10-K/A 1 b406282_10ka.htm FORM 10-K/A Prepared and filed by St Ives Burrups

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K/A
(Amendment No. 1)

(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/A Annual Report

This Form 10-K/A (Amendment No. 1) amends the Registrant’s annual report on Form 10-K for the year ended December 31, 2004, as filed on March 31, 2005. The Registrant’s consolidated financial statements are being restated to correct an error made by the Company’s external actuaries in computing the Company’s December 31, 2004 pension valuation used in the preparation of the December 31, 2004 consolidated financial statements and to modify certain disclosures within Part II, Item 9A, “Controls and Procedures.” See Note 2 to the consolidated financial statements for further discussion on these matters. Each item of the Form 10-K for the year ended December 31, 2004 that was affected by the restatement has been amended and restated. No attempt has been made in this Form 10-K/A to modify or update other disclosures as presented in the original Form 10-K except as required to reflect the effects of the restatement.

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    

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 411  
Controls and Procedures 411  
Other Information 414  
       
  PART III    
Directors and Executive Officers of the Registrant 415  
Executive Compensation 415  
Security Ownership of Certain Beneficial Owners and Management 415  
Certain Relationships and Related Transactions 416  
Principal Accounting Fees and Services 416  
       
  PART IV    
Exhibits and Financial Statement Schedules 417  

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.

This Form 10-K/A is hereinafter referred to as “Form 10-K.”

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.

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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 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 $525,600 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 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 affected area to the other end of the affected 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  
   

 

 

 

 

 
    (Restated**)                          
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
    1,261,400     1,350,400     1,449,800     2,388,600     1,454,600  
Working capital
    (212,100 )   (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.
**
The balance sheet data as of December 31, 2004 has been restated to correct an error in the Company’s December 31, 2004 pension valuation used in the preparation of the December 31, 2004 consolidated financial statements. The effect of this restatement on the balance sheet data is presented below. There was no impact on the statement of operations data or the other data.

 

    December 31, 2004,
As Previously
Reported
  December 31, 2004,
Restated
 
   

 

 
Balance Sheet Data:
             
Current liabilities
  $ 1,255,100   $ 1,261,400  
Working capital
    (205,800 )   (212,100 )

 

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

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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 $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.

 

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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.

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.

 

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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)  

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 )
   

 

 

 

 

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(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 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

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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.
(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 %      

 

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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.

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.

 

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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 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.

 

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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.

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.

 

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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 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.

 

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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 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 $26,700 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)
  84,500     26,700     24,600     17,900     11,600     3,700      
Pension funding requirements — Foreign (1)
  140,600     30,700     28,800     27,900     27,000     26,200      
 

 

 

 

 

 

 

 
Total contractual cash obligations
$ 2,316,400   $ 659,600   $ 195,200   $ 173,100   $ 117,000   $ 107,300   $ 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
  $ (33,900 ) $ (100 )
One-percentage point decrease in the discount rate
    37,900     (300 )
One-percentage point increase in the expected return on plan assets
        (2,300 )
One-percentage point decrease in the expected return on plan assets
        2,300  

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 $29,700, while an increase by one-percentage point would decrease cumulative contributions by $24,600 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  
   

 
    68  
         
    70  
         
    71  
         
    72  
         
    73  
         
    74  
         
    165  
         
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.
       
         
    167  
         
    223  
         
    279  
         
    307  
         
    334  
         
    361  
         
    385  
         
    399  

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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 the first paragraph of Note 2 to the consolidated financial statements, the accompanying consolidated balance sheet as of December 31, 2004 and the related consolidated statements of operations and comprehensive loss and of changes in shareholders’ deficit for the year ended December 31, 2004 have been restated.

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 $525,565,000 at December 31, 2004. The Company has substantial debt obligations and during 2003 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

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internal control over financial reporting. Our responsibility is to express opinions on management’s 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, except for
the first paragraph of
Note 2, for which the
date is May 20, 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  
   

 

 

 
    (Restated)
(See Note 2)
             
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)
    (19,899 )   58,677     (226,011 )
   

 

 

 
Net comprehensive loss
  $ (278,038 ) $ (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
 
   

 

 
    (Restated)
(See Note 2)
       
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
    314,529     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
    1,261,421     1,350,359  
   

 

 
Long-term debt
    534,859     1,011,972  
Deferred income taxes
    7,948     9,092  
Pension, postretirement and other employee benefits
    271,851     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
    2,713,104     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
    (296,743 )   (303,999 )
Unearned compensation
    (16,047 )    
   

 

 
TOTAL SHAREHOLDERS’ DEFICIT
    (525,565 )   (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  
   

 

 

 

 

 

 
        (Restated)
(See Note 2)
                         
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)
          (19,899 )         58,677           (226,011 )
         
       
       
 
Balance at end of year
        $ (296,743 )       $ (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
        $ (525,565 )       $ (872,440 )       $ (780,939 )
         
       
       
 

See notes to consolidated financial statements.

72


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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
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