FOSTER WHEELER LTD - 10-Q Quarterly Report

PART I FINANCIAL INFORMATION

ITEM 1 –FINANCIAL STATEMENTS

FOSTER WHEELER LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars) (Unaudited)

	June 27, 2003			December 27, 2002


ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	370,487		$	344,305
Short-term investments		281			271
Accounts and notes receivable, net		564,780			628,221
Contracts in process and inventories		213,280			279,824
Prepaid, deferred and refundable income taxes		34,188			41,155
Prepaid expenses		38,441			36,071

Total current assets		1,221,457			1,329,847

Land, buildings and equipment		731,021			769,680
Less accumulated depreciation		360,822			361,861

Net book value		370,199			407,819

Restricted cash		48,521			84,793
Notes and accounts receivable – long-term		30,685			21,944
Investment and advances		91,301			88,523
Goodwill, net		50,756			50,214
Other intangible assets, net		72,372			72,668
Prepaid pension cost and related benefit assets		26,922			26,567
Asbestos-related insurance recovery receivable		520,717			534,045
Other assets		163,770			156,279
Deferred income taxes		74,225			69,578

TOTAL ASSETS	$	2,670,925		$	2,842,277

LIABILITIES AND SHAREHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current installments on long-term debt	$	27,661		$	31,562
Bank loans		442			14,474
Accounts payable and accrued expenses		608,533			635,089
Estimated costs to complete long-term contracts		596,936			645,763
Advance payments by customers		76,402			82,658
Income taxes		61,483			64,517

Total current liabilities		1,371,457			1,474,063

Corporate and other debt less current installment.		335,321			341,702
Special-purpose project debt less current installments		175,690			181,613
Capital lease obligations		60,144			58,237
Deferred income taxes		7,763			8,333
Pension, postretirement and other employee benefits		477,205			437,820
Asbestos-related liability		481,178			519,790
Other long-term liabilities and minority interest		114,083			109,373
Subordinated Robbins exit funding obligations less current installment		107,285			107,285
Convertible subordinated notes		210,000			210,000
Mandatory redeemable preferred securities of subsidiary trust holding solely junior subordinated deferrable interest debentures		175,000			175,000
Commitments and contingencies		—			—

TOTAL LIABILITIES		3,515,126			3,623,216

SHAREHOLDERS’ DEFICIT:
Common Stock		40,772			40,772
Paid-in capital		201,841			201,718
Accumulated deficit		(703,149	)		(653,991	)
Accumulated other comprehensive loss		(383,665	)		(369,438	)

TOTAL SHAREHOLDERS’ DEFICIT		(844,201	)		(780,939	)

TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	2,670,925		$	2,842,277

See notes to condensed consolidated financial statements.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)

			Three Months Ended						Six Months Ended

		June 27, 2003			June 28, 2002			June 27, 2003			June 28, 2002

					(Restated)						(Restated)
					(See Note 2)						(See Note 2)
Revenues:
	Operating revenues	$	922,238		$	944,334		$	1,706,330		$	1,739,743
	Other income		13,568			14,567			40,344			25,187

	Total revenues and other income		935,806			958,901			1,746,674			1,764,930

Costs and expenses:
	Cost of operating revenues		859,215			895,547			1,586,344			1,607,479
	Selling, general and administrative expenses		47,388			57,706			99,128			111,964
	Other deductions		25,674			65,719			46,918			103,025
	Minority interest		3,035			2,073			4,358			3,416
	Interest expense		18,410			15,053			35,832			31,957
	Dividends on preferred security of subsidiary trust		4,487			4,104			8,859			8,116

	Total costs and expenses		958,209			1,040,202			1,781,439			1,865,957

Loss before income taxes			(22,403	)		(81,301	)		(34,765	)		(101,027	)
Provision for income taxes			6,935			4,695			14,393			10,579

Net loss prior to cumulative effect of a change in accounting principle			(29,338	)		(85,996	)		(49,158	)		(111,606	)
Cumulative effect on prior years (to December 28, 2001) of a change in accounting principle for goodwill, net of $0 tax			—			—			—			(150,500	)

Net loss			(29,338	)		(85,996	)		(49,158	)		(262,106	)

Other comprehensive earnings/(loss):
	Foreign currency translation adjustment		99			18,683			(716	)		9,406
	Change in unrealized losses on derivative instruments, net of tax
			—			—			—			(1,679	)
	Reclassification of unrealized gain on derivative instruments to earnings
			—			(456	)		—			(2,155	)
	Minimum pension liability adjustment, net of $0 tax benefit		(13,511	)		—			(13,511	)		—


Comprehensive loss		$	(42,750	)	$	(67,769	)	$	(63,385	)	$	(256,534	)

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				Three Months Ended						Six Months Ended

				June 27, 2003			June 28, 2002			June 27, 2003		June 28, 2002

Loss per share:
	Basic:
		Net loss prior to cumulative effect of a change in accounting principle	$	(0.72	)	$	(2.10	)	$	(1.20	)	$	(2.73	)
		Cumulative effect on prior years (to December 28, 2001) of a change in accounting principle for goodwill		—			—			—			(3.67	)

		Net loss	$	(0.72	)	$	(2.10	)	$	(1.20	)	$	(6.40	)

	Diluted:
		Net loss prior to cumulative effect of a change in accounting principle	$	(0.72	)	$	(2.10	)	$	(1.20	)	$	(2.73	)
		Cumulative effect on prior years (to December 28, 2001) of a change in accounting principle for goodwill		—			—			—			(3.67	)

		Net loss	$	(0.72	)	$	(2.10	)	$	(1.20	)	$	(6.40	)

Shares outstanding (in thousands):
	Basic: weighted average number of shares outstanding			41,044			40,945			41,039			40,932
	Diluted: effect of share options			—			—			—			—

	Total diluted			41,044			40,945			41,039			40,932

Cash dividends paid per common share			$	—		$	—		$	—		$	—

See notes to condensed consolidated financial statements.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)

			Six Months Ended

		June 27, 2003			June 28, 2002

					(Restated)
					(See Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(49,158	)	$	(262,106	)
Adjustments to reconcile net earnings to cash flows from
	operating activities:
	Cumulative effect of a change in accounting principle		—			150,500
	Depreciation and amortization		18,284			22,703
	Deferred tax (benefit)/provision		(2,721	)		3,655
	(Gain)/loss on sale of assets		(16,071	)		50,800
	Dividends on Preferred Trust securities		8,859			8,116
	Dividends in excess of equity earnings		729			2,999
	Other		15,711			1,611
Changes in assets and liabilities:
	Receivables		65,882			62,674
	Contracts in process and inventories		27,731			76,091
	Accounts payable and accrued expenses		(26,813	)		(110,730	)
	Estimated costs to complete long-term contracts		(74,790	)		64,666
	Advance payments by customers		(10,479	)		13,706
	Income taxes		4,649			(4,504	)
	Other assets and liabilities		(33,894	)		4,771

NET CASH (USED)/PROVIDED BY OPERATING ACTIVITIES			(72,081	)		84,952

CASH FLOWS FROM INVESTING ACTIVITIES
Change in restricted cash			40,180			(40,594	)
Capital expenditures			(7,534	)		(10,940	)
Proceeds from sale of assets			81,425			1,170
Decrease/(increase) in investments and advances			597			(1,567	)
(Increase)/decrease in short-term investments			(5	)		4

NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES			114,663			(51,927	)

CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to minority shareholder			(2,879	)		(2,061	)
(Decrease)/increase in short-term debt			(14,505	)		299
Proceeds from long-term debt			83			69,118
Repayment of long-term debt			(17,214	)		(5,044	)

NET CASH (USED)/PROVIDED BY FINANCING ACTIVITIES			(34,515	)		62,312

Effect of exchange rate changes on cash and cash equivalents			18,115			24,667

INCREASE IN CASH AND CASH EQUIVALENTS			26,182			120,004
Cash and cash equivalents at beginning of year			344,305			224,020

CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	370,487		$	344,024

Cash paid during period:
Interest (net of amount capitalized)		$	30,011		$	26,298

Income taxes		$	4,061		$	5,080

See notes to condensed consolidated financial statements.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars, Except per Share Amounts)
(Unaudited)

The accompanying condensed consolidated financial statements are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. 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 Company’s ability to return to profitability, to continue to generate cash flows from operations, asset sales and collections of receivables to fund its obligations including those resulting from asbestos related liabilities, as well as the Company maintaining credit facilities and bonding capacity adequate to conduct its business. The Company has incurred significant losses in each of the years in the two-year period ended December 27, 2002 and in the six months ended June 27, 2003, and has a shareholder deficit of $844,201 at June 27, 2003. The Company has substantial debt obligations and during 2002 it was unable to comply with certain debt covenants under the previous revolving credit agreement. The Company received waivers of covenant violations and ultimately negotiated new credit facilities in August 2002. In November 2002, the credit facilities were amended to provide covenant relief of up to $180,000 of gross pre-tax charges recorded in the third quarter of 2002 and also to provide that up to an additional $63,000 in pre-tax charges related to specific contingencies could be excluded from the covenant calculation through December 2003, if incurred. In March 2003 the Senior Credit Facility was again amended to provide further covenant relief by modifying certain definitions of financial measures utilized in the calculation of the financial covenants and the minimum EBITDA and senior debt ratio. The credit facilities were also amended in July 2003 to provide waivers of the applicable sections of the Senior Credit Facility to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. There is no assurance that the Company will be able to comply with the terms of the Senior Credit Facility, as amended, and other debt agreements during 2003 and 2004.

The Company’s U.S. operations are cash flow negative and are expected to continue to generate negative cash flow due to a number of factors including the litigation and settlement of asbestos related claims, costs related to the Company’s indebtedness, obligations to fund U.S. pension obligations, and other expenses related to corporate overhead. As of June 27, 2003, the Company had aggregate indebtedness of approximately $1,100,000, which must be funded primarily from distributions from subsidiaries. As of June 27, 2003, the Company had cash and cash equivalents on hand, short-term investments, and restricted cash totaling $419,000 compared to $429,000 as of December 27, 2002. Of the total cash at June 27, 2003, approximately $342,000 was held by foreign subsidiaries. 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. The Company’s current 2003 forecast assumes cash repatriations from its non-U.S. subsidiaries from royalties, management fees, inter-company loans, debt service on inter-company loans, and dividends, of approximately $125,000. As of June 27, 2003 $50,000 has been repatriated from the non-U.S. subsidiaries.

There can be no assurance that the balance will be repatriated as there are significant legal and contractual restrictions on the Company’s ability to repatriate funds from its non-U.S. subsidiaries. These subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts are well in excess of the $44,000 classified as restricted cash in the accompanying condensed consolidated balance sheet. 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 minimum capitalization requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. Distributions in excess of these specified amounts would violate the terms of the agreements or applicable law which could result in civil or criminal penalties. 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 or future earnings of those subsidiaries in sufficient amounts to fund its 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.

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Management updates its forecasts of U.S. liquidity on a weekly basis. These forecasts include, among other analyses, cash flow forecasts, which include cash on hand, cash flows from operations, cash repatriated from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, and working capital needs. Commercial operations under a contract retained by the Company in the Foster Wheeler Environmental asset sale that were to commence in the fourth quarter of 2003, have been delayed. This change in timing will delay receipt of a material amount of domestic cash until early 2004 that was previously expected in the fourth quarter of 2003. Management developed a plan to increase the U.S. cash flow in the fourth quarter, but actions within the plan are contingent on the approval of certain third parties. If the efforts to secure the required approvals are unsuccessful, the Company may not have sufficient cash to operate its U.S. businesses in the fourth quarter 2003 and may not be able to continue to operate as a going concern. If the required approvals are obtained and the U.S. cash flow is increased, management forecasts that sufficient cash will be available to fund the Company’s U.S. working capital needs through 2004. There can be no assurance that the cash amounts realized and/or timing of the cash flows will match the Company’s forecast. It is possible that asset sales may result in amounts realized which differ materially from the balances recorded in the financial statements.

As part of its debt restructuring plan, the Company and some of its subsidiaries filed a registration statement on Form S-4 under the Securities Act of 1933 with the Securities and Exchange Commission on July 15, 2003 relating to an offer to exchange preferred shares of a wholly-owned subsidiary of the Company in exchange for all of the existing Preferred Trust Securities issued by FW Preferred Capital Trust I. The registration statement is currently being reviewed by the Securities and Exchange Commission. As part of the restructuring, the Company also expects to make an exchange offer to the holders of its Convertible Subordinated Notes and holders of the bonds supported by the Robbins Facility exit funding agreement of preferred shares of a newly formed subsidiary that would hold substantially all of the subsidiaries and assets of the Company’s engineering and construction business. The planned restructuring contemplates the sale of assets, including the potential sale of one or more of the Company’s European operations. The Company may not be able to complete the components of the restructuring plan on acceptable terms, or at all.

Failure by the Company to achieve its forecast and complete the components of the restructuring plan on acceptable terms would have a material adverse effect on the Company’s financial condition. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

In August 2002, the Company finalized a Senior Credit Facility with its lender group. This facility, including a $71,000 term loan, a $69,000 revolving credit facility, and a $149,900 letter of credit facility, expires on April 30, 2005. The Senior Credit Facility is secured by the assets of the domestic subsidiaries, the stock of the domestic subsidiaries, and, in connection with amendment no. 3 discussed below, 100% of the stock of the first-tier foreign subsidiaries. The Senior Credit Facility has no scheduled repayments prior to maturity on April 30, 2005. The agreement requires prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. The Company retains the first $77,000 of such amounts and also retains a 50% share of the balance. The financial covenants in the agreement commenced at the end of the first quarter 2003 and include a senior leverage ratio and a minimum earnings before interest, taxes, depreciation and amortization (“EBITDA”) level as described in the agreement, as amended. With the Company’s sale of the Foster Wheeler Environmental net assets on March 7, 2003, and an interest in a corporate office building on March 31, 2003, the $77,000 threshold was exceeded. Accordingly, a principal prepayment of $1,445 was made on the term loan in the second quarter of 2003.

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Amendment No. 1 to the Senior Credit Facility, obtained on November 8, 2002, provides covenant relief of up to $180,000 of gross pre-tax charges recorded by the Company in the third quarter of 2002. The amendment further provides that up to an additional $63,000 in pretax charges related to specific contingencies may be excluded from the covenant calculation through December 31, 2003, if incurred. Through the second quarter of 2003, $11,000 of the contingency risks was favorably resolved, and additional project reserves were established for $31,000 leaving a contingency balance of $21,000.

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

Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modifies certain affirmative and negative covenants to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. In connection with this amendment to the Senior Credit Facility, the Company agreed to pay a reduction fee equal to 5% of the lenders’ credit exposure if the Company has not made a prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004.

Holders of the Company’s 6.75% Notes due November 15, 2005 have a security interest in the stock and debt of Foster Wheeler LLC's subsidiaries and on facilities owned by Foster Wheeler LLC or its subsidiaries that exceed 1% of consolidated net tangible assets, in each case to the extent such stock, debt and facilities secure obligations under the Senior Credit Facility. As permitted by the Indenture, the Term Loan and the obligations under the letter of credit facility (collectively approximating $188,600 at June 27, 2003) have priority to the 6.75% Notes in these assets while the security interest of the 6.75% Notes ranks equally and ratably with another $69,000 of debt under the Senior Credit Facility.

The Company finalized a sale/leaseback arrangement in the third quarter of 2002 for an office building at its corporate headquarters. This capital lease arrangement leases the facility to the Company for an initial non-cancelable period of 20 years. The proceeds from the sale/leaseback were sufficient to repay the balance outstanding under a previous operating financing lease arrangement of $33,000 for a second corporate office building. The long-term capital lease obligation is included in capital lease obligations in the accompanying consolidated balance sheet.

In the third quarter of 2002, the Company entered into a receivables financing facility that matures on August 15, 2005 and is secured by a portion of the Company’s domestic trade receivables. The facility operates through the use of a wholly owned, special purpose subsidiary, Foster Wheeler Funding LLC (“FW Funding”) as described below. FW Funding is included in the condensed consolidated financial statements of the Company.

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FW Funding entered into a Purchase, Sale and Contribution Agreement (“PSCA”) on August 15, 2002 with six of the Company’s wholly owned domestic subsidiaries. Pursuant to the PSCA, FW Funding is obligated to purchase eligible trade receivables, as defined in the PSCA, from these companies and these companies are obligated to contribute as capital their ineligible trade accounts receivable as defined in the PSCA. On August 15, 2002, FW Funding also entered into a Loan and Security Agreement with Foothill Capital Corporation and Ableco Finance Corporation LLC. Under this agreement, FW Funding has the ability to borrow up to a maximum of $40,000 using eligible trade accounts receivable as security. FW Funding pays 10% interest on all outstanding borrowings. In addition, FW Funding pays a monthly unused line fee equal to 0.5% per annum of the maximum available amount less the average daily amount of borrowings during the preceding month. The facility is subject to covenant compliance. The financial covenants commenced at the end of the first quarter of 2003 and include a senior leverage ratio and a minimum EBITDA level. Noncompliance with the financial covenants allows the receivable purchaser to terminate the arrangement and accelerate any amounts then outstanding. Although the Company had not received a notice of termination, the Company had been informed by the lender that it believes FW Funding is out of compliance with certain maintenance covenants regarding the nature and amount of domestic receivables. On July 31, 2003, the receivables financing documents were amended to adjust, among other things, certain financial, maintenance and reporting covenants, and to create Foster Wheeler Funding II LLC, a wholly owned special purpose subsidiary, to operate the facility.

No borrowings were outstanding under this facility as of June 27, 2003 or December 27, 2002. As of June 27, 2003, FW Funding held $115,300 of trade accounts receivable, which are included in the condensed consolidated balance sheet.

The Senior Credit Facility, the sale/leaseback arrangement, and the receivables financing arrangement have quarterly debt covenant requirements. Management’s forecast indicates that the Company will be in compliance with the debt covenants throughout 2003 and 2004. However, there can be no assurance that the actual financial results will match the forecasts or that the Company will not violate the covenants. If the Company violates a covenant under the Senior Credit Facility or the sale/leaseback arrangement, repayment of amounts borrowed under such agreements could be accelerated. Acceleration of these facilities would result in a default under the following agreements: the 6.75% Notes, the Convertible Subordinated Notes, the Preferred Trust Securities, the Subordinated Robbins Facility exit funding obligations, and certain of the special-purpose project debt facilities, which would allow such debt to be accelerated as well. The total a mount of the debt that could be accelerated, including the amount outstanding under the Senior Credit Facility, is $918,500 as of June 27, 2003. The Company would not be able to repay amounts borrowed if the payment dates were accelerated. Failure by the Company to repay such amounts would cause the Company to no longer be able to operate as a going concern. The debt covenants and the potential payment acceleration requirements raise substantial doubts about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

On March 18, 2003, Foster Wheeler received a formal notice from the New York Stock Exchange (“NYSE”) indicating that the Company was below the continued listing criteria of a total market capitalization of not less than $50,000 over a 30-day trading period and shareholders’ equity of not less than $50,000. The Company has held discussions with the NYSE and on May 5, 2003, submitted a business plan that demonstrates compliance with the continued listing standard within 18 months of notice from the NYSE. The NYSE accepted the Company’s business plan on June 25, 2003, but will perform quarterly reviews until December 2004 for compliance with the goals and initiatives outlined in the Company’s plan. Foster Wheeler continues to be listed on the NYSE but its ticker symbol has been designated with the letters “bc” indicating that it is below compliance with respect to the listing standards. There can be no assurance that the Company’s plan to return to compliance will be successful.

The condensed consolidated balance sheet as of June 27, 2003 and the related condensed consolidated statements of earnings and comprehensive income for the three and six-month periods ended June 27, 2003 and June 28, 2002, as restated, and condensed consolidated statement of cash flows for the six months ended June 27, 2003 and June 28, 2002, as restated, are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted of normal recurring items except for specific items discussed herein. Interim results are not necessarily indicative of results for a full year.

The financial statements and notes are presented in accordance with the requirements of Form 10-Q and do not contain certain information included in Foster Wheeler Ltd.'s Annual Report on Form 10-K/A for the fiscal year ended December 27, 2002 (“2002 Form 10-K”) filed with the Securities and Exchange Commission on June 20, 2003. The condensed consolidated balance sheet as of December 27, 2002 has been derived from the audited consolidated balance sheet included in the 2002 Form 10-K. A summary of Foster Wheeler Ltd.’s significant accounting policies is presented below. There has been no material change in the accounting policies followed by Foster Wheeler Ltd. (hereinafter referred to as “Foster Wheeler” or the “Company”) during the second quarter of 2003.

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Restatement — In the fourth quarter of 2002, management determined that the liabilities and results of operations associated with one of its postretirement medical benefit plans was not accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions” (“SFAS 106”). The condensed consolidated statement of earnings and comprehensive income for the three and six months ended June 28, 2002 and the condensed consolidated statement of cash flows for the six month period ended June 28, 2002 have been restated to account for such benefit plan in accordance with SFAS 106. Also see Note 15.

In addition, the 2002 financial statements have been revised to reflect the cumulative effect of the change in accounting principle for goodwill in accordance with the provisions of SFAS 142, “Goodwill and Other Intangibles.” As permitted by SFAS 142, the Company completed its step two assessment of goodwill impairment on one of its reporting units in the fourth quarter of 2002, resulting in an impairment charge of $77,000. The June 28, 2002 financial statements have been revised in accordance with SFAS 142 to record this charge effective as of the beginning of the year (December 29, 2001), as required.

Principles of Consolidation — The condensed consolidated financial statements include the accounts of Foster Wheeler and all significant domestic and foreign subsidiary companies. All significant intercompany transactions and balances have been eliminated.

Use of Estimates — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. Changes in estimates are reflected in the periods in which they become known. Significant estimates are used when accounting for long-term contracts, customer and vendor claims, depreciation, employee and retiree benefit plans, taxes, asbestos litigation and expected recoveries and contingencies, among others. The Company established a provision for the balance of outstanding commercial claims as of December 27, 2002. The Company revised its estimates of claim revenues to reflect recent adverse recovery experience, management’s desire to monetize claims, and the poor economic conditions impacting the markets served by the Company. As of December 27, 2002, the Company had recorded commercial claims of $0. In early July 2003, a subsidiary of the Company received $23,000 in settlement of a receivable dispute and corresponding claim from a client. A pre-tax gain of $2,500 associated with the anticipated claim recovery was recorded in the second quarter of 2003; accordingly as of June 27, 2003, the Company had recorded commercial claims of $2,500. The cash proceeds will be recorded in the third quarter of 2003. At June 27, 2003 and December 27, 2002, the Company anticipates collection of approximately $7,000 and $9,000, respectively, in requests for equitable adjustments. These amounts relate primarily to a claim against a U.S. Government agency for a project currently being executed. If this claim were to be unsuccessful, the costs would be charged to cost of operating revenues.

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

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

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

The Company has numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. However, current estimates may be revised as additional information becomes available. If estimates of costs to complete long-term contracts indicate a loss, provision is made currently for the total loss anticipated. The elapsed time from award of a contract to completion of performance may be up to four years.

Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that a contractor seeks to collect from customers or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes of unanticipated additional costs. The Company records claims in accordance with paragraph 65 of the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” This statement of position states that recognition of amounts as additional contract revenue related to claims is appropriate only if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. Those two requirements are satisfied by the existence of all of the following conditions: (i) the contract or other evidence provides a legal basis for the claim; additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor’s performance; (ii) costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and (iii) the evidence supporting the claim is objective and verifiable. If such requirements are met, revenue from a claim is recorded only to the extent that contract costs relating to the claim have been incurred. Costs attributable to claims are treated as costs of contract performance as incurred. While the Company has established reserves against its commercial claims to bring the net book value of such claims to $2,500 at June 27, 2003 and $0 at December 27, 2002, such claims continue to be pursued and are currently in various stages of negotiation, arbitration and other legal proceedings.

Certain special-purpose subsidiaries in the Energy Group are reimbursed by customers for their costs, including amounts related to principal repayments of non-recourse project debt, for building and operating certain facilities over the lives of the non-cancelable service contracts. The Company records revenues relating to debt repayment obligations on these contracts on a straight-line basis over the lives of the service contracts, and records depreciation of the facilities on a straight-line basis over the estimated useful lives of the facilities, after consideration of the estimated residual value.

Cash and Cash Equivalents — Cash and cash equivalents include highly liquid short-term investments purchased with original maturities of three months or less. Cash and cash equivalents of approximately $297,500 are maintained by foreign subsidiaries as of June 27, 2003. These subsidiaries require a substantial portion of these funds to support their liquidity and working capital needs as well as required minimum capitalization and contractual restrictions. Accordingly, these funds may not be readily available for repatriation to U.S. entities.

Restricted Cash — Restricted cash at June 27, 2003 consists of approximately $3,800 held by special purpose entities and restricted for debt service payments; approximately $40,200 that was required to collateralize letters of credit and bank guarantees, and approximately $4,500 of client escrow funds. Domestic restricted cash totals approximately $4,400 which relates to funds held by special purpose entities and restricted for debt service payments and client escrow funds. Foreign restricted cash totals approximately $44,100 and is comprised of cash collateralized letters of credit and bank guarantees and client escrow funds.

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Short-term Investments — Short-term investments consist primarily of bonds of foreign governments and are classified as available for sale under SFAS Statement 115 “Accounting for Certain Investments in Debt and Equity Securities.” Realized gains and losses from sales are based on the specific identification method.

Trade Accounts R


BERMUDA	22-3802649
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Perryville Corporate Park, Clinton, NJ	08809-4000
(Address of principal executive offices)	(Zip Code)

Part I			Financial Information:

	Item 1	–	Financial Statements:

			Condensed Consolidated Balance Sheet at June 27, 2003 and December 27, 2002

			Condensed Consolidated Statement of Earnings and Comprehensive Income for the Three and Six Months Ended June 27, 2003 and June 28, 2002 (Restated)

			Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 27, 2003 and June 28, 2002 (Restated)

			Notes to Condensed Consolidated Financial Statements

	Item 2	–	Management's Discussion and Analysis of Financial Condition and Results of Operations

	Item 3	–	Quantitative and Qualitative Disclosures about Market Risk

	Item 4	–	Controls and Procedures

Part II			Other Information:

	Item 1	–	Legal Proceedings

	Item 6	–	Exhibits and Reports on Form 8-K

Signatures