisions resulted from events such as earning project incentive bonuses or the incurrence or forecasted incurrence of contractual liquidated damages for performance or schedule issues, executing services and purchasing third party materials and equipment at costs differing from previously estimated, and testing of completed facilities which in turn eliminates or incurs completion and warranty-related costs. The net aggregate dollar value of the accrued contract profit resulting from these estimate changes during 2004 amounted to a net increase of $76,500. 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.

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 SOP 81-1. 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. Costs attributable to claims are treated as costs of contract performance as

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

incurred. Such claims are currently in various stages of negotiation, arbitration and other legal proceedings. As of December 31, 2004, the Company had recorded a commercial claims receivable of $544.

Cash and Cash Equivalents — Cash and cash equivalents include liquid short-term investments purchased with original maturities of three months or less. The Company requires a substantial portion of these funds to support their liquidity and working capital needs. Accordingly, these funds may not be readily available for repatriation to its parent.

Restricted Cash — Restricted cash consists of approximately $34,800 at December 31, 2004 that was required to collateralize letters of credit and bank guarantees, and approximately $10,600 of client escrow funds.

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 might not be received within a one-year period. However, in conformity with industry practice, the full amount of accounts receivable, including such amounts withheld, has been included in current assets.

Trade accounts receivable are continually evaluated in accordance with corporate policy. Provisions are established on a project specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues. Customer payment history, trends within the various markets served and general economic trends are also considered when evaluating the necessity of a provision.

Accounts and Notes Receivable Other — Non-trade accounts and notes receivable consist primarily of receivables from affiliated companies of $16,249 at December 31, 2004, and $18,658 at December 26, 2003, foreign refundable value-added tax and accrued interest receivable.

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 as incurred. 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.

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 due to a lack of a controlling financial interest. Investment ownership of less than 20% in affiliates is carried at cost.

Income Taxes — Income tax expense in the Company’s statement of operations has been calculated on a separate company basis for its subsidiaries that file tax returns in their foreign jurisdictions. 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.

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

Foreign Currency — Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at month-end exchange rates and income and expenses and cash flows at monthly weighted-average rates.

    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Cumulative translation adjustment at beginning of year
  $ (62,897 ) $ (49,257 ) $ (73,277 )
Current year foreign currency adjustment
    36,260     (13,640 )   24,020  
   

 

 

 
Cumulative translation adjustment at end of year
  $ (26,637 ) $ (62,897 ) $ (49,257 )
   

 

 

 

For the year ended December 31, 2004, the Company recorded an after-tax net foreign currency transaction loss of $2,560. For the year ended December 31, 2003, the Company recorded an after-tax net foreign currency transaction gain of $4,701, and in the year ended December 31, 2002, recorded after-tax net foreign currency transaction loss of $1,918.

Contracts in Process and Estimated Costs to Complete Long-term Contracts — In accordance with terms of long-term contracts, amounts recorded in contracts in process and estimated costs to complete long-term contracts may not be realized or paid, respectively, within a one-year period. In conformity with industry practice, however, the full amount of contracts in process and estimated costs to complete long-term contracts have been included in current assets and current liabilities, respectively.

Inventories — Inventories, principally materials and supplies, are stated at the lower of cost or market, determined primarily on the average-cost method.

Stock Option Plans — Foster Wheeler Ltd. has fixed option plans which reserve common shares for issuance to executives, key employees, and directors. Employees of the Company participate in these plans. Foster Wheeler Ltd. and the Company have adopted the disclosure-only provision of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148 “Accounting for Stock Based Compensation — Transition and Disclosure.” Foster Wheeler Ltd. and the Company continue to account for stock options granted to employees and directors using the intrinsic value method under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Had compensation costs for the stock-based compensation plans been accounted for using the fair value method of accounting described by SFAS No. 123, the Company’s net earnings/(loss) would have been as follows:

    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Net earnings/(loss) — as reported
  $ 49,017   $ 2,172   $ (30,408 )
Deduct: Total stock-based employee compensation expense determined under fair value based method for awards net of taxes of $174 in 2004 and $92 in 2003 and $23 in 2002
    (346 )   (186 )   (46 )
   

 

 

 
Net earnings/(loss) — pro forma
  $ 48,671   $ 1,986   $ (30,454 )
   

 

 

 

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:

    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Dividend yield
    0.00 %   0.00 %   0.00 %
Expected volatility
    50.00 %   88.23 %   83.62 %
Risk-free interest rate
    2.99 %   3.22 %   2.90 %
Expected life (years)
    3.0     5.0     5.0  

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

On September 10, 2004, the Board of Directors adopted the 2004 Stock Option Plan (the “2004 Plan”) which reserves 56,421 preferred shares for issuance. The options granted under the 2004 Plan expire up to a maximum of ten years from the date granted. On October 6, 2004, management was issued options under the 2004 Plan to purchase 43,103 preferred shares at an exercise price of $9.378 per common share issuable. Such options expire on October 5, 2007. One third of the options issued to management vest in the fourth quarter of 2005, and the balance vest during the fourth quarter of 2006.

Under Foster Wheeler Ltd.’s 1995 Stock Option Plan approved by that company’s shareholders in April 1995 and amended in April 1999 and May 2002, the total number of shares of common stock that may be granted is 265,000.

These plans provide that shares granted be issued from Foster Wheeler Ltd.’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 of grant.

The Foster Wheeler Ltd. shareholders approved several capital share alterations at the November 29, 2004 meeting. Among them was a one-for-twenty reverse stock split. Please note that all stock option amounts reflect post reverse stock split amounts.

Information as of and for the years ended December 31, 2004, 2003 and 2002 relating to options granted to Company personnel and options available for grant is as follows (presented in actual number of shares):

    December 31, 2004

  December 26, 2003

  December 27, 2002

 
    Shares   Weighted-
Average
Exercise
Price
  Shares   Weighted-
Average
Exercise
Price
  Shares   Weighted-
Average
Exercise
Price
 
   

 

 

 

 

 

 
Options outstanding, beginning of year
    69,419   $ 179.08     69,249   $ 180.08     31,785   $ 356.66  
Options exercised
                               
Options granted
    746,475   $ 9.38     857     23.40     37,827     32.80  
Options cancelled or expired
    (888 ) $ 187.69     (687 )   71.49     (363 )   199.60  
   
       
       
       
Options outstanding, end of year
    815,006   $ 23.65     69,419   $ 179.08     69,249   $ 180.08  
   
       
       
       
                                       
Option price range at end of year
  $ 9.38 - $843.75         $ 23.40 - $843.75         $ 32.80 - $843.75        
                                       
Options available for grant at end of year
    869,273           25,342           22,253        
   
       
       
       
Weighted-average fair value of options granted during the year
  $ 3.30         $ 15.80         $ 22.20        
Options exercisable at end of year
    56,089           40,972           31,322        
Weighted-average price of exercisable options at end of year
  $ 211.54         $ 275.63         $ 358.42        

The following table summarizes information about fixed-price stock options outstanding as of December 31, 2004:

    Options Outstanding

  Options Exercisable

 
Range of Exercise Prices
  Number
Outstanding at
12/31/2004
  Weighted-
Average
Remaining
Contractual Life
  Weighted-
Average
Exercise Price
  Number
Exercisable at
12/31/2004
  Weighted-
Average
Exercise Price
 

 

 

 

 

 

 
$9.38
    746,475     9.8 years   $ 9.38       $  
$23.40 to $32.80
    38,184     7.8 years   $ 32.59     25,742   $ 32.49  
$113.75
    7,475     6.0 years   $ 113.75     7,475   $ 113.75  
$180.00
    2,700     5.0 years   $ 180.00     2,700   $ 180.00  
$270.00 to $301.25
    8,888     4.2 years   $ 285.60     8,888   $ 285.60  
$552.50 to $738.75
    10,555     1.9 years   $ 619.50     10,555   $ 619.50  
$843.75
    729     1.4 years   $ 843.75     729   $ 843.75  
   
             
       
      815,006                 56,089        
   
             
       

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

Recent Accounting Developments — On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires that all share-based payments to employees, including grants of employee stock options and restricted stock, be recognized in the consolidated statement of operations and comprehensive loss based on their fair values. Prior to SFAS No. 123R, the Company adopted the disclosure-only provisions of SFAS No. 123 and therefore only certain pro forma disclosures of the fair value of share-based payments were required in the notes to the consolidated financial statements. SFAS No. 123R provides for the adoption of the new standard in one of two ways: the modified prospective transition method and the modified retrospective transition method. Using the modified prospective transition method, share-based employee compensation cost would be recognized from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date. Using the modified retrospective method, employee compensation cost would be recognized for periods presented prior to the adoption of the proposed standard in accordance with the original provisions of SFAS No. 123; that is, employee compensation cost would be recognized in the amounts reported in the pro forma disclosures provided in accordance with SFAS No. 123. Adoption of the provisions of SFAS No. 123R is effective as of the beginning of the Company’s quarter ending September 30, 2005. The Company is still evaluating the method of adoption and the impact that the adoption of SFAS No. 123R will have on its consolidated financial position and results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets, which were previously required to be recorded on a carryover basis rather than a fair value basis. Instead, SFAS No. 153 provides that exchanges of nonmonetary assets that do not have commercial substance be reported at carryover basis rather than a fair value basis. A nonmonetary exchange is considered to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the consolidated financial statements of the Company.

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

5. Accounts and Notes Receivable — Trade

The following table shows the components of trade accounts and notes receivable:

    December 31,
2004
  December 26,
2003
 
   

 

 
From long-term contracts:
             
Amounts billed due within one year
  $ 147,116   $ 171,603  
               
Retention - Billed:
             
Estimated to be due in:
2004
        2,868  
2005
    5,006     128  
2006
    30     656  
2007
    570      
   

 

 
Total billed
    5,606     3,652  
   

 

 
Retention - Unbilled:
             
Estimated to be due in:
             
2004
        51,731  
2005
    87,836     234  
2006
         
2007
        2,698  
2008
    4,019      
   

 

 
Total unbilled
    91,855     54,663  
   

 

 
Total retentions
    97,461     58,315  
   

 

 
Total receivables from long-term contracts
    244,577     229,918  
Other trade accounts and notes receivable
        56  
   

 

 
      244,577     229,974  
Less: allowance for doubtful accounts
    14,752     15,006  
   

 

 
Net Trade Accounts and Notes Receivable
  $ 229,825   $ 214,968  
   

 

 

Unbilled amounts are billed in accordance with contract provisions that include monthly, milestone and other billing criteria.

Changes in the allowance for doubtful accounts during the years ended December 31, 2002 through 2004 are presented below.

    2004   2003   2002  
   

 

 

 
Balance at beginning of year
  $ 15,006   $ 14,399   $ 2,988  
Additions
    6,109     7,631     19,019  
(Deductions)/amounts recovered
    (6,363 )   (7,024 )   (7,608 )
   

 

 

 
Balance at end of year
  $ 14,752   $ 15,006   $ 14,399  
   

 

 

 

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

6. Contracts in Process and Inventories

The following table shows the elements included in contracts in process as related to long-term contracts:

    December 31,
2004
  December 26,
2003
 
   

 

 
Contracts in Process
             
Costs plus accrued profits less earned revenues on contracts currently in process
  $ 18,055   $ 32,501  
Less: progress payments
    4,254     3,873  
   

 

 
Net
  $ 13,801   $ 28,628  
   

 

 

Costs of inventories are shown below:

    December 31,
2004
  December 26,
2003
 
   

 

 
Inventories
             
Materials and supplies
  $ 518   $ 510  
Finished goods
    361     387  
Other
    19      
   

 

 
Total
  $ 898   $ 897  
   

 

 

7. Land, Buildings and Equipment

Land, buildings and equipment are stated at cost and are set forth below:

    December 31,
2004
  December 26,
2003
 
   

 

 
Land and land improvements
  $ 35   $ 32  
Buildings
    27,420     22,791  
Equipment
    104,900     101,890  
   

 

 
Total
  $ 132,355   $ 124,713  
   

 

 

Depreciation and amortization expenses for the years 2004, 2003 and 2002 was $8,360, $7,440 and $9,257, respectively.

8. Investments, Advances and Equity Interests

The Company owns a non-controlling equity interest in two electric power generation projects and one waste-to-energy project in Italy. Two of the projects in Italy are each 42% owned while the third is 49% owned by the Company. In 2004, the Company entered into a binding agreement to sell 10% of its minority equity interest in the third Italian project. Following is summarized financial information for the Company’s equity affiliates combined, as well as the Company’s interest in the affiliated.

    2004   2003  
   

 

 
Balance Sheet Data:
             
Current assets
  $ 147,625   $ 94,525  
Other assets (primarily buildings and equipment)
    414,779     409,267  
Current liabilities
    39,445     31,445  
Other liabilities (primarily long-term debt)
    404,802     385,047  
   

 

 
Net assets
  $ 118,157   $ 87,300  
   

 

 

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

8. Investments, Advances and Equity Interests — (Continued)

    For the Year Ended

 
    2004   2003   2002  
   

 

 

 
Income Statement Data:
                   
Total revenues
  $ 240,228   $ 216,006   $ 168,421  
Gross earnings
    59,760     56,355     42,819  
Income before taxes
    43,599     38,062     31,013  
Net earnings
    26,317     22,802     17,303  

The Company’s share of the net earnings of equity affiliates, included in other income, totaled $11,292, $9,738 and $7,334 for the years ended December 31, 2004, 2003 and 2002, respectively. The Company’s investment in the equity affiliates totaled $48,458 and $36,681 as of December 31, 2004 and 2003, respectively. The Company has guaranteed certain performance obligations of these projects. The Company’s contingent obligations under the guarantees for two of the projects are approximately $1,000 in total. The contingent obligation for the third project is capped at approximately $10,300 over the twelve-year life of the project’s financing; to date, no amounts have been paid under this guarantee. The Company has also provided a guarantee of $5,200 representing 49% of the debt service reserve letter of credit providing liquidity should the performance of the third project be insufficient to cover the debt service payments.

The undistributed retained earnings of the Company’s equity investees amounted to approximately $42,000 and $28,500 at December 31, 2004 and December 26, 2003, respectively.

Additionally, at December 31, 2004, the Company held investments in unconsolidated affiliates of $56,819 carried at cost since the Company does not hold a controlling financial interest. The Company has made advances of approximately $34,800 to its third-party equity investees.

9. Income Taxes

The Company’s earnings/(losses) before income taxes for the years 2004, 2003 and 2002 were taxed under the following jurisdictions.

    2004   2003   2002  
   

 

 

 
Domestic
  $ 20,898   $ 17,984   $ 13,847  
Foreign
    61,925     2,261     (37,642 )
   

 

 

 
Earnings/(loss) before income taxes
  $ 82,823   $ 20,245   $ (23,795 )
   

 

 

 

The provision for income taxes on those earnings/(losses) was as follows:

    2004   2003   2002  
   

 

 

 
Current tax expense:
                   
Domestic
  $ (1,304 ) $ (5,000 ) $ (1,646 )
Foreign
    (35,713 )   (22,481 )   (14,643 )
   

 

 

 
Total current
    (37,017 )   (27,481 )   (16,289 )
   

 

 

 
Deferred tax benefit:
                   
Domestic
             
Foreign
    3,211     9,408     9,676  
   

 

 

 
Total deferred
    3,211     9,408     9,676  
   

 

 

 
Total provision for incomes taxes
  $ (33,806 ) $ (18,073 ) $ (6,613 )
   

 

 

 

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

9. Income Taxes — (Continued)

Deferred tax assets (liabilities) consist of the following:

    2004   2003  
   

 

 
Net operating loss carryforwards
  $ 16,176   $ 15,357  
Valuation allowance
    (57,519 )   (57,018 )
Fixed assets and operating leases
    30,655     27,718  
Pension
    18,568     25,852  
Other
    9,299     12,819  
Difference between book and tax recognition of income
    167     (87 )
Tax credit carryforwards
    25,839     25,773  
Contract and bonus reserve
    21,944     21,797  
   

 

 
Net deferred tax assets (liabilities)
  $ 65,129   $ 72,211  
   

 

 

As reflected above, the Company has recorded various deferred tax assets/(liabilities). Realization is dependent on generating sufficient taxable income. 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. Certain components of the deferred tax assets for 2003 shown above have changed from the amounts originally reported in 2003. In all cases, any such adjustment was offset by a corresponding adjustment to the valuation allowance for 2003 such that the reported net deferred tax assets (liabilities) for 2003 did not change. The valuation allowance increased by $501 in 2004. A valuation allowance is required under SFAS No. 109, “Accounting for Income Taxes” when there is an evidence of losses from operations in the three most recent 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 2011 and beyond, based on the current tax laws.

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to earnings/(loss) before income taxes, as a result of the following:

    2004   2003   2002  
   

 

 

 
Tax provision/(benefit) at U.S. statutory rate
    35.0 %   35.0 %   (35.0 )%
Permanent differences/Non-deductible expenses/other
    10.0 %   32.6 %   126.4 %
Nontaxable income
    (3.3 )%   %   %
Alternative minimum tax
    2.6 %   18.6 %   5.1 %
Valuation allowance
    (2.6 )%   15.0 %   23.2 %
Foreign rate differential
    2.9 %   21.9 %   (6.8 )%
Foreign tax credit utilized
    (6.9 )%   (32.8 )%   (89.9 )%
Other
    3.1 %   (1.0 )%   4.8 %
   

 

 

 
      40.8 %   89.3 %   27.8 %
   

 

 

 

10. Pension and Other Postretirement Benefits

Pension Benefits — The Company’s subsidiaries in the United Kingdom and Canada have pension plans which cover all full-time employees. Under the plans, retirement benefits are primarily a function of both years of service and level of compensation. At December 31, 2004, the Company recognized a cumulative minimum liability in its consolidated financial statements for the underfunded amount of $183,164 pretax, resulting in a cumulative pretax charge to other comprehensive income/(loss). This represents a decrease in the minimum liability of $16,945 from the prior year, including the impact of foreign currency translation.

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pension and Other Postretirement Benefits — (Continued)

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.

Other Postretirement Benefits — In addition to providing pension benefits, the Company’s subsidiary in Canada provides certain health care and life insurance benefits for retired employees (“other benefits”). Employees may become eligible for these other 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.

The following chart contains the disclosures for the pension and the other benefits plans for the years 2004, 2003 and 2002.

    Pension Benefits

  Other Benefits

 
    December 31,
2004
  December 26,
2003
  December 31,
2004
  December 26,
2003
 
   

 

 

 

 
Projected Benefit Obligation (PBO):
                         
PBO at beginning of period
  $ 569,117   $ 487,734   $ 983   $ 697  
Service cost
    18,113     13,070     18     11  
Interest cost
    31,587     27,799     59     48  
Plan participants’ contributions
    8,107     7,147          
Plan amendments
        1,961          
Actuarial (gain)/loss
    271     158     (134 )   149  
Benefits paid
    (25,041 )   (22,072 )   (66 )   (47 )
Special termination benefits/other
    778     993          
Foreign currency exchange rate changes
    51,345     52,327     87     125  
   

 

 

 

 
PBO at end of period
    654,277     569,117     947     983  
   

 

 

 

 
Plan Assets:
                         
Fair value of plan assets at beginning of period
    413,989     310,277          
Actual return on plan assets
    48,667     51,712          
Employer contributions
    28,510     26,721     66     47  
Plan participants’ contributions
    8,107     7,147          
Benefits paid
    (25,041 )   (22,072 )   (66 )   (47 )
Other
    797     2,802          
Foreign currency exchange rate changes
    39,061     37,402          
   

 

 

 

 
Fair value of plan assets at end of period
    514,090     413,989          
   

 

 

 

 
Funded Status:
                         
Funded Status
    (140,187 )   (155,128 )   (947 )   (983 )
Unrecognized net actuarial loss
    253,541     265,932     119     249  
Unrecognized prior service cost
    8,673     9,894     (116 )   (119 )
Unrecognized transition (asset) obligation
        (162 )        
Adjustment for the minimum liability
    (183,164 )   (200,109 )        
   

 

 

 

 
Accrued benefit cost
  $ (61,137 ) $ (79,573 ) $ (944 ) $ (853 )
   

 

 

 

 

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pension and Other Postretirement Benefits — (Continued)

    Pension Benefits

  Other Benefits

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
  December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 

 

 

 
Net Periodic Benefit Cost:
                                     
Service cost
  $ 18,113   $ 13,071   $ 12,374   $ 18   $ 11   $ 15  
Interest cost
    31,587     27,799     20,502     59     48     67  
Expected return on plan assets
    (32,396 )   (24,480 )   (25,757 )            
Amortization of transition
    8     71     63             (18 )
Amortization of prior service cost
    1,701     1,461     1,352              
Recognized actuarial loss – other
    18,135     20,311     8,340     (4 )   (13 )    
   

 

 

 

 

 

 
Total SFAS No. 87 net periodic pension cost
  $ 37,148   $ 38,233   $ 16,874   $ 73   $ 46   $ 64  
   

 

 

 

 

 

 
                                       
    Pension Benefits

  Other Benefits

 
    December 31,
2004
  December 26,
2003
  December 27,
2002
  December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 

 

 

 
Assumptions:
                                     
Periodic Benefit Cost
                                     
Discount rate
    5.46 %   5.61 %   5.75 %   6.00 %   6.25 %   6.25 %
Long-term rate of return
    7.35 %   7.51 %   8.00 %                  
Salary scale
    3.08 %   3.33 %   4.00 %                  
                                       
Benefit Obligations
                                     
Discount rate
    5.45 %   5.42 %   5.60 %   6.00 %   6.00 %      
Salary scale
    3.34 %   3.07 %   3.30 %                  
                                       
Health-care cost trend:
       
2004
    15.00%  
Decline to 2014
    4.00%  

Assumed health-care cost trend rates have a significant effect on the amounts reported for the other postretirement benefit plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

    One-Percentage
Point Increase
  One-Percentage
Point Decrease
 
   

 

 
Effect on total of service and interest cost components
  $ 2   $ (2)  
Effect on accumulated postretirement benefit obligations
  $ 14   $ (2)  

Plan measurement date — The measurement date for all of the Company’s pension and other benefits plans is December 31 of each year for both plan assets and obligations.

Accumulated benefit obligation — The accumulated benefit obligation (ABO) for the Company’s pension plans totaled approximately $580,000 and $500,000 at year end 2004 and 2003, respectively. As previously discussed, the Company recorded charges to other comprehensive income/(loss) in each of the years 2000 through 2004, due to the ABO exceeding the fair value of plan assets.

Investment policy — Each of the Company’s plans is governed by a written investment policy.

The investment policy of the U.K. pension plan is designed to improve the ongoing funding level of the plan while gradually, over time, changing the mix of investment allocation between equities and bonds to

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pension and Other Postretirement Benefits — (Continued)

more fully match the liabilities of the plan. The bond and equity allocations range from 40% bonds and 60% equities to 50% bonds and 50% equities, depending on the funding level.

The investment policy of the Canadian pension plan uses a balances approach and allocates investments in pooled funds in accordance with the policy’s asset mix guidelines. These guidelines identify target, maximum and minimum allocations by asset class. The target allocation is 45% bonds, 50% equities and 5% cash. The minimum and maximum allocations are: 42.5% to 57.5% equities; 40% to 50% bonds; and 2.5% to 7.5% cash.

Long-term rate of return assumptions — The expected long-term rate of return on pension plan assets is developed using a weighted-average methodology, blending the expected returns on each class of investment in the pension plans’ portfolio. The expected returns by asset class are developed considering both past performance and future considerations. The long-term rate of return is reviewed annually by the Company for its funded plans and adjusted, if required. The weighted-average expected long-term rate of return on plan assets has declined from 8.0% to 7.3% over the past three years.

Plan Asset Allocations
 
      2004     2003  
   

 

 
U.K. Plans
             
U.K. equities
    60 %   38 %
Non-U.K. equities
    1 %   25 %
U.K. fixed income securities
    36 %   32 %
Non-U.K. fixed income securities
    0 %   0 %
Other
    3 %   5 %
   

 

 
Total
    100 %   100 %
   

 

 

Canada Plan

Canadian equities
    23 %   23 %
Non-Canadian equities
    29 %   26 %
Canadian fixed income securities
    43 %   44 %
Non-Canadian fixed income securities
    0 %   0 %
Other
    5 %   7 %
   

 

 
Total
    100 %   100 %
   

 

 

Contributions — The Company expects to contribute approximately $30,700 to its pension plans and $79 to its other benefits plan in 2005.

Estimated future benefit payments — The following benefit payments, which reflect expected future service, are expected to be paid.

    Pension Benefits   Other Benefits  
   

 

 
2005
  $ 26,099   $ 79  
2006
    28,092     88  
2007
    28,556     98  
2008
    33,074     107  
2009
    37,798     117  
2010-2014
    231,673     724  

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pension and Other Postretirement Benefits — (Continued)

Other Employee Benefits — The Company’s subsidiaries in Italy participate in a government-mandated indemnity program for its employees. Accordingly, the Company accrues one month’s salary per employee for each year of the employee’s service, payable when the employee leaves the Company. In 2004, 2003 and 2002, the Company recorded an expense of approximately $4,050, $3,700 and $3,300, respectively. A liability of $27,623 in 2004 and $25,176 in 2003 related to the Company’s obligation in connection with this program is included in pension, postretirement and other employee benefits obligation on the consolidated balance sheet.

11. Sale/leaseback Transactions

The Company entered into sale/leaseback transactions for an office building in Spain in 2000 and an office building in the U.K. in 1999. In connection with these transactions, the Company recorded deferred gains which are being amortized to income over the term of the respective leases. The amortization was $4,135, $3,622 and $3,197, for the years ended 2004, 2003 and 2002, respectively. As of December 31, 2004 and December 26, 2003, the balance of the deferred gains was $76,383 and $74,151, respectively, and is included in other long-term liabilities on the accompanying consolidated balance sheet. The year-over-year increase in the deferred gain balance was primarily due to a change in foreign currency translation rates.

12. Operating Leases

The Company and certain of its subsidiaries are obligated under operating lease agreements primarily for office space. Rental expense for these leases totaled $23,711 in 2004, $19,588 in 2003 and $16,084 in 2002. Future minimum rental commitments on non-cancelable leases are as follows:

Fiscal year:
       
2005
  $ 24,654  
2006
    20,764  
2007
    17,532  
2008
    15,281  
2009
    14,857  
Thereafter
    232,135  
   

 
    $ 325,223  
   

 

13. Capital Leases

Assets under capital leases are summarized as follows:

    December 31
2004
  December 26,
2003
 
   

 

 
Buildings and improvements
  $ 4,692   $ 1,716  
Less accumulated amortization
    1,450     548  
   

 

 
Net assets under capital leases
  $ 3,242   $ 1,168  
   

 

 

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

13. Capital Leases — (Continued)

The following are the minimum lease payments to be made in each of the years indicated for the capital leases in effect as of December 31, 2004:

Fiscal year:
       
2005
  $ 816  
2006
    977  
2007
    542  
2008
    411  
2009
    385  
Thereafter
    770  
Less: interest
    (843 )
   

 
Net minimum lease payments under capital leases
    3,058  
Less: current portion of net minimum lease payments
    643  
   

 
Long-term net minimum lease payments
  $ 2,415  
   

 

14. Derivative Financial Instruments

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 cash flows that may arise from volatility in currency exchange rates. The Company utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS No. 133. At December 31, 2004, December 26, 2003 and December 27, 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the year ended December 31, 2004 a pretax loss on derivative instruments of $189, recorded in the year ended December 26, 2003 a pretax gain on derivative instruments of $617, and in the year ended December 27, 2002 a pretax loss of $402, which were recorded in cost of operating revenues on the consolidated statement of operations and comprehensive income/(loss). Amounts receivable (gains) or payable (losses) under foreign exchange contracts 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 is exposed to credit loss in the event of non-performance by the counterparties. All of these counterparties are significant financial institutions that are primarily rated “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies). As of December 31, 2004, approximately $7,300 was owed to the Company by counterparties and approximately $21,200 was owed by the Company to counterparties. A $517 after-tax loss was recorded in other comprehensive income as of December 28, 2001. This amount was reclassified to earnings in 2002 as the Company no longer qualified for deferral under SFAS No. 133.

The maximum term over which the Company is hedging exposure to the variability of cash flows is 12 months.

15. Warranty Reserves

The Company provides for make good/warranty reserves on certain of its long-term contracts. Generally, these reserves are accrued over the life of the contract so that a sufficient balance is maintained to cover the exposures at the conclusion of the contract.

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

15. Warranty Reserves — (Continued)

Balance as of December 27, 2002
  $ 25,500  
Accruals
    26,000  
Settlements
    (1,900 )
Adjustments to provisions
    (600 )
   

 
Balance as of December 26, 2003
    49,000  
Accruals
    13,100  
Settlements
    (3,800 )
Adjustments to provisions
    (22,900 )
   

 
Balance as of December 31, 2004
  $ 35,400  
   

 

16. 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. Additionally, the Company evaluates its non-contract exposures and records accruals as necessary. 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.

Subsidiaries of the Company in the U.K. have received a number of claims alleging personal injury arising from exposure to asbestos. To date 446 claims have been brought against the U.K. subsidiaries of which 255 remain open at December 31, 2004. None of the settled claims has resulted in material costs to the Company.

At December 31, 2004, the Company recorded the estimated U.S. dollar equivalent for the total U.K. asbestos liabilities of $44,300. An identical asset was recorded for the expected U.K. asbestos-related insurance recoveries. The estimated U.S. dollar equivalent liability for open (outstanding) U.K. asbestos claims is $5,800 and the estimated liability to future unasserted U.K. asbestos claims is $38,500. The current portion of $1,900 is recorded as Accounts receivable — other and Accrued expenses.

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 as these are subject to change as events evolve and as additional information becomes available during the administration and litigation process. Increases in the number of claims filed or costs to resolve those claims will cause the Company to increase further the estimates of the costs associated with such claims and could have a material adverse effect on the business, financial condition, results of operations, and cash flows.

17. 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.

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

17. Financial Instruments and Risk Management — (Continued)

Long-term Debt — The fair value of the Company’s third-party 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. It is not practicable to estimate the fair value of the Company’s intercompany debt as there is no market for this type of debt instrument.

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 “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies) (see Notes 4 and 14).

Carrying Amounts and Fair Values — The estimated fair values of the Company’s financial instruments are as follows:

    December 31, 2004

  December 26, 2003

 
    Carrying
Amount
  Fair Value   Carrying
Amount
  Fair Value  
   

 

 

 

 
Nonderivatives:
                         
Cash and short-term investments
  $ 163,473   $ 163,473   $ 178,050   $ 178,050  
Restricted cash
    45,387     45,387     21,123     21,123  
Third-party debt
    3,058     3,058     1,423     1,423  
Intercompany notes receivable - current
    1,265         564      
Intercompany notes receivable - long-term
    25,883         25,883      
Intercompany notes payable - current
    6,604         7,488      
Intercompany notes payable - long-term
    129,283         129,283      
Derivatives:
                         
Foreign currency contracts
    (31 )   (31 )   215     215  

In the ordinary course of business, the Company is contingently liable for performance under letters of credit, bank guarantees and surety bonds totaling $186,830 and $159,298 as of December 31, 2004 and December 26, 2003, respectively. 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 31, 2004, the Company had $28,519 of foreign currency contracts outstanding. These foreign currency contracts mature during 2005. 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 31, 2004 and December 26, 2003, the Company had no significant concentrations of credit risk.

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FOSTER WHEELER INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

18. Related Party Transactions

The Company enters into long-term contracts as a subcontractor and/or performs subcontracting work for certain Foster Wheeler affiliates. Included in the consolidated statement of operations and comprehensive income/(loss) for 2004, 2003 and 2002 related to these contracts and intercompany borrowings is the following:

    December 31,
2004
  December 26,
2003
  December 27,
2002
 
   

 

 

 
Operating revenue
  $ 5,550   $ 4,272   $ 8,882  
Cost of operating revenue
    49,968     10,757     29,926  
Interest income
    3,744     4,816     6,293  
Interest expense
    3,486     4,105     5,899  

Costs incurred by Foster Wheeler Ltd. and certain of its affiliates on behalf of the Company are charged to the Company through a management fee. These fees represent management’s estimation of a reasonable allocation of the Company’s share of such costs. These costs, plus royalty fees, are included in costs and expenses and totaled $24,980, $18,886 and $23,146 in 2004, 2003 and 2002, respectively.

Included in the consolidated balance sheet for 2004 and 2003 related to long-term contract activity and intercompany borrowings with Foster Wheeler affiliates is the following:

    December 31,
2004
  December 26,
2003
 
   

 

 
Accounts and notes receivable - other
  $ 16,249   $ 18,658  
Intercompany notes receivable
    27,148     26,447  
Accounts payable
    30,202     49,439  
Intercompany notes payable
    135,887     136,771  

Intercompany notes payable includes $103,400 which bears interest at LIBOR plus .375% and $25,883 which bears interest at 2.0%.

Also reflected in the balance sheet, due to the uncertainty of collection based on the going concern issues addressed in Note 2, the Company reduced intercompany notes receivable and charged shareholder’s deficit for its notes receivable from U.S. affiliates. The year-over-year change is reflected in the Consolidated Statement of Changes in Shareholder’s Deficit and the Consolidated Statement of Cash Flows. The impact on shareholder’s deficit was a reduction of $99,408 and $65,151 at December 31, 2004 and December 26, 2003, respectively.

Additionally, at December 31, 2004 and December 26, 2003, the Company held investments in unconsolidated affiliates of $57,687 and $51,544 at cost, respectively.

All of the related party transactions discussed above are eliminated in the Foster Wheeler Ltd. and Subsidiaries Consolidated Financial Statements for the years ended December 31, 2004, December 26, 2003, and December 27, 2002.

19. Sale of Certain Business Assets

In 2004, the Company sold minority equity interests in special-purpose companies established to develop power plant projects in Europe. The Company recorded an aggregate gain on the sales of $19,200 in 2004, which was recorded in other income on the consolidated statement of operations and comprehensive income/(loss).

In 2004, the Company also entered into a binding agreement to sell 10% of its equity interest in a waste-to energy project in Italy. The Company recorded a loss on the sale of $3,300 in 2004, which was recorded in other income on the consolidated statement of operations and comprehensive income/(loss).

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FOSTER WHEELER EUROPE LIMITED
AND SUBSIDIARIES

Consolidated Financial Statements
December 31, 2004

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Foster Wheeler Ltd:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income/(loss), of cash flows and of changes in shareholder’s deficit present fairly, in all material respects, the financial position of Foster Wheeler Europe Limited and Subsidiaries (the “Company”), an indirect, wholly-owned subsidiary of Foster Wheeler Ltd. (the “Parent”), at December 31, 2004 and December 31, 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 and the Parent will continue as a going concern. As discussed in Note 2 to the financial statements, the Parent has incurred significant losses in each of the three years in the period ended December 31, 2004 and has a shareholders’ deficit of $513,283,000 at December 31, 2004. The Parent has substantial debt obligations and during 2004 it was required to obtain an additional amendment to its senior credit facility to provide covenant relief by modifying certain definitions of financial measures utilized in the calculation of certain financial covenants. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Parent’s ability to return to profitability, to complete planned restructuring activities, to generate cash flows from operations and collections of receivables to fund its operations, including obligations resulting from asbestos claims, as well as the maintenance of credit facilities and bonding capacity adequate to conduct business. These matters raise substantial doubt about the Company’s and the Parent’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 30, 2005

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
(in thousands of dollars)

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
Operating revenues (including $11,176 in 2004, $3,373 in 2003 and $5,377 in 2002 with affiliates)
  $ 1,501,670   $ 1,967,266   $ 1,379,167  
Cost of operating revenues (including $(81,626) in 2004, $(18,574) in 2003 and $(23,952) in 2002 with affiliates)
    (1,372,946 )   (1,878,319 )   (1,358,105 )
   

 

 

 
Contract Profit
    128,724     88,947     21,062  
Selling, general and administrative expenses
    (96,168 )   (72,080 )   (59,494 )
Interest income (including $3,612 in 2004, $3,516 in 2003 and $7,079 in 2002 with affiliates)
    8,777     7,251     11,674  
Other income
    48,627     30,410     23,661  
Minority interest
        (405 )    
Interest expense (including $(25,497) in 2004, $(23,336) in 2003 and $(22,558) in 2002 with affiliates)
    (27,246 )   (23,758 )   (23,248 )
Other deductions
    (11,307 )   (22,194 )   (20,567 )
   

 

 

 
Earnings/(loss) before income taxes
    51,407     8,171     (46,912 )
(Provision)/benefit for income taxes
    (25,682 )   (13,796 )   3,839  
   

 

 

 
Net earnings/(loss)
    25,725     (5,625 )   (43,073 )
Other comprehensive income/(loss):
                   
Change in net loss on derivative instruments designated as cash flow hedges (net of taxes of $(298) in 2002)
            553  
Change in accumulated translation adjustment during the year
    32,137     (14,824 )   36,462  
Minimum pension liability adjustment (net of tax (provision)/benefits: $202 in 2004, $(18,763) in 2003 and $71,305 in 2002)
    (421 )   44,058     (166,380 )
   

 

 

 
Comprehensive income/(loss)
  $ 57,441   $ 23,609   $ (172,438 )
   

 

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands of dollars, except share data and per share amounts)

    December 31,

 
    2004   2003  
   

 

 
ASSETS
             
Current Assets:
             
Cash and cash equivalents
  $ 147,352   $ 169,321  
Accounts and notes receivable:
             
Trade, net
    205,213     183,041  
Other (including $13,801 in 2004 and $17,681 in 2003 with affiliates)
    20,304     36,542  
Intercompany notes
    6,679     5,486  
Contracts in process and inventories
    12,719     26,397  
Prepaid, deferred and refundable income taxes
    20,542     30,034  
Prepaid expenses
    6,294     6,354  
   

 

 
Total current assets
    419,103     457,175  
   

 

 
Land, buildings and equipment
    120,927     114,225  
Less accumulated depreciation
    96,613     88,793  
   

 

 
Net book value
    24,314     25,432  
   

 

 
Restricted cash
    44,458     20,747  
Notes and accounts receivable — long-term
    1,535     1,654  
Investment and advances
    140,083     116,408  
Deferred income taxes
    47,396     53,995  
Asbestos-related insurance recovery receivable
    42,400      
Other assets
    10,329     9,495  
   

 

 
TOTAL ASSETS
  $ 729,618   $ 684,906  
   

 

 
LIABILITIES AND SHAREHOLDER’S DEFICIT
             
Current Liabilities:
             
Current installments on capital lease obligations
  $ 643   $ 440  
Accounts payable (including $46,670 in 2004 and $50,920 in 2003 with affiliates)
    164,321     172,551  
Accrued expenses
    103,667     104,397  
Intercompany notes payable
    4,267     3,903  
Estimated costs to complete long-term contracts
    172,223     238,196  
Advance payments by customers
    62,472     28,556  
Income taxes
    19,244     17,339  
   

 

 
Total current liabilities
    526,837     565,382  
Capital lease obligations
    2,415     983  
Intercompany notes payable — long-term
    300,784     306,871  
Deferred income taxes
    1,747     5,277  
Pension, postretirement and other employee benefits
    61,315     75,569  
Deferred gain
    76,383     74,151  
Asbestos-related liability
    42,400      
Other long-term liabilities and minority interest
    16,140     80  
Commitments and contingencies
             
   

 

 
TOTAL LIABILITIES
    1,028,021     1,028,313  
   

 

 
Shareholder’s Deficit:
             
Common Stock — $1.456 par value; authorized 10,000,000 shares; issued 5,000,000
    7,280     7,280  
Capitalization of intercompany notes receivable
    (82,277 )   (66,251 )
Accumulated deficit
    (87,973 )   (117,287 )
Accumulated other comprehensive loss
    (135,433 )   (167,149 )
   

 

 
TOTAL SHAREHOLDER’S DEFICIT
    (298,403 )   (343,407 )
   

 

 
TOTAL LIABILITIES AND SHAREHOLDER’S DEFICIT
  $ 729,618   $ 684,906  
   

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER’S DEFICIT
(in thousands of dollars)

    December 31,

 
    2004   2003   2002  
   

 

 

 
Common Stock
                   
Balance at beginning and end of year
  $ 7,280   $ 7,280   $ 7,280  
   

 

 

 
Capitalization of Intercompany Notes Receivable
                   
Balance at beginning of year
    (66,251 )   (41,259 )   (50,829 )
Current year activity
    (16,026 )   (24,992 )   9,570  
   

 

 

 
Balance at end of year
    (82,277 )   (66,251 )   (41,259 )
   

 

 

 
Accumulated Deficit
                   
Balance at beginning of year
    (117,287 )   (111,662 )   (68,589 )
Adjustment for Foster Wheeler Energia S.A. (see Note 3)
    3,589          
Net earnings (loss) for the year
    25,725     (5,625 )   (43,073 )
   

 

 

 
Balance at end of year
    (87,973 )   (117,287 )   (111,662 )
   

 

 

 
Accumulated Other Comprehensive Loss
                   
Balance at beginning of year
    (167,149 )   (196,383 )   (67,018 )
Change in net gain on derivative instruments designated as cash flow hedges (net of taxes of $(298) in 2002)
            553  
Change in accumulated translation adjustment during the year
    32,137     (14,824 )   36,462  
Minimum pension liability adjustment (net of tax benefit/(provision): $202 in 2004, $(18,763) in 2003 and $71,305 in 2002)
    (421 )   44,058     (166,380 )
   

 

 

 
Balance at end of year
    (135,433 )   (167,149 )   (196,383 )
   

 

 

 
Total Shareholder’s Deficit
  $ (298,403 ) $ (343,407 ) $ (342,024 )
   

 

 

 

See notes to consolidated financial statements.

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
CASH FLOWS FROM OPERATING ACTIVITIES
                   
Net income/(loss)
  $ 25,725   $ (5,625 ) $ (43,073 )
Adjustments to reconcile net loss to cash flows from operating activities:
                   
Depreciation and amortization
    7,698     8,276     8,273  
Provision for losses on accounts receivable
    5,311     9,149     9,063  
Deferred tax
    7,720     19,177     (827 )
Net gain on asset sales
    (15,902 )   (28 )   (3,260 )
Equity earnings, net of dividends
    (16,918 )   (9,738 )   (9,424 )
Other noncash items
    3,920     494     9,435  
Changes in assets and liabilities:
                   
Receivables
    5,906     11,086     37,793  
Contracts in process and inventories
    15,072     30,293     7,204  
Accounts payable and accrued expenses
    874     (20,363 )   23,750  
Estimated costs to complete long-term contracts
    (69,498 )   54,190     49,025  
Advance payments by customers
    33,519     (24,906 )   31,585  
Income taxes
    10,174     (2,555 )   (7,778 )
Other assets and liabilities
    (4,960 )   2,409     (12,348 )
   

 

 

 
Net cash (used)/provided by operating activities
    8,641     71,859     99,418  
   

 

 

 
CASH FLOWS FROM INVESTING ACTIVITIES
                   
Change in restricted cash
    (21,481 )   11,481     (30,169 )
Proceeds from sale of Foster Wheeler Energia S.A. (see Note 3)
    3,589          
Capital expenditures
    (2,049 )   (4,639 )   (6,585 )
Proceeds from sale of assets
    259     263     501  
Decrease in investments and advances
    396     885      
Decrease in short-term investments
        40     6,279  
   

 

 

 
Net cash (used)/provided by investing activities
    (19,286 )   8,030     (29,974 )
   

 

 

 
CASH FLOWS FROM FINANCING ACTIVITIES
                   
Capitalization of intercompany notes receivable
    (16,026 )   (24,992 )   9,570  
Change in notes with affiliates
    151     (7,376 )   (15,513 )
Change in bank loans
        (13,740 )   (2,122 )
Payment of long-term debt
    (14 )   (5 )   (619 )
Payment of capital lease obligations
    (521 )        
   

 

 

 
Net cash used by financing activities
    (16,410 )   (46,113 )   (8,684 )
   

 

 

 
Effect of exchange rate changes on cash and cash equivalents
    5,086     6,537     6,410  
   

 

 

 
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    (21,969 )   40,313     67,170  
Cash and cash equivalents at beginning of period
    169,321     129,008     61,838  
   

 

 

 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 147,352   $ 169,321   $ 129,008  
   

 

 

 
Cash paid during the year for:
                   
Interest (net of amounts capitalized)
  $ 1,867   $ 1,993   $ 4,252  
Income taxes
  $ 10,323   $ 12,118   $ 2,632  

NONCASH INVESTING AND FINANCING ACTIVITIES:     In 2004, land, building and equipment increased by $2.7 million with a corresponding increase to capital lease obligations.

See notes to consolidated financial statements.

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)

1. Nature of Operations and Relationship to Foster Wheeler Ltd. and Subsidiaries

Foster Wheeler Europe Limited (the “Company”) is a wholly owned subsidiary of Foster Wheeler International Corporation, which is an indirectly wholly owned subsidiary of Foster Wheeler Ltd. The principal operations of the Company are to provide design, engineer, and construct petroleum processing facilities (upstream and downstream), chemical, petrochemical, pharmaceutical and natural gas liquefaction (LNG) facilities, and related infrastructure, including power generation and distribution facilities, production terminals and pollution control equipment. The Company principally operates under one segment, primarily outside of the United States, with operations in the United Kingdom, Italy, France, Turkey, Spain, Singapore and South Africa.

The Company has transactions and relationships with Foster Wheeler Ltd. and its affiliates. The financial position, results of operations, and the cash flows of the Company have been impacted by these transactions and relationships as discussed in Notes 2, 3, 8, 17, and 18.

The functional currency of the Company is the Pound Sterling and the reporting currency is the U.S. dollar.

2. Liquidity and Going Concern

The accompanying consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s ability to continue as a going concern is largely dependent on Foster Wheeler Ltd.’s ability to continue as a going concern. Foster Wheeler Ltd. and the Company may not, however, be able to continue as a going concern. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, Foster Wheeler Ltd.’s and the Company’s ability to operate profitably, to generate cash flows from operations, collections of receivables to fund its obligations, including those resulting from asbestos-related liabilities, as well as Foster Wheeler Ltd.’s ability to maintain credit facilities and bonding capacity adequate to conduct its business. Foster Wheeler Ltd. incurred significant operating losses in each of the years in the three-year period ended December 31, 2004, and has a shareholders’ deficit of $513,283 as of December 31, 2004.

In 2004, Foster Wheeler Ltd. consummated an equity-for-debt exchange in which it issued common shares, preferred shares, warrants to purchase common shares and new notes in exchange for certain of its outstanding debt securities and trust securities. The exchange offer reduced Foster Wheeler Ltd.’s existing debt (excluding a reduction in deferred accrued interest of $31,128) by $437,041, improved the shareholders’ deficit by $448,136 and when combined with the proceeds from the issuance of the new notes that were used to repay amounts that were outstanding under a previous Senior Credit Facility, eliminated substantially all material scheduled corporate debt maturities prior to 2011. After completing the exchange, Foster Wheeler Ltd. had outstanding debt obligations of approximately $570,073 as of December 31, 2004.

In August of 2002, Foster Wheeler Ltd. negotiated a Senior Credit Facility that was comprised of a $71,000 term loan, a $69,000 revolving credit facility and a $149,900 letter of credit facility having an April 30, 2005 maturity date. In connection with the equity-for-debt exchange, Foster Wheeler Ltd. prepaid the term loan and amounts outstanding under the revolving credit facility. Accordingly, there were no borrowings outstanding under the Senior Credit Facility as of December 31, 2004. Letters of credit of $90,018 remained outstanding under the Senior Credit Facility as of December 31, 2004.

In March 2005, the Senior Credit Facility was replaced with a new 5-year $250,000 Senior Credit Agreement. The new Senior Credit Agreement includes a $75,000 sub-limit for borrowings at a rate equal to LIBOR plus a spread. Standby letters of credit issued under the new Senior Credit Agreement will carry a fixed price throughout the life of the facility. The Senior Credit Agreement is collateralized by the assets and/or the stock of certain of Foster Wheeler Ltd.’s domestic subsidiaries and certain of its foreign subsidiaries.

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

Foster Wheeler Ltd. paid up-front fees to the lender of approximately $8,225 in conjunction with the execution of the Senior Credit Agreement. Such fees, paid predominately in the first quarter of 2005, have been deferred and will be amortized to expense over the life of the agreement.

Foster Wheeler Ltd. finalized a sale/leaseback arrangement for an office building at its corporate headquarters in the third quarter of 2002. Under this arrangement, Foster Wheeler Ltd. leases the facility for an initial non-cancelable period of 20 years. The long-term capital lease obligation of $45,280 as of December 31, 2004 is included in long-term debt in Foster Wheeler Ltd.’s consolidated balance sheet.

The new Senior Credit Agreement and the sale/leaseback arrangement have quarterly financial covenant compliance requirements. Management’s forecast indicates that Foster Wheeler Ltd. will be in compliance with the financial covenants throughout 2005. The forecast assumes a significant level of new contracts and improved performance on existing contracts. However, there can be no assurance that Foster Wheeler Ltd. will comply with the covenants. If Foster Wheeler Ltd. violates a covenant under the Senior Credit Agreement or the sale/leaseback arrangement, repayment of amounts outstanding under such agreements could be accelerated and the following borrowings outstanding could also be accelerated: the 2011 Senior Notes, the 2005 Senior Notes, the Convertible Subordinated Notes, the Trust Preferred Securities, the Subordinated Robbins Facility Exit Funding Obligations, and certain of the special-purpose project debt facilities. The total amount of Foster Wheeler Ltd. debt that could be accelerated is $463,563 as of December 31, 2004. Foster Wheeler Ltd. would not be able to repay amounts borrowed if the payment dates were accelerated.

Holders of Foster Wheeler Ltd.’s new 2011 Senior Notes have a security interest in the stock, debt and assets of certain of Foster Wheeler Ltd.’s subsidiaries. The 2011 Senior Notes contain incurrence covenants that limit Foster Wheeler Ltd.’s ability to undertake certain actions including incurring debt, making certain payments and investments, granting liens, selling assets and entering into specific intercompany transactions, among others. Management monitors these covenants to ensure Foster Wheeler Ltd. remains in compliance with the indenture.

In connection with the exchange, the holders of Foster Wheeler Ltd.’s 2005 Senior Notes agreed to amend the indenture governing these notes to effectively eliminate the security interest previously held by the notes.

On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provided for up to $45,000 of additional revolving loans available to provide working capital. As of December 31, 2004, the facility remained undrawn. In December 2004, the U.K. subsidiaries gave notice canceling the revolving credit facility effective January 24, 2005.

Since January 15, 2002, Foster Wheeler Ltd. has exercised its right to defer payments on the Trust Preferred Securities. The aggregate liquidation amount of the Trust Preferred Securities at December 31, 2004 was $71,177 after completing the equity-for-debt exchange. The previous Senior Credit Facility required Foster Wheeler Ltd. to defer the payment of the dividends on the Trust Preferred Securities and, accordingly, no dividends were paid during 2004 or 2003. As of December 31, 2004, the amount of dividends deferred plus accrued interest approximates $23,460. Foster Wheeler Ltd. intends to continue to defer payment of the dividends on the Trust Preferred Securities until January 15, 2007 - the full term allowed by the underlying agreement. Once the deferred dividend obligation has been satisfied, Foster Wheeler Ltd. has the right to defer subsequent dividend payments for an additional 20 consecutive quarters. The new Senior Credit Agreement requires the approval of the lenders to make payments on the Trust Preferred Securities to the extent such payments are not contractually required by the underlying Trust Preferred Securities agreements.

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

Foster Wheeler Ltd.’s European Power subsidiary in Finland is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. Obligations under both facilities are guaranteed by Foster Wheeler Ltd. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio.

One of the performance bond facilities is dedicated to a specific project and, as of December 31, 2004, had performance bonds outstanding equivalent to $24,522 (none of which has been drawn as of such date). Covenants under this facility are tested quarterly. The second facility is a general performance bond facility and, as of December 31, 2004, had performance bonds outstanding in favor of several clients equivalent to $10,114 (none of which has been drawn).

As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of Foster Wheeler Ltd.’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the two performance bond facilities. On August 6, 2004 and August 9, 2004, Foster Wheeler Ltd.’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities.

The waiver for the project-specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum equity ratio levels so long as the performance bonds are outstanding. Foster Wheeler Ltd.’s subsidiary remained below the minimum equity ratio as of December 31, 2004. On March 15, 2005, the bond expired and the banks funded the client and Foster Wheeler Ltd. reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of Foster Wheeler Ltd. to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

The waiver for the general performance bond facility is effective through March 31, 2005. As of that date, approximately $4,900 is forecasted to be outstanding under the facility. Foster Wheeler Ltd. has provided a standby letter of credit to back up the general performance bond facility and intends to do so until such facility can be permanently replaced or the last performance bond issued thereunder has expired. Therefore, Foster Wheeler Ltd. believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio is reflected in Foster Wheeler Ltd.’s liquidity forecasts.

Management closely monitors liquidity and updates its U.S. liquidity forecasts weekly. These forecasts cover, among other analyses, existing cash balances, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, working capital needs and unused credit line availability. Foster Wheeler Ltd.’s cash flow forecasts continue to indicate that sufficient cash will be available to fund Foster Wheeler Ltd.’s U.S. and foreign working capital needs throughout 2005.

As of December 31, 2004, Foster Wheeler Ltd. had cash and cash equivalents, short-term investments, and restricted cash totalling $390,186, compared to $430,170 as of December 26, 2003. Of the $390,186 total at December 31, 2004, $319,612 was held by foreign subsidiaries.

Foster Wheeler Ltd.’s domestic operating entities are cash flow positive. However they do not generate sufficient cash flow to cover the costs related to Foster Wheeler Ltd.’s indebtedness, obligations to fund U.S. pension plans, and corporate overhead expenses. Consequently, Foster Wheeler Ltd. requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs and to service its debt. Foster Wheeler Ltd.’s current 2005 forecast assumes

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

total cash repatriation from its non-U.S. subsidiaries of approximately $107,000 from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends. In 2004 and 2003, Foster Wheeler Ltd. repatriated approximately $77,000 and $100,000, respectively, from its non-U.S. subsidiaries.

There can be no assurance that the forecasted foreign cash repatriation will occur, as the non-U.S. subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of Foster Wheeler Ltd.’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. The repatriation of funds may also subject those funds to taxation. As a result of these factors, Foster Wheeler Ltd. may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries in the amount forecasted above.

Commercial operations under a domestic contract retained by Foster Wheeler Ltd. in connection with the sales of assets of the Foster Wheeler Environmental Corporation (“Environmental”), commenced in January 2004. The plant processes low-level nuclear waste for the U.S. Department of Energy (“DOE”). Foster Wheeler Ltd. funded the plant’s construction costs and operates the facility. The majority of Foster Wheeler Ltd.’s invested capital was recovered during the early stages of processing the first stream of waste materials. This project successfully processed all quantities of the first waste stream of materials ahead of schedule and is currently finalizing the processing line for the second waste stream. In 2004, the project generated net cash flow of approximately $53,300. An additional $17,800 of capital recovery is dependent on the initial processing of the second waste stream of materials. This capital recovery is expected in 2005.

Foster Wheeler Ltd.’s inability to operate profitably and to generate cash flows from operations, its reliance on repatriated cash from its foreign subsidiaries to fund its domestic obligations, and its obligations to maintain minimum debt covenants to avoid possible acceleration of its debt, raises substantial doubt about Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern.

3. Sale of Investment in Foster Wheeler Energia S.A.

In October 2003, pursuant to a Stock Purchase Agreement dated October 10, 2003 (“SPA”), the Company sold its investment in Foster Wheeler Energia S.A., a wholly owned subsidiary of Foster Wheeler Europe Limited, for proceeds of approximately $30,675. The subsidiary was sold to a wholly owned affiliate of Foster Wheeler Ltd. The sales price approximated the carrying value. The Company has reflected this transaction as a reorganization of companies under common control. Accordingly, the 2002 financial statements were revised to eliminate the activity of Foster Wheeler Energia S.A. from the consolidated statements of operations and cash flows. In May 2004, pursuant to the SPA, an additional payment of $3,589 was made to the Company. The payment could not be estimated at the time of purchase, and was therefore not accrued. The payment received by the Company was recorded as a decrease in accumulated deficit in 2004.

4. Summary of Significant Accounting Policies

Principles of Consolidation — The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of Foster Wheeler Europe Limited and all significant subsidiary companies. All significant intercompany transactions and balances have been eliminated.

The Company’s fiscal year ends on December 31.

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the periods 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 and contingencies, among others.

Revenue Recognition on Long-term Contracts — Revenues and profits on long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress toward completion is measured using physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress toward completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.

Revenues and profits on cost-reimbursable contracts are recorded as the costs are incurred. The Company includes flow-through costs consisting of materials, equipment and subcontractor costs as revenue on cost-reimbursable contracts when the Company is responsible for the engineering specifications and procurement for such costs.

Contracts in progress are stated at cost, increased for profits recorded on the completed effort or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. Negative balances are presented as “estimated costs to complete long-term contracts.” The Company has numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. However, current estimates may be revised as additional information becomes available. In accordance with the accounting and disclosure requirements of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”) and Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes,” the Company reviews its contracts monthly. As a result of this process, in 2004 27 individual projects had final estimated profit revisions exceeding $1,000. These revisions resulted from events such as earning project incentive bonuses or the incurrence or forecasted incurrence of contractual liquidated damages for performance or schedule issues, executing services and purchasing third party materials and equipment at costs differing from previously estimated, and testing of completed facilities which in turn eliminates or incurs completion and warranty-related costs. The net aggregate dollar value of the accrued contract profit resulting from these estimate changes during 2004 amounted to a net increase of $76,500. 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.

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 SOP 81-1. 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

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

to the claim have been incurred. 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. As of December 31, 2004, the Company had recorded a commercial claims receivable of $544.

Cash and Cash Equivalents — Cash and cash equivalents include liquid short-term investments purchased with original maturities of three months or less. The Company requires a substantial portion of these funds to support their liquidity and working capital needs. Accordingly, these funds may not be readily available for repatriation to its parent.

Restricted Cash — Restricted cash consists of approximately $33,900 at December 31, 2004 that was required to collateralize letters of credit and bank guarantees, and approximately $10,600 of client escrow funds.

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 might not be received within a one- year period. However, in conformity with industry practice, the full amount of accounts receivable, including such amounts withheld, has been included in current assets.

Trade accounts receivable are continually evaluated in accordance with corporate policy. Provisions are established on a project specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues. Customer payment history, trends within the various markets served and general economic trends are also considered when evaluating the necessity of a provision.

Accounts and Notes Receivable Other — Non-trade accounts and notes receivable consist primarily of receivables from affiliated companies of $13,801 at December 31, 2004, and $17,681 at December 31, 2003, foreign refundable value-added tax and accrued interest receivable.

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 as incurred. 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.

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 due to a lack of a controlling financial interest. Investment ownership of less than 20% in affiliates is carried at cost.

Income Taxes — Income tax expense in the Company’s statement of operations has been calculated on a separate company basis for its subsidiaries that file tax returns in their foreign jurisdictions. 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.

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

Foreign Currency — Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at month-end exchange rates and income and expenses and cash flows at monthly weighted-average rates.

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
Cumulative translation adjustment at beginning of year
  $ (44,827 ) $ (30,003 ) $ (66,465 )
Current year foreign currency adjustment
    32,137     (14,824 )   36,462  
   

 

 

 
Cumulative translation adjustment at end of year
  $ (12,690 ) $ (44,827 ) $ (30,003 )
   

 

 

 

For the year ended December 31, 2004, the Company recorded an after-tax net foreign currency transaction loss of $2,845. For the year ended December 31, 2003, the Company recorded an after-tax net foreign currency transaction gain of $129, and in the year ended December 31, 2002, recorded after-tax net foreign currency transaction loss of $1,289.

Contracts in Process and Estimated Costs to Complete Long-term Contracts — In accordance with terms of long-term contracts, amounts recorded in contracts in process and estimated costs to complete long-term contracts may not be realized or paid, respectively, within a one-year period. In conformity with industry practice, however, the full amount of contracts in process and estimated costs to complete long-term contracts have been included in current assets and current liabilities, respectively.

Inventories — Inventories, principally materials and supplies, are stated at the lower of cost or market, determined primarily on the average-cost method.

Stock Option Plans — Foster Wheeler Ltd. has fixed option plans which reserve common shares for issuance to executives, key employees, and directors. Employees of the Company participate in these plans. Foster Wheeler Ltd. and the Company have adopted the disclosure-only provision of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148 “Accounting for Stock Based Compensation – Transition and Disclosure.” Foster Wheeler Ltd. and the Company continue to account for stock options granted to employees and directors using the intrinsic value method under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Had compensation costs for the stock-based compensation plans been accounted for using the fair value method of accounting described by SFAS No. 123, the Company’s net earnings/(loss) would have been as follows:

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
Net earnings/(loss) — as reported
  $ 25,725   $ (5,625 ) $ (43,073 )
Deduct: Total stock-based employee compensation expense determined under fair-value based method for awards net of taxes of $174 in 2004, $92 in 2003 and $23 in 2002
    (346 )   (186 )   (46 )
   

 

 

 
Net earnings/(loss) — pro forma
  $ 25,379   $ (5,811 ) $ (43,119 )
   

 

 

 

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:

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
Dividend yield
    0.00 %   0.00 %   0.00 %
Expected volatility
    50.00 %   88.23 %   83.62 %
Risk-free interest rate
    2.99 %   3.22 %   2.90 %
Expected life (years)
    3.0     5.0     5.0  

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

On September 10, 2004, the Board of Directors adopted the 2004 Stock Option Plan (the “2004 Plan”) which reserves 56,421 preferred shares for issuance. The options granted under the 2004 Plan expire up to a maximum of ten years from the date granted. On October 6, 2004, management was issued options under the 2004 Plan to purchase 43,103 preferred shares at an exercise price of $9.378 per common share issuable. Such options expire on October 5, 2007. One third of the options issued to management vest in the fourth quarter of 2005, and the balance vest during the fourth quarter of 2006.

Under Foster Wheeler Ltd.’s 1995 Stock Option Plan approved by that company’s shareholders in April 1995 and amended in April 1999 and May 2002, the total number of shares of common stock that may be granted is 265,000.

These plans provide that shares granted be issued from Foster Wheeler Ltd.’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 of grant.

The Foster Wheeler Ltd. shareholders approved several capital share alterations at the November 29, 2004 meeting. Among them was a one-for-twenty reverse stock split. Please note that all stock option amounts reflect post reverse stock split amounts.

Information as of and for the years ended December 31, 2004, 2003 and 2002 relating to options granted to Company personnel and options available for grant is as follows (presented in actual number of shares):

    For the Year Ended December 31,

 
    2004

  2003

  2002

 
    Shares   Weighted-
Average
Exercise
Price
  Shares   Weighted-
Average
Exercise
Price
  Shares   Weighted-
Average
Exercise
Price
 
   

 

 

 

 

 

 
Options outstanding, beginning of year
    67,609   $ 175.13     67,376   $ 176.22     29,849   $ 358.21  
Options exercised
                               
Options granted
    746,475   $ 9.38     858   $ 23.40     37,827   $ 32.80  
Options cancelled or expired
    (888 ) $ 187.69     (625 ) $ 71.49     (300 ) $ 199.60  
   
       
       
       
Options outstanding, end of year
    813,196   $ 22.97     67,609   $ 175.13     67,376   $ 176.22  
   
       
       
       
Option price range at end of year
  $ 9.38 - $843.75         $ 23.40 - $843.75         $ 32.80 - $843.75        
Options available for grant at end of year
    869,273           25,342           22,253        
   
       
       
       
Weighted-average fair value of options granted during the year
  $ 3.30         $ 15.80         $ 22.20        
Options exercisable at end of year
    54,279           39,325           29,549        
Weighted-average price of exercisable options at end of year
  $ 207.70         $ 272.61         $ 359.82        

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

The following table summarizes information about fixed-price stock options outstanding as of December 31, 2004:

    Options Outstanding

  Options Exercisable

 
Range of
Exercise Prices
  Number
Outstanding at
12/31/2004
  Weighted-
Average
Remaining
Contractual Life
  Weighted-
Average
Exercise Price
  Number
Exercisable at
12/31/2004
  Weighted-
Average
Exercise Price
 

 

 

 

 

 

 
$9.38
    746,475     9.8 years   $ 9.38       $  
$23.40 to $32.80
    38,184     7.8 years   $ 32.59     25,742   $ 32.49  
$113.75
    6,988     6.0 years   $ 113.75     6,988   $ 113.75  
$180.00
    2,450     5.0 years   $ 180.00     2,450   $ 180.00  
$270.00 to $301.25
    8,350     4.2 years   $ 285.53     8,350   $ 285.53  
$552.50 to $738.75
    10,020     1.8 years   $ 619.00     10,020   $ 619.00  
$843.75
    729     1.4 years   $ 843.75     729   $ 843.75  
   
             
       
      813,196                 54,279        
   
             
       

Recent Accounting Developments — On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires that all share-based payments to employees, including grants of employee stock options and restricted stock, be recognized in the consolidated statement of operations and comprehensive loss based on their fair values. Prior to SFAS No. 123R, the Company adopted the disclosure-only provisions of SFAS No. 123 and therefore only certain pro forma disclosures of the fair value of share-based payments were required in the notes to the consolidated financial statements. SFAS No. 123R provides for the adoption of the new standard in one of two ways: the modified prospective transition method and the modified retrospective transition method. Using the modified prospective transition method, share-based employee compensation cost would be recognized from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date. Using the modified retrospective method, employee compensation cost would be recognized for periods presented prior to the adoption of the proposed standard in accordance with the original provisions of SFAS No. 123; that is, employee compensation cost would be recognized in the amounts reported in the pro forma disclosures provided in accordance with SFAS No. 123. Adoption of the provisions of SFAS No. 123R is effective as of the beginning of the Company’s quarter ending September 30, 2005. The Company is still evaluating the method of adoption and the impact that the adoption of SFAS No. 123R will have on its consolidated financial position and results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets, which were previously required to be recorded on a carryover basis rather than a fair value basis. Instead, SFAS No. 153 provides that exchanges of nonmonetary assets that do not have commercial substance be reported at carryover basis rather than a fair value basis. A nonmonetary exchange is considered to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the consolidated financial statements of the Company.

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

5. Accounts and Notes Receivable — Trade

The following table shows the components of trade accounts and notes receivable:

    December 31,

 
    2004   2003  
   

 

 
From long-term contracts:
             
Amounts billed due within one year
  $ 130,602   $ 138,677  
Retention — Billed:
             
Estimated to be due in:
             
2004
        2,868  
2005
    4,826     128  
2006
    30     656  
2007
    570      
   

 

 
Total billed
    5,426     3,652  
   

 

 
Retention — Unbilled:
             
Estimated to be due in:
             
2004
        51,731  
2005
    82,389      
   

 

 
Total unbilled
    82,389     51,731  
   

 

 
Total retentions
    87,815     55,383  
   

 

 
Total receivables from long-term contracts
    218,417     194,060  
Other trade accounts and notes receivable
        56  
   

 

 
      218,417     194,116  
Less: allowance for doubtful accounts
    13,204     11,075  
   

 

 
Net Trade Accounts and Notes Receivable
  $ 205,213   $ 183,041  
   

 

 

Unbilled amounts are billed in accordance with contract provisions that include monthly, milestone and other billing criteria.

Changes in the allowance for doubtful accounts during the years ended December 31, 2002 through 2004 are presented below.

    2004   2003   2002  
   

 

 

 
Balance at beginning of year
  $ 11,075   $ 3,343   $ 962  
Additions
    5,311     9,149     9,063  
(Deductions)/amounts recovered
    (3,182 )   (1,417 )   (6,682 )
   

 

 

 
Balance at end of year
  $ 13,204   $ 11,075   $ 3,343  
   

 

 

 

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

6. Contracts in Process and Inventories

The following table shows the elements included in contracts in process as related to long-term contracts:

    December 31,

 
    2004   2003  
   

 

 
Contracts in Process
             
Costs plus accrued profits less earned revenues on contracts currently in process
  $ 15,210   $ 29,373  
Less: progress payments
    3,389     3,873  
   

 

 
Net
  $ 11,821   $ 25,500  
   

 

 

Costs of inventories are shown below:

    December 31,

 
    2004   2003  
   

 

 
Inventories
             
Materials and supplies
  $ 518   $ 510  
Finished goods
    361     387  
Other
    19      
   

 

 
Total
  $      898   $      897  
   

 

 

7. Land, Buildings and Equipment

Land, buildings and equipment are stated at cost and are set forth below:

    December 31,

 
    2004   2003  
   

 

 
Land and land improvements
  $ 35   $ 32  
Buildings
    27,407     22,263  
Equipment
    93,485     91,929  
Construction in progress
        1  
   

 

 
Total
  $ 120,927   $ 114,225  
   

 

 

Depreciation and amortization expense for the years 2004, 2003 and 2002 was $7,637, $8,203 and $8,126, respectively.

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

8. Investments, Advances and Equity Interests

The Company owns a non-controlling equity interest in two electric power generation projects and one waste-to-energy project in Italy. Two of the projects in Italy are each 42% owned while the third is 49% owned by the Company. In 2004, the Company entered into a binding agreement to sell 10% of its minority equity interest in the third Italian project. Following is summarized financial information for the Company’s equity affiliates combined, as well as the Company’s interest in the affiliates.

    December 31,

 
    2004   2003  
   

 

 
Balance Sheet Data:
             
Current assets
  $ 147,625   $ 94,525  
Other assets (primarily buildings and equipment)
    414,779     409,267  
Current liabilities
    39,445     31,445  
Other liabilities (primarily long-term debt)
    404,802     385,047  
Net assets
    118,157     87,300  
               
    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
Income Statement Data:
                   
Total revenues
  $ 240,228   $ 216,006   $ 168,421  
Gross earnings
    59,760     56,355     42,819  
Income before taxes
    43,599     38,062     31,013  
Net earnings
    26,317     22,802     17,303  

The Company’s share of the net earnings of equity affiliates included in other income totaled $11,292, $9,738 and $7,334 for the years ended December 31, 2004, 2003 and 2002, respectively. The Company’s investment in the equity affiliates totaled $48,458 and $36,681 as of December 31, 2004 and 2003, respectively.

The Company has guaranteed certain performance obligations of these projects. The Company’s contingent obligations under the guarantees for two of the projects are approximately $1,000 in total. The contingent obligation for the third project is capped at approximately $10,300 over the twelve-year life of the project’s financing; to date, no amounts have been paid under this guarantee. The Company has also provided a guarantee of $5,200 representing 49% of the debt service reserve letter of credit providing liquidity should the performance of the third project be insufficient to cover the debt service payments.

The undistributed retained earnings of the Company’s equity investees amounted to approximately $42,000 and $28,500 at December 31, 2004 and 2003, respectively.

Additionally, at December 31, 2004, the Company held investments in unconsolidated affiliates of $56,819 carried at cost since the Company does not hold a controlling financial interest. The Company has made advances of approximately $34,800 to its third-party equity investees.

9. Income Taxes

The Company’s earnings/(losses) before income taxes for the years 2004, 2003 and 2002 were taxed under foreign jurisdictions.

    2004   2003   2002  
   

 

 

 
Earnings/(loss) before income taxes
  $ 51,407   $ 8,171   $ (46,912)  

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

9. Income Taxes — (Continued)

The provision for income taxes on those earnings/(loss) was as follows:

    2004   2003   2002  
   

 

 

 
Current tax expense
  $ (31,170 ) $ (22,356 ) $ (8,355 )
Deferred tax benefit
    5,488     8,560     12,194  
   

 

 

 
Total (provision)/benefit for income taxes
  $ (25,682 ) $ (13,796 ) $ 3,839  
   

 

 

 

Deferred tax assets (liabilities) consist of the following:

    2004   2003  
   

 

 
Net operating loss carryforwards
  $ 16,176   $ 15,357  
Valuation allowance
    (30,251 )   (29,777 )
Fixed assets and operating leases
    30,747     27,718  
Pension
    17,359     23,514  
Other
    12,453     12,819  
Difference between book and tax recognition of income
    167     74  
Contract and bonus reserve
    18,370     20,330  
   

 

 
Net deferred tax assets (liabilities)
  $ 65,021   $ 70,035  
   

 

 

As reflected above, the Company has recorded various deferred tax assets/(liabilities). Realization is dependent on generating sufficient taxable income. 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. Certain components of the deferred tax assets for 2003 shown above have changed from the amounts originally reported in 2003. In all cases, any such adjustment was offset by a corresponding adjustment to the valuation allowance for 2003 such that the reported net deferred tax assets (liabilities) for 2003 did not change. The valuation allowance increased by $474 in 2004. A valuation reserve is required under SFAS No. 109, “Accounting for Income Taxes” when there is an evidence of losses from operations in the three most recent 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 2014 and beyond, based on the current tax laws.

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.K. statutory rate to earnings/(loss) before income taxes, as a result of the following:

    2004   2003   2002  
   

 

 

 
Tax provision/(benefit) at U.K. statutory rate
    30.0 %   30.0 %   (30.0 )%
Non-deductible expenses / other
    17.9 %   45.9 %   11.3 %
Non-taxable income
    (5.3 )%   %   %
Valuation allowance
    (4.2 )%   31.5 %   17.5 %
Foreign rate differential
    10.4 %   63.1 %   (8.4 )%
Other
    1.2 %   (1.7 )%   1.4 %
   

 

 

 
      50.0 %   168.8 %   (8.2 )%
   

 

 

 

10. Pension Benefits

Pension Benefits — The Company’s subsidiary in the United Kingdom has a pension plan which covers all full-time employees. Under the plan, retirement benefits are primarily a function of both years of service

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pension Benefits — (Continued)

and level of compensation. At December 31, 2004, the Company recognized a cumulative minimum liability in its consolidated financial statements for the underfunded amount of $175,486 pretax, resulting in a cumulative pretax charge to other comprehensive income/(loss). This represents a decrease in the minimum liability of $18,149 from the prior year, including the impact of foreign currency translation. 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.

The following chart contains the disclosures for pension benefits for the years 2004, 2003 and 2002.

    Pension Benefits

 
    For the Year Ended December 31,

 
    2004   2003  
   

 

 
Projected Benefit Obligation (PBO):
             
PBO at beginning of period
  $ 548,680   $ 470,372  
Service cost
    17,859     12,835  
Interest cost
    30,365     26,622  
Plan participants’ contributions
    8,107     7,147  
Plan amendments
        1,961  
Actuarial loss
    (632 )   (36 )
Benefits paid
    (23,360 )   (20,618 )
Special termination benefits/other
    778     993  
Foreign currency exchange rate changes
    49,306     49,404  
   

 

 
PBO at end of period
    631,103     548,680  
   

 

 
Plan Assets:
             
Fair value of plan assets at beginning of period
    396,062     294,975  
Actual return on plan assets
    47,272     50,151  
Employer contributions
    28,510     26,721  
Plan participants’ contributions
    8,107     7,147  
Benefits paid
    (23,360 )   (20,618 )
Other
    867     2,855  
Foreign currency exchange rate changes
    37,344     34,831  
   

 

 
Fair value of plan assets at end of period
    494,802     396,062  
   

 

 
Funded Status:
             
Funded Status
    (136,301 )   (152,618 )
Unrecognized net actuarial loss
    246,371     259,783  
Unrecognized prior service cost
    7,623     8,686  
Adjustment for the minimum liability
    (175,486 )   (193,635 )
   

 

 
(Accrued) benefit cost
  $ (57,793)   $ (77,784)  
   

 

 

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pension Benefits — (Continued)

    Pension Benefits

 
    For the Year Ended Decenber 31,

 
    2004   2003   2002  
   

 

 

 
Net Periodic Benefit Cost:
                   
Service cost
  $ 17,859   $ 12,835   $ 12,161  
Interest cost
    30,365     26,622     19,408  
Expected return on plan assets
    (31,081 )   (23,179 )   (24,261 )
Amortization of transition asset
    (68 )        
Amortization of prior service cost
    1,686     1,446     1,339  
Recognized actuarial loss - other
    17,705     19,886     8,279  
   

 

 

 
Total SFAS No. 87 net periodic pension cost
  $ 36,466   $ 37,610   $ 16,926  
   

 

 

 
                     
    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
Assumptions:
                   
Periodic Benefit Cost:
                   
Discount rate
            5.45 %           5.60 %           5.75 %
Long-term rate of return
    7.34 %   7.50 %   8.00 %
Salary scale
    3.04 %   3.30 %   4.00 %
                     
Benefit Obligations:
                   
Discount rate
    5.43 %   5.40 %   5.60 %
Salary scale
    3.32 %   3.00 %   3.30 %

Plan measurement date — The measurement date for the Company’s defined benefit plan is December 31 of each year for both plan assets and obligations.

Accumulated benefit obligation — The accumulated benefit obligation (ABO) for the Company’s plan totaled approximately $557,500 and $481,000 at year end 2004 and 2003, respectively. As previously discussed, the Company recorded charges to other comprehensive income/(loss) in each of the years 2000 through 2004, due to the ABO exceeding the fair value of plan assets.

Investment policy — The Company’s plan is governed by a written investment policy.

The investment policy of the U.K. plan is designed to improve the ongoing funding level of the plan while gradually, over time, changing the mix of investment allocation between equities and bonds to more fully match the liabilities of the plan. The bond and equity allocations range from 40% bonds and 60% equities to 50% bonds and 50% equities, depending on the funding level.

Long-term rate of return assumptions — The expected long-term rate of return on plan assets is developed using a weighted-average methodology, blending the expected returns on each class of investment in the plan’s portfolio. The expected returns by asset class are developed considering both past performance and future considerations. The long-term rate of return is reviewed annually by the Company for its funded plans and adjusted, if required.

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Pension Benefits — (Continued)

    2004   2003  
   

 

 
Plan Asset Allocation:
             
U.K. equities
    60 %   38 %
Non-U.K. equities
    1 %   25 %
U.K. fixed income securities
    36 %   32 %
Non-U.K. fixed income securities
    0 %   0 %
Other
    3 %   5 %
   

 

 
Total
    100 %   100 %
   

 

 

Contributions — The Company expects to contribute approximately $29,800 to its pension plan in 2005.

Estimated future benefit payments — The following benefit payments, which reflect expected future service, are expected to be paid on the defined benefit plan.

2005
  $ 24,465  
2006
    26,381  
2007
    26,817  
2008
    31,315  
2009
    36,038  
2010-2014
    223,671  

Other Employee Benefits — The Company’s subsidiaries in Italy participate in a government-mandated indemnity program for its employees. Accordingly, the Company accrues one month’s salary per employee for each year of the employee’s service, payable when the employee leaves the Company. In 2004, 2003 and 2002, the Company recorded an expense of approximately $4,050, $3,700 and $3,300, respectively. A liability of $27,623 in 2004 and $24,324 in 2003 related to the Company’s obligation in connection with this program is included in pension, postretirement and other employee benefits obligation on the consolidated balance sheet.

11. Sale/leaseback Transactions

The Company entered into sale/leaseback transactions for an office building in Spain in 2000 and an office building in the U.K. in 1999. In connection with these transactions, the Company recorded deferred gains which are being amortized to income over the term of the respective leases. The amortization was $4,135, $3,622 and $3,197, for the years ended December 31, 2004, 2003 and 2002, respectively. As of December 31, 2004 and December 31, 2003, the balance of the deferred gains was $76,383 and $74,151, respectively, and is included in other long-term liabilities on the accompanying consolidated balance sheet. The year-over-year increase in the deferred gain balance was primarily due to a change in foreign currency translation rates.

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

12. Operating Leases

The Company and certain of its subsidiaries are obligated under operating lease agreements primarily for office space. Rental expense for these leases totaled $23,070 in 2004, $19,235 in 2003 and $15,416 in 2002. Future minimum rental commitments on non-cancelable leases are as follows:

Fiscal year:
       
2005
  $ 24,038  
2006
    20,211  
2007
    17,084  
2008
    14,833  
2009
    14,848  
Thereafter
    232,136  
   

 
    $ 323,150  
   

 

13. Capital Leases

Assets under capital leases are summarized as follows:

    December 31,

 
    2004   2003  
   

 

 
Buildings and improvements
  $ 4,692   $ 1,716  
Less accumulated amortization
    1,450     548  
   

 

 
Net assets under capital leases
  $ 3,242   $ 1,168  
   

 

 

The following are the minimum lease payments to be made in each of the years indicated for the capital leases in effect as of December 31, 2004:

Fiscal year:
       
2005
  $ 816  
2006
    977  
2007
    542  
2008
    411  
2009
    385  
Thereafter
    770  
Less: interest
    (843 )
   

 
Net minimum lease payments under capital leases
    3,058  
Less: current portion of net minimum lease payments
    643  
   

 
Long-term net minimum lease payments
  $ 2,415  
   

 

14. Derivative Financial Instruments

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 cash flows that may arise from volatility in currency exchange rates. The Company utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS No. 133. At December 31, 2004, 2003 and 2002, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded in the year ended December 31, 2004 a pretax loss on derivative instruments of $227, recorded in the year ended December 31, 2003 a pretax gain on derivative instruments of $616, and in the year ended December 31,

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

14. Derivative Financial Instruments — (Continued)

2002 a pretax loss of $457, which were recorded in cost of operating revenues on the consolidated statement of operations and comprehensive income/(loss). Amounts receivable (gains) or payable (losses) under foreign exchange contracts 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 is exposed to credit loss in the event of non-performance by the counterparties. All of these counterparties are significant financial institutions that are primarily rated “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies). As of December 31, 2004, approximately $7,300 was owed to the Company by counterparties and approximately $21,200 was owed by the Company to counterparties. A $553 after-tax loss was recorded in other comprehensive income as of December 31, 2001. This amount was reclassified to earnings in 2002 as the Company no longer qualified for deferral under SFAS No. 133.

The maximum term over which the Company is hedging exposure to the variability of cash flows is 12 months.

15. Warranty Reserves

The Company provides for make good/warranty reserves on certain of its long-term contracts. Generally, these reserves are accrued over the life of the contract so that a sufficient balance is maintained to cover the exposures at the conclusion of the contract.

Balance as of December 31, 2002
  $ 19,900  
Accruals
    21,600  
Settlements
    (1,300 )
Adjustments to provisions
    600  
   

 
Balance as of December 31, 2003
    40,800  
Accruals
    12,600  
Settlements
    (1,200 )
Adjustments to provisions
    (20,400 )
   

 
Balance as of December 31, 2004
  $ 31,800  
   

 

16. 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. Additionally, the Company evaluates its non-contract exposures and records accruals as necessary. 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.

Subsidiaries of the Company in the U.K. have received a number of claims alleging personal injury arising from exposure to asbestos. To date 446 claims have been brought against the U.K. subsidiaries of which 255 remain open at December 31, 2004. None of the settled claims has resulted in material costs to the Company.

At December 31, 2004 the Company recorded the estimated U.S. dollar equivalent for the total U.K. asbestos liabilities of $44,300. An identical asset was recorded for the expected U.K. asbestos-related

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

16. Litigation and Uncertainties — (Continued)

insurance recoveries. The estimated U.S. dollar equivalent liability for open (outstanding) U.K. asbestos claims is $5,800 and the estimated liability to future unasserted U.K. asbestos claims is $38,500. The current portion of $1,900 is recorded as Accounts receivable – other and Accrued expenses.

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 as these are subject to change as events evolve and as additional information becomes available during the administration and litigation process. Increases in the number of claims filed or costs to resolve those claims will cause the Company to increase further the estimates of the costs associated with such claims and could have a material adverse effect on the business, financial condition, results of operations, and cash flows.

17. 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 third-party 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. It is not practicable to estimate the fair value of the Company’s intercompany debt as there is no market for this type of debt instrument.

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 “BBB+” or better by Standard & Poor’s (or the equivalent by other recongnized credit rating agencies) (see Notes 4 and 14).

Carrying Amounts and Fair Values — The estimated fair values of the Company’s financial instruments are as follows:

    December 31,

 
    2004

  2003

 
    Carrying
Amount
  Fair Value   Carrying
Amount
  Fair Value  
   

 

 

 

 
Nonderivatives:
                         
Cash and short-term investments
  $ 147,352   $ 147,352   $ 169,321   $ 169,321  
Restricted cash
    44,458     44,458     20,747     20,747  
Intercompany notes receivable - current
    6,679         5,486      
Third-party debt
    3,058     3,058     1,423     1,423  
Intercompany notes payable - current
    4,267         3,903      
Intercompany notes payable - long-term
    300,784         306,871      
Derivatives:
                         
Foreign currency contracts
    (69 )   (69 )   158     158  

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

17. Financial Instruments and Risk Management — (Continued)

In the ordinary course of business, the Company is contingently liable for performance under letters of credit, bank guarantees and surety bonds totaling $163,281 and $137,592 as of December 31, 2004 and December 31, 2003, respectively. 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 31, 2004, the Company had $28,519 of foreign currency contracts outstanding. These foreign currency contracts mature during 2005. 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 31, 2004 and 2003, the Company had no significant concentrations of credit risk.

18. Related Party Transactions

The Company enters into long-term contracts as a subcontractor and/or performs subcontracting work for certain Foster Wheeler affiliates. Included in the consolidated statement of operations and comprehensive income/(loss) for 2004, 2003 and 2002 related to these contracts and intercompany borrowings is the following:

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
Operating revenues
  $ 11,176   $ 3,373   $ 5,377  
Cost of operating revenues
    63,207     2,986     6,348  
Interest income
    3,612     3,516     7,079  
Interest expense
    25,497     23,336     22,558  

Costs incurred by Foster Wheeler Ltd. and certain of its affiliates on behalf of the Company are charged to the Company through a management fee. These fees represent management’s estimation of a reasonable allocation of the Company’s share of such costs. These costs, plus royalty fees, are included in costs and expenses and totaled $21,316, $17,254 and $20,018 in 2004, 2003 and 2002, respectively.

Included in the consolidated balance sheet for 2004 and 2003 related to long-term contract activity and intercompany borrowings with Foster Wheeler affiliates is the following:

    December 31,

 
    2004   2003  
   

 

 
Accounts and notes receivable - other
  $ 13,801   $ 17,681  
Intercompany notes receivable
    6,679     5,486  
Accounts payable
    46,670     50,920  
Intercompany notes payable
    305,051     310,774  

Intercompany notes payable includes $270,000 due in full in 2016 at interest rates of 7.5% in 2004 and 2003, and 8.0% in 2002.

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FOSTER WHEELER EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

18. Related Party Transactions — (Continued)

Also reflected in the balance sheet, due to the uncertainty of collection based on the going concern issues addressed in Note 2, the Company reduced intercompany notes receivable and charged shareholder’s deficit for its notes receivable from U.S. affiliates. The year-over-year change is reflected in the Consolidated Statement of Changes in Shareholder’s Deficit and the Consolidated Statement of Cash Flows. The impact on shareholder’s deficit was a reduction of $82,277 and $66,251 at December 31, 2004 and 2003, respectively.

Additionally, at December 31, 2004 and 2003, the Company held investments in unconsolidated affiliates of $56,819 and $50,680 at cost, respectively.

In 2001, the Company purchased the investments in its subsidiaries from its parent, Foster Wheeler International Corporation. As the transfer of ownership occurred between entities under common control, the difference between the purchase price and the net equity of these subsidiaries of $250,291 was charged to paid-in capital in the amount of $86,886 and to accumulated deficit in the amount of $163,405, as the Company’s paid-in capital could not absorb the full amount of the excess purchase price.

All of the related party transactions discussed above are eliminated in the Foster Wheeler Ltd. and Subsidiaries Consolidated Financial Statements for the years ended December 31, 2004, December 26, 2003, and December 27, 2002.

19. Sale of Certain Business Assets

In 2004, the Company sold minority equity interests in special-purpose companies established to develop power plant projects in Europe. The Company recorded an aggregate gain on the sales of $19,200 in 2004, which was recorded in other income on the consolidated statement of operations and comprehensive income/(loss).

In 2004, the Company also entered into a binding agreement to sell 10% of its equity interest in a waste-to-energy project in Italy. The Company recorded a loss on the sale of $3,300 in 2004, which was recorded in other income on the consolidated statement of operations and comprehensive income/(loss).

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FW NETHERLANDS C.V. AND SUBSIDIARIES

Consolidated Financial Statements
December 31, 2004

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Foster Wheeler Ltd:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive (loss)/income, of cash flows and of changes in partners’ capital present fairly, in all material respects, the financial position of FW Netherlands C.V. and Subsidiaries (the “Partnership”), an indirect, wholly-owned subsidiary of Foster Wheeler Ltd. (the “Parent”), at December 31, 2004 and December 31, 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Partnership and the Parent will continue as a going concern. As discussed in Note 2 to the financial statements, the Parent has incurred significant losses in each of the three years in the period ended December 31, 2004 and has a shareholders’ deficit of $513,283,000 at December 31, 2004. The Parent has substantial debt obligations and during 2004 it was required to obtain an additional amendment to its senior credit facility to provide covenant relief by modifying certain definitions of financial measures utilized in the calculation of certain financial covenants. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Parent’s ability to return to profitability, to complete planned restructuring activities, to generate cash flows from operations and collections of receivables to fund its operations, including obligations resulting from asbestos claims, as well as the maintenance of credit facilities and bonding capacity adequate to conduct business. These matters raise substantial doubt about the Partnership’s and the Parent’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 30, 2005

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FW NETHERLANDS C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE (LOSS)/ INCOME
(in thousands of dollars)

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
Operating revenues (including $45,203 in 2004, $72,820 in 2003 and $73,807 in 2002 with affiliates)
  $ 476,025   $ 655,459   $ 478,105  
Cost of operating revenues
    (507,460 )   (598,622 )   (421,905 )
   

 

 

 
Contract Profit
    (31,435 )   56,837     56,200  
                     
Selling, general and administrative expenses
    (43,569 )   (37,297 )   (32,333 )
Interest income (including $128 in 2004, $107 in 2003 and $195 in 2002 with affiliates)
    3,425     4,215     4,439  
Other income
    6,974     1,778     2,693  
Minority interest
        (133 )    
Interest expense (including $(3,342) in 2004, $(3,500) in 2003 and $(3,500) in 2002 with affiliates)
    (4,227 )   (4,417 )   (3,606 )
Other deductions
    (4,439 )   (7,581 )   (5,580 )
   

 

 

 
(Loss)/income before income taxes
    (73,271 )   13,402     21,813  
Provision for income taxes
    (2,013 )   (12,815 )   (7,978 )
   

 

 

 
Net (loss)/income
    (75,284 )   587     13,835  
                     
Other comprehensive (loss)/income:
                   
Change in net loss on derivative instruments designated as cash flow hedges (net of tax benefit of $126 in 2002)
            (235 )
Change in accumulated translation adjustment during the year
    7,423     23,776     14,201  
   

 

 

 
Comprehensive (loss)/income
  $ (67,861)   $ 24,363   $ 27,801  
   

 

 

 

See notes to consolidated financial statements.

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FW NETHERLANDS C.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)

    December 31,

 
    2004   2003  
   

 

 
ASSETS
             
Current Assets:
             
Cash and cash equivalents
  $ 37,312   $ 108,891  
Short-term investments
    25,775     13,390  
Accounts and notes receivable:
             
Trade, net
    72,829     104,567  
Other (including $1,513 in 2004 and $1,270 in 2003 with affiiates)
    1,569     4,067  
Contracts in process and inventories
    107,510     18,895  
Prepaid, deferred and refundable income taxes
    2,868     4,102  
Prepaid expenses
    7,924     13,813  
   

 

 
Total current assets
    255,787     267,725  
   

 

 
Land, buildings and equipment
    83,673     75,904  
Less accumulated depreciation
    35,083     28,421  
   

 

 
Net book value
    48,590     47,483  
   

 

 
Restricted cash
    5,718     9,228  
Notes and accounts receivable - long-term
    1,925     282  
Intercompany notes receivable - long-term
    1,773     1,523  
Investment and advances
    762     2,987  
Goodwill, net
    49,378     48,690  
Other intangible assets, net
    16,026     15,219  
Deferred income taxes
    158     413  
Other assets
    82     2,243  
   

 

 
TOTAL ASSETS
  $ 380,199   $ 395,793  
   

 

 
               
LIABILITIES AND PARTNERS’ (DEFICIT)/CAPITAL
             
Current Liabilities:
             
Current installments on long-term debt and capital lease obligations
  $ 347   $ 373  
Accounts payable (including $17,859 in 2004 and $7,913 in 2003 with affiliates)
    101,291     88,726  
Accrued expenses
    15,907     18,316  
Intercompany notes payable
    1,300     893  
Estimated costs to complete long-term contracts
    171,137     132,297  
Advance payments by customers
    28,109     3,125  
Income taxes
    1,969     876  
   

 

 
Total current liabilities
    320,060     244,606  
   

 

 
Long-term debt less current installments
        130  
Capital lease obligations
    18,601     17,270  
Intercompany notes payable - long-term
    40,000     40,000  
Deferred income taxes
    2,478     4,271  
Other long-term liabilities and minority interest
    7,226     4,607  
Commitments and contingencies
             
   

 

 
TOTAL LIABILITIES
    388,365     310,884  
   

 

 
TOTAL PARTNERS’ (DEFICIT)/CAPITAL
    (8,166 )   84,909  
   

 

 
TOTAL LIABILITIES AND PARTNERS’ (DEFICIT)/CAPITAL
  $ 380,199   $ 395,793  
   

 

 

See notes to consolidated financial statements.

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FW NETHERLANDS C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ (DEFICIT)/CAPITAL
(in thousands of dollars)

    Accumulated
Earnings/(Loss)
  Contributed
Capital
  Accumulated
Translation
Adjustment
  Capitalization of
Intercompany
Notes
  Other   Total  
   

 

 

 

 

 

 
Balance at December 31, 2001
  $ 18,062   $ 75,312   $ (48,922 )  $ (14,425 ) $ 235   $ 30,262  
                                       
Allocation of net earnings to Partners
    13,835                             13,835  
Capitalization of intercompany notes
                      2,800           2,800  
Derivative instruments
                            (235 )   (235 )
Change in translation adjustment
                14,201                 14,201  
   

 

 

 

 

 

 
Balance at December 31, 2002
    31,897     75,312     (34,721 )   (11,625 )       60,863  
                                       
Allocation of net earnings to Partners
    587                             587  
Capitalization of intercompany notes
                      (317 )         (317 )
Change in translation adjustment
                23,776                 23,776  
   

 

 

 

 

 

 
Balance at December 31, 2003
    32,484     75,312     (10,945 )   (11,942 )       84,909  
                                       
Allocation of net loss to Partners
    (75,284 )                           (75,284 )
Purchase price adjustment (see Note 3)
          (3,589 )                     (3,589 )
Capitalization of intercompany notes
                      (21,625 )         (21,625 )
Change in translation adjustment
                7,423                 7,423  
   

 

 

 

 

 

 
Balance at December 31, 2004
  $ (42,800 ) $ 71,723   $ (3,522 ) $ (33,567 ) $   $ (8,166 )
   

 

 

 

 

 

 

See notes to consolidated financial statements.

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FW NETHERLANDS C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
CASH FLOWS FROM OPERATING ACTIVITIES
                   
Net (loss)/earnings
  $ (75,284 $ 587   $ 13,835  
Depreciation and amortization
    6,782     5,178     4,723  
Provision for losses on accounts receivable
    6,976     96     1,115  
Deferred tax
    (1,801 )   2,688     1,748  
(Gain)/loss on sale of assets
    (72 )   (406 )   267  
Other noncash items
    3,093     7,672     1,519  
Changes in assets and liabilities:
                   
Receivables
    37,054     46,789     (11,133 )
Contracts in process and inventories
    (76,614 )   30,970     34,228  
Accounts payable and accrued expenses
    3,050     (7,356 )   (2,897 )
Estimated costs to complete long-term contracts
    19,473     (62,229 )   49,566  
Advance payments by customers
    23,488     588     (15,154 )
Income taxes
    5,166     (5,844 )   (1,900 )
Other assets and liabilities
    9,422     (7,296 )   1,362  
   

 

 

 
Net cash (used)/provided by operating activities
    (39,267 )   11,437     77,279  
   

 

 

 
                     
CASH FLOWS FROM INVESTING ACTIVITIES
                   
Change in restricted cash
    3,491     17,126     (22,081 )
Payment for purchase of Foster Wheeler Energia S.A. (see Note 3)
    (3,589 )        
Capital expenditures
    (2,359 )   (5,749 )   (3,772 )
Proceeds from sale of assets
    472     858     1,102  
Decrease/(increase) in investments and advances
    6     905     (5,949 )
(Increase)/decrease in short-term investments
    (9,426 )   (7,106 )   72  
   

 

 

 
Net cash (used)/provided by investing activities
    (11,405 )   6,034     (30,628 )
   

 

 

 
CASH FLOWS FROM FINANCING ACTIVITIES
                   
Capitalization of intercompany notes
    (21,625 )   (317 )   2,800  
Proceeds from long-term debt
            139  
Payments of capital lease and long-term debt
    (1,114 )   (451 )    
Change in intercompany notes
    157     (25,620 )   (17,018 )
   

 

 

 
Net cash (used) by financing activities
    (22,582 )   (26,388 )   (14,079 )
   

 

 

 
Effect of exchange rate changes on cash and cash equivalents
    1,675     18,933     16,428  
   

 

 

 
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    (71,579 )   10,016     49,000  
Cash and cash equivalents at beginning of period
    108,891     98,875     49,875  
   

 

 

 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 37,312   $ 108,891   $ 98,875  
   

 

 

 
                     
Cash paid during the year for:
                   
Interest (net of amounts capitalized)
  $ 68   $ 229   $ 49  
Income taxes
  $ 3,264   $ 3,461   $ 5,024  

NONCASH INVESTING AND FINANCING ACTIVITIES
In December 2002, a subsidiary of FW Netherlands C.V. entered into a lease transaction for an office building in Finland. The transaction qualified as a capital lease (see Note 13).

See notes to consolidated financial statements.

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)

1. Description of Business

FW Netherlands C.V., a limited liability partnership registered in the Netherlands, and subsidiaries, collectively referred to herein as the “Partnership,” is owned by Foster Wheeler LLC (99%) and Foster Wheeler Inc. (1%), which are indirectly wholly owned by Foster Wheeler Ltd. The principal operations of the Partnership are to design, manufacture and erect 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 Partnership also provides research analysis and experimental work in fluid dynamics, heat transfer, combustion and fuel technology, materials engineering, and solids mechanics. The Partnership principally operates under one segment, primarily in Finland, Poland and Spain.

The Partnership has transactions and relationships with Foster Wheeler Ltd. and its affiliates. The financial position, results of operations, and cash flows of the Partnership have been impacted by these transactions and relationships as discussed in Notes 2, 3, 8 and 17.

2. Liquidity and Going Concern

The accompanying consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Partnership’s ability to continue as a going concern is largely dependent on Foster Wheeler Ltd.’s ability to continue as a going concern. Foster Wheeler Ltd. and the Partnership may not, however, be able to continue as a going concern. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, Foster Wheeler Ltd.’s and the Partnership’s ability to operate profitably, to generate cash flows from operations, collections of receivables to fund its obligations, including those resulting from asbestos-related liabilities, as well as Foster Wheeler Ltd.’s ability to maintain credit facilities and bonding capacity adequate to conduct its business. Foster Wheeler Ltd. incurred significant operating losses in each of the years in the three-year period ended December 31, 2004, and has a shareholders’ deficit of $513,283 as of December 31, 2004.

In 2004, Foster Wheeler Ltd. consummated an equity-for-debt exchange in which it issued common shares, preferred shares, warrants to purchase common shares and new notes in exchange for certain of its outstanding debt securities and trust securities. The exchange offer reduced Foster Wheeler Ltd.’s existing debt (excluding a reduction in deferred accrued interest of $31,128) by $437,041, improved the shareholders’ deficit by $448,136 and when combined with the proceeds from the issuance of the new notes that were used to repay amounts that were outstanding under a previous Senior Credit Facility, eliminated substantially all material scheduled corporate debt maturities prior to 2011. After completing the exchange, Foster Wheeler Ltd. had outstanding debt obligations of approximately $570,073 as of December 31, 2004.

In August of 2002, Foster Wheeler Ltd. negotiated a Senior Credit Facility that was comprised of a $71,000 term loan, a $69,000 revolving credit facility and a $149,900 letter of credit facility having an April 30, 2005 maturity date. In connection with the equity-for- debt exchange, Foster Wheeler Ltd. prepaid the term loan and amounts outstanding under the revolving credit facility. Accordingly, there were no borrowings outstanding under the Senior Credit Facility as of December 31, 2004. Letters of credit of $90,018 remained outstanding under the Senior Credit Facility as of December 31, 2004.

In March 2005, the Senior Credit Facility was replaced with a new 5-year $250,000 Senior Credit Agreement. The new Senior Credit Agreement includes a $75,000 sub-limit for borrowings at a rate equal to LIBOR plus a spread. Standby letters of credit issued under the new Senior Credit Agreement will carry a fixed price throughout the life of the facility. The Senior Credit Agreement is collateralized by the assets

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

and/or the stock of certain of Foster Wheeler Ltd.’s domestic subsidiaries and certain of its foreign subsidiaries. Foster Wheeler Ltd. paid up-front fees to the lender of approximately $8,225 in conjunction with the execution of the Senior Credit Agreement. Such fees, paid predominately in the first quarter of 2005, have been deferred and will be amortized to expense over the life of the agreement.

Foster Wheeler Ltd. finalized a sale/leaseback arrangement for an office building at its corporate headquarters in the third quarter of 2002. Under this arrangement, Foster Wheeler Ltd. leases the facility for an initial non-cancelable period of 20 years. The long-term capital lease obligation of $45,280 as of December 31, 2004 is included in long-term debt in Foster Wheeler Ltd.’s consolidated balance sheet.

The new Senior Credit Agreement and the sale/leaseback arrangement have quarterly financial covenant compliance requirements. Management’s forecast indicates that Foster Wheeler Ltd. will be in compliance with the financial covenants throughout 2005. The forecast assumes a significant level of new contracts and improved performance on existing contracts. However, there can be no assurance that Foster Wheeler Ltd. will comply with the covenants. If Foster Wheeler Ltd. violates a covenant under the Senior Credit Agreement or the sale/leaseback arrangement, repayment of amounts outstanding under such agreements could be accelerated and the following borrowings outstanding could also be accelerated: the 2011 Senior Notes, the 2005 Senior Notes, the Convertible Subordinated Notes, the Trust Preferred Securities, the Subordinated Robbins Facility Exit Funding Obligations, and certain of the special-purpose project debt facilities. The total amount of Foster Wheeler Ltd. debt that could be accelerated is $463,563 as of December 31, 2004. Foster Wheeler Ltd. would not be able to repay amounts borrowed if the payment dates were accelerated.

Holders of Foster Wheeler Ltd.’s new 2011 Senior Notes have a security interest in the stock, debt and assets of certain of Foster Wheeler Ltd.’s subsidiaries. The 2011 Senior Notes contain incurrence covenants that limit Foster Wheeler Ltd.’s ability to undertake certain actions including incurring debt, making certain payments and investments, granting liens, selling assets and entering into specific intercompany transactions, among others. Management monitors these covenants to ensure Foster Wheeler Ltd. remains in compliance with the indenture.

In connection with the exchange, the holders of Foster Wheeler Ltd.’s 2005 Senior Notes agreed to amend the indenture governing these notes to effectively eliminate the security interest previously held by the notes.

On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provided for up to $45,000 of additional revolving loans available to provide working capital. As of December 31, 2004, the facility remained undrawn. In December 2004, the U.K. subsidiaries gave notice canceling the revolving credit facility effective January 24, 2005.

Since January 15, 2002, Foster Wheeler Ltd. has exercised its right to defer payments on the Trust Preferred Securities. The aggregate liquidation amount of the Trust Preferred Securities at December 31, 2004 was $71,177 after completing the equity-for-debt exchange. The previous Senior Credit Facility required Foster Wheeler Ltd. to defer the payment of the dividends on the Trust Preferred Securities and, accordingly, no dividends were paid during 2004 or 2003. As of December 31, 2004, the amount of dividends deferred plus accrued interest approximates $23,460. Foster Wheeler Ltd. intends to continue to defer payment of the dividends on the Trust Preferred Securities until January 15, 2007 - the full term allowed by the underlying agreement. Once the deferred dividend obligation has been satisfied, Foster Wheeler Ltd. has the right to defer subsequent dividend payments for an additional 20 consecutive quarters. The new Senior Credit Agreement requires the approval of the lenders to make payments on the Trust Preferred Securities to the extent such payments are not contractually required by the underlying Trust Preferred Securities agreement.

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

The Partnership’s subsidiary in Finland is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. Obligations under both facilities are guaranteed by Foster Wheeler Ltd. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio.

One of the performance bond facilities is dedicated to a specific project and, as of December 31, 2004, had performance bonds outstanding equivalent to $24,522 (none of which has been drawn as of such date). Covenants under this facility are tested quarterly. The second facility is a general performance bond facility and, as of December 31, 2004, had performance bonds outstanding in favor of several clients equivalent to $10,114 (none of which has been drawn).

As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of the Partnership’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the two performance bond facilities. On August 6, 2004 and August 9, 2004, the Partnership’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities.

The waiver for the project-specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum equity ratio levels so long as the performance bonds are outstanding. The Partnership’s subsidiary remained below the minimum equity ratio as of December 31, 2004. On March 15, 2005, the bond expired and the banks funded the client and the Partnership reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of Foster Wheeler Ltd. to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

The waiver for the general performance bond facility is effective through March 31, 2005. As of that date, approximately $4,900 is forecasted to be outstanding under the facility. Foster Wheeler Ltd. has provided a standby letter of credit to back up the general performance bond facility and intends to do so until such facility can be permanently replaced or the last performance bond issued thereunder has expired. Therefore, Foster Wheeler Ltd. believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio is reflected in Foster Wheeler Ltd.’s and the Partnership’s liquidity forecasts.

Management closely monitors liquidity and updates its U.S. liquidity forecasts weekly. These forecasts cover, among other analyses, existing cash balances, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, working capital needs and unused credit line availability. Foster Wheeler Ltd.’s cash flow forecasts continue to indicate that sufficient cash will be available to fund Foster Wheeler Ltd.’s U.S. and foreign working capital needs throughout 2005.

As of December 31, 2004, Foster Wheeler Ltd. had cash and cash equivalents, short-term investments, and restricted cash totalling $390,186, compared to $430,170 as of December 26, 2003. Of the $390,186 total at December 31, 2004, $319,612 was held by foreign subsidiaries.

Foster Wheeler Ltd.’s domestic operating entities are cash flow positive. However they do not generate sufficient cash flow to cover the costs related to Foster Wheeler Ltd.’s indebtedness, obligations to fund U.S. pension plans, and corporate overhead expenses. Consequently, Foster Wheeler Ltd. requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs and to service its debt. Foster Wheeler Ltd.’s current 2005 forecast assumes

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

total cash repatriation from its non-U.S. subsidiaries of approximately $107,000 from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends. In 2004 and 2003, Foster Wheeler Ltd. repatriated approximately $77,000 and $100,000, respectively, from its non-U.S. subsidiaries.

There can be no assurance that the forecasted foreign cash repatriation will occur, as the non-U.S. subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of Foster Wheeler Ltd.’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. The repatriation of funds may also subject those funds to taxation. As a result of these factors, Foster Wheeler Ltd. may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries in the amount forecasted above.

Commercial operations under a domestic contract retained by Foster Wheeler Ltd. in connection with the sales of assets of the Foster Wheeler Environmental Corporation (“Environmental”), commenced in January 2004. The plant processes low-level nuclear waste for the U.S. Department of Energy (“DOE”). Foster Wheeler Ltd. funded the plant’s construction costs and operates the facility. The majority of Foster Wheeler Ltd.’s invested capital was recovered during the early stages of processing the first stream of waste materials. This project successfully processed all quantities of the first waste stream of materials ahead of schedule and is currently finalizing the processing line for the second waste stream. In 2004, the project generated net cash flow of approximately $53,300. An additional $17,800 of capital recovery is dependent on the initial processing of the second waste stream of materials. This capital recovery is expected in 2005.

Foster Wheeler Ltd.’s inability to operate profitably and to generate cash flows from operations, its reliance on repatriated cash from its foreign subsidiaries to fund its domestic obligations, and its obligations to maintain minimum debt covenants to avoid possible acceleration of its debt, raises substantial doubt about Foster Wheeler Ltd.’s and the Partnership’s ability to continue as a going concern.

3. Purchase of Foster Wheeler Energia S.A.

In October 2003, the Partnership acquired Foster Wheeler Energia S.A., a wholly owned subsidiary of Foster Wheeler Europe Limited, for proceeds of approximately $30,675. The subsidiary was purchased from a wholly owned affiliate of Foster Wheeler Ltd. The sales price approximated the carrying value. The Partnership has reflected this transaction as a reorganization of companies under common control. Accordingly, the 2002 financial statements were revised to include the historical activity of Foster Wheeler Energia S.A. in the consolidated statements of operations and cash flows for all periods presented. In May 2004, pursuant to the Foster Wheeler Energia S.A. sale agreement, an additional payment of $3,589 was made to Foster Wheeler Europe Limited. The payment could not be estimated at the time of purchase, and was therefore not accrued. The payment made by the Partnership was recorded as a decrease to Contributed Capital in 2004.

4. Summary of Significant Accounting Policies

Principles of Consolidation — The consolidated financial statements have been prepared based on accounting principles generally accepted in the United States of America and include the accounts of all significant domestic and foreign subsidiary companies. All significant intercompany transactions and balances have been eliminated.

The Partnership’s fiscal year ends on December 31.

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the periods 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, and contingencies, among others.

Revenue Recognition on Long-term Contracts — Revenues and profits on long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress toward completion is measured using physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress toward completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.

Revenues and profits on cost-reimbursable contracts are recorded as the costs are incurred. The Partnership includes flow-through costs consisting of materials, equipment and subcontractor costs as revenue on cost-reimbursable contracts when the Partnership is responsible for the engineering specifications and procurement for such costs.

Contracts in progress are stated at cost, increased for profits recorded on the completed effort or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. Negative balances are presented as “estimated costs to complete long-term contracts.” The Partnership has numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. However, current estimates may be revised as additional information becomes available. In accordance with the accounting and disclosure requirements of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”) and Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes,” the Partnership reviews its contracts monthly. As a result of this process, in 2004, ten individual projects had final estimated profit revisions exceeding $1,000. These revisions primarily resulted from problems on ongoing lump-sum turnkey power projects in Europe. The net aggregate dollar value of the accrued contract profit reversal resulting from these estimate changes during 2004 amounted to a net charge of $71,100. 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.

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 Partnership records claims in accordance with paragraph 65 of SOP 81-1. 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. 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.

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

As of December 31, 2004, the Partnership had recorded a commercial claims receivable of approximately $3,402.

Cash and Cash Equivalents — Cash and cash equivalents include liquid short-term investments purchased with original maturities of three months or less. The Partnership requires a substantial portion of these funds to support their liquidity and working capital needs. Accordingly, these funds may not be readily available for repatriation to its parent.

Restricted Net Assets — One of the Partnership’s foreign subsidiaries is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. Obligations under both facilities are guaranteed by Foster Wheeler Ltd. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio.

One of the performance bond facilities is dedicated to a specific project and, as of December 31, 2004, had performance bonds outstanding equivalent to $24,522 (none of which has been drawn as of such date). The covenants are tested quarterly. The second facility is a general performance bond facility and, as of December 31, 2004, had performance bonds outstanding in favor of several clients equivalent to $10,114 (none of which has been drawn).

As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of the Partnership’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the two performance bond facilities. On August 6, 2004 and August 9, 2004, the Partnership’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities.

The waiver for the project-specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum amounts and the performance bonds are outstanding. The equity of the Partnership’s subsidiary remained below the minimum equity ratio as of December 31, 2004. On March 15, 2005, the bond expired and the banks funded the client and the Partnership reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of the Partnership to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

The waiver for the general performance bond facility is effective through March 31, 2005. As of that date, approximately $4,900 is forecasted to be outstanding under the facility. FW LLC has provided a standby letter of credit to back up the general performance bond facility and intends to do so until such facility can be permanently replaced or the last performance bond issued thereunder has expired.

Therefore, the Partnership believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio covenants is reflected its liquidity forecasts.

Restricted Cash — At December 31, 2004 and 2003, restricted cash was $5,718 and $9,228, respectively, that was required primarily to collateralize letters of credit and bank guarantees.

Short-term Investments — Short-term investments consist primarily of certificates of deposit and are classified as held to maturity under Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.”

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

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 might not be received within a one- year period. However, in conformity with industry practice, the full amount of accounts receivable, including such amounts withheld, has been included in current assets.

Trade accounts receivable are continually evaluated in accordance with corporate policy. Provisions are established on a project specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues. Customer payment history, trends within the various markets served and general economic trends are also considered when evaluating the necessity of a provision.

Accounts and Notes Receivable Other — Non-trade accounts and notes receivable consist primarily of receivables from affiliated companies of $1,513 at December 31, 2004, and $1,270 at December 31, 2003, foreign refundable value-added tax and accrued interest receivable.

Land, Buildings and Equipment — Land, buildings and equipment are stated at cost. Depreciation is computed on a straight-line basis using composite estimated lives ranging from 10 to 25 years for buildings and from 3 to 20 years for equipment. Expenditures for maintenance and repairs are charged to operations as incurred. 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.

Investments and Advances — The Partnership uses the equity method of accounting for investment ownership of between 20% and 50% in affiliates unless significant economic considerations indicate that the cost method is appropriate. The equity method is also used for investments in which ownership is greater than 50% when the Partnership does not have a controlling financial interest. Investment ownership of less than 20% in affiliates is carried at cost. Currently, all of the Partnership’s significant investments in affiliates are recorded using the equity method.

Income Taxes — The Partnership is not subject to income taxes. The taxable income or loss applicable to the operation of the Partnership is includable in the income tax return of the partners. Income tax in the Partnership’s statement of operations and balance sheet have been calculated on a separate company basis for its subsidiaries subject to tax that file tax returns in their foreign jurisdictions.

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.

Foreign Currency — The Partnership’s functional and reporting currency is the U.S. dollar. Assets and liabilities of foreign subsidiaries using other functional currencies are translated into U.S. dollars at year-end exchange rates and income and expenses and cash flows at monthly weighted-average rates.

For the years ended December 31, 2004 and 2003, the Partnership recorded after-tax net foreign currency transaction losses of $40 and $850, respectively, and in the year ended December 31, 2002, recorded an after-tax net foreign currency transaction gain of $127.

Contracts in Process and Estimated Costs to Complete Long-term Contracts — In accordance with terms of long-term contracts, amounts recorded in contracts in process and estimated costs to complete long-term contracts may not be realized or paid, respectively, within a one-year period. In conformity with

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

industry practice, however, the full amount of contracts in process and estimated costs to complete long-term contracts have been included in current assets and current liabilities, respectively.

Inventories — Inventories, principally materials and supplies, are stated at the lower of cost or market, determined primarily on the average-cost method.

Intangible Assets — Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (goodwill), trademarks and patents. Goodwill was allocated to the reporting units based on the original purchase price allocation. Patents and trademarks are being amortized on a straight-line basis over periods of 12 to 40 years.

The Partnership tests for impairment at the reporting unit level as defined in SFAS No. 142, “Goodwill and Other Intangible Assets.” This test is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. In the fourth quarter of each year, the Partnership evaluates goodwill on a separate operating unit basis to assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. SFAS No. 142 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives and reviewed annually for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

As of December 31, 2004 and 2003, the Partnership had unamortized goodwill of $49,378 and $48,690, respectively. The change is due to the change in the foreign currency translation rates.

As of December 31, 2004 and 2003, the Partnership had unamortized identifiable intangible assets of $16,026 and $15,219, respectively. The following table details amounts relating to those assets as of December 31, 2004 and 2003.

    As of December 31, 2004

  As of December 31, 2003

 
    Gross Carrying
Amount
  Accumulated
Amortization
  Gross Carrying
Amount
  Accumulated
Amortization
 
   

 

 

 

 
Patents
  $ 8,492   $ (2,256 ) $ 7,803   $ (1,881 )
Trademarks
    13,425     (3,635 )   12,343     (3,046 )
   

 

 

 

 
Total
  $ 21,917   $ (5,891 ) $ 20,146   $ (4,927 )
   

 

 

 

 

Amortization expense related to patents and trademarks for the years 2004, 2003 and 2002 was $960, $990 and $850, respectively. Amortization expense is expected to approximate $1,000 each year in the next five years.

Stock Option Plans — Foster Wheeler Ltd. has fixed option plans which reserve common shares for issuance to executives, key employees, and directors. Employees of the Partnership participate in these plans. Foster Wheeler Ltd. and the Partnership have adopted the disclosure-only provision of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148 “Accounting for Stock Based Compensation – Transition and Disclosure.” Foster Wheeler Ltd. and the Partnership continue to account for stock options granted to employees and directors using the intrinsic value method under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Had compensation costs for the stock-based compensation

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

plans been accounted for using the fair value method of accounting described by SFAS No. 123, the Partnership’s net (loss)/earnings would have been as follows:

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
Net (loss)/income — as reported
  $ (75,284 ) $ 587   $ 13,835  
Deduct: Total stock-based employee compensation expense determined under fair-value based method for awards net of taxes of $35 in 2004, $34 in 2003 and $9 in 2002
    (101 )   (98 )   (24 )
   

 

 

 
Net (loss)/income — pro forma
  $ (75,385 ) $ 489   $ 13,811  
   

 

 

 

There were no stock options issued in 2003. 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:

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
Dividend yield
    0 %   *     0 %
Expected volatility
    50.00 %   *     83.60 %
Risk free interest rate
    2.99 %   *     2.90 %
Expected life (years)
    3     *     5  
                     
* not applicable since there were no stock options issued in 2003.                    

On September 10, 2004, the Board of Directors adopted the 2004 Stock Option Plan (the “2004 Plan”) which reserves 56,421 preferred shares for issuance. The options granted under the 2004 Plan expire up to a maximum of ten years from the date granted. On October 6, 2004, management was issued options under the 2004 Plan to purchase 43,103 preferred shares at an exercise price of $9.378 per common share issuable. Such options expire on October 5, 2007. One third of the options issued to management vest in the fourth quarter of 2005, and the balance vest during the fourth quarter of 2006.

Under the 1995 Stock Option Plan approved by Foster Wheeler Ltd.’s shareholders in April 1995 and amended in April 1999 and May 2002, the total number of shares of common stock that may be granted is 265,000.

These plans provide that shares granted come from Foster Wheeler Ltd.’s authorized but unissued or reacquired common stock. The price of the options granted pursuant to this plan 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.

The Foster Wheeler Ltd. shareholders approved several capital share alterations at the November 29, 2004 meeting. Among them was a one-for-twenty reverse stock split. Please note that all stock option amounts reflect post reverse stock split amounts.

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

Information regarding these option plans for the years 2004, 2003, and 2002 is as follows (presented in actual number of shares):

    For the Year Ended December 31,

 
    2004

  2003

  2002

 
    Shares   Weighted-
Average
Exercise
Price
  Shares   Weighted-
Average
Exercise
Price
  Shares   Weighted-
Average
Exercise
Price
 
   

 

 

 

 

 

 
Options outstanding, beginning of year
    23,708   $ 106.82     23,708   $ 106.82     6,376   $ 348.97  
Options exercised
                               
Options granted
    13,908   $ 9.38             17,820   $ 32.80  
Options cancelled or expired
    (50 ) $ 207.50             (488 ) $ 568.00  
   
       
       
       
Options outstanding, end of year
    37,566   $ 70.61     23,708   $ 106.82     23,708   $ 106.82  
   
       
       
       
Option price range at end of year
    $9.38 - $881.25           $32.80 - $881.25           $32.80 - $881.25        
                                       
Options available for grant at end of year
    869,273           25,342           22,253        
   
       
       
       
Weighted-average fair value of options granted during the year
  $ 3.30         $         $ 22.20        
Options exercisable at end of year
    17,718           11,828           5,888        
Weighted-average price of exercisable options at end of year
  $ 131.35         $ 181.16         $ 330.84        

The following table summarizes information about fixed-price stock options outstanding as of December 31, 2004:

    Options Outstanding

  Options Exercisable

 
Range of Exercise Prices
  Number
Outstanding at
12/31/2004
  Weighted-
Average
Remaining
Contractual Life
  Weighted-
Average
Exercise Price
  Number
Exercisable at
12/31/2004
  Weighted-
Average
Exercise Price
 

 

 

 

 

 

 
$9.38
    13,908     9.8 years   $ 9.38       $  
$32.80
    17,820     7.7 years   $ 32.80     11,880   $ 32.80  
$113.75
    1,850     6.0 years   $ 113.75     1,850   $ 113.75  
$180.00
    625     5.0 years   $ 180.00     625   $ 180.00  
$270.00 to $301.25
    1,713     4.2 years   $ 289.84     1,713   $ 289.84  
$552.50 to $738.75
    1,475     2.5 years   $ 653.52     1,475   $ 653.52  
$881.25
    175     1.1 years   $ 175.00     175   $ 175.00  
   
             
       
      37,566                 17,718        
   
             
       

Pensions and Other Postretirement Benefits — The Partnership offers a government sponsored retirement program for the employees of its subsidiary in Finland. No plans exist for the Partnership’s other subsidiaries.

Recent Accounting Developments — On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires that all share-based payments to employees, including grants of employee stock options and restricted stock, be recognized in the consolidated statement of operations and comprehensive loss based on their fair values. Prior to SFAS No. 123R, the

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

Partnership adopted the disclosure-only provisions of SFAS No. 123 and therefore only certain pro forma disclosures of the fair value of share-based payments were required in the notes to the consolidated financial statements. SFAS No. 123R provides for the adoption of the new standard in one of two ways: the modified prospective transition method and the modified retrospective transition method. Using the modified prospective transition method, share-based employee compensation cost would be recognized from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date. Using the modified retrospective method, employee compensation cost would be recognized for periods presented prior to the adoption of the proposed standard in accordance with the original provisions of SFAS No. 123; that is, employee compensation cost would be recognized in the amounts reported in the pro forma disclosures provided in accordance with SFAS No. 123. Adoption of the provisions of SFAS No. 123R is effective as of the beginning of the Partnership’s quarter ending September 30, 2005. The Partnership is still evaluating the method of adoption and the impact that the adoption of SFAS No. 123R will have on its consolidated financial position and results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets, which were previously required to be recorded on a carryover basis rather than a fair value basis. Instead, SFAS No. 153 provides that exchanges of nonmonetary assets that do not have commercial substance be reported at carryover basis rather than a fair value basis. A nonmonetary exchange is considered to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the consolidated financial statements of the Partnership.

5. Accounts and Notes Receivable

The following table shows the components of trade accounts and notes receivable:

    December 31,

 
    2004   2003  
   

 

 
From long-term contracts:
             
Amounts billed, due within one year
  $ 43,130   $ 71,792  
               
Retention - Billed:
             
Estimated to be due in:
             
2005
    2,941      
   

 

 
Total unbilled
    2,941      
   

 

 
Retention - Unbilled:
             
Estimated to be due in:
             
2004
        32,409  
2005
    25,918     19  
2006
    412      
   

 

 
Total unbilled
    26,330     32,428  
   

 

 
Total receivables from long-term contracts
    72,401     104,220  
Other trade accounts and notes receivable
    2,317     1,480  
   

 

 
      74,718     105,700  
Less allowance for doubtful accounts
    1,889     1,133  
   

 

 
Accounts Receivable - Net
  $ 72,829   $ 104,567  
   

 

 

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

5. Accounts and Notes Receivable — (Continued)

Unbilled amounts are billed in accordance with contract provisions which include monthly, milestone and other billing criteria.

Changes in the allowance for doubtful accounts during the periods ended December 31, 2002 through 2004 are presented below.

    2004   2003   2002  
   

 

 

 
Balance at beginning of year
  $ 1,133   $ 1,106   $  
Additions charged to expense
    6,976     96     1,115  
Deductions / other
    (6,220 )   (69 )   (9 )
   

 

 

 
Balance at end of year
  $ 1,889   $ 1,133   $ 1,106  
   

 

 

 

6. Contracts in Process and Inventories

The following table shows the elements included in contract in process as it relates to long-term contracts:

    December 31,

 
    2004   2003  
   

 

 
Contracts in Process
             
Costs plus accrued profits less earned revenues on contracts currently in process
  $ 140,590   $ 83,113  
Less: progress payments
    36,370     65,812  
   

 

 
Net
  $ 104,220   $ 17,301  
   

 

 

Costs of inventories are shown below:

    December 31,

 
    2004   2003  
   

 

 
Inventories
             
Materials and supplies
  $ 3,222   $ 1,594  
Finished goods
    68      
   

 

 
Total
  $ 3,290   $ 1,594  
   

 

 

7. Land, Buildings and Equipment

Land, buildings and equipment are stated at cost and are set forth below:

    December 31,

 
    2004   2003  
   

 

 
Land and land improvements
  $ 1,590   $ 1,598  
Buildings
    48,394     44,966  
Equipment
    33,689     29,319  
Construction in progress
        21  
   

 

 
    $ 83,673   $ 75,904  
   

 

 

Depreciation and amortization expense for the years 2004, 2003 and 2002 was $5,817, $4,189 and $3,872, respectively.

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

8. Notes Payable and Long-Term Debt

Notes payable and long-term debt consisted of the following:

    December 31,

 
    2004   2003  
   

 

 
Payable to an affiliate
  $ 41,300   $ 40,893  
Payable to third parties
        200  
   

 

 
      41,300     41,093  
Less: Current portion
    1,300     963  
   

 

 
    $ 40,000   $ 40,130  
   

 

 

The notes payable to affiliates is primarily composed of two $20,000 notes. One note has an interest rate of 10%, and the other note has an interest rate of 7.5%. Both notes are due in full in December 2006.

The $200 notes payable to third parties at December 31, 2003 was composed of two notes: one note payable to the State of Finland for $130 with an interest rate of 2.25%, and a second note payable to the Ministry of Finance, Finland for $70 with an interest rate tied to WIBOR (Warsaw Interbank Offered Rate).

9. Derivative Financial Instruments

The Partnership’s activities expose it to risks related to the effect of changes in foreign-currency exchange rates. The Partnership maintains a foreign-currency risk-management strategy that uses derivative instruments to protect it from unanticipated fluctuations in cash flows that may arise from volatility in currency exchange rates. The Partnership utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS 133. At December 31, 2004, 2003 and 2002, the Partnership did not meet the requirements for deferral under SFAS 133 and recorded in the years ended December 31, 2004 and 2003, $2,020 and $6,232 of pretax net losses, respectively, and in the year ended December 31, 2002 a $9,332 pretax net gain on derivative instruments, which were reflected in the cost of operating revenues on the consolidated statement of earnings and comprehensive (loss)/ income.

The Partnership is exposed to credit loss in the event of non-performance by the counterparties. All of these counterparties are significant financial institutions that are primarily rated “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies). As of December 31, 2004, approximately $7,300 was owed to the Partnership by counterparties and $10,500 was owed by the Partnership to counterparties. A $235 net of tax gain was recorded in other comprehensive (loss)/ income as of December 31, 2001. This amount was reclassified to earnings in 2002 as the Partnership no longer qualified for deferral under SFAS No. 133.

The maximum term over which the Partnership is hedging exposure to the variability of cash flows is 12 months.

10. Warranty Reserves

The Partnership provides for make good/warranty reserves on certain of its long-term contracts. Generally, these reserves are accrued over the life of the contract so that a sufficient balance is maintained to cover the exposures at the conclusion of the contract.

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

10. Warranty Reserves — (Continued)

Balance as of December 31, 2002
  $ 13,900  
Accruals
    27,400  
Settlements
    (5,300 )
Adjustments to provision
    (1,100 )
   

 
Balance as of December 31, 2003
    34,900  
Accruals
    9,900  
Settlements
    (9,800 )
Adjustments to provision
    (100 )
   

 
Balance as of December 31, 2004
  $ 34,900  
   

 

11. Income Taxes

The Partnership’s (loss)/earnings before income taxes for the years 2004, 2003 and 2002 were taxed under foreign jurisdictions.

    2004   2003   2002  
   

 

 

 
(Loss)/earnings before income taxes
  $ (73,271 ) $ 13,402   $ 21,813  

The provision for income taxes on those earnings was as follows:

    2004   2003   2002  
   

 

 

 
Current tax expense
  $ (1,635 ) $ (15,683 ) $ (7,162 )
Deferred tax (expense)/benefit
    (378 )   2,868     (816 )
   

 

 

 
Total provision for income taxes
  $ (2,013 ) $ (12,815 ) $ (7,978 )
   

 

 

 

Deferred tax assets (liabilities) consist of the following:

    2004   2003  
   

 

 
Difference between book and tax depreciation
  $ (5,285 ) $ (4,788 )
Net operating loss carryforwards
    34,899     8,462  
Valuation allowance
    (31,272 )   (6,804 )
Difference between book and tax recognition of income
    2,299     4,135  
Unrealized exchange gains/loss
        (617 )
Other
    (784 )   (153 )
   

 

 
Net deferred tax (liabilities)/asset
  $ (143 ) $ 235  
   

 

 

The provision for income taxes differs from the amount of income tax determined by applying the applicable Finland statutory rate to earnings before income taxes, as a result of the following:

    2004   2003   2002  
   

 

 

 
Tax provision at the Finland statutory rate
    (29.0 )%   29.0 %   29.0 %
Non-deductible book expenses
    0.8     3.5     0.4  
Foreign rate differential
    (3.0 )   (19.8 )   (2.8 )
Valuation allowance
    32.2     44.0     4.1  
Nondeductible losses
        14.4     3.0  
Tax credits and reserves
        12.8     3.0  
Effect of tax rate change
    0.3     11.3      
Other
    1.4     0.4     (0.1 )
   

 

 

 
      2.7 %   95.6 %   36.6 %
   

 

 

 

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

11. Income Taxes — (Continued)

As reflected above, the Partnership has recorded various deferred tax (liabilities)/assets. Realization is dependent on generating sufficient taxable income. 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 valuation allowance increased by $24,468 in 2004. A valuation reserve is required under SFAS No. 109, “Accounting for Income Taxes,” when there is an evidence of losses in certain foreign tax jurisdictions 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 2014 and beyond, based on the current tax laws.

12. Operating Leases

The Partnership and certain of its subsidiaries are obligated under operating lease agreements, primarily for office space. Rental expense totaled $4,845 in 2004, $4,333 in 2003 and $3,106 in 2002. Future minimum rental commitments on non-cancelable leases are as follows:

Fiscal year:
       
2005
  $ 4,455  
2006
    4,045  
2007
    3,872  
2008
    3,834  
2009
    3,894  
Thereafter
    3,237  
   

 
    $ 23,337  
   

 

13. Capital Lease

During 2002, the Partnership entered into a lease transaction for an office building in Finland. The transaction qualified as a capital lease and is summarized as follows:

    December 31,

 
    2004   2003  
   

 

 
Buildings
  $ 19,624   $ 17,886  
Less: accumulated amortization
    1,363     596  
   

 

 
Net assets under capital lease
  $ 18,261   $ 17,290  
   

 

 

The following are the minimum lease payments to be made in each of the years indicated for the capital lease in effect as of December 31, 2004:

Fiscal year:
       
2005
  $ 1,220  
2006
    1,220  
2007
    1,220  
2008
    1,220  
2009
    1,220  
Thereafter
    27,948  
Less: Interest
    (15,100 )
   

 
Net minimum lease payments under capital lease
  $ 18,948  
   

 

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

14. Litigation and Uncertainties

In the ordinary course of business, the Partnership 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 Partnership 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 Partnership’s liabilities, if any, and to its insurance coverage, management of the Partnership 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 ultimate legal and financial liability of the Partnership in respect to all claims, lawsuits and proceedings cannot be estimated with certainty. As additional information concerning the estimates used by the Partnership becomes known, the Partnership 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 as these are subject to change as events evolve and as additional information becomes available during the administration and litigation process. Increases in the number of claims filed or costs to resolve those claims will cause the Partnership to increase further the estimates of the costs associated with such claims and could have a material adverse effect on the business, financial condition, results of operations, and cash flows.

15. 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 Partnership’s third-party 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 Partnership for debt of the same remaining maturities. It is not practicable to estimate the fair value of the Partnership’s intercompany debt, as there is no market for this type of debt instrument.

Foreign Currency Contracts — The fair values of these financial instruments (used for hedging purposes) are estimated by obtaining quotes from brokers. The Partnership is exposed to market risks from fluctuations in foreign exchange rates. Financial instruments are utilized by the Partnership to reduce this risk. The Partnership does not hold or issue financial instruments for trading purposes. The Partnership 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 “BBB+” or better by Standard & Poor’s (or the equivalent by other recognized credit rating agencies) (see Notes 4 and 10).

Carrying Amounts and Fair Values — The estimated fair values of the Partnership’s financial instruments are as follows:

    December 31,

 
    2004   2003  
   
 
 
    Carrying
Amount
  Fair Value   Carrying
Amount
  Fair Value  
   

 

 

 

 
Nonderivatives:
                         
Cash and short-term investments
  $ 63,087   $ 63,087   $ 122,281   $ 122,281  
Restricted Cash
    5,718     5,718     9,228     9,228  
Third-party long-term debt
            200     200  
Intercompany notes payable - current
    1,300         893      
Intercompany notes payable - long-term
    40,000         40,000      
Capital lease obligation
    18,948     18,948     17,573     17,573  
Derivatives:
                         
Foreign currency contracts
    450     450     3,100     3,100  

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

15. Financial Instruments and Risk Management — (Continued)

In the ordinary course of business, the Partnership is contingently liable for performance under letters of credit and bank guarantees totaling $188,875 and $264,262 as of December 31, 2004 and 2003, respectively. In the Partnership’s past experience, no material claims have been made against these financial instruments. Management of the Partnership 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 31, 2004, the Partnership had $17,756 of foreign currency contracts outstanding. These foreign currency contracts mature in 2005. 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 Partnership to concentrations of credit risk, consist principally of cash equivalents and trade receivables. The Partnership 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 Partnership’s customer base and their dispersion across different business and geographic areas, except as indicated in Note 16. As of December 31, 2004 and 2003, the Partnership had no significant concentrations of credit risk.

16. Concentrations

For the year ended December 31, 2004, approximately 37% of the Partnership’s operating revenues was from two third-party customers, and approximately 9% of the operating revenues was from one affiliated company. Management considers the credit risk to be low. Both third-party customers pay monthly according to project progress. The related accounts receivable are current.

17. Related Party Transactions

The Partnership enters into long-term contracts as a subcontractor for and subcontracts work to certain Foster Wheeler affiliates.

Included in the statement of operations relating to such contracts were as follows:

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
Operating revenues
  $ 45,203   $ 72,820   $ 73,807  
Cost of operating revenues
    1,661     803     478  
Interest income
    128     107     195  
Cost and expenses:
                   
Royalty and management fees
    6,017     10,563     9,297  
Interest expense
    3,342     3,500     3,500  

Included in the consolidated balance sheet for 2004 and 2003 related to long-term contract activity and intercompany borrowings with Foster Wheeler affiliates is the following:

    December 31,

 
    2004   2003  
   

 

 
Accounts and notes receivable
  $ 1,513   $ 1,270  
Intercompany notes receivable
    1,773     1,523  
Accounts payable
    17,859     7,913  
Intercompany notes payable
    41,300     40,893  

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FW NETHERLANDS C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

17. Related Party Transactions — (Continued)

Also reflected in the balance sheet, due to the uncertainty of collection based on the going concern issues addressed in Note 2, the Partnership reduced intercompany notes receivable and charged Partners’ capital for its notes receivable from U.S. affiliates. The year-over-year change is reflected in the Consolidated Statement of Changes in Partners’ Capital and the Consolidated Statement of Cash Flows. The impact on Partners’ Capital was a reduction of $33,567 and $11,942 at December 31, 2004 and 2003, respectively.

Costs incurred by Foster Wheeler Ltd. and certain of its affiliates on behalf of the Partnership are charged to the Partnership through a management fee. The fees were $1,399, $1,186 and $752 in 2004, 2003 and 2002, respectively. These fees represent management’s estimation of a reasonable allocation of the Partnership’s share of such costs.

All of the related party transactions discussed above are eliminated in the Foster Wheeler Ltd. and Subsidiaries Consolidated Financial Statements for the years ended December 31, 2004, December 26, 2003 and December 27, 2002.

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FINANCIAL SERVICES S.a.r.l. AND SUBSIDIARY

Consolidated Financial Statements
December 31, 2004

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Foster Wheeler Ltd:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of changes in shareholders’ deficit present fairly, in all material respects, the financial position of Financial Services S.a.r.l. and Subsidiary (the “Company”), an indirect, wholly-owned subsidiary of Foster Wheeler Ltd. (the “Parent”), at December 31, 2004 and December 31, 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 and the Parent will continue as a going concern. As discussed in Note 2 to the financial statements, the Parent has incurred significant losses in each of the three years in the period ended December 31, 2004 and has a shareholders’ deficit of $513,283,000 at December 31, 2004. The Parent has substantial debt obligations and during 2004 it was required to obtain an additional amendment to its senior credit facility to provide covenant relief by modifying certain definitions of financial measures utilized in the calculation of certain financial covenants. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Parent’s ability to return to profitability, to complete planned restructuring activities, to generate cash flows from operations and collections of receivables to fund its operations, including obligations resulting from asbestos claims, as well as the maintenance of credit facilities and bonding capacity adequate to conduct business. These matters raise substantial doubt about the Company’s and the Parent’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 30, 2005

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FINANCIAL SERVICES S.a.r.l. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands of dollars)

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
Revenues:
                   
Royalty income with affiliates
  $ 23,733   $ 20,473   $ 25,114  
Interest income with affiliates
    16,835     18,320     31,875  
   

 

 

 
Total Revenues
    40,568     38,793     56,989  
   

 

 

 
Costs and Expenses:
                   
Interest expense with affiliates
    31,999     35,580     49,069  
Other deductions
    2,632     586     1,887  
   

 

 

 
Total Costs and Expenses
    34,631     36,166     50,956  
   

 

 

 
Earnings before income taxes
    5,937     2,627     6,033  
Benefit/(provision) for income taxes
    5,821     1,090     (844 )
   

 

 

 
Net Earnings
  $ 11,758   $ 3,717   $ 5,189  
   

 

 

 

See notes to consolidated financial statements.

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FINANCIAL SERVICES S.a.r.l. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(in thousands of dollars, except per share amount)

    December 31, 2004   December 31, 2003  
   

 

 
ASSETS
             
Current Assets:
             
Cash and cash equivalents
  $ 371   $ 462  
Accounts receivable from affiliates
    8,566     389  
Interest receivable from affiliates, net
    19,050     2,491  
Prepaid expenses
    68     49  
   

 

 
Total current assets
    28,055     3,391  
Notes receivable from affiliates
    320,000     200,000  
Deferred income taxes
    13,408     7,029  
   

 

 
TOTAL ASSETS
  $ 361,463   $ 210,420  
   

 

 
               
LIABILITIES AND SHAREHOLDERS’ DEFICIT
             
Current Liabilities:
             
Accounts payable to affiliates
  $ 2,278   $ 1,105  
Accrued interest payable to affiliates
    22,792     3,447  
Accrued expenses
    207     111  
Advance payments received
    447      
Income taxes payable
    1,376     1,050  
Note payable to affiliate
    167,333     169,403  
   

 

 
Total current liabilities
    194,433     175,116  
Long-term notes payable to affiliates
    320,000     200,000  
Commitment and contingencies
             
   

 

 
TOTAL LIABILITIES
    514,433     375,116  
Shareholders’ Deficit:
             
Capital shares $30.00 stated value; 250,500 shares authorized, issued and outstanding
    7,515     7,515  
Accumulated deficit
    (160,484 )   (172,211 )
   

 

 
TOTAL SHAREHOLDERS’ DEFICIT
    (152,969 )   (164,696 )
   

 

 
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
  $ 361,463   $ 210,420  
   

 

 

See notes to consolidated financial statements.

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FINANCIAL SERVICES S.a.r.l. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIT
(in thousands of dollars)

    Capital
Shares
  Accumulated
Deficit (1)
  Total  
   

 

 

 
Balance — December 31, 2001
  $ 7,515   $ (181,471 ) $ (173,956 )
Earnings for the year
        5,189     5,189  
Capitalization of interest receivable
        94     94  
   

 

 

 
Balance — December 31, 2002
    7,515     (176,188 )   (168,673 )
Earnings for the year
        3,717     3,717  
Capitalization of interest receivable
        260     260  
   

 

 

 
Balance — December 31, 2003
    7,515     (172,211 )   (164,696 )
Capitalization of interest receivable
        (31 )   (31 )
Earnings for the year
        11,758     11,758  
   

 

 

 
Balance — December 31, 2004
  $ 7,515   $ (160,484 ) $ (152,969 )
   

 

 

 

(1) Accumulated deficit includes the excess of fair value over recorded amount of intangible assets acquired from affiliated company of $190,000, net of tax benefit of $5,700 and capitalization of note receivable of $50.

See notes to consolidated financial statements.

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FINANCIAL SERVICES S.a.r.l. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
CASH FLOWS FROM OPERATING ACTIVITIES
                   
Net earnings
  $ 11,758   $ 3,717   $ 5,189  
Deferred tax assets
    (6,379 )   (1,594 )   163  
Capitalization of interest receivable charged to accumulated deficit
    (31 )   260     94  
Changes in assets and liabilities:
                   
Accounts receivable from affiliates
    (8,177 )   16,740     661  
Royalties received in advance
    447          
Interest receivable from affiliates
    (16,559 )   20,038     (16,519 )
Prepaid expenses
    (19 )   (49 )    
Accounts payable to affiliates
    1,173     (7,086 )   (5,919 )
Accrued interest payable to affiliates
    19,345     (19,082 )   16,519  
Accrued expenses
    96     (134 )   144  
Income taxes
    325     119     367  
   

 

 

 
NET CASH PROVIDED BY OPERATING ACTIVITIES
    1,979     12,929     699  
   

 

 

 
                     
CASH FLOWS FROM FINANCING ACTIVITIES
                   
Decrease in notes payable to affiliates
    (2,070 )   (13,182 )    
   

 

 

 
Net cash used by financing activities
    (2,070 )   (13,182 )    
   

 

 

 
                     
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    (91 )   (253 )   699  
Cash and cash equivalents at beginning of year
    462     715     16  
   

 

 

 
CASH AND CASH EQUIVALENTS AT END OF YEAR
  $ 371   $ 462   $ 715  
   

 

 

 
                     
Cash paid during the year for:
                   
Interest
  $ 12,654   $ 58,286   $ 40,213  
Income taxes
  $ 232   $ 385   $ 314  
 
NONCASH FINANCING ACTIVITIES

At the date of formation, Financial Services S.a.r.l. received $405,000 of notes receivable from affiliated companies and assumed $405, 000 of notes payable to an affiliated company. On April 1, 2003, the Company transferred $205,000 of its notes receivable and $205,000 of its notes payable back to FWLLC. (See Note 5.)

See notes to consolidated financial statements.

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FINANCIAL SERVICES S.a.r.l. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)

1. Nature of Operations and Relationship to Foster Wheeler Ltd. and Subsidiaries

Financial Services S.a.r.l. (the “Company”) was organized under the laws of Luxembourg and is a subsidiary of Foster Wheeler LLC (“FWLLC”) (99.2%) and Perryville Services Company Ltd. (“Perryville”) (0.8%). FWLLC and Perryville are indirectly wholly owned subsidiaries of Foster Wheeler Ltd. The principal operation of the Company is to provide financing to Foster Wheeler affiliates around the world. In addition, FW Hungary Licensing Limited Liability Company (“FW Hungary”), a wholly owned subsidiary of the Company, provides the management, developing and licensing of the beneficial rights of Foster Wheeler Ltd.’s intellectual property. FW Hungary currently licenses such rights to various Foster Wheeler affiliates outside of the United States.

The Company’s only transactions and relationships are with its Parent and other affiliated companies as discussed in Notes 2, 3, 5, and 7. Currently, the Company holds notes receivable from various United States affiliates. Accordingly, the financial position, results of operations, and cash flows of the Company could differ significantly from those that would have resulted had the Company been an independent entity.

The Company’s functional currency is the U.S. dollar.

2. Liquidity and Going Concern

The accompanying consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s ability to continue as a going concern is largely dependent on Foster Wheeler Ltd.’s ability to continue as a going concern. Foster Wheeler Ltd. and the Company may not, however, be able to continue as a going concern. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, Foster Wheeler Ltd.’s and the Company’s ability to operate profitably, to generate cash flows from operations, collections of receivables to fund its obligations, including those resulting from asbestos-related liabilities, as well as Foster Wheeler Ltd.’s ability to maintain credit facilities and bonding capacity adequate to conduct its business. Foster Wheeler Ltd. incurred significant operating losses in each of the years in the three-year period ended December 31, 2004, and has a shareholders’ deficit of $513,283 as of December 31, 2004.

In 2004, Foster Wheeler Ltd. consummated an equity-for-debt exchange in which it issued common shares, preferred shares, warrants to purchase common shares and new notes in exchange for certain of its outstanding debt securities and trust securities. The exchange offer reduced Foster Wheeler Ltd.’s existing debt (excluding a reduction in deferred accrued interest of $31,128) by $437,041, improved the shareholders’ deficit by $448,136 and when combined with the proceeds from the issuance of the new notes that were used to repay amounts that were outstanding under a previous Senior Credit Facility, eliminated substantially all material scheduled corporate debt maturities prior to 2011. After completing the exchange, Foster Wheeler Ltd. had outstanding debt obligations of approximately $570,073 as of December 31, 2004.

In August of 2002, Foster Wheeler Ltd. negotiated a Senior Credit Facility that was comprised of a $71,000 term loan, a $69,000 revolving credit facility and a $149,900 letter of credit facility having an April 30, 2005 maturity date. In connection with the equity-for- debt exchange, Foster Wheeler Ltd. prepaid the term loan and amounts outstanding under the revolving credit facility. Accordingly, there were no borrowings outstanding under the Senior Credit Facility as of December 31, 2004. Letters of credit of $90,018 remained outstanding under the Senior Credit Facility as of December 31, 2004.

In March 2005, the Senior Credit Facility was replaced with a new 5-year $250,000 Senior Credit Agreement. The new Senior Credit Agreement includes a $75,000 sub-limit for borrowings at a rate equal to LIBOR plus a spread. Standby letters of credit issued under the new Senior Credit Agreement will carry a fixed price throughout the life of the facility. The Senior Credit Agreement is collateralized by the assets and/or the stock of certain of Foster Wheeler Ltd.’s domestic subsidiaries and certain of its foreign subsidiaries.

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FINANCIAL SERVICES S.a.r.l. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

Foster Wheeler Ltd. paid up-front fees to the lender of approximately $8,225 in conjunction with the execution of the Senior Credit Agreement. Such fees, paid predominately in the first quarter of 2005, have been deferred and will be amortized to expense over the life of the agreement.

Foster Wheeler Ltd. finalized a sale/leaseback arrangement for an office building at its corporate headquarters in the third quarter of 2002. Under this arrangement, Foster Wheeler Ltd. leases the facility for an initial non-cancelable period of 20 years. The long-term capital lease obligation of $45,280 as of December 31, 2004 is included in long-term debt in Foster Wheeler Ltd.’s consolidated balance sheet.

The new Senior Credit Agreement and the sale/leaseback arrangement have quarterly financial covenant compliance requirements. Management’s forecast indicates that Foster Wheeler Ltd. will be in compliance with the financial covenants throughout 2005. The forecast assumes a significant level of new contracts and improved performance on existing contracts. However, there can be no assurance that Foster Wheeler Ltd. will comply with the covenants. If Foster Wheeler Ltd. violates a covenant under the Senior Credit Agreement or the sale/leaseback arrangement, repayment of amounts outstanding under such agreements could be accelerated and the following borrowings outstanding could also be accelerated: the 2011 Senior Notes, the 2005 Senior Notes, the Convertible Subordinated Notes, the Trust Preferred Securities, the Subordinated Robbins Facility Exit Funding Obligations, and certain of the special-purpose project debt facilities. The total amount of Foster Wheeler Ltd. debt that could be accelerated is $463,563 as of December 31, 2004. Foster Wheeler Ltd. would not be able to repay amounts borrowed if the payment dates were accelerated.

Holders of Foster Wheeler Ltd.’s new 2011 Senior Notes have a security interest in the stock, debt and assets of certain of Foster Wheeler Ltd.’s subsidiaries. The 2011 Senior Notes contain incurrence covenants that limit Foster Wheeler Ltd.’s ability to undertake certain actions including incurring debt, making certain payments and investments, granting liens, selling assets and entering into specific intercompany transactions, among others. Management monitors these covenants to ensure Foster Wheeler Ltd. remains in compliance with the indenture.

In connection with the exchange, the holders of Foster Wheeler Ltd.’s 2005 Senior Notes agreed to amend the indenture governing these notes to effectively eliminate the security interest previously held by the notes.

On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provided for up to $45,000 of additional revolving loans available to provide working capital. As of December 31, 2004, the facility remained undrawn. In December 2004, the U.K. subsidiaries gave notice canceling the revolving credit facility effective January 24, 2005.

Since January 15, 2002, Foster Wheeler Ltd. has exercised its right to defer payments on the Trust Preferred Securities. The aggregate liquidation amount of the Trust Preferred Securities at December 31, 2004 was $71,177 after completing the equity-for-debt exchange. The previous Senior Credit Facility required Foster Wheeler Ltd. to defer the payment of the dividends on the Trust Preferred Securities and, accordingly, no dividends were paid during 2004 or 2003. As of December 31, 2004, the amount of dividends deferred plus accrued interest approximates $23,460. Foster Wheeler Ltd. intends to continue to defer payment of the dividends on the Trust Preferred Securities until January 15, 2007 - the full term allowed by the underlying agreement. Once the deferred dividend obligation has been satisfied, Foster Wheeler Ltd. has the right to defer subsequent dividend payments for an additional 20 consecutive quarters. The new Senior Credit Agreement requires the approval of the lenders to make payments on the Trust Preferred Securities to the extent such payments are not contractually required by the underlying Trust Preferred Securities agreements.

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FINANCIAL SERVICES S.a.r.l. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

Foster Wheeler Ltd.’s European Power subsidiary in Finland is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. Obligations under both facilities are guaranteed by Foster Wheeler Ltd. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio.

One of the performance bond facilities is dedicated to a specific project and, as of December 31, 2004, had performance bonds outstanding equivalent to $24,522 (none of which has been drawn as of such date). Covenants under this facility are tested quarterly. The second facility is a general performance bond facility and, as of December 31, 2004, had performance bonds outstanding in favor of several clients equivalent to $10,114 (none of which has been drawn).

As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of Foster Wheeler Ltd.’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the two performance bond facilities. On August 6, 2004 and August 9, 2004, Foster Wheeler Ltd.’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities.

The waiver for the project-specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum equity ratio levels so long as the performance bonds are outstanding. Foster Wheeler Ltd.’s subsidiary remained below the minimum equity ratio as of December 31, 2004. On March 15, 2005, the bond expired and the banks funded the client and Foster Wheeler Ltd. reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of Foster Wheeler Ltd. to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

The waiver for the general performance bond facility is effective through March 31, 2005. As of that date, approximately $4,900 is forecasted to be outstanding under the facility. Foster Wheeler Ltd. has provided a standby letter of credit to back up the general performance bond facility and intends to do so until such facility can be permanently replaced or the last performance bond issued there under has expired. Therefore, Foster Wheeler Ltd. believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio covenant is reflected in Foster Wheeler Ltd.’s liquidity forecasts.

Management closely monitors liquidity and updates its U.S. liquidity forecasts weekly. These forecasts cover, among other analyses, existing cash balances, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, working capital needs and unused credit line availability. Foster Wheeler Ltd.’s cash flow forecasts continue to indicate that sufficient cash will be available to fund Foster Wheeler Ltd.’s U.S. and foreign working capital needs throughout 2005.

As of December 31, 2004, Foster Wheeler Ltd. had cash and cash equivalents, short-term investments, and restricted cash totaling $390,186, compared to $430,170 as of December 26, 2003. Of the $390,186 total at December 31, 2004, $319,612 was held by foreign subsidiaries.

Foster Wheeler Ltd.’s domestic operating entities are cash flow positive. However they do not generate sufficient cash flow to cover the costs related to Foster Wheeler Ltd.’s indebtedness, obligations to fund U.S. pension plans, and corporate overhead expenses. Consequently, Foster Wheeler Ltd. requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’

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FINANCIAL SERVICES S.a.r.l. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

minimum working capital needs and to service its debt. Foster Wheeler Ltd.’s current 2005 forecast assumes total cash repatriation from its non-U.S. subsidiaries of approximately $107,000 from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends. In 2004 and 2003, Foster Wheeler Ltd. repatriated approximately $77,000 and $100,000, respectively, from its non-U.S. subsidiaries.

There can be no assurance that the forecasted foreign cash repatriation will occur, as the non-U.S. subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of Foster Wheeler Ltd.’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. The repatriation of funds may also subject those funds to taxation. As a result of these factors, Foster Wheeler Ltd. may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries in the amount forecasted above.

Commercial operations under a domestic contract retained by Foster Wheeler Ltd. in connection with the sales of assets of the Foster Wheeler Environmental Corporation (“Environmental”), commenced in January 2004. The plant processes low-level nuclear waste for the U.S. Department of Energy (“DOE”). Foster Wheeler Ltd. funded the plant’s construction costs and operates the facility. The majority of Foster Wheeler Ltd.’s invested capital was recovered during the early stages of processing the first stream of waste materials. This project successfully processed all quantities of the first waste stream of materials ahead of schedule and is currently finalizing the processing line for the second waste stream. In 2004, the project generated net cash flow of approximately $53,300. An additional $17,800 of capital recovery is dependent on the initial processing of the second waste stream of materials. This capital recovery is expected in 2005.

Foster Wheeler Ltd.’s inability to operate profitably and to generate cash flows from operations, its reliance on repatriated cash from its foreign subsidiaries to fund its domestic obligations, and its obligations to maintain minimum debt covenants to avoid possible acceleration of its debt, raises substantial doubt about Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern.

3. Purchase of FW Hungary Licensing Limited Liability Company

In December 2003, the Company acquired 100% of FW Hungary, previously a wholly owned subsidiary of FW Technologies Holding, LLC (“FW Tech Holding”), for approximately $50,000. The transaction was financed by issuing a $42,500 demand note payable bearing interest at 9% to FW Tech Holding and by issuing additional ownership interest in the Company with an approximate value of $7,500 to Perryville, in exchange for their respective 85% and 15% ownership interests in FW Hungary. The Company has reflected this transaction as a reorganization of companies under common control. Accordingly, the accompanying consolidated financial statements include the activity of FW Hungary in the consolidated statements of financial position, results of operations and cash flows for all periods presented.

4. Summary of Significant Accounting Policies

Principles of Consolidation — The consolidated financial statements include the accounts of the Company and its wholly owned foreign subsidiary. All intercompany transactions and balances have been eliminated.

The Company’s fiscal year ends December 31.

Use of Estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial

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FINANCIAL SERVICES S.a.r.l. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Summary of Significant Accounting Policies — (Continued)

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. The most significant estimates relate to the collection of notes, interest receivable and royalty income from affiliates and taxes.

Revenue Recognition — Revenue is recognized on the accrual basis. The Company’s primary source of revenue is interest income and royalty income from affiliated companies.

Cash and Cash Equivalents — Cash and cash equivalents include highly liquid short-term investments purchased with original maturities of three months or less.

Accounts and Interest Receivable from Affiliates — Accounts receivable and interest receivable consists of amounts due from related parties (presented at net realizable value). See Note 5.

Income Taxes — The Company files a tax return in Luxembourg. Income tax expense in the Company’s consolidated statement of operations has been calculated on a separate company basis for its subsidiary that files a tax return in its foreign jurisdiction. The Company has an agreement with the Luxembourg tax jurisdiction whereby the Company is required to pay a minimum tax. Provision is made for foreign income taxes payable by the Company’s subsidiary in Hungary at the statutory rate of 4% for the twelve months ended December 31, 2004 and 3% for the twelve months ended December 31, 2003. New Hungarian legislation increased the statutory rate to 4% from 3% effective January 1, 2004 and will increase the statutory rate to 16% with certain exemptions which will bring the effective tax rate for the Company to 8% effective January 1, 2006. In addition, royalty income from foreign sources of the Company’s subsidiary is subject to foreign tax withholding.

Deferred income taxes are provided on a liability method whereby deferred tax assets/liabilities are established for the difference between financial reporting and income tax basis of assets and liabilities, as well as operating loss 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 were adjusted to reflect the increase in the Hungarian tax rates described above.

5. Related Party Transactions

The Company acquired $405,000 of notes receivable from various affiliated companies through assignment by FWLLC on May 25, 2001. The notes were at interest rates ranging from 7.00% to 8.50%. In exchange for these notes, the Company assumed the obligation to finance $405,000 of FWLLC’s debt and the related carrying charges. The debt was at interest rates ranging from 6.75% to 9.00%.

On April 1, 2003, the Company transferred $205,000 of its notes receivable and $205,000 of its notes payable back to FWLLC. The interest rate on the remaining notes receivable was also changed to 6.85% per annum on April 1, 2003. The balance of the note payable was at an interest rate of 6.75% per annum from April 1, 2003 until September 24, 2004. On September 24, 2004 as a result of the Foster Wheeler Ltd. equity for debt exchange discussed in Note 2, the interest rate on the obligations assumed by the Company changed to a weighted average rate of 7.71107% per annum. The debt matures on November 15, 2005 ($11,417), on September 24, 2011 ($141,437), and on May 1, 2016 ($47,146) .

On September 24, 2004 the Company acquired a $120,000 demand note receivable which bears interest at 10.45275% from an affiliated company through assignment by FWLLC. In exchange for this note, the Company assumed the obligation to finance $120,000 of FWLLC’s debt and the related carrying charges. The debt was at an interest rate of 10.359%.

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FINANCIAL SERVICES S.a.r.l. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

5. Related Party Transactions — (Continued)

Interest income on the notes receivable recognized for the years ended December 31, 2004, 2003 and 2002 amounted to $16,835, $18,320 and $31,875 respectively. Interest receivable on those notes amounted to $19,050 and $2,491 as of December 31, 2004 and December 31, 2003, respectively. Reflected in the consolidated balance sheet, due to the uncertainty of collection based on the going concern issue addressed in Note 2, the Company reduced intercompany interest receivable from U.S. affiliates and charged accumulated deficit. A charge/(credit) to accumulated deficit was recorded in the amounts of $31 and $(260) for the periods ended December 31, 2004 and December 31, 2003, respectively, to reflect the excess of interest receivable over interest payable to affiliates. See below for a discussion of the Company’s credit risk.

Interest expense on the notes payable recognized for the years ended December 31, 2004, 2003 and 2002 amounted to $16,804, $18,580 and $31,969, respectively. Interest payable to FWLLC as of December 31, 2004 and 2003 was $12,637 and $2,283, respectively.

The Company is required to fund its obligations to FWLLC only to the extent it collects amounts due on its notes receivable from affiliates. See Note 2 for contingencies associated with the affiliates’ ability to repay the debt. To the extent that any amounts of the notes receivable become uncollectible, FWLLC agrees to assume the obligation of the Company pursuant to the Note Transfer and Debt Assumption Agreement dated May 25, 2001. In addition, the Company agrees to the extent the obligation for the notes payable is reduced for whatever reason, the Company’s rights to those notes receivable will correspondingly be transferred to FWLLC. As a result, the Company has no credit risk relating to the notes receivable.

FW Hungary made an investment in Foster Wheeler Licensing Services G.P. (“FWLS”) of $190,000 on December 22, 2000 through the issuance of a $190,000 note payable to FWLS, which was later assigned to FWLLC. FWLS held licensed property that included intellectual property, confidential informational, licensing rights and marketing intangibles of Foster Wheeler Ltd. On May 18, 2001, FWLS was dissolved and FW Hungary acquired the licensed property in exchange for its ownership interest. The transfer of the licensed property was seen as a transaction between entities under common control. As a result, the licensed property was recorded at its carrying value of zero. The note payable bears interest at an annual rate of 9.0%. For the three years ended December 31, 2004, 2003 and 2002, interest expense was $15,195, $17,000 and $17,100, respectively. Unpaid interest at December 31, 2004, and 2003 was $10,155 and $1,164, respectively.

FW Hungary enters into licensing agreements as a Licensor of LP to certain foreign affiliates of Foster Wheeler Ltd. The affiliates pay a royalty to FW Hungary based on an agreed upon range of between 1.0% and 4.0% of the affiliates’ current year net revenues (operating revenues less intercompany revenues). These agreements are for one-year periods with the right of extension and revision. Royalty income is calculated and billed on a quarterly basis. For the years ended December 31, 2004, 2003 and 2002, royalty income was $23,733, $20,473 and $25,114, respectively.

Accounts receivable from affiliates at December 31, 2004 and 2003 represents unpaid royalty fees of $8,566 and $389, respectively.

On January 1, 2001, FW Hungary entered into a Cost Sharing Agreement with certain Foster Wheeler affiliates to share their collective knowledge and to jointly develop Intangible Property. The costs of developing this property allocable to FW Hungary shall be fifty percent of the pretax net expenses of the affiliates for the year. The agreement is effective for five years and shall automatically renew for additional two-year terms unless FW Hungary or affiliates give thirty days notice prior to the end of the term or any renewal term. The amount of costs incurred under this agreement for the years ended December 31, 2004, 2003 and 2002 was $2,225, $532, and $1,744, respectively. As of December 31, 2004 and 2003, $2,225 and $532, respectively, were payable to affiliates pursuant to this agreement.

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FINANCIAL SERVICES S.a.r.l. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

5. Related Party Transactions — (Continued)

Foster Wheeler, Inc., an indirectly wholly owned subsidiary of Foster Wheeler Ltd., acts as a banking agent to the Company, managing cash and financing requirements as needed by the Company, and charges interest on advances made to the Company, if any.

All of the related party transactions discussed above are eliminated in the Foster Wheeler Ltd. and Subsidiaries Consolidated Financial Statements for the years ended as of December 31, 2004, December 26, 2003 and December 27, 2002.

The Management of Foster Wheeler Ltd. has considered whether there are any costs borne by affiliates of the Company that should be allocated to the Company and has determined that these costs, if any, are immaterial.

6. Income Taxes

The components of earnings before income taxes for the years 2004, 2003 and 2002 were taxed as follows:

    2004   2003   2002  
   

 

 

 
Foreign
  $ 5,937   $ 2,627   $ 6,033  
   

 

 

 

The benefit/(provision) for income taxes on that earnings was as follows:

    2004   2003   2002  
   

 

 

 
Current tax expense:
                   
Foreign
  $ (558 ) $ (504 ) $ (681 )
Deferred tax benefit/(expense):
                   
Foreign
    6,379     1,594     (163 )
   

 

 

 
Total benefit/(provision) for income taxes
  $ 5,821   $ 1,090   $ (844 )
   

 

 

 
Deferred tax assets consist of the following:
                   
Intangible assets
  $ 13,408   $ 7,029        
   
 
       
Net deferred tax assets
  $ 13,408   $ 7,029        
   
 
       

The (benefit)/provision for income taxes is determined by applying the Luxembourg statutory rate applicable to the Company. Due to enactment of new legislation, the Hungarian tax rate was increased to 4% effective January 1, 2004 and will increase to 16% with certain exemptions which will bring the effective tax rate for the Company to 8% effective January 1, 2006. Accordingly, the deferred tax provisions include a benefit of $6,596 for 2004 and $1,757 for 2003 to reflect the increase of the value of the deferred tax assets.

The provision for income taxes differs from the amount of income tax determined by applying the applicable statutory rate to earnings before income taxes, as a result of the following:

    2004   2003   2002  
   

 

 

 
Tax provision at the Luxembourg statutory rate
    30.4 %   30.4 %   30.4 %
Foreign rate differential
    (43.4 )%   (33.3 )%   (27.9 )%
Difference in estimated income tax on foreign income and losses, net of amounts previously provided
    2.0 %   4.4 %   1.9 %
Unutilized loss
    18.1 %   9.1 %   0.5 %
Effect of tax rate change
    (111.1 )%   (66.9 )%   %
Withholding tax rate
    6.0 %   14.8 %   9.1 %
   

 

 

 
      (98.0 )%   (41.5 )%   14.0 %
   

 

 

 

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FINANCIAL SERVICES S.a.r.l. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

7. Financial Instruments and Risk Management

The fair value of the Company’s long-term debt is estimated based on the quoted market prices for the same or similar issues. The carrying amounts and fair value of the Company’s long-term debt are as follows: at December 31, 2004-$272,854 and $295,019, respectively; at December 26, 2003-$200,000 and $150,500, respectively. It is not practicable to estimate the fair value of the Company’s intercompany debt of $214,479 at December 31, 2004 and $169,403 at December 31, 2003 as there is no market value for this type of debt instrument.

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FW HUNGARY LICENSING LIMITED LIABILITY COMPANY
Financial Statements
December 31, 2004

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Foster Wheeler Ltd:

In our opinion, the accompanying statement of financial position and the related statements of operations, of cash flows and of changes in member’s interest present fairly, in all material respects, the financial position of FW Hungary Licensing Limited Liability Company (the “Company”), an indirect, wholly-owned subsidiary of Foster Wheeler Ltd. (the “Parent”), at December 31, 2004 and December 31, 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 and the Parent will continue as a going concern. As discussed in Note 2 to the financial statements, the Parent has incurred significant losses in each of the three years in the period ended December 31, 2004 and has a shareholders’ deficit of $513,283,000 at December 31, 2004. The Parent has substantial debt obligations and during 2004 it was required to obtain an additional amendment to its senior credit facility to provide covenant relief by modifying certain definitions of financial measures utilized in the calculation of certain financial covenants. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Parent’s ability to return to profitability, to complete planned restructuring activities, to generate cash flows from operations and collections of receivables to fund its operations, including obligations resulting from asbestos claims, as well as the maintenance of credit facilities and bonding capacity adequate to conduct business. These matters raise substantial doubt about the Company’s and the Parent’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
March 30, 2005

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FW HUNGARY LICENSING LIMITED LIABILITY COMPANY
STATEMENT OF OPERATIONS
(in thousands of dollars)

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
Revenues:
                   
Royalty income with affiliates
  $ 23,733   $ 20,473   $ 25,114  
Interest income with affiliates
        200      
   

 

 

 
Total Revenues
    23,733     20,673     25,114  
                     
Costs and Expenses:
                   
Interest expense with affiliates
    11,338     17,000     17,100  
Other deductions
    2,627     482     1,872  
   

 

 

 
Total Costs and Expenses
    13,965     17,482     18,972  
   

 

 

 
Earnings before income taxes
    9,768     3,191     6,142  
Benefit/(provision) for income taxes
    5,936     1,205     (729 )
   

 

 

 
Net earnings
  $ 15,704   $ 4,396   $ 5,413  
   

 

 

 

See notes to financial statements.

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FW HUNGARY LICENSING LIMITED LIABILITY COMPANY
STATEMENT OF FINANCIAL POSITION
(in thousands of dollars)

    December 31, 2004   December 31, 2003  
   

 

 
ASSETS
             
Current Assets:
             
Cash and cash equivalents
  $ 347   $ 461  
Accounts receivable from affiliates
    8,610     389  
Prepaid expenses
    68     49  
   

 

 
Total current assets
    9,025     899  
Deferred income taxes
    13,408     7,029  
   

 

 
TOTAL ASSETS
  $ 22,433   $ 7,928  
   

 

 
LIABILITIES AND MEMBER’S INTEREST
             
Current Liabilities:
             
Accounts payable to affiliates
  $ 2,277   $ 2,041  
Accrued expenses
    73     96  
Advance payments
    447      
Income taxes payable
    900     689  
Notes payable to affiliates
    124,477     126,547  
   

 

 
Total current liabilities
    128,174     129,373  
Commitments and contingencies
             
   

 

 
TOTAL LIABILITIES
    128,174     129,373  
   

 

 
TOTAL MEMBER’S INTEREST
    (105,741 )   (121,445 )
   

 

 
TOTAL LIABILITIES AND MEMBER’S INTEREST
  $ 22,433   $ 7,928  
   

 

 

See notes to financial statements.

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FW HUNGARY LICENSING LIMITED LIABILITY COMPANY
STATEMENT OF MEMBER’S INTEREST
(in thousands of dollars)

    Contributed
Capital
  Accumulated
Earnings
  Other
Adjustments (1)
  Total  
   

 

 

 

 
Balance — December 31, 2001
  $ 100   $ 2,995   $ (184,350 ) $ (181,255 ) 
Earnings for the year
          5,413           5,413  
   

 

 

 

 
Balance — December 31, 2002
    100     8,408     (184,350 )   (175,842 )
Additional capital contribution
    50,001             50,001  
Earnings for the year
        4,396         4,396  
   

 

 

 

 
Balance — December 31, 2003
    50,101     12,804     (184,350 )   (121,445 )
Earnings for the year
        15,704         15,704  
   

 

 

 

 
Balance — December 31, 2004
  $ 50,101   $ 28,508   $ (184,350 ) $ (105,741 )
   

 

 

 

 
                           

 
(1)
Other adjustments reflect the excess of fair value over recorded amount of intangible assets acquired from affiliated company of $190,000, net of tax benefit of $5,700 and capitalization of note receivable of $50.

See notes to financial statements.

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FW HUNGARY LICENSING LIMITED LIABILITY COMPANY
STATEMENT OF CASH FLOWS
(in thousands of dollars)

    For the Year Ended December 31,

 
    2004   2003   2002  
   

 

 

 
CASH FLOWS FROM OPERATING ACTIVITIES
                   
Net earnings
  $ 15,704   $ 4,396   $ 5,413  
Deferred tax assets
    (6,379 )   (1,594 )   163  
Changes in assets and liabilities:
                   
Accounts receivables from affiliates
    (8,221 )   16,740     661  
Prepaid expenses
    (19 )   (49 )    
Accounts payable to affiliates
    236     (6,150 )   (5,919 )
Advance payments
    447          
Accrued expenses
    (23 )   (134 )   129  
Income taxes
    211     4     252  
   

 

 

 
Net cash provided by operating activities
    1,956     13,213     699  
   

 

 

 
                     
CASH FLOWS FROM FINANCING ACTIVITIES
                   
Capital contribution
        1      
Decrease in notes payable to affiliates
    (2,070 )   (13,453 )    
   

 

 

 
Net cash used by financing activities
    (2,070 )   (13,452 )    
   

 

 

 
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    (114 )   (239 )   699  
Cash and cash equivalents at beginning of year
    461     700     1  
   

 

 

 
CASH AND CASH EQUIVALENTS AT END OF YEAR
  $ 347   $ 461   $ 700  
   

 

 

 
Cash paid during the year for:
                   
Interest
  $ 12,691   $ 19,688   $ 24,763  
Income taxes
  $ 232   $ 385   $ 314  

NONCASH FINANCING ACTIVITIES:

In December 2003, FW Hungary Licensing Limited Liability Company received a non-cash capital contribution of $50,000 from Financial Services S.a.r.l. (“SARL”) in exchange for a reduction in FW Hungary’s note payable to SARL of $50,000. (See Note 4.)

See notes to financial statements.

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FW HUNGARY LICENSING LIMITED LIABILITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(in thousands of dollars)

1. Nature of Operations and Relationship to Foster Wheeler Ltd. and Subsidiaries

FW Hungary Licensing Limited Liability Company (the “Company”) was organized on December 1, 2000 under the laws of Hungary. The Company, as of December 2003, is a wholly owned subsidiary of Financial Services S.a.r.l. (“SARL”) or the “Member” which is a subsidiary of Foster Wheeler LLC (“FWLLC”) (99.2%), and Perryville Services Company Ltd. (“Perryville”) (.8%), which are indirectly wholly owned subsidiaries of Foster Wheeler Ltd. Prior to December 2003, the Company was owned by FW Technologies Holdings, LLC (“FWTH”) which was, prior to its dissolution, a subsidiary of FWLLC (99.9%) and Perryville (.1%) (see Note 4). The principal operation of the Company is the management, developing and licensing of the beneficial rights of Foster Wheeler Ltd.’s intellectual property. The Company currently licenses such rights to various Foster Wheeler affiliates outside of the United States.

The Company’s only transactions and relationships are with SARL, FWLLC and other affiliated companies as discussed in Notes 2, 4 and 6. Accordingly, the financial position, results of operations and cash flows of the Company could differ significantly from those that would have resulted had the Company been an independent entity.

The Company’s functional currency is the U.S. dollar.

2. Liquidity and Going Concern

The accompanying financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s ability to continue as a going concern is largely dependent on Foster Wheeler Ltd.’s ability to continue as a going concern. Foster Wheeler Ltd. and the Company may not, however, be able to continue as a going concern. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, Foster Wheeler Ltd.’s and the Company’s ability to operate profitably, to generate cash flows from operations, collections of receivables to fund its obligations, including those resulting from asbestos-related liabilities, as well as Foster Wheeler Ltd.’s ability to maintain credit facilities and bonding capacity adequate to conduct its business. Foster Wheeler Ltd. incurred significant operating losses in each of the years in the three-year period ended December 31, 2004, and has a shareholders’ deficit of $513,283 as of December 31, 2004.

In 2004, Foster Wheeler Ltd. consummated an equity-for-debt exchange in which it issued common shares, preferred shares, warrants to purchase common shares and new notes in exchange for certain of its outstanding debt securities and trust securities. The exchange offer reduced Foster Wheeler Ltd.’s existing debt (excluding a reduction in deferred accrued interest of $31,128) by $437,041, improved the shareholders’ deficit by $448,136 and when combined with the proceeds from the issuance of the new notes that were used to repay amounts that were outstanding under a previous Senior Credit Facility, eliminated substantially all material scheduled corporate debt maturities prior to 2011. After completing the exchange, Foster Wheeler Ltd. had outstanding debt obligations of approximately $570,073 as of December 31, 2004.

In August of 2002, Foster Wheeler Ltd. negotiated a Senior Credit Facility that was comprised of a $71,000 term loan, a $69,000 revolving credit facility and a $149,900 letter of credit facility having an April 30, 2005 maturity date. In connection with the equity-for- debt exchange, Foster Wheeler Ltd. prepaid the term loan and amounts outstanding under the revolving credit facility. Accordingly, there were no borrowings outstanding under the Senior Credit Facility as of December 31, 2004. Letters of credit of $90,018 remained outstanding under the Senior Credit Facility as of December 31, 2004.

In March 2005, the Senior Credit Facility was replaced with a new 5-year $250,000 Senior Credit Agreement. The new Senior Credit Agreement includes a $75,000 sub-limit for borrowings at a rate equal to LIBOR plus a spread. Standby letters of credit issued under the new Senior Credit Agreement will carry a fixed price throughout the life of the facility. The Senior Credit Agreement is collateralized by the assets and/or the stock of certain of Foster Wheeler Ltd.’s domestic subsidiaries and certain of its foreign subsidiaries.

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FW HUNGARY LICENSING LIMITED LIABILITY COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

Foster Wheeler Ltd. paid up-front fees to the lender of approximately $8,225 in conjunction with the execution of the Senior Credit Agreement. Such fees, paid predominately in the first quarter of 2005, have been deferred and will be amortized to expense over the life of the agreement.

Foster Wheeler Ltd. finalized a sale/leaseback arrangement for an office building at its corporate headquarters in the third quarter of 2002. Under this arrangement, Foster Wheeler Ltd. leases the facility for an initial non-cancelable period of 20 years. The long-term capital lease obligation of $45,280 as of December 31, 2004 is included in long-term debt in Foster Wheeler Ltd.’s consolidated balance sheet.

The new Senior Credit Agreement and the sale/leaseback arrangement have quarterly financial covenant compliance requirements. Management’s forecast indicates that Foster Wheeler Ltd. will be in compliance with the financial covenants throughout 2005. The forecast assumes a significant level of new contracts and improved performance on existing contracts. However, there can be no assurance that Foster Wheeler Ltd. will comply with the covenants. If Foster Wheeler Ltd. violates a covenant under the Senior Credit Agreement or the sale/leaseback arrangement, repayment of amounts outstanding under such agreements could be accelerated and the following borrowings outstanding could also be accelerated: the 2011 Senior Notes, the 2005 Senior Notes, the Convertible Subordinated Notes, the Trust Preferred Securities, the Subordinated Robbins Facility Exit Funding Obligations, and certain of the special-purpose project debt facilities. The total amount of Foster Wheeler Ltd. debt that could be accelerated is $463,563 as of December 31, 2004. Foster Wheeler Ltd. would not be able to repay amounts borrowed if the payment dates were accelerated.

Holders of Foster Wheeler Ltd.’s new 2011 Senior Notes have a security interest in the stock, debt and assets of certain of Foster Wheeler Ltd.’s subsidiaries. The 2011 Senior Notes contain incurrence covenants that limit Foster Wheeler Ltd.’s ability to undertake certain actions including incurring debt, making certain payments and investments, granting liens, selling assets and entering into specific intercompany transactions, among others. Management monitors these covenants to ensure Foster Wheeler Ltd. remains in compliance with the indenture.

In connection with the exchange, the holders of Foster Wheeler Ltd.’s 2005 Senior Notes agreed to amend the indenture governing these notes to effectively eliminate the security interest previously held by the notes.

On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provided for up to $45,000 of additional revolving loans available to provide working capital. As of December 31, 2004, the facility remained undrawn. In December 2004, the U.K. subsidiaries gave notice canceling the revolving credit facility effective January 24, 2005.

Since January 15, 2002, Foster Wheeler Ltd. has exercised its right to defer payments on the Trust Preferred Securities. The aggregate liquidation amount of the Trust Preferred Securities at December 31, 2004 was $71,177 after completing the equity-for-debt exchange. The previous Senior Credit Facility required Foster Wheeler Ltd. to defer the payment of the dividends on the Trust Preferred Securities and, accordingly, no dividends were paid during 2004 or 2003. As of December 31, 2004, the amount of dividends deferred plus accrued interest approximates $23,460. Foster Wheeler Ltd. intends to continue to defer payment of the dividends on the Trust Preferred Securities until January 15, 2007 - the full term allowed by the underlying agreement. Once the deferred dividend obligation has been satisfied, Foster Wheeler Ltd. has the right to defer subsequent dividend payments for an additional 20 consecutive quarters. The new Senior Credit Agreement requires the approval of the lenders to make payments on the Trust Preferred Securities to the extent such payments are not contractually required by the underlying Trust Preferred Securities agreements.

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FW HUNGARY LICENSING LIMITED LIABILITY COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

Foster Wheeler Ltd.’s European Power subsidiary in Finland is a party to two Euro-denominated performance bond facilities with financial institutions that contain covenants. Obligations under both facilities are guaranteed by Foster Wheeler Ltd. The covenants include (i) a limitation on the amount of dividends to 75% of the subsidiary’s annual earnings and (ii) a requirement that the payment of dividends and certain restricted payments be subject to the subsidiary having minimum equity ratios, calculated as equity divided by total assets each as defined in the facilities. In addition, the facilities require the subsidiary to maintain a minimum equity ratio.

One of the performance bond facilities is dedicated to a specific project and, as of December 31, 2004, had performance bonds outstanding equivalent to $24,522 (none of which has been drawn as of such date). Covenants under this facility are tested quarterly. The second facility is a general performance bond facility and, as of December 31, 2004, had performance bonds outstanding in favor of several clients equivalent to $10,114 (none of which has been drawn).

As a result of operating losses at the foreign subsidiary during the second quarter of 2004, the equity of Foster Wheeler Ltd.’s subsidiary fell below the minimum equity ratios, breaching the covenants contained in the two performance bond facilities. On August 6, 2004 and August 9, 2004, Foster Wheeler Ltd.’s foreign subsidiary obtained waivers from the financial institutions providing the performance bond facilities.

The waiver for the project-specific performance bond facility requires that the foreign subsidiary make no dividends or other restricted payments, including intercompany loans, debt service on existing intercompany loans, royalties, and management fees, for as long as the foreign subsidiary’s equity remains below the minimum equity ratio levels so long as the performance bonds are outstanding. Foster Wheeler Ltd.’s subsidiary remained below the minimum equity ratio as of December 31, 2004. On March 15, 2005, the bond expired and the banks funded the client and Foster Wheeler Ltd. reimbursed the banks. The bond is therefore no longer outstanding. It is the intention of Foster Wheeler Ltd. to issue a letter of credit under the new Senior Credit Agreement and thus recover the cash from the client.

The waiver for the general performance bond facility is effective through March 31, 2005. As of that date, approximately $4,900 is forecasted to be outstanding under the facility. Foster Wheeler Ltd. has provided a standby letter of credit to back up the general performance bond facility and intends to do so until such facility can be permanently replaced or the last performance bond issued there under has expired. Therefore, Foster Wheeler Ltd. believes this matter will not have an adverse impact on its forecasted liquidity. The foreign subsidiary’s inability to pay dividends and restricted payments because of its failure to remain in compliance with the minimum equity ratio covenant is reflected in Foster Wheeler Ltd.’s liquidity forecasts.

Management closely monitors liquidity and updates its U.S. liquidity forecasts weekly. These forecasts cover, among other analyses, existing cash balances, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, working capital needs and unused credit line availability. Foster Wheeler Ltd.’s cash flow forecasts continue to indicate that sufficient cash will be available to fund Foster Wheeler Ltd.’s U.S. and foreign working capital needs throughout 2005.

As of December 31, 2004, Foster Wheeler Ltd. had cash and cash equivalents, short-term investments, and restricted cash totaling $390,186, compared to $430,170 as of December 26, 2003. Of the $390,186 total at December 31, 2004, $319,612 was held by foreign subsidiaries.

Foster Wheeler Ltd.’s domestic operating entities are cash flow positive. However they do not generate sufficient cash flow to cover the costs related to Foster Wheeler Ltd.’s indebtedness, obligations to fund U.S. pension plans, and corporate overhead expenses. Consequently, Foster Wheeler Ltd. requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’

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FW HUNGARY LICENSING LIMITED LIABILITY COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

2. Liquidity and Going Concern — (Continued)

minimum working capital needs and to service its debt. Foster Wheeler Ltd.’s current 2005 forecast assumes total cash repatriation from its non-U.S. subsidiaries of approximately $107,000 from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends. In 2004 and 2003, Foster Wheeler Ltd. repatriated approximately $77,000 and $100,000, respectively, from its non-U.S. subsidiaries.

There can be no assurance that the forecasted foreign cash repatriation will occur, as the non-U.S. subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of Foster Wheeler Ltd.’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. The repatriation of funds may also subject those funds to taxation. As a result of these factors, Foster Wheeler Ltd. may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries in the amount forecasted above.

Commercial operations under a domestic contract retained by Foster Wheeler Ltd. in connection with the sales of assets of the Foster Wheeler Environmental Corporation (“Environmental”), commenced in January 2004. The plant processes low-level nuclear waste for the U.S. Department of Energy (“DOE”). Foster Wheeler Ltd. funded the plant’s construction costs and operates the facility. The majority of Foster Wheeler Ltd.’s invested capital was recovered during the early stages of processing the first stream of waste materials. This project successfully processed all quantities of the first waste stream of materials ahead of schedule and is currently finalizing the processing line for the second waste stream. In 2004, the project generated net cash flow of approximately $53,300. An additional $17,800 of capital recovery is dependent on the initial processing of the second waste stream of materials. This capital recovery is expected in 2005.

Foster Wheeler Ltd.’s inability to operate profitably and to generate cash flows from operations, its reliance on repatriated cash from its foreign subsidiaries to fund its domestic obligations, and its obligations to maintain minimum debt covenants to avoid possible acceleration of its debt, raises substantial doubt about Foster Wheeler Ltd.’s and the Company’s ability to continue as a going concern.

3. Summary of Significant Accounting Policies

Fiscal Year — The Company’s fiscal year ends December 31.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of 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. The most significant estimates relate to the collectibility of royalty income from affiliates and income taxes.

Revenue Recognition — Revenue is recognized on the accrual basis. The Company’s primary source of revenue is royalty income from related parties.

Cash and Cash Equivalents — Cash and cash equivalents include highly liquid short-term investments purchased with original maturities of three months or less.

Accounts Receivable from Affiliates — Accounts receivable consist solely of amounts due from related parties. See Note 4.

Income Taxes — The Company files a tax return in Hungary. Provision is made for foreign income taxes payable in Hungary at the statutory rate of 4% for the twelve months ended December 31, 2004 and 3% for the twelve months ended December 31, 2003. New Hungarian legislation increased the statutory rate to

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FW HUNGARY LICENSING LIMITED LIABILITY COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

3. Summary of Significant Accounting Policies — (Continued)

4% from 3% effective January 1, 2004 and will increase the statutory rate to 16% with certain exemptions which will bring the effective tax rate for the Company to 8% effective January 1, 2006. In addition, the Company’s royalty income from foreign sources is subject to foreign tax withholding. Income tax expense in the Company’s condensed statement of operations has been calculated on a separate company basis.

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 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 were adjusted to reflect the increase in the Hungarian tax rates described above.

4. Related Party Transactions

The Company made an investment in Foster Wheeler Licensing Services G.P. (“FWLS”) of $190,000 on December 22, 2000 through the issuance of a $190,000 note payable to FWLS, which was later assigned to FWLLC. FWLS held licensed property that included intellectual property, confidential informational, licensing rights and marketing intangibles of Foster Wheeler Ltd. On May 18, 2001, FWLS was dissolved and the Company acquired the licensed property in exchange for its ownership interest. The transfer of the licensed property was seen as a transaction between entities under common control. As a result, the licensed property was recorded at its carrying value of zero.

On December 1, 2003, FWLLC transferred its $190,000 note receivable from the Company to Financial Services S.a.r.l. (“SARL”). This transfer was part of a reorganization of the Company whereby a portion of the note, $50,000, was contributed for additional membership units and recorded as additional capital of the Company. SARL subsequently acquired 100% of the interest in the Company during December 2003. The note payable to SARL bears interest at an annual rate of 9.0%. Interest expense for the years ended December 31, 2004, 2003 and 2002 was $11,338, $17,000 and $17,100, respectively.

The Company enters into licensing agreements as a Licensor of LP to certain foreign affiliates of Foster Wheeler Ltd. The affiliates pay a royalty to the Company based on an agreed upon range of between 1.0% and 4.0% of the affiliates’ current year net revenues (operating revenues less intercompany revenues). These agreements are for one-year periods with the right of extension and revision. Royalty income is calculated and billed on a quarterly basis. For the years ended December 31, 2004, 2003 and 2002, royalty income was $23,733, $20,473 and $25,114, respectively.

Accounts receivable from affiliates at December 31, 2004 and December 31, 2003 of $8,610 and $389, respectively, represents mainly unpaid royalty fees.

On January 1, 2001, the Company entered into a Cost Sharing Agreement with certain Foster Wheeler affiliates to share their collective knowledge and to jointly develop Intangible Property. The costs of developing this property allocable to the Company shall be fifty percent of the pretax net expenses of the affiliates for the year. The agreement is effective for five years and shall automatically renew for additional two-year terms unless the Company or affiliates give thirty days notice prior to the end of the term or any renewal term. The amount of costs incurred under this agreement for the years ended December 31, 2004, 2003, 2002 was $2,225, $532 and $1,744, respectively. As of December 31, 2004 and 2003, $2,225 and $532, respectively, were payable to affiliates pursuant to this agreement.

All of the related party transactions discussed above are eliminated in the Foster Wheeler Ltd. and Subsidiaries Consolidated Financial Statements for the years ended December 31, 2004, December 26, 2003 and December 27, 2002.

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FW HUNGARY LICENSING LIMITED LIABILITY COMPANY
NOTES TO FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars)

4. Related Party Transactions — (Continued)

The management of Foster Wheeler Ltd. has considered whether there are any costs borne by affiliates of the Company that should be allocated to the Company and has determined that these costs, if any, are immaterial.

5. Income Taxes

The components of earnings before income taxes for the years 2004, 2003 and 2002 were taxed as follows:

    2004   2003   2002  
   

 

 

 
Foreign
  $ 9,768   $ 3,191   $6,142    
   

 

 

 

The benefit/(provision) for income taxes on that earnings was as follows:

    2004   2003   2002  
   

 

 

 
Current tax expense:
                   
Foreign
  $ (443 ) $ (389 ) $ (566 )
Deferred tax benefit/(expense):
                   
Foreign
    6,379     1,594     (163 )
   

 

 

 
Total benefit/(provision) for income taxes
  $ 5,936   $ 1,205   $ (729 )
   

 

 

 

Deferred tax assets consist of the following:

    2004   2003        
   

 

       
Intangible assets
  $ 13,408   $ 7,029        
   

 

       
Net deferred tax assets
  $ 13,408   $  7,029        
   

 

       

The (benefit)/ provision for income taxes is determined by applying the Hungarian statutory rate applicable to the Company. Due to enactment of new legislation, the Hungarian tax rate was increased to 4% effective January 1, 2004 and will increase to 16% with certain exemptions which will bring the effective tax rate for the Company to 8% effective January 1, 2006. Accordingly, the deferred tax provisions include a benefit of $6,596 for 2004 and $1,757 for 2003 to reflect the increase of the value of the deferred tax assets.

The provision for income taxes differs from the amount of income tax determined by applying the applicable statutory rate to earnings before income taxes, as a result of the following:

    2004   2003   2002  
   

 

 

 
Tax provision at the Hungarian statutory rate
    4.0 %   3.0 %   3.0 %
(Utilized)/unutilized loss
    (0.9 )%   2.1 %   %
Effect of tax rate change
    (67.5 )%   (55.1 )%   %
Withholding tax rate
    3.6 %   12.2 %   8.9 %
   

 

 

 
      (60.8 )%   (37.8 )%   11.9 %
   

 

 

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES
 
     Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the fiscal year covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Disclosure Committee and management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) pursuant to Exchange Act Rule 13a-15. Based upon such evaluation, and as of December 31, 2004, the Company’s chief executive officer along with the chief financial officer concluded, at the reasonable assurance level, that the Company’s disclosure controls and procedures were not effective as of December 31, 2004 because of the material weakness discussed below. In light of the material weakness, the Company performed additional analysis and other procedures to ensure the consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented.

     Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of the Company’s management, including the Company’s chief executive officer and chief financial officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

A material weakness is defined as a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected. As of December 31, 2004, the Company did not maintain effective controls over the completeness and accuracy of estimated costs to complete at one of its European power projects. Specifically, the Company’s controls over its estimated costs to complete were not operating effectively because project management and accounting personnel did not have adequate control of commitments to third-party subcontractors and vendors, and therefore did not adequately track the actual financial results of the project on a timely basis. The control deficiency did not result in any adjustments to the 2004 annual or interim consolidated financial statements. However, this control deficiency could result in a misstatement to the estimated costs to complete long term contracts and cost of operating revenue accounts resulting in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness.

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Based on the evaluation under the framework in Internal Control — Integrated Framework, management concluded that internal control over financial reporting was not effective as of December 31, 2004 because of the material weakness disclosed above.

Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in Item 8 of this Annual Report on Form 10-K.

     Material Weakness and Remediation Plans

In connection with the preparation of its 2004 year-end financial statements, the Company detected a reporting deficiency in the measurement and tracking processes during the fourth quarter of 2004 at one of European Power’s lump-sum turnkey projects. The project was nearing completion during the fourth quarter and the worse than expected project performance compressed the time available to meet the scheduled completion dates. In an attempt to meet the completion dates, construction site personnel entered into additional commitments beyond the planned commitments for the project, and did not adequately communicate these updated commitments on a timely basis to the home office personnel, who were responsible for tracking actual and estimated costs of the project and the details of updated commitments being made in the field. Moreover, one of the two lead managers of the project responsible for monitoring the commitments made at the project site and relaying this information back to the home office, became ill and was absent during November and December of 2004. As a result, the project’s management did not have adequate control of outstanding commitments to third-party subcontractors and vendors during the fourth quarter of 2004, and therefore could not adequately track the ongoing financial results of the project until after the quarter had ended.

As stated in Management’s Report on Internal Control over Financial Reporting, management concluded that the control deficiency in reporting at the project represented a “material weakness” in its internal control over financial reporting as of December 31, 2004. Management believes that the failure to adequately control outstanding commitments to third party subcontractors and vendors on this project was the result of a deficiency in the project’s measurement processes that arose when the volume of activity increased substantially in the fourth quarter of 2004 combined with the absence of a member of the projects key oversight personnel. Additionally, management noted that there was no compensating control that detected this deficiency on a timely basis. Because of the overall magnitude of this project, this results in a deficiency in the Company’s internal control over financial reporting. These controls and procedures are designed to ensure that outstanding commitments are known, quantified and communicated to the appropriate project personnel responsible for estimating the project’s financial results.

The control deficiency was detected in the first quarter of 2005. At that time, management immediately implemented a detailed review of all costs incurred to date plus the estimate of costs to complete. Additional project management personnel were assigned to the project from the E&C Group as these operating units have more experience working on lump-sum turnkey projects, and specialists in negotiating subcontractor settlements were added to the project team. The Company has previously announced that its European Power operating unit will no longer undertake lump-sum turnkey projects for full power plants without the involvement of one of the Company’s E&C operating companies or a third party partner, and there is no evidence that any similar problems managing third party commitments exist on other projects.

The Company has assigned the highest priority to the assessment and remediation of this material weakness and is working together with the audit committee to resolve the issue. Management believes that its consolidated financial statements contained herein contain its best estimates of the project’s final estimated costs and that the appropriate compensating controls have been implemented at the particular site to ensure commitment information is adequately controlled and communicated on a timely basis. However, management believes more time must pass to adequately evidence that the new procedures at this project are operating as intended. If these actions are not successful in addressing this material weakness, the Company’s ability to report its financial results on a timely and accurate basis may be adversely affected. The Company has taken the actions described above, which it believes address the material weaknesses described above. If

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the Company is unable to successfully address the identified material weaknesses in its internal controls, its ability to report its financial results on a timely and accurate basis may be adversely affected.

 
     Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting in the fourth quarter 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

     Limitations on the Effectiveness of Controls and Procedures

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference to Foster Wheeler Ltd.’s 2005 Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2005. Certain information regarding executive officers is included in Part I hereof in accordance with General Instructions G (3) of Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference to Foster Wheeler Ltd.’s 2005 Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2005.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference to Foster Wheeler Ltd.’s 2005 Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2005.

Equity Compensation Plan Information

The following table sets forth, as of December 31, 2004, the number of securities outstanding under each of the Company’s stock option plans, the weighted-average exercise price of such options, and the number of options available for grant under such plans.

Plan Category
  Number of Securities
to be Issued
Upon Exercise of
Outstanding Options,
Warrants and
Rights
(a)
  Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and
Rights ($)
(b)
  Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(excluding securities
reflected in column (a))
(c)
 

 

 

 

 
Equity Compensation Plans
                   
Approved by Security Holders:
                   
1995 Stock Option Plan
    231,098   $ 227.13     30,478  
1984 Stock Option Plan
    17,358   $ 597.52      
Directors Stock Option Plan
    11,350   $ 406.34     7,100  
Equity Compensation Plans
                   
Not Approved by Security Holders:
                   
Raymond J. Milchovich (1)
    115,000   $ 70.61      
Bernard H. Cherry (2)
    17,750   $ 28.19      
M.J. Rosenthal & Associates, Inc. (3)
    12,500   $ 37.60      
2004 Stock Option Plan (4)
    2,828,570   $ 9.378     838,795  
Management Restricted Stock Plan (Units) (5)
    549,964   $ 0.00     56,824  
   

 

 

 
Total
    3,783,590   $ 27.25     933,197  
   

 

 

 

 
1.
Under the terms of his employment agreement, Mr. Milchovich received an option to purchase 65,000 common shares of the Company. These were granted at an exercise price of $99.70 and vest 20% each year over the term of the agreement. Pursuant to an amendment to the agreement dated September 13, 2002, additional options that would have been granted to Mr. Milchovich on the first and second anniversaries of his employment were accelerated and granted September 24, 2002. The amended grant was for an option to purchase a number of shares such that the Black-Scholes value of the option on the grant date equaled $5 million; provided that the number of shares was not less than 35,000 or more than 50,000. Based on the calculation, Mr. Milchovich received an option to purchase 50,000 common shares of the Company at an exercise price of $32.80. A portion of the option representing one-forty-eighth (1/48) of the number of shares represented by such option vested on the date of grant and on the first day

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of each successive month thereafter. The option exercise price is equal to the median of the high and low price of the Company’s common stock on the grant date. Each option has a term of 10 years from the date of grant.
2.
Under the terms of his employment agreement, Mr. Cherry received an option to purchase 12,750 common shares of the Company on November 4, 2002 at an exercise price of $29.80. These options will vest one-fifth on each anniversary date of grant. One-fifth of these options become exercisable after one year, two-fifths become exercisable after two years, three-fifths after three years, four-fifths after four years and all of the options are exercisable after five years. Mr. Cherry also received an option to purchase 5,000 common shares of the Company on December 23, 2003 under the terms of his employment agreement. This option will vest one-fourth on each anniversary date of grant and be fully exercisable after four years from the date of grant. The exercise price is equal to the mean of the high and low price of the Company’s common stock on the first anniversary of his employment agreement effective date at a price of $24.10. Each option has a term of 10 years from the date of grant.
3.
Under the terms of the consulting agreement with M.J. Rosenthal & Associates, Inc. on May 7, 2002, the Company granted a nonqualified stock option to purchase 12,500 shares of the Company’s common shares at a price of $37.60 with a term of ten years from the date of grant. The exercise price is equal to the mean of the high and low price of the stock on the date of grant. The option is exercisable on March 31, 2003. The option, to the extent not then exercised, shall terminate upon any breach of certain covenants contained in the consulting agreement.
4.
Under the terms of the 2004 Stock Option Plan, adopted by the Board of Directors in September 2004, the Company granted stock options to management to purchase approximately 43,103 preferred shares at an exercise price of $9.378 per common share issuable on October 6, 2004. Such options expire on October 5, 2007. One third of the options issued to management vest in the fourth quarter of 2005, and the balance vest during the fourth quarter of 2006. On November 29, 2004, the Company’s shareholders approved the grant of options under the 2004 Plan to purchase approximately 413 preferred shares to the Company’s non-employee directors at an exercise price of $9.378 per common share issuable. Such options expire on October 5, 2007. The non-employee director options vest on December 31, 2005. On November 29, 2004, each option under the 2004 Stock Option Plan to purchase preferred shares granted to management and the non-employee directors automatically converted to an option to purchase 65 common shares at an exercise price of $9.378 per common share issuable.
5.
Under the terms of the Management Restricted Stock Plan, adopted by the Board of Directors in September 2004, management was issued restricted common share awards, of which 531,899 were in the form of restricted share units, on October 6, 2004. The restricted share units do not have voting rights. Each restricted share unit will convert into an unrestricted common share upon vesting. The restricted awards provide that issued units may not be sold or otherwise transferred until restrictions lapse. One third of the restricted awards vest in the fourth quarter of 2005 and the balance vest during the fourth quarter of 2006. On November 29, 2004, the Company’s shareholders approved the grant of 18,065 restricted share units to non-employee directors. The restricted share units awarded to non-employee directors will vest on December 31, 2005.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to Foster Wheeler Ltd.’s 2005 Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2005.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated by reference to Foster Wheeler Ltd.’s 2005 Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2005.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
     
  (a)
Documents filed as part of this Report:
       
    (1)
Financial Statements
Financial Statements — See Item 8 of this Report.
       
    (2)
Financial Statement Schedules
Schedule II: Valuation and Qualifying Accounts — See Item 8 of this Report.
       
     
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.
       
    (3)
Exhibits
       
Exhibit No.
    Exhibits  
         
  3.1
    Memorandum of Association of Foster Wheeler Ltd. (Filed as Annex II to Foster Wheeler Ltd.’s Form S-4/A (File No. 333-52468) filed on March 9, 2001, and incorporated herein by reference.)  
  3.2
    Memoranda of Reduction of Share Capital and Memorandum of Increase in Share Capital each dated December 1, 2004. (Filed as Exhibit 99.2 to Foster Wheeler Ltd.’s Form 8-K, filed on December 2, 2004, and incorporated herein by reference.)  
  3.3
    Certificate of Designation relating to Foster Wheeler Ltd.’s Series B Convertible Preferred Shares, adopted on September 24, 2004. (Filed as Exhibit 3.1 to Foster Wheeler Ltd.’s on Form 10-Q for the quarter ended September 24, 2004, and incorporated herein by reference.)  
  3.4
    Bye-Laws of Foster Wheeler Ltd. amended November 30, 2004. (Filed as Exhibit 99.3 to Foster Wheeler Ltd.’s Form 8-K, dated November 29, 2004 and filed on December 2, 2004, 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 request.  
10.1
    Form of Indenture, dated as of November 15, 1995, among Foster Wheeler Ltd. (formerly known as Foster Wheeler Corporation) and BNY Midwest Trust Company (formerly known as Harris Trust and Savings Bank), relating to Foster Wheeler LLC’s 6.75% Senior Secured Notes due 2005. (Filed as Exhibit 4 to Foster Wheeler Ltd.’s Form 8-K, filed on November 17, 1995, and incorporated by reference.)  
10.2
    Amended and Restated First Supplemental Indenture, dated August 10, 2001, to the Indenture, dated as of November 15, 1995, among Foster Wheeler LLC, Foster Wheeler USA Corporation, Foster Wheeler North America Corp. (formerly known as Foster Wheeler Power Group, Inc.), Foster Wheeler Energy Corporation, Foster Wheeler Inc., Foster Wheeler International Holdings, Inc., and BNY Midwest Trust Company, relating to Foster Wheeler LLC’s 6.75% Senior Secured Notes due 2005. (Filed as Exhibit 4.2 to Foster Wheeler Ltd.’s on Form 10-Q for the quarter ended June 29, 2001, and incorporated herein by reference.)  
10.3
    Second Supplemental Indenture (relating to the Indenture dated as of November 15, 1995) dated August 16, 2002, by and between Foster Wheeler LLC, the Guarantors thereto, and BNY Midwest Trust Company, relating to Foster Wheeler LLC’s 6.75% Senior Secured Notes due 2005. (Filed as Exhibit 4.1 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended June 28, 2002, and incorporated herein by reference.)  

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Exhibit No.
    Exhibits  
         
10.4
    Third Supplemental Indenture dated as of September 24, 2004 among Foster Wheeler LLC, the guarantors named therein and BNY Midwest Trust Company, as trustee, relating to Foster Wheeler LLC’s 6.75% Senior Secured Notes due 2005. (Filed as Exhibit 4.4 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended September 24, 2004, and incorporated herein by reference.)  
10.5
    Guaranty dated August 16, 2002 by the Guarantors party thereto in favor of the holders of Foster Wheeler LLC’s 6.75% Notes due November 15, 2005 and BNY Midwest Trust Company. (Filed as Exhibit 4.2 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended June 28, 2002, and incorporated herein by reference.)  
10.6
    Indenture, dated as of May 31, 2001, among Foster Wheeler Ltd., Foster Wheeler LLC and BNY Midwest Trust Company regarding the 6.50% Convertible Subordinated Notes due 2007. (Filed as Exhibit 4.4 to Foster Wheeler Ltd.’s registration statement on Form S-3 (Registration No. 333-64090) filed on June 28, 2001, and incorporated herein by reference.)  
10.7
    First Supplemental Indenture dated February 20, 2002, between Foster Wheeler Ltd. and BNY Midwest Trust Company regarding the 6.50% Convertible Subordinated Notes due 2007. (Filed as Exhibit 4.6 to Foster Wheeler Ltd.’s Form 10-K for the fiscal year ended December 28, 2001, and incorporated herein by reference.)  
10.8
    Supplemental Indenture dated as of September 24, 2004 among Foster Wheeler Ltd., Foster Wheeler LLC, and BNY Midwest Trust Company, as trustee, relating to Foster Wheeler Ltd.’s 6.50% Convertible Subordinated Notes due 2007. (Filed as Exhibit 4.5 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended September 24, 2004, and incorporated herein by reference.)  
10.9
    Amendment to Guarantee Agreement, dated as of March 15, 2003, made by Foster Wheeler Ltd. in favor of FW Preferred Capital Trust I. (Filed as Exhibit 4.1 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended March 28, 2003, filed on May 12, 2003 and incorporated herein by reference.)  
10.10
    Second Supplemental Indenture, dated as of March 15, 2003, among Foster Wheeler Ltd., FW Preferred Capital Trust I and BNY Midwest Trust Company. (Filed as Exhibit 4.2 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended March 28, 2003, filed on May 12, 2003, and incorporated herein by reference.)  
10.11
    Third Supplemental Indenture dated as of September 24, 2004 between Foster Wheeler LLC and BNY Midwest Trust Company, as trustee, relating to the 9.00% Preferred Securities, Series I (liquidation amount $25 per preferred security) issued by FW Preferred Capital Trust I. (Filed as Exhibit 4.3 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended September 24, 2004, and incorporated herein by reference.)  
10.12
    Loan Agreement and Guaranty dated March 24, 2005 among Foster Wheeler LLC, Foster Wheeler USA Corporation, Foster Wheeler North America Corp., Foster Wheeler Energy Corporation and Foster Wheeler Inc., as Borrowers, the guarantors party thereto, the lenders party thereto, Morgan Stanley & Co. Incorporated as Collateral Agent and Morgan Stanley Senior Funding, Inc. as Administrative Agent, Documentation Agent, Syndication Agent, Sole Lead Arranger and Sole Lead Bookrunner. (Filed as Exhibit 99.2 to Foster Wheeler Ltd.’s Form 8-K, dated March 24, 2005 and filed on March 29, 2005, and incorporated herein by reference.)  
10.13
    Pledge and Security Agreement dated March 24, 2005 among the grantors named therein and Morgan Stanley & Co. Incorporated as Collateral Agent. (Filed as Exhibit 99.3 to Foster Wheeler Ltd.’s Form 8-K, dated March 24, 2005 and filed on March 29, 2005, and incorporated herein by reference.)  

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Exhibit No.
    Exhibits  
         
10.14
    Intercreditor Agreement dated March 24, 2005 among Morgan Stanley & Co. Incorporated as Collateral Agent, Wells Fargo Bank, National Association, as trustee, Foster Wheeler LLC and the affiliates party thereto. (Filed as Exhibit 99.4 to Foster Wheeler Ltd.’s Form 8-K, dated March 24, 2005 and filed on March 29, 2005, and incorporated herein by reference.)  
10.15
    Lease Agreement dated August 16, 2002, by and among Energy (NJ) QRS 15-10, Inc. and Foster Wheeler Realty Services, Inc. (Filed as Exhibit 10.15 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended June 28, 2002, and incorporated herein by reference.)  
10.16
    Amendment to the Lease Agreement dated August 16, 2002 between Energy (NJ) QRS 15-10, Inc. and Foster Wheeler Realty Services, Inc. (Filed as Exhibit 10.30 to Foster Wheeler Ltd.’s Form 10-K for the fiscal year ended December 27, 2002 filed on March 25, 2003, and incorporated herein by reference.)  
10.17
    Amendment No. 2 dated April 21, 2003 to the Lease Agreement between Energy (NJ) QRS 15-10, Inc. and Foster Wheeler Realty Services, Inc. (Filed as Exhibit 10.7 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended March 28, 2003, filed on May 12, 2003, and incorporated herein by reference.)  
10.18
    Amendment No. 3 dated as of July 14, 2003 to the Lease Agreement dated August 16, 2002, between Energy (NJ) QRS 15-10, Inc. and Foster Wheeler Realty Services, Inc. (Filed as Exhibit 10.6 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended June 27, 2003, filed on August 8, 2003, and incorporated herein by reference.)  
10.19
    Guaranty and Suretyship Agreement dated August 16, 2002 made by Foster Wheeler LLC, Foster Wheeler Ltd., Foster Wheeler Inc., Foster Wheeler International Holdings, Inc. and Energy (NJ) QRS 15-10, Inc. (Filed as Exhibit 10.14 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended June 28, 2002 and incorporated herein by reference.)  
10.20
    Deed between Foster Wheeler LLC and Foster Wheeler Realty Services, Inc. and CIT Group Inc. (NJ) dated March 31, 2003. (Filed as Exhibit 10.3 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended March 28, 2003, filed on May 12, 2003 and incorporated herein by reference.)  
10.21
    Indenture dated as of September 24, 2004 among Foster Wheeler LLC, the guarantors named therein and Wells Fargo Bank, National Association, as trustee, relating to the 10.359% notes due 2011. (Filed as Exhibit 4.2 to Foster Wheeler Ltd.’s registration statement on Form S-4 (File No. 119841) filed on October 20, 2004 and incorporated by reference herein.)  
10.22
    Registration Rights Agreement dated as of September 24, 2004 by and among Foster Wheeler LLC, the guarantors listed therein and each of the purchasers signatory thereto. (Filed as Exhibit 4.5 to Foster Wheeler Ltd.’s registration statement on Form S-4 (File No. 119841) filed on October 20, 2004 and incorporated by reference herein.)  
10.23
    Security Agreement dated as of September 24, 2004 among Foster Wheeler LLC, the grantors listed therein and Wells Fargo Bank, National Association. (Filed as Exhibit 4.6 to Foster Wheeler Ltd.’s registration statement on Form S-4 (File No. 119841) filed on October 20, 2004 and incorporated by reference herein.)  
10.24
    Intercreditor Agreement dated as of September 24, 2004 among Bank of America, N.A., as Administrative Agent and Collateral Agent, Wells Fargo Bank, N.A., as trustee, Foster Wheeler LLC and its subsidiaries, which are parties thereto. (Filed as Exhibit 4.7 to Foster Wheeler Ltd.’s registration statement on Form S-4 (File No. 119841) filed on October 20, 2004 and incorporated by reference herein.)  

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Exhibit No.
    Exhibits  

   
 
10.25
    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 (File No. 333-52468) dated June 27, 2001, and incorporated herein by reference.)  
10.26
    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.)  
10.27
    1995 Stock Option Plan of Foster Wheeler Inc. (as Amended and Restated as of September 24, 2002). (Filed as Exhibit 10.1 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended September 27, 2002, and incorporated herein by reference.)  
10.28
    The Foster Wheeler Annual Incentive Plan for 2002 and Subsequent Years. (Filed as Exhibit 10.11 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended June 28, 2002, and incorporated herein by reference.)  
10.29
    Foster Wheeler Ltd. Management Restricted Stock Plan. (Filed as Exhibit 10.1 to Foster Wheeler Ltd.’s Form 8-K, dated September 29, 2004 and filed on October 1, 2004, and incorporated herein by reference.)  
10.30
    Foster Wheeler Ltd. 2004 Stock Option Plan. (Filed as Exhibit 10.2 to Foster Wheeler Ltd.’s Form 8-K, dated September 29, 2004 and filed on October 1, 2004, and incorporated herein by reference.)  
10.31
    Warrant Agreement between Foster Wheeler Ltd. and Mellon Investor Services LLC, including forms of warrant certificates. (Filed as Exhibit 4.10 to Foster Wheeler Ltd.’s registration statement on Form S-3 (File No. 333-120076) filed on October 29, 2004 and incorporated by reference herein.)  
10.32
    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 on Form 10-Q for the quarter ended June 29, 2001, and incorporated herein by reference.)  
10.33
    Form of Change of Control Agreement dated May 25, 2001, and entered into by the Company with executive officers. (Filed as Exhibit 10.5 to Foster Wheeler Ltd.’s on Form 10-Q for the quarter ended June 29, 2001, and incorporated herein by reference.)  
10.34
    Form of Indemnification Agreement for directors and officers of the Company and Foster Wheeler Inc., dated November 3, 2004. (Filed as Exhibit 99.1 to Foster Wheeler Ltd.’s Form 8-K, dated November 3, 2004 and filed on November 8, 2004, and incorporated herein by reference.)  
10.35
    Irrevocable Letter of Credit Issued to Lisa Fries Gardner dated April 18, 2003. (Filed as Exhibit 10.3 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended June 27, 2003, filed on August 8, 2003, and incorporated herein by reference.)  
10.36
    Employment Agreement between Foster Wheeler Ltd. and Raymond J. Milchovich dated as of October 22, 2001. (Filed as Exhibit 10.1 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended September 28, 2001, and incorporated herein by reference.)  
10.37
    Stock Option Agreement of Raymond J. Milchovich dated as of October 22, 2001. (Filed as Exhibit 10.13 to Foster Wheeler Ltd.’s Form 10- K for the fiscal year ended December 28, 2001, and incorporated herein by reference.)  

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Exhibit No.
    Exhibits  
         
10.38
    First Amendment to the Employment Agreement between Foster Wheeler Ltd. and Raymond J. Milchovich dated September 13, 2002. (Filed as Exhibit 10.1 to Foster Wheeler Ltd.’s Form 8-K filed on September 25, 2002, and incorporated herein by reference.)  
10.39
    Stock Option Agreement of Raymond J. Milchovich dated September 24, 2002. (Filed as Exhibit 10.2 to Foster Wheeler Ltd.’s Form 8-K filed on September 25, 2002, and incorporated herein by reference.)  
10.40
    Amendment to the Employment Agreement between Foster Wheeler Ltd. and Raymond J. Milchovich dated January 23, 2003. (Filed as Exhibit 10.11 to Foster Wheeler Ltd.’s Form 10-K for the fiscal year ended December 27, 2002 filed on March 25, 2003, and incorporated herein by reference.)  
10.41
    Form of Third Amendment to the Employment Agreement between Foster Wheeler Ltd. and Raymond J. Milchovich. (Filed as Exhibit 99.1 to Foster Wheeler Ltd.’s Form 8-K, filed on July 23, 2004, and incorporated herein by reference.)  
10.42
    Employment Agreement between Foster Wheeler Ltd. and Bernard H. Cherry dated as of September 23, 2002. (Filed as Exhibit 10.4 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended September 27, 2002, and incorporated herein by reference.)  
10.43
    Change of Control Employment Agreement between Foster Wheeler Inc. and Bernard H. Cherry dated as of November 4, 2002. (Filed as Exhibit 10.5 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended September 27, 2002, and incorporated herein by reference.)  
10.44
    Stock Option Agreement of Bernard H. Cherry dated as of November 4, 2002. (Filed as Exhibit 10.16 to Foster Wheeler Ltd.’s Form 10-K for the fiscal year ended December 26, 2003 filed on March 12, 2004, and incorporated herein by reference.)  
10.45
    Stock Option Agreement of Bernard H. Cherry dated December 23, 2003. (Filed as Exhibit 10.17 to Foster Wheeler Ltd.’s Form 10-K for the fiscal year ended December 26, 2003 filed on March 12, 2004, and incorporated herein by reference.)  
10.46
    Employment Agreement between Foster Wheeler Ltd. and John T. La Duc dated as of April 14, 2004. (Filed as Exhibit 99.2 to Foster Wheeler Ltd.’s Form 8-K filed on April 15, 2004, and incorporated herein by reference.)  
10.47
    Change of Control Employment Agreement between Foster Wheeler Inc. and John T. La Duc dated as of April 14, 2004. (Filed as Exhibit 99.3 to Foster Wheeler Ltd.’s Form 8-K filed on April 15, 2004, and incorporated herein by reference.)  
10.48
    Employment Agreement between Foster Wheeler Ltd. and Brian K. Ferraioli dated as of April 27, 2004 and effective as of December 1, 2003. (Filed as Exhibit 10.8 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended March 26, 2004, filed on May 5, 2004, and incorporated herein by reference.)  
10.49
    Change of Control Agreement between Foster Wheeler Inc. and Brian K. Ferraioli effective as of December 1, 2003. (Filed as Exhibit 10.9 to Foster Wheeler Ltd.’s. Form 10-Q for the quarter ended March 26, 2004, filed on May 5, 2004, and incorporated herein by reference.)  
10.50
    Employment Agreement between Foster Wheeler Ltd. and Steven I. Weinstein dated as of September 10, 2002. (Filed as Exhibit 10.21 to Foster Wheeler Ltd.’s Form 10-K for the fiscal year ended December 26, 2003 filed on March 12, 2004, and incorporated herein by reference.)  

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Exhibit No.
    Exhibits  
         
10.51
    Change of Control Employment Agreement between Foster Wheeler Inc. and Steven I. Weinstein dated as of September 10, 2002. (Filed as Exhibit 10.22 to Foster Wheeler Ltd.’s Form 10-K for the fiscal year ended December 26, 2003, filed on March 12, 2004, and incorporated herein by reference.)  
10.52
    Irrevocable Letter of Credit Issued to Steven I. Weinstein dated April 18, 2003. (Filed as Exhibit 10.1 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended June 27, 2003, filed on August 8, 2003 and incorporated herein by reference.)  
10.53
    Waiver and Release Agreement, dated November 5, 2004, of Steven I. Weinstein. (Filed as Exhibit 99.1 to Foster Wheeler Ltd.’s Form 8-K, dated November 5, 2004 and filed on November 8, 2004, and incorporated herein by reference.)  
12.1
    Statement of Computation of Consolidated Ratio of Earnings to Fixed Charges and Preferred Shares Dividend Requirements.  
14.0
    Revised Code of Business Conduct and Ethics. (Filed as Exhibit 99.1 to Foster Wheeler Ltd.’s Form 8-K, dated November 29, 2004 and filed on December 2, 2004, and incorporated herein by reference.)  
21.0
    Subsidiaries of the Registrant.  
23.0
    Consent of Independent Registered Public Accounting Firm.  
31.1
    Section 302 Certification of Raymond J. Milchovich  
31.2
    Section 302 Certification of John T. La Duc  
32.1
    Section 906 Certification of Raymond J. Milchovich  
32.2
    Section 906 Certification of John T. La Duc  

For the purposes of complying with the amendments to the rules governing Form S-3, under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into the Registrant’s Registration Statements on Form S-3: Registration No. 33-61809; Registration No. 333-64090; Registration No. 333-52369; Registration No. 333-52369-01; Registration No. 333-52369-02 and Registration No. 333-120076.

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 Registration Statements on Form S-8: Registration No. 33-40878; Registration No. 333-52468; Registration No. 333-25945-99; Registration No. 002-91384-99; Registration No. 003-59739-99; Registration No. 333-88912; Registration No.333-101524 and Registration No. 333-119308.

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 Securities Act of 1933 and will be governed by the final adjudication of such issue.

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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)
         
Date: March 31, 2005
    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 March 31, 2005, by the following persons on behalf of the Registrant, in the capacities indicated.

Signature
  Title
     
     
/s/ RAYMOND J. MILCHOVICH

Raymond J. Milchovich
(Principal Executive Officer)
  Director, Chairman of the Board,
President, and Chief Executive Officer
     
/s/ JOHN T. LA DUC

John T. La Duc
(Principal Financial Officer)
  Executive Vice President and
Chief Financial Officer
     
/s/ BRIAN K. FERRAIOLI

Brian K. Ferraioli
(Principal Accounting Officer)
  Vice President and Controller
     
/s/ EUGENE D. ATKINSON

Eugene D. Atkinson
  Director
     
/s/ DIANE C. CREEL
Diane C. Creel
  Director
     
/s/ STEPHANIE HANBURY-BROWN

Stephanie Hanbury-Brown
  Director
     
/s/ ROGER L. HEFFERNAN

Roger L. Heffernan
  Director
     
/s/ JOSEPH J. MELONE

Joseph J. Melone
  Director
     
/s/ DAVID M. SLOAN

David M. Sloan
  Director
     
/s/ JAMES D. WOODS

James D. Woods
  Director

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FOSTER WHEELER LTD.
SHAREHOLDER INFORMATION

Common Share Quotation:
Over-the-Counter Bulletin Board
Ticker Symbol: FWHLF.OB

Telephone Inquiries:
Call Mellon Investor Services LLC’s interactive voice response system at 1-800-358-2314, which is available 24 hours a day, 7 days a week, for help with account inquiries and requests for assistance, including stock transfers.

For the hearing and speech impaired, please call 1-201-329-8354.

Foreign shareholders should call 201-329-8660.

Transfer Agent, Registrar Warrant Agent and Dividend Disbursing Agent

For general inquiries, changes of address and transfer instructions:

Foster Wheeler Ltd.
c/o Mellon Investor Services LLC
P. O. Box 3315
South Hackensack, NJ 07606

Requests for transactions involving
stock certificates to:

Foster Wheeler Ltd.
c/o Mellon Investor Services LLC
Securities Transfer Services
P. O. Box 3312
South Hackensack, NJ 07606-1912
  Shareholder Services on the Internet:
You can view shareholder information and perform certain transactions by visiting “www.melloninvestor.com/isd”

Company Information on the Internet:
You can view Information about Foster Wheeler Ltd. by visiting our website at “www.fwc.com”

Requests for Financial Information:
Foster Wheeler’s annual reports, quarterly reports and other financial documents are available on our website at “www.fwc.com”

To request paper copies of reports filed with the Securities and Exchange Commission, write to:

Office of the Secretary
Foster Wheeler Ltd.
Perryville Corporate Park
Clinton, NJ 08809-4000