<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) F O R M 1 0 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________________ to ____________________
Commission File Number 1-8430
McDERMOTT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-0593134
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1450 POYDRAS STREET
NEW ORLEANS, LOUISIANA 70112-6050
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5400
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
------------------- -------------------
Common Stock, $1.00 par value New York Stock Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
(Currently Traded with Common Stock)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate 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. [_]
The aggregate market value of the Company's Common Stock held by non-affiliates
of the registrant was $1,725,490,308 as of April 29, 1999.
The number of shares outstanding of the Company's Common Stock at April 29, 1999
was 59,248,598.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934
in connection with the Company's 1999 Annual Meeting of Stockholders are
incorporated by reference into Part III hereof.
<PAGE>
McDERMOTT INTERNATIONAL, INC.
INDEX - FORM 10-K
PART 1
PAGE
Items 1. & 2. BUSINESS AND PROPERTIES
A. General 1
B. Marine Construction Services
General 3
Foreign Operations 4
Raw Materials 5
Customers and Competition 5
Backlog 5
Factors Affecting Demand 6
C. Power Generation Systems
General 6
Foreign Operations 6
Raw Materials 7
Customers and Competition 7
Backlog 7
Factors Affecting Demand 8
D. Government Operations
General 8
Raw Materials 9
Customers and Competition 9
Backlog 9
Factors Affecting Demand 9
E. Industrial Operations
General 10
Foreign Operations 10
Raw Materials 10
Customers and Competition 10
Backlog 11
Factors Affecting Demand 11
F. Patents and Licenses 11
G. Research and Development Activities 11
H. Insurance 12
I. Employees 13
J. Environmental Regulations and Matters 13
i
<PAGE>
INDEX - FORM 10-K
PAGE
Item 3. LEGAL PROCEEDINGS 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS 18
Item 6. SELECTED FINANCIAL DATA 19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General 21
Fiscal Year 1999 vs Fiscal Year 1998 22
Fiscal Year 1998 vs Fiscal Year 1997 24
Effects of Inflation and Changing Prices 26
Liquidity and Capital Resources 27
Impact of the Year 2000 30
New Accounting Standards 32
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK 33
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Company Report on Consolidated Financial
Statements 35
Report of PricewaterhouseCoopers LLP 36
Report of Ernst & Young LLP 37
Consolidated Balance Sheet - March 31, 1999
and 1998 38
Consolidated Statement of Income (Loss) for the
Three Fiscal Years ended March 31, 1999 40
Consolidated Statement of Comprehensive Income
(Loss) for the Three Fiscal Years ended
March 31, 1999 41
Consolidated Statement of Stockholders'
Equity for the Three Fiscal Years ended
March 31, 1999 42
Consolidated Statement of Cash Flows for the
Three Fiscal Years ended March 31, 1999 44
Notes to Consolidated Financial Statements 46
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 84
ii
<PAGE>
INDEX - FORM 10-K
PAGE
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 85
Item 11. EXECUTIVE COMPENSATION 85
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 85
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 85
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 86
Signatures 88
Exhibit 4.1 - AMENDED AND RESTATED RIGHTS AGREEMENT
Exhibit 21 - SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
Exhibit 23.1 - CONSENT OF PRICEWATERHOUSECOOPERS LLP
Exhibit 23.2 - CONSENT OF ERNST & YOUNG LLP
Exhibit 27 - FINANCIAL DATA SCHEDULE
iii
<PAGE>
P A R T I
Items 1. and 2. BUSINESS AND PROPERTIES
A. GENERAL
McDermott International, Inc. ("MII") was incorporated under the laws of the
Republic of Panama in 1959 and is the parent company of the McDermott group of
companies, which includes J. Ray McDermott, S.A. ("JRM") and McDermott
Incorporated. MII's Common Stock and JRM's Common Stock and 9.375% Senior
Subordinated Notes due July 2006 are publicly traded. On May 7, 1999, MII and
JRM jointly announced that they executed a definitive merger agreement pursuant
to which MII will acquire all shares of JRM not already owned by MII for $35.62
per share in cash. Pursuant to the merger agreement, on May 13, 1999, MII
initiated a tender offer for all shares of JRM common stock for $35.62 per share
in cash. The tender offer will expire on June 10, 1999 unless extended. Any
shares not purchased in the tender offer will be acquired for the same price in
cash in a second-step merger . The tender offer is subject to the condition
that the majority of the publicly held shares are validly tendered pursuant to
the tender offer, as well as other customary conditions. JRM currently has
approximately 39,060,000 shares of common stock outstanding, of which 24,668,297
shares, or 63%, are owned by MII, and approximately 14,400,000 are publicly
held.
Hereinafter, unless the context requires otherwise, the following terms shall
mean:
. MII for McDermott International, Inc., a Panama corporation,
. JRM for J. Ray McDermott, S. A., a majority owned Panamanian subsidiary of
MII, and its consolidated subsidiaries,
. MI for McDermott Incorporated, a Delaware subsidiary of MII, and its
consolidated subsidiaries,
. BWICO for Babcock & Wilcox Investment Company, a Delaware subsidiary of MI,
. B&W for the Babcock & Wilcox Company, a Delaware subsidiary of BWICO, and
its consolidated subsidiaries,
. BWXT for BWX Technologies, Inc., a Delaware subsidiary of BWICO, and its
consolidated subsidiaries, and
. McDermott for the consolidated enterprise.
McDermott operates in four business segments:
. Marine Construction Services includes the results of the operations of JRM,
which supplies worldwide services for the offshore oil and gas exploration
and production and hydrocarbon processing industries, and to other marine
construction companies. Principal activities include the design,
engineering, fabrication and installation of offshore drilling and
production platforms and other specialized structures, modular facilities,
marine pipelines and subsea production systems and procurement activities.
. Power Generation Systems includes the results of the operations of the
Power Generation Group, which is conducted primarily through B&W, and
provides services and equipment and systems to generate steam and electric
power at energy facilities worldwide.
. Government Operations includes the results of the operations of BWXT, which
supplies nuclear reactor components and nuclear fuel assemblies to the U.S.
Navy and various other equipment and services to the U.S. Government and
manages various U.S. Government-owned facilities.
. Industrial Operations includes the results of the operations of McDermott
Engineers & Constructors (Canada) Ltd., Hudson Products Corporation,
McDermott Technologies, Inc. ("MTI") and other smaller businesses.
McDermott has a continuing program of reviewing joint venture, acquisition and
disposition opportunities. The following tables show revenues and operating
income (loss) of McDermott for the three fiscal years ended March 31, 1999. See
Note 17 to the consolidated financial statements for additional information with
respect to McDermott's business segments and operations in different geographic
areas.
1
<PAGE>
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED MARCH 31,
(Dollars in Millions)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Marine Construction Services $1,279.6 40.6% $1,855.5 50.5% $1,408.5 44.7%
Power Generation Systems 1,066.2 33.8% 1,142.7 31.1% 985.4 31.3%
Government Operations 382.7 12.1% 370.5 10.1% 373.1 11.8%
Industrial Operations 427.5 13.5% 337.8 9.2% 458.1 14.5%
Adjustments and Eliminations (6.0) - (31.9) (0.9%) (74.2) (2.3%)
- ---------------------------------------------------------------------------------------------------------
Total Revenues $3,150.0 100.0% $3,674.6 100.0% $3,150.9 100.0%
- ---------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS):
Segment Operating Income (Loss):
Marine Construction Services $ 126.5 46.3% $ 107.1 46.6% $ 10.8 -
Power Generation Systems 90.3 33.1% 82.5 35.8% (34.6) -
Government Operations 39.4 14.4% 35.8 15.6% 32.5 -
Industrial Operations 16.9 6.2% 4.7 2.0% (30.6) -
- ---------------------------------------------------------------------------------------------------------
Total $273.1 100.0% $230.1 100.0% $(21.9) 100.0%
- ---------------------------------------------------------------------------------------------------------
Gain (Loss) on Asset Disposals
and Impairments - Net:
Marine Construction Services $ 18.6 80.8% $(40.1) - $ 29.0 -
Power Generation Systems 4.4 19.4% (6.1) - (19.2) -
Government Operations 0.2 0.8% 0.5 - 0.4 -
Industrial Operations (0.2) (1.0%) 128.2 - (11.9) -
- ---------------------------------------------------------------------------------------------------------
Total $ 23.0 100.0% $ 82.5 100.0% $ (1.7) 100.0%
- ---------------------------------------------------------------------------------------------------------
Income (Loss) from Investees:
Marine Construction Services $ 10.7 - $ 70.2 82.2% $ (7.8) -
Power Generation Systems (4.7) - 7.5 8.8% (0.3) -
Government Operations 4.1 - 4.3 5.0% 3.6 -
Industrial Operations (1.7) - 3.4 4.0% 0.7 -
- ---------------------------------------------------------------------------------------------------------
Total $ 8.4 100.0% $ 85.4 100.0% $ (3.8) 100.0%
- ---------------------------------------------------------------------------------------------------------
SEGMENT INCOME (LOSS):
Marine Construction Services $155.8 51.2% $137.2 34.5% $ 32.0 -
Power Generation Systems 90.0 29.6% 83.9 21.1% (54.1) -
Government Operations 43.7 14.3% 40.6 10.2% 36.5 -
Industrial Operations 15.0 4.9% 136.3 34.2% (41.8) -
- ---------------------------------------------------------------------------------------------------------
Total Segment Income (Loss): 304.5 100.0% 398.0 100.0% (27.4) 100.0%
- ---------------------------------------------------------------------------------------------------------
Other Unallocated Items (51.0) (5.3) (72.4)
General Corporate Expenses-Net (36.1) (37.2) (47.4)
- ---------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $217.4 $355.5 $(147.2)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
B. MARINE CONSTRUCTION SERVICES
GENERAL
On January 31, 1995, McDermott contributed substantially all of its marine
construction services business to JRM, a new company incorporated under the laws
of the Republic of Panama in 1994. Also, on January 31, 1995, JRM acquired
Offshore Pipelines, Inc. ("OPI") in a merger transaction. Prior to the merger
with OPI, JRM was a wholly owned subsidiary of MII; as a result of the merger,
JRM became a majority owned subsidiary of MII. On May 7, 1999, MII and JRM
entered into a merger agreement pursuant to which MII initiated a tender offer
for those shares of JRM that it did not already own for $35.62 per share in
cash. Any such shares not purchased in the offer will be acquired for the same
price in cash in a second-step merger. JRM conducts the business activities of
this segment.
The Marine Construction Services segment consists of the basic and detailed
design, engineering, fabrication and installation of offshore drilling and
production platforms and other specialized structures, modular facilities,
marine pipelines and subsea production systems. As a strategic operating
decision, JRM has transitioned away from installation, particularly heavy-lift
technology, into deep water subsea technology. This segment also provides
comprehensive project management services, feasibility studies, procurement
activities, and removal, salvage and refurbishment services for offshore fixed
platforms. This segment operates throughout the world in all major offshore oil
and gas producing regions, including the Gulf of Mexico, the North Sea, West
Africa, South America, the Middle East, India and the Far East.
This segment also participates in joint ventures. The joint ventures are
accounted for using either the equity or the cost method. JRM's joint ventures
are largely financed through their own resources, including, in some cases,
stand-alone borrowing arrangements. JRM's two most significant joint venture
investments were in the HeereMac joint venture and the McDermott-ETPM joint
venture. JRM has terminated its interests in both of these joint ventures.
The HeereMac joint venture was formed in January 1989 and utilized the
specialized, heavy-lift marine construction vessels which were previously owned
by the two parties. Each party had a 50% interest in the joint venture, and
Heerema had responsibility for its day-to-day operations. On December 19, 1997,
JRM and Heerema Offshore Construction Group, Inc. ("Heerema") terminated the
HeereMac joint venture. Heerema acquired and assumed JRM's 50% interest in the
joint venture in exchange for cash of $318,500,000 and title to several pieces
of equipment. The equipment transferred to JRM includes two launch barges and
the derrick barge 101, a 3,500-ton lift capacity, semi-submersible derrick
barge. The HeereMac joint venture was accounted for using the equity method
until March 31, 1997 and the cost method thereafter.
JRM formed its initial joint venture with ETPM S.A., McDermott-ETPM, in April
1989 to provide general marine construction services to the petroleum industry
in West Africa, South America, the Middle East and India and to provide offshore
pipelaying services in the North Sea. In March 1995, JRM and ETPM S.A. expanded
their joint venture's operations to include the Far East and began jointly
pursuing subsea contracting work on a worldwide basis. Most of the operating
companies in the McDermott-ETPM joint venture were majority-owned and controlled
by JRM and were consolidated for financial reporting purposes. However, the
operations of McDermott-ETPM West, Inc., which conducts operations in the North
Sea, South America and West Africa, were managed and controlled by ETPM S.A.
McDermott-ETPM West, Inc. was accounted for using the equity method. On April
3, 1998, JRM and ETPM S.A. terminated the McDermott-ETPM joint venture. Pursuant
to the termination, JRM received net cash of approximately $105,000,000 and the
derrick/lay barge 1601 and assumed 100% ownership of McDermott-ETPM East, Inc.
and McDermott-ETPM Far East, Inc. ETPM S.A. received the lay barge 200 and took
ownership of McDermott Subsea Constructors Limited ("MSCL") and McDermott-ETPM
West, Inc.
JRM participates in other joint ventures involving operations in foreign
countries that require majority-ownership by local interests. Through a
subsidiary, JRM also participates in an equally owned joint venture with the
Brown & Root Energy Services unit of Halliburton Company ("Brown & Root"), which
was formed in
3
<PAGE>
February 1995 to combine the operations of JRM's Inverness and Brown & Root's
Nigg fabrication facilities in Scotland.
In May 1998, JRM sold its Aberdeen based engineering business of McDermott
Engineering (Europe) Limited and announced its intention to withdraw from
traditional European engineering markets. See Note 17 to the consolidated
financial statements regarding these events. JRM retains a presence in the
European markets via Mentor Subsea Technology Services, Ltd. to focus on subsea
opportunities. During fiscal year 1999, McDermott announced its intention to
withdraw from substantially all third-party engineering activities.
At March 31, 1999, JRM owned or operated 5 fabrication facilities throughout the
world. JRM's principal domestic fabrication yard and offshore base is located
on 1,114 acres of land, under lease, near Morgan City, Louisiana. JRM also owns
or operates fabrication facilities in the following locations: near Corpus
Christi, Texas; near Inverness, Scotland; in Indonesia on Batam Island; and in
Jebel Ali, U.A.E. JRM also owns and operates a ship repair yard in Veracruz,
Mexico.
JRM's fabrication facilities are equipped with a wide variety of heavy-duty
construction and fabrication equipment, including cranes, welding equipment,
machine tools and robotic and other automated equipment, most of which is
movable. JRM can fabricate a full range of offshore structures, from
conventional jacket-type fixed platforms to deepwater platform configurations
employing compliant-tower, tension leg, floating production platform and spar
technology. JRM also fabricates platform deck structures and modular
components, including complete production processing systems, hydrocarbon
separation and treatment systems, pressure and flow control systems and
personnel quarters.
At March 31, 1999, expiration dates, including renewal options, of leases
covering land for JRM's fabrication yards were as follows:
Morgan City, Louisiana Years 2000-2033
Jebel Ali, U.A.E. Year 2005
Batam Island, Indonesia Year 2008
JRM owns or, through its ownership interests in joint ventures, has interests in
one of the largest fleets of marine equipment used in major offshore
construction. The nucleus of a "construction spread" is a large derrick barge,
pipelaying barge or combination derrick-pipelaying barge capable of offshore
operations for an extended period of time in remote locations. At March 31,
1999, JRM owned or, through ownership interests in joint ventures, had interests
in 5 derrick vessels, 2 pipelaying vessels and 8 combination derrick-pipelaying
vessels. The lifting capacities of the derrick and combination derrick-
pipelaying vessels range from 800 to 5,000 tons. These vessels range in length
from 400 to 698 feet and are fully equipped with stiff leg or revolving cranes,
auxiliary cranes, welding equipment, pile-driving hammers, anchor winches and a
variety of additional gear. The largest vessel is the semi-submersible derrick
barge 101.
To support the operations of these major marine construction vessels, JRM and
its joint ventures also own or lease a substantial number of other vessels, such
as tugboats, utility boats, launch barges and cargo barges.
FOREIGN OPERATIONS
JRM's revenues, net of intersegment revenues, and segment income derived from
operations located outside of the United States, and the approximate percentages
to McDermott's total revenues and total segment income, respectively, follow:
4
<PAGE>
<TABLE>
<CAPTION>
REVENUES SEGMENT INCOME
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in thousands)
<S> <C> <C> <C> <C>
1999 $ 731,022 23% $129,440 43%
1998 1,112,685 30% 317,482 80%
1997 839,583 27% 14,525 -
</TABLE>
RAW MATERIALS
This segment uses raw materials such as carbon and alloy steel in various forms,
welding gases, concrete, fuel oil and gasoline that are available from many
sources. JRM is not dependent upon any single supplier or source. Although
shortages of certain of these raw materials and fuels have existed from time to
time, no serious shortage exists at the present time.
CUSTOMERS AND COMPETITION
This segment's principal customers are oil and gas companies, including foreign
government-owned companies. Customers generally contract with JRM for the
design, engineering, fabrication and installation of offshore drilling and
production platforms and other specialized structures, modular facilities,
marine pipelines and subsea production systems. Contracts are usually awarded
on a competitive bid basis. A number of companies compete effectively with JRM
and its joint ventures in each of the separate marine construction phases in
various parts of the world. Examples are Aker Gulf Marine, Gulf Island
Fabrication, Inc., Hyundai Heavy Industries, Global Industries Ltd., Saipem
S.p.A., Heerema Offshore Construction Group, Inc. and other companies.
BACKLOG
At March 31, 1999 and 1998, Marine Construction Services' backlog amounted to
$406,183,000 and $1,266,310,000, respectively. This represents approximately
16% and 37%, respectively, of McDermott's total backlog. JRM's backlog declined
in all operating areas because of lower oil prices. In addition, backlog
declined because of JRM's withdrawal from traditional engineering markets.
Finally, backlog decreased because of sluggish economic conditions in the Middle
and Far East and the political instability in the Far East. Of the March 31,
1999 backlog, management expects that approximately $386,454,000 will be
recognized in revenues in fiscal year 2000 and $19,729,000 in fiscal year 2001.
JRM has been awarded a contract valued at $20,500,000 from Larsen & Toubro
Limited for the ONGC Pipelines and Platform Modification Project. Under this
contract, JRM is responsible for transportation of coated pipelines and offshore
installation of 12 pipelines, 17 risers, 3 subsea tie-ins, and 19 crossings.
JRM is also responsible for freespan rectification and de-watering and
commissioning of one pipeline with platform gas.
Subsequent to March 31, 1999, JRM was awarded a contract for $335,000,000 from
Conoco Indonesia Inc. and other West Natuna Sea operators to construct a subsea
natural gas pipeline from Indonesia's West Natuna Sea gas fields to Singapore.
This award was not included in backlog at March 31, 1999.
Work has historically been performed on a fixed-price, cost-plus or day-rate
basis or a combination thereof. More recently, certain "partnering-type"
contracts have introduced a risk and reward element wherein a portion of total
compensation is tied to the overall performance of the alliance partners. This
segment attempts to cover increased costs of anticipated changes in labor,
material and service costs of long-term contracts either through an estimate of
such changes, which is reflected in the original price, or through price
escalation clauses. Most long-term contracts have provisions for progress
payments.
5
<PAGE>
FACTORS AFFECTING DEMAND
The activity of this segment depends mainly on the capital expenditures of oil
and gas companies and foreign governments for developmental construction.
Several factors influence these expenditures:
. oil and gas prices, along with the cost of production and delivery,
. the terms and conditions of offshore leases,
. the discovery rates of new reserves offshore,
. the ability of the oil and gas industry to raise capital, and
. local and international political and economic conditions.
In some Far East countries, internal consumption of oil and gas products has
decreased due to the current economic crises.
Oil and gas company capital exploration and production budgets for calendar year
1999 have been significantly reduced because of falling oil and gas prices.
These budgets are now set and, therefore, unaffected by the partial recovery in
prices resulting from the recent OPEC production agreements. Economic and
political conditions in Asia have had an adverse effect on exploration and
production spending.
C. POWER GENERATION SYSTEMS
GENERAL
The Power Generation Systems segment:
. supplies engineered-to-order services, products and systems for energy
conversion worldwide and related industrial equipment, such as burners,
pulverizer mills, soot blowers and ash handlers,
. manufactures heavy pressure equipment for energy conversion such as boilers
fueled by coal, oil, bitumen, natural gas, solid municipal waste, biomass,
and other fuels,
. fabricates steam generators for nuclear power plants,
. designs and supplies environmental control systems, including both wet and
dry scrubbers for flue gas desulfurization, modules for selective catalytic
reduction of nitrogen oxides, and electrostatic precipitators and similar
devices,
. supports operating plants with a wide variety of services, including the
installation of new systems and replacement parts, engineering upgrades,
construction, maintenance, and field technical services such as condition
assessment,
. provides inventory services to help customers respond quickly to plant
interruptions and to construction crews to maintain and repair operating
equipment, and
. provides power through cogeneration, refuse-fueled power plants, and other
independent power producing facilities, and participates in this market as
a contractor for engineer-procure-construct services, as an equipment
supplier, as an operations and maintenance contractor and through ownership
interests.
The principal manufacturing plants of this segment, which B&W owns, are located
in West Point, Mississippi; Lancaster, Ohio; and Cambridge, Ontario, Canada. B&W
closed its Paris, Texas plant in fiscal year 1999. This segment's unconsolidated
affiliates' (equity investees) foreign plants are located in Beijing, China;
Batam Island, Indonesia; Pune, India; and Cairo, Egypt. This segment also
operates independent power facilities located in Ebensburg, Pennsylvania and
Sunnyside, Utah. All of these plants are well maintained, have suitable
equipment and are of adequate size.
FOREIGN OPERATIONS
Power Generation Systems' revenues, net of intersegment revenues, and segment
income (loss) derived from operations located outside of the United States, and
the approximate percentages to McDermott's total revenues and total segment
income (loss), respectively, follow:
6
<PAGE>
<TABLE>
<CAPTION>
REVENUES SEGMENT INCOME (LOSS)
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1999 $189,148 6% $ 8,283 3%
1998 196,831 5% 25,694 6%
1997 296,544 9% (33,701) 123%
</TABLE>
Products for McDermott installation are engineered and built in B&W's United
States and Canadian facilities, as well as in the facilities of the segment's
equity investees in China, Indonesia, India and Egypt.
RAW MATERIALS
The Power Generations Systems segment uses raw materials such as carbon and
alloy steels in various forms, such as plates, forgings, structurals, bars,
sheets, strips, heavy wall pipes and tubes to construct power generation systems
and equipment. Significant amounts of components and accessories are also
purchased for assembly into the supplied systems and equipment. These raw
materials and components generally are purchased as needed for individual
contracts. Although shortages of certain of these raw materials have existed
from time to time, no serious shortage exists at the present time. This segment
is not sole source dependent for any significant raw materials.
CUSTOMERS AND COMPETITION
This segment's principal customers are the electric power generation industry
(including government-owned utilities and independent power producers); the pulp
and paper industry; process industries such as petrochemical plants, oil
refineries and steel mills; and other steam-using industries and institutions.
The electric power generation industry accounted for approximately 26%, 24% and
22% of McDermott's total revenues for fiscal years 1999, 1998 and 1997,
respectively.
Customers normally purchase services, equipment or systems from the Power
Generation Systems segment after an extensive evaluation process based on
competitive bids. Proposals are submitted based on the estimated cost of each
job.
Within the United States, the Power Generation Systems segment competes with a
number of domestic and foreign-based companies specializing in steam generating
systems, equipment and services. Examples include ABB Asea Brown Boveri Ltd.,
Ahlstrom Corporation, DB Riley, Inc., Foster Wheeler Corporation, Kvaerner ASA,
and other companies. In international markets, this segment competes against
these companies, plus additional foreign-based companies. A number of
additional companies compete in environmental control equipment, related
specialized industrial equipment and the independent power producing business.
Other suppliers of steam systems, as well as many other businesses, compete for
replacement parts, repair and alteration, and other services required to backfit
and maintain existing systems.
BACKLOG
At March 31, 1999 and 1998, this segment's backlog amounted to $905,283,000 and
$1,070,351,000, or approximately 35% and 31%, respectively, of McDermott's
backlog. Backlog decreased primarily as a result of delays and cancellations of
power projects in Southeast Asia due to that region's current economic crisis
and management's focus on higher margin projects. Backlog includes $65,000,000
of delayed contracts as a result of the Asian economic crisis. Of the March 31,
1999 backlog, it is expected that approximately $552,534,000 will be recognized
in revenues in fiscal year 2000, $173,501,000 in fiscal year 2001 and
$179,248,000 thereafter, of which approximately 77% will be recognized in fiscal
years 2002 through 2004.
During fiscal year 1999, this segment was awarded a contract valued at
approximately $100,000,000 to supply four nuclear steam generators to Baltimore
Gas and Electric's Calvert Cliffs nuclear power plant on Chesapeake Bay in
Calvert County, Maryland. This segment also received a $46,000,000 contract for
a Sidi Krir, Egypt
7
<PAGE>
build, own, operate and transfer ("BOOT") project for two utility boilers from
Bechtel International Inc. for Intergen; and a contract valued at $40,000,000
for boiler maintenance and precipitator installation at Dominion Energy's
Kincaid Station in Kincaid, Illinois.
If in management's judgment it becomes doubtful whether contracts will proceed,
the backlog is adjusted accordingly. If contracts are deferred or cancelled,
the Power Generation Systems segment is usually entitled to a financial
settlement related to the individual circumstances of the contract. Operations
and maintenance contracts, which are performed over an extended period, are
included in backlog based upon an estimate of the revenues from these contracts.
The Power Generation Systems segment attempts to cover increased costs of
anticipated changes in labor, material and service costs of long-term contracts
either through an estimate of such changes, which is reflected in the original
price, or through price escalation clauses. Most long-term contracts have
provisions for progress payments.
FACTORS AFFECTING DEMAND
Electric utilities in parts of Asia and the Middle East are current purchasers
of new baseload generating units and environmental control systems. This was
due to the growth of their economies and to the small existing stock of
electrical generating capacity in most developing countries. However, a
currency crisis, which began in Southeast Asia in the summer of 1997, has slowed
the number of inquiries and orders. With the international markets in an
unsettled condition, several projects in emerging markets have been delayed,
suspended or cancelled. Management expects this segment to be adversely
affected if the adverse economic and political conditions in Southeast Asia
continue.
Electrical consumption has grown moderately in the United States in recent years
and competition within the electric power industry in the United States has
intensified. The Energy Policy Act of 1992 deregulated the electric power
generation industry by allowing independent power producers access to the
electric utilities' transmission and distribution systems. Several states have
changed their laws to encourage competition among generators of electricity.
The modest growth in demand and the changes associated with this transition from
a regulated to a competitive industry have caused electric power companies to
defer ordering new coal-fired power plants in the United States. When electric
utilities are in need of peaking capacity, many are purchasing combustion
turbines with short lead-times or are purchasing electricity from other
utilities and non-regulated sources, such as cogenerators and independent power
producers.
Substantially all the customers of the Power Generation Systems segment are
affected by environmental regulations of the countries in which their facilities
are located. In the United States, the Clean Air Act requires many customer
industries to implement systems to limit or remove emissions. These mandated
expenditures have caused some customers to defer refurbishments of existing
plants. The same requirements have caused other customers to purchase
environmental control equipment from this segment. Future changes in
environmental regulations will continue to affect demand for this segment's
products and services.
This segment's systems, products and services are capital intensive. As such,
customer demand is heavily affected by the variations in their business cycles
and by the overall economies of their countries. Availability of funds for
project financing, investment and maintenance at this segment's customers varies
with the conditions of their domestic businesses.
D. GOVERNMENT OPERATIONS
GENERAL
The Government Operations segment provides nuclear fuel assemblies and nuclear
reactor components to the U.S. Navy for the Naval Reactors Program. This
activity has made contributions to operating income of McDermott in all three
fiscal years and is expected to do so in the foreseeable future. This segment,
in addition to its Naval Reactors Program business, supplies other equipment and
services to the U.S. Government. It is
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also proceeding with new Government projects and exploring new programs which
require the technological capabilities it developed as a Government contractor.
Environmental restoration services and the management of government-owned
facilities, primarily within the Department of Energy's ("DOE") nuclear weapons
complex, are examples of these markets.
The principal plants of this segment are located in Lynchburg, Virginia and
Barberton, Ohio.
RAW MATERIALS
This segment is not sole source dependent for any significant raw materials
except for uranium, which is furnished and owned by the U.S. Government and used
in the nuclear fuel assemblies supplied to the U.S. Navy for the Naval Reactors
Program.
CUSTOMERS AND COMPETITION
This segment is the sole supplier to the U.S. Navy of all major nuclear steam
system equipment and all nuclear fuel assemblies and reactor components for the
Naval Reactors Program. There are a small number of suppliers of small nuclear
components, with BWXT being the largest based on revenues. This segment is
involved along with other companies in the operation of the Idaho National
Engineering and Environmental Laboratory near Idaho Falls, Idaho; the Rocky
Flats Environmental Technology Site near Boulder, Colorado; the Savannah River
Site in Aiken, South Carolina; and the Hanford Site in Richland, Washington.
During fiscal year 1998, the Government Operations segment received a contract
from the U.S. DOE as the prime contractor to manage the environmental
remediation and site transition project at the DOE's Mound Site in Miamisburg,
Ohio. A BWXT subsidiary, Babcock & Wilcox of Ohio, Inc., began performance
under the several hundred million dollar multi-year contract in October 1997.
The contract is subject to annual funding. For the fiscal years 1999, 1998 and
1997, the U.S. Government accounted for approximately 12%, 10% and 11%,
respectively, of McDermott's total revenues, including 8%, 7% and 10%,
respectively, related to nuclear fuel assemblies and reactor components for the
U.S. Navy.
BACKLOG
At March 31, 1999 and 1998, Government Operations segment backlog amounted to
$860,981,000 and $810,230,000, or approximately 33% and 24%, respectively, of
McDermott's backlog. Of the March 31, 1999 backlog, management expects that
approximately $330,532,000 will be recognized in revenues in fiscal year 2000,
$194,694,000 in fiscal year 2001 and $335,755,000 thereafter, of which
approximately 89% will be recognized in fiscal years 2002 through 2004. At
March 31, 1999, this segment's backlog with the U.S. Government was $760,202,000
(of which $12,023,000 had not yet been funded), or approximately 30% of
McDermott's total backlog. The March 31, 1999 U.S. Government backlog includes
only the current year funding for the DOE Mound Site in Miamisburg, Ohio.
During fiscal year 1999, this segment was awarded approximately $270,000,000 in
new orders for aircraft carrier components, prototypical steam generation
equipment for the newest submarine design and the downloading of enriched
uranium for the commercial markets.
FACTORS AFFECTING DEMAND
This segment's systems are generally capital intensive. This segment may be
impacted by U.S. Government budget restraints.
Even with the maturing of the U.S. Navy's shipbuilding program and U.S.
Government defense budget reductions, the demand for nuclear fuel assemblies and
reactor components for the U.S. Navy has continued to comprise a substantial
portion of this segment's backlog. Orders for U.S. Navy nuclear fuel assemblies
and nuclear reactor components are expected to continue to be a significant part
of backlog since this segment is the sole source provider of these nuclear fuel
assemblies and nuclear reactor components.
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E. INDUSTRIAL OPERATIONS
GENERAL
Industrial Operations includes the results of Engineering and Construction
operations, Hudson Products Corporation ("HPC") and MTI, and other businesses.
Engineering and Construction operations are conducted primarily through
McDermott Engineers & Constructors (Canada), Ltd. ("MECL").
MECL provides services, including project management, conceptual and process
design, front-end engineering and design, detailed engineering, procurement,
construction management and contract maintenance. HPC products include air-
cooled heat exchangers, combination water and air-cooled systems, air-cooled
vacuum steam condensers, fiberglass reinforced axial flow fans for air-cooled
heat exchangers and wet cooling towers and fan control systems. MTI performs
research activities for internal operating segments of McDermott and markets,
negotiates and administers contracts that leverage company research and
development technology needs with external funds.
The principal plant of HPC is located in Beasley, Texas. One of Industrial
Operations' unconsolidated affiliates has a plant in Monterrey, Mexico, which
manufactures axial flow fans and structural components for air-cooled heat
exchangers. Both of these plants are well maintained, have suitable equipment
and are of adequate size. MTI's research and development facilities are located
in Alliance, Ohio and Lynchburg, Virginia. MECL is located in Calgary, Alberta,
Canada.
FOREIGN OPERATIONS
Industrial Operations' revenues, net of intersegment revenues, and segment
income (loss) derived from operations located outside of the United States, and
the approximate percentages to McDermott's total revenues and total segment
income (loss), respectively, follow:
<TABLE>
<CAPTION>
REVENUES SEGMENT INCOME (LOSS)
FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1999 $319,937 10% $ 4,592 2%
1998 195,886 5% 90,516 23%
1997 242,973 8% (29,614) 108%
</TABLE>
RAW MATERIALS
Industrial Operations uses raw materials such as carbon and alloy steels in
various forms, such as plates, bars, sheets, and pipes, and aluminum pipes,
aluminum strips, fiberglass cloth and epoxy resins. The majority of raw
materials and components are purchased as needed for individual contracts.
Additional quantities of raw materials are carried as base stock for jobs
requiring quick turnaround. Although extended lead time of certain raw
materials have existed from time to time, no serious shortage exists at the
present time, nor is any shortage expected in the foreseeable future.
Industrial Operations is not sole source dependent for any significant raw
materials.
CUSTOMERS AND COMPETITION
Industrial Operations' principal customers include oil and natural gas
producers, the electric power generation industry, petrochemical and chemical
processing industries, state and federal government agencies and non-profit
utility groups.
Equipment orders for items such as air-cooled heat exchangers are customarily
awarded after competitive bids have been submitted as proposals to customers
based on the estimated cost of each job. In both the U.S. and international
markets, this segment competes with a number of domestic and foreign-based
companies
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specializing in air-cooled heat exchanger equipment. The majority of
the engineering and construction operations contracts are awarded in a
competitive market in which both price and quality are considerations.
BACKLOG
At March 31, 1999 and 1998, Industrial Operations' backlog amounted to
$400,649,000 and $262,339,000, or approximately 16% and 8%, respectively, of
McDermott's total backlog. Of the March 31, 1999 backlog, management expects
that approximately $352,900,000 will be recognized in revenues in fiscal year
2000, $43,509,000 in fiscal year 2001 and $4,240,000 thereafter.
This segment received a contract award valued at $80,000,000 for the
engineering, procurement and construction management contract for the Impress
Phase 5 Natural Gas Liquids Extraction Plant for Canada Petroleum Company and
its partner TransCanada Pipelines Ltd.
Also, they were awarded a contract for the engineering, procurement and
construction management contract for $60,000,000 cogeneration plant in Fort
Saskatchewan, Alberta by TransAlta Energy Corporation and Air Liquide Canada
Inc.
In addition, they were awarded a $200,000,000 contract to supply engineering and
procurement services for world scale gas liquids extraction facilities and
fractionation facilities to be built near Joliet, Illinois by Aux Sable Liquid
Products LP.
The remaining value of all contracts with the above three customers reflected in
the March 31, 1999 backlog is $262,545,000.
FACTORS AFFECTING DEMAND
The equipment and services provided by Industrial Operations are somewhat
capital intensive, and the demand for its equipment and services is affected by
variations in the business cycles of their customers' industries and in the
overall economies in their regions. Variations in business cycles are affected
by the price of oil. Industrial Operations is also affected by legislative
issues such as environmental regulations and fluctuations in U.S. Government
funding patterns. Seasonal plant outages, business cycles and economic
conditions cause variations in availability of funds for investment and
maintenance at customers' facilities.
F. PATENTS AND LICENSES
McDermott has been issued many U.S. and foreign patents and it has many pending
patent applications. Patents and licenses have been acquired and licenses have
been granted to others when advantageous to McDermott. While McDermott regards
its patents and licenses to be of value, no single patent or license or group of
related patents or licenses is believed to be material in relation to its
business as a whole.
G. RESEARCH AND DEVELOPMENT ACTIVITIES
McDermott conducts its principal research and development activities at MTI's
research centers in Alliance, Ohio and Lynchburg, Virginia. McDermott also
conducts development activities at its various manufacturing plants and
engineering and design offices. McDermott spent approximately $28,064,000,
$37,928,000 and $50,749,000, on research and development activities during the
fiscal years ended March 31, 1999, 1998 and 1997, respectively. Contractual
arrangements for customer-sponsored research and development can vary on a case
by case basis, and includes contracts, cooperative agreements and grants.
Customers of McDermott paid for approximately $15,752,000, $22,803,000 and
$34,170,000, of the total spent on research and development expenses during
fiscal years 1999, 1998 and 1997, respectively. Research and development
activities were related to development and improvement of new and existing
products and equipment and conceptual and engineering evaluation for translation
into practical applications. MTI's multi-million dollar clean environment
development facility in Alliance, Ohio was constructed in response to present
and future emission pollution standards in the
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U.S. and worldwide. Approximately 125 employees were engaged full time in
research and development activities at March 31, 1999.
H. INSURANCE
McDermott maintains liability and property insurance against such risk and in
such amounts as it considers adequate. However, certain risks are either not
insurable or insurance is available only at rates which McDermott considers
uneconomical. These risks include war and confiscation of property in certain
areas of the world, pollution liability in excess of relatively low limits and,
in recent years, asbestos liability. Depending on competitive conditions and
other factors, McDermott endeavors to obtain contractual protection against
uninsured risks from its customers. However, there is no assurance that
insurance or contractual indemnity protection, when obtained, will be sufficient
or effective under all circumstances or against all hazards to which McDermott
may be subject.
McDermott's insurance policies do not insure against liability and property
damage losses resulting from nuclear accidents at reactor facilities of its
utility customers. To protect against liability for damage to a customer's
property, McDermott obtains waivers of subrogation from the customer and its
insurer and is generally named as an additional insured under the utility
customer's nuclear property policy. To protect against liability from claims
brought by third parties, McDermott is insured under the utility customer's
nuclear liability policies and has the benefit of the indemnity and limitation
of any applicable liability provision of the Price-Anderson Act, as amended (the
"Act"). The Act limits the public liability of manufacturers and operators of
licensed nuclear facilities and other parties who may be liable in respect of,
and indemnifies them against, all claims in excess of a certain amount. This
amount is determined by the sum of commercially available liability insurance
plus certain retrospective premium assessments payable by operators of
commercial nuclear reactors. For those sites where McDermott provides
environmental remediation services, it seeks the same protection from its
customers as it does for its other nuclear activities.
Although McDermott does not own or operate any nuclear reactors, it has coverage
under commercially available nuclear liability and property insurance for three
of its four facilities that are licensed to possess special nuclear materials.
The fourth facility operates primarily as a conventional research center. This
facility is licensed to possess special nuclear material and has a small and
limited amount of special nuclear material on the premises. Two of the four
owned facilities are located at MTI's Lynchburg, Virginia site. These
facilities are insured under a nuclear liability policy that also insures the
facility of Framatome Cogema Fuel Company ("FCFC"), formerly B&W Fuel Company,
that was sold during fiscal year 1993. All three licensed facilities share the
same nuclear liability insurance limit, as the commercial insurer would not
allow FCFC to obtain a separate nuclear liability insurance policy. Due to the
type or quantity of nuclear material present under contract with the U.S.
Government, two facilities in Lynchburg have statutory indemnity and limitation
of liability as provided under the Act. In addition, contracts to manufacture
and supply nuclear fuel or nuclear components to the U.S. Government contain
statutory indemnity clauses, whereby the U.S. Government has assumed the risks
of public liability claims related to nuclear incidents.
JRM's offshore construction business is subject to the usual risks of operations
at sea. JRM has additional exposure because it uses expensive construction
equipment, sometimes under extreme weather conditions, often in remote areas of
the world. In many cases, JRM also operates on or in proximity to existing
offshore facilities. These facilities are subject to damage which could result
in the escape of oil and gas into the sea.
McDermott's insurance coverage for products liability and employers' liability
claims is subject to varying insurance limits that are dependent upon the year
involved. B&W has agreements with the majority of its principal insurers
concerning the method of allocation of products liability asbestos claim
payments to the years of coverage. Pursuant to those agreements, B&W negotiates
and settles these claims and bills these amounts to the appropriate insurers.
McDermott has recognized a provision to the extent that recovery of these
amounts from the insurers is not probable. McDermott's estimates of future
asbestos products liability and probable insurance recoveries are based on prior
history and management's best estimate of cost based on all available
information. However, future costs to settle claims, as well as the number of
claims, could be adversely
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affected by changes in judicial rulings and influences beyond McDermott's
control. Accordingly, changes in the estimates of future asbestos products
liability and insurance recoverables and differences between the proportion of
any additional asbestos products liabilities covered by insurance, and that
experienced in the past could result in material adjustments to the results of
operations for any fiscal quarter or year, and the ultimate loss may differ
materially from amounts provided in the consolidated financial statements.
MII has two wholly-owned insurance subsidiaries that provide general and
automotive liability, builders' risk within certain limits, marine hull, and
workers' compensation insurance to the McDermott group of companies. These
insurance subsidiaries have not provided significant amounts of insurance to
unrelated parties.
I. EMPLOYEES
At March 31, 1999, McDermott employed, under its direct supervision,
approximately 20,350 persons compared with 24,700 at March 31, 1998.
Approximately 7,000 employees were members of labor unions at March 31, 1999 as
compared with approximately 6,400 at March 31, 1998. After nine months of
negotiations between BWXT and one of its unions, BWXT temporarily discontinued
operations for their union workforce on April 23, 1999 due to the union's
refusal to vote on a new labor contract. Negotiations continued and the union
ratified BWXT's final offer on May 9, 1999 and the union workers returned to
work. The majority of B&W's and BWXT's manufacturing facilities operate under
union contracts which customarily are renewed every two to three years. One
union contract covering 200 hourly workers at one of B&W's Ohio facilities
expired on April 24, 1999. The negotiating groups are operating under a day-to-
day agreement and management expects to renew the contract without incident.
During the next twelve months, three union contracts covering approximately 100
B&W hourly workers will expire. Management expects to renew the contracts
without incident. McDermott considers its relationship with its employees to be
satisfactory.
J. ENVIRONMENTAL REGULATIONS AND MATTERS
McDermott is subject to the existing and evolving legal and regulatory standards
relating to the environment. These standards include the Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act, and the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA"). They also include any similar laws that provide for responses to
and liability for releases of hazardous substances into the environment, and
other federal laws, each as amended. These standards also include similar
foreign, state or local counterparts to these federal laws, which regulate air
emissions, water discharges, hazardous substances and wastes, and require public
disclosure related to the use of various hazardous substances.
McDermott's operations are also governed by laws and regulations relating to
workplace safety and worker health, primarily the Occupational Safety and Health
Act and regulations promulgated thereunder. McDermott believes that its
facilities are in substantial compliance with current regulatory standards.
McDermott's compliance with U.S. federal, state and local environmental control
and protection regulations necessitated capital expenditures of $413,000 in
fiscal year 1999. Management expects to spend another $3,046,000 on such
capital expenditures over the next five years. Management cannot predict all of
the environmental requirements or circumstances that will exist in the future,
but anticipates that environmental control and protection standards will become
increasingly stringent and costly. Complying with existing environmental
regulations resulted in pretax charges of approximately $13,299,000 in fiscal
year 1999.
McDermott has been identified as a potentially responsible party at various
cleanup sites under CERCLA. McDermott has not been determined to be a major
contributor of wastes to these sites. However, each potentially responsible
party or contributor may face assertions of joint and several liability.
Generally, however, a final allocation of costs is made based on relative
contribution of wastes to each site. Based on its relative contribution of
waste to each site, McDermott's share of the ultimate liability for the various
sites is not expected to have a material adverse effect on McDermott's
consolidated financial position, results of operations or liquidity in any given
year.
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Remediation projects have been or may be undertaken at certain of McDermott's
current and former plant sites. During fiscal year 1995, B&W completed, subject
to Nuclear Regulatory Commission ("NRC") certification, the decommissioning and
decontamination of its former nuclear fuel processing plant at Apollo,
Pennsylvania. All fabrication and support buildings have been removed, and all
contaminated soil has been shipped to authorized disposal facilities. In fiscal
year 1997, B&W was notified by the NRC that the Apollo plant site had been
released for unrestricted use. The Apollo plant site is the first major nuclear
facility in the U.S. to achieve "green-field" status after remediation, and will
now be removed from the NRC's Site Decommissioning Management Plan. The nuclear
license for the plant was terminated.
During fiscal year 1995, management decided to close B&W's nuclear manufacturing
facilities in Parks Township, Armstrong County, Pennsylvania (the "Parks
Facilities"). Decontamination is proceeding as permitted by the existing NRC
license. A decommissioning plan was submitted to the NRC for review and
approval during January 1996. The facilities were transferred to BWXT in fiscal
year 1998. BWXT's management reached an agreement with the NRC in fiscal year
1999 on a plan that provides for the completion of facilities dismantlement and
soil restoration by 2001 and license termination in 2002. BWXT's management
expects to request approval from the NRC to release the site for unrestricted
use at that time. At March 31, 1999, the remaining provision for the
decontamination, decommissioning and the closing of these facilities was
$15,811,000.
The Department of Environmental Protection of the Commonwealth of Pennsylvania
("PADEP"), by letter dated March 19, 1994, advised B&W that it would seek
monetary sanctions, and remedial and monitoring relief, related to the Parks
Facilities. The relief sought related to potential groundwater contamination of
the previous operations of the facilities. These facilities are now a part of
BWXT. PADEP has advised BWXT that it does not intend to assess any monetary
sanctions provided that BWXT continues its remediation program of the Parks
Facilities.
At March 31, 1999 and 1998, McDermott had total environmental reserves
(including provisions for the facilities discussed above), of $31,568,000 and
$46,164,000,respectively. Of the total environmental reserves at March 31, 1999
and 1998, $19,835,000 and $9,934,000, respectively, were included in current
liabilities. Estimated recoveries of these costs are included in environmental
and products liability recoverable at March 31, 1999. Inherent in the estimates
of such reserves and recoveries are expected levels of contamination,
decommissioning costs and recoverability from other parties, which may vary
significantly as decommissioning activities progress. Accordingly, changes in
estimates could result in a material adjustment to operating results, and the
ultimate loss may differ materially from amounts provided in the consolidated
financial statements.
McDermott performs significant amounts of work for the U.S. Government under
both prime contracts and subcontracts and operates certain facilities that are
licensed to possess and process special nuclear materials. McDermott is thus
subject to continuing reviews by governmental agencies, including the
Environmental Protection Agency and the NRC.
Decommissioning regulations promulgated by the NRC require BWXT and MTI to
provide financial assurance that it will be able to pay the expected cost of
decommissioning its facilities at the end of their service lives. BWXT and MTI
will continue to provide financial assurance of $25,103,000 during fiscal year
2000 by issuing letters of credit for the ultimate decommissioning of all its
licensed facilities, except one. This facility, which represents the largest
portion of BWXT's eventual decommissioning costs, has provisions in its
government contracts pursuant to which all of its decommissioning costs and
financial assurance obligations are covered by the U.S. Government (DOE).
An agreement between the NRC and the State of Ohio to transfer regulatory
authority for MTI/NRC licenses for byproduct and source nuclear material is
anticipated to occur in July 1999. In conjunction with the transfer of this
regulatory authority and upon notification by NRC of the effective date of
agreement, MTI will reissue decommissioning financial assurance instruments
naming the State of Ohio as the beneficiary. No other provisions of the
instruments will be modified at this time.
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ITEM 3. LEGAL PROCEEDINGS
In March 1997, MII and JRM, with the help of outside counsel, began an
investigation into allegations of wrongdoing by a limited number of former
employees of MII and JRM and others. The allegations concerned the heavy-lift
business of JRM's HeereMac joint venture ("HeereMac") with Heerema Offshore
Construction Group, Inc. ("Heerema"). Upon becoming aware of these allegations,
MII and JRM notified authorities, including the Antitrust Division of the U.S.
Department of Justice and the European Commission. As a result of MII's and
JRM's prompt disclosure of the allegations, both companies and their officers,
directors and employees at the time of the disclosure were granted immunity from
criminal prosecution by the Department of Justice for any anti-competitive acts
involving worldwide heavy-lift activities.
After receiving the allegations, JRM initiated action to terminate its interest
in HeereMac, and, on December 19, 1997, JRM's co-venturer in the joint venture,
Heerema, acquired JRM's interest in exchange for cash and title to several
pieces of equipment. On December 21, 1997, HeereMac and one of its employees
pled guilty to criminal charges by the Department of Justice that they and
others had participated in a conspiracy to rig bids in connection with the
heavy-lift business of HeereMac in the Gulf of Mexico, North Sea and Far East.
HeereMac and the HeereMac employee were fined $49,000,000 and $100,000,
respectively. As part of the plea, both HeereMac and certain employees of
HeereMac agreed to cooperate fully with the Department of Justice investigation.
Neither MII, JRM nor any of their officers, directors or employees was a party
to those proceedings.
MII and JRM have cooperated and are continuing to cooperate with the Department
of Justice in its investigation. The Department of Justice also has requested
additional information from the companies relating to possible anti-competitive
activity in the marine construction business of McDermott-ETPM East, Inc., one
of the operating companies within JRM's former McDermott-ETPM joint venture with
ETPM S.A., a French company. In connection with the termination of the
McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of
McDermott-ETPM East, Inc., which has been renamed J. Ray McDermott Middle East,
Inc.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and certain related entities (the "Phillips Plaintiffs") filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema, certain Heerema affiliates, and others alleging that the defendants
engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman
Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code,
engaged in fraudulent activity and tortiously interfered with the plaintiffs'
businesses in connection with certain offshore transportation and installation
projects in the Gulf of Mexico, North Sea and Far East (the "Phillips
Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually
and on behalf of certain of its ventures and its participants, filed a similar
lawsuit in the same court. In addition to seeking injunctive relief, actual
damages and attorneys' fees, the plaintiffs in the Phillips Litigation have
requested punitive as well as treble damages. In January 1999, the court
dismissed without prejudice, due to the court's lack of subject matter
jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries
sustained on any foreign projects.
In June 1998, Shell Offshore, Inc. and certain related entities also filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema and others alleging that the defendants engaged in anti-competitive acts
in violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation").
Subsequent thereto, Amoco Production Company and B.P. Exploration & Oil, Inc.;
Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco
Exploration and Production Inc. and certain of its affiliates; Elf Exploration
UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc. and The Louisiana
Land & Exploration Company; Marathon Oil Company and certain of its affiliates;
VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline Company, L.L.C.
and Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas
Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside
Energy, Ltd; and Saga Petroleum, S.A. intervened (acting for themselves and, if
applicable, on behalf of their respective co-venturers and for whom
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they operate) as plaintiffs in the Shell Litigation. Also, in December 1998,
Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and on
behalf of their respective co-venturers, filed similar lawsuits in the same
court, which lawsuits were consolidated with the Shell Litigation. In addition
to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs
in the Shell Lawsuit request treble damages.
MII and JRM are also cooperating with a Securities and Exchange Commission
("SEC") investigation into whether the companies may have violated U.S.
securities laws in connection with, but not limited to, the matters described
above. MII and JRM are subject to a judicial order entered in 1976, with the
consent of MI (which at that time was the parent of the McDermott group of
companies), pursuant to an SEC complaint (the "Consent Decree"). The Consent
Decree prohibits the companies from making false entries in their books,
maintaining secret or unrecorded funds or using corporate funds for unlawful
purposes. Violations of the Consent Decree could result in substantial civil
and/or criminal penalties to the companies.
As a result of the initial allegations of wrongdoing in March 1997, both MII and
JRM formed and continue to maintain special committees of their Board of
Directors to monitor and oversee the companies' investigation into all of these
matters.
It is not possible to predict the ultimate outcome of the Department of Justice
investigation, the SEC investigation, the companies' internal investigation, the
above-referenced lawsuits, or any actions that may be taken by others as a
result of HeereMac's guilty plea or otherwise. However, these matters could
result in civil and criminal liability and have a material adverse effect on
McDermott's consolidated financial position and results of operations.
B&W and Atlantic Richfield Company ("ARCO")are defendants in lawsuits filed by
Donald F. Hall, Mary Ann Hall and others in the United States District Court for
the Western District of Pennsylvania involving over 120 separate cases relating
to the operation of two former nuclear fuel processing facilities located in
Pennsylvania (the "Hall Litigation"), alleging, among other things, that they
suffered personal injury and other damages as a result of radioactive emissions
from these facilities. In September 1998, a jury found B&W and ARCO liable to
the plaintiffs in the first eight cases brought to trial, awarding $36,700,000
in compensatory damages. B&W believes that adequate insurance is available to
meet any possible liability in this matter. However, the jury verdict is not
final, and a number of post trial lawsuits are pending contesting this
contingency. There is a controversy between B&W and its insurer as to the
amount of insurance coverage under the insurance policies covering these
facilities available for this award, and all other claims. B&W has filed an
action seeking a judicial determination of this matter, which is currently
pending in a Pennsylvania court. Management believes that the award and all
other claims will be resolved within the limits and coverage of such insurance
policies; however, no assurance on insurance coverage or financial impact if
limits of coverage are exceeded can be given. In connection with the foregoing,
B&W settled all pending and future punitive damage claims represented by the
plaintiffs' lawyers in the Hall Litigation for $8,000,000 and seeks
reimbursement of this amount from other parties.
Two purported class actions have been filed in the Civil District Court for the
Parish of Orleans, State of Louisiana, by alleged public shareholders of JRM,
challenging MII's initial proposal to acquire the publicly traded shares of JRM
Common Stock in a stock for stock merger. On May 7, 1999, MII and JRM announced
that they had entered into a merger agreement pursuant to which MII
will acquire all of such publicly traded shares of JRM Common Stock for $35.62
per share pursuant to a cash tender offer followed by a second step merger. On
the same day, the Court entered an order consolidating the two actions under the
caption In re J. Ray McDermott Shareholder Litigation. There have been no
further proceedings in either of the actions to date. JRM and MII believe that
the actions are without merit and intend to contest these suits vigorously.
Additionally, due to the nature of its business, McDermott is, from time to
time, involved in routine litigation related to its business activities. It is
management's opinion that none of this routine litigation will have a material
adverse effect on McDermott's consolidated financial position or results of
operations.
See Item 1H and Note 11 to the consolidated financial statements regarding
McDermott's potential liability for non-employee products liability asbestos
claims.
16
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security holders, through the solicitation of proxies
or otherwise.
17
<PAGE>
P A R T I
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MII's Common Stock is traded on the New York Stock Exchange. High and low stock
prices and dividends declared for the fiscal years ended March 31, 1998 and 1999
were as follows:
FISCAL YEAR 1998
<TABLE>
<CAPTION>
SALES PRICE CASH
----------------------- DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- ------------------ ----------- --------- ---------
<S> <C> <C> <C>
June 30, 1997 $ 29 - 5/8 $18 $0.05
September 30, 1997 36 - 1/2 28 - 1/2 0.05
December 31, 1997 40 - 1/8 28 - 7/8 0.05
March 31, 1998 41 - 15/16 29 - 1/4 0.05
</TABLE>
FISCAL YEAR 1999
<TABLE>
<CAPTION>
SALES PRICE CASH
----------------------- DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
- ------------------ ----------- --------- ---------
<S> <C> <C> <C>
June 30, 1998 $43 - 15/16 $ 34 - 3/8 $0.05
September 30, 1998 35 19 - 1/4 0.05
December 31, 1998 32 - 5/16 21 - 31/32 0.05
March 31, 1999 27 19 - 1/4 0.05
</TABLE>
As of March 31, 1999, the approximate number of record holders of Common Stock
was 4,609.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED MARCH 31,
1999 1998 1997 1996 1995
---------- ---------- ----------- ---------- ----------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues $3,149,985 $3,674,635 $3,150,850 $3,244,318 $3,043,680
Income (Loss) before Extraordinary
Item and Cumulative Effect of
Accounting Change $ 192,081 $ 215,690 $ (206,105) $ 20,625 $ 10,876
Net Income (Loss) $ 153,362 $ 215,690 $ (206,105) $ 20,625 $ 9,111
Basic Earnings (Loss) per Common Share:
Income (Loss) before Extraordinary
Item and Cumulative Effect of
Accounting Change $ 3.25 $ 3.74 $ (3.95) $ 0.23 $ 0.05
Net Income (Loss) $ 2.60 $ 3.74 $ (3.95) $ 0.23 $ 0.02
Diluted Earnings (Loss) per Common Share:
Income (Loss) before Extraordinary
Item and Cumulative Effect of
Accounting Change $ 3.16 $ 3.48 $ (3.95) $ 0.23 $ 0.05
Net Income (Loss) $ 2.53 $ 3.48 $ (3.95) $ 0.23 $ 0.02
Total Assets $4,305,520 $4,501,130 $4,599,482 $4,387,251 $4,751,670
Long-Term Debt $ 323,774 $ 598,182 $ 667,174 $ 576,256 $ 579,101
Subsidiary's Redeemable
Preferred Stocks - 155,358 170,983 173,301 179,251
---------------------------------------------------------------
Total $ 323,774 $ 753,540 $ 838,157 $ 749,557 $ 758,352
Cash Dividends per Common Share $ 0.20 $ 0.20 $ 0.60 $ 1.00 $ 1.00
</TABLE>
See Note 18 to the consolidated financial statements for significant items
included in fiscal year 1999 and 1998 results.
Fiscal year 1997 results include:
. asset impairment losses of $54,642,000,
. gains on asset disposals of $72,121,000, including the realization of
$12,271,000 of the deferred gain on the sale of major marine vessels to
HeereMac,
. favorable workers' compensation cost and other insurance adjustments of
$21,441,000,
. a provision of $72,400,000 for estimated future non-employee products
asbestos claims,
. write-downs of equity investments totaling $25,875,000,
. the write-down of certain claims of $12,506,000 for which recovery was not
probable, and
. a $10,285,000 provision related to employee severance costs.
Fiscal year 1996 results include:
. an equity income gain of $30,612,000 resulting from the sale of two power
purchase contracts,
. favorable workers' compensation cost and other insurance adjustments of
$24,640,000,
. a gain of $34,788,000 resulting from the sale of McDermott's interest in
Caspian Sea oil fields, and
. the write-off of an insurance claim of $12,600,000 due to an unfavorable
arbitration ruling related to the recovery of cost incurred for corrective
action in certain utility and industrial installations.
19
<PAGE>
Fiscal year 1995 results include:
. a $46,489,000 charge for the decontamination, decommissioning and closing of
certain nuclear manufacturing facilities and the closing of a manufacturing
facility,
. a $14,478,000 charge for the reduction of estimated products liability
asbestos claims recoveries from insurers, and
. a $26,300,000 benefit for a reduction in accrued interest expense due to the
settlement of outstanding tax issues.
See Note 3 to the consolidated financial statements regarding the change to the
cost method of accounting for McDermott's investment in the HeereMac joint
venture in fiscal year 1997. Equity in income of HeereMac was $1,083,000 and
$6,244,000 in fiscal years 1996 and 1995, respectively. See Note 3 regarding
the April 3, 1998 termination of the McDermott-ETPM joint venture. Fiscal year
1995 includes the cumulative effect of the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 112. See Note 11 regarding the uncertainty
as to the ultimate loss relating to products liability asbestos claims and the
results of the ongoing investigations into possible anti-competitive practices
by MII and JRM, and related civil lawsuits.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Revenues of the Marine Construction Services segment are largely a function of
the level of oil and gas development activity in the world's major hydrocarbon
producing regions. Consequently, revenues reflect the variability associated
with the timing of significant development projects. As a result of continuing
lower oil prices, Marine Construction Services' customers have significantly
reduced capital expenditures for exploration and production spending, and
backlog has declined over $850,000,000 since the beginning of the fiscal year.
At the current backlog level, management expects revenues in fiscal year 2000 to
be as much as forty percent lower than in the current fiscal year, and
profitability to be lower because of the volume decline. Economic and political
instability in Asia have also had an adverse effect on the timing of exploration
and production spending.
Revenues of the Power Generation Systems segment are largely a function of
capital spending by the electric power generation industry. In the electric
power generation industry, persistent economic growth in the United States has
brought the supply of electricity into approximate balance with energy demand,
except at periods of peak demand. However, electric power producers have
generally chosen to meet these peaks with new combustion turbines rather than
with base-load capacity. New emissions requirements have also prompted some
customers to place orders for environmental equipment. Demand for electrical
power generation industry services and replacement nuclear steam generators
continues at strong levels. International markets remain unsettled, and
economic and political instability in Asia have caused projects in these
emerging markets to be delayed, suspended or cancelled. In the process
industry, demand for services remains strong, and the pulp and paper industry
has begun to issue inquiries relating to the refurbishment or replacement of
existing recovery boilers. Management expects the fiscal year 2000 operating
activity of this segment to be about the same as in the current fiscal year.
Revenues of the Government Operations segment are largely a function of capital
spending by the U.S. Government. Management does not expect this segment to
experience any significant growth because of reductions in the defense budget
over the past several years; however, management expects the segment to remain
relatively constant since it is the sole-source provider of nuclear fuel
assemblies and nuclear reactor components to the U.S. Government. Management
expects the fiscal year 2000 operating activity of this segment to be about the
same as in the current fiscal year.
Revenues of Industrial Operations are affected by variations in the business
cycles in the customers' industries and the overall economy. Legislative issues
such as environmental regulations and fluctuations in U.S. Government funding
patterns also affect Industrial Operations. Backlog for Industrial Operations
has improved significantly from a year ago, primarily because of significant new
contracts in engineering and construction. Management expects the fiscal year
2000 operating activity of this segment to be about the same as in the current
fiscal year.
In general, all of McDermott's business segments are capital intensive
businesses that rely on large contracts for a substantial amount of their
revenues.
A significant portion of McDermott's revenues and operating results are derived
from its foreign operations. As a result, McDermott's operations and financial
results are affected by international factors, such as changes in foreign
currency exchange rates. McDermott attempts to minimize its exposure to changes
in foreign currency exchange rates by matching foreign currency contract
receipts with like foreign currency disbursements. To the extent that it is
unable to match the foreign currency receipts and disbursements related to its
contracts, McDermott enters into forward exchange contracts to reduce the impact
of foreign exchange rate movements on operating results.
21
<PAGE>
Statements made herein which express a belief, expectation or intention, as well
as those that are not historical fact, are forward looking. They involve a
number of risks and uncertainties that may cause actual results to differ
materially from such forward-looking statements. These risks and uncertainties
include:
. decisions about offshore developments to be made by oil and gas companies,
. the deregulation of the U.S. energy market,
. governmental regulation and the continued funding of McDermott's contracts
with U.S. government agencies,
. estimates for pending and future non-employee asbestos claims,
. the highly competitive nature of McDermott's businesses,
. operating risks associated with the marine construction services business,
. economic and political conditions in Asia,
. the results of the ongoing investigation by MII and JRM and the U.S.
Department of Justice into possible anti-competitive practices by MII and
JRM, and related civil lawsuits, and
. the results of the ongoing SEC investigation into whether McDermott may have
violated U.S. securities laws in connection with such anti-competitive
practices and other matters.
FISCAL YEAR 1999 VS FISCAL YEAR 1998
Marine Construction Services
- ----------------------------
Revenues decreased $575,916,000 to $1,279,570,000, primarily due to lower volume
in Europe as a result of the withdrawal from the traditional European
engineering markets and from lower volume in essentially all activities in North
America, the Middle East and in worldwide engineering. These decreases were
partially offset by higher volume in the Far East.
Segment operating income increased $19,360,000 to $126,482,000, primarily due to
higher volume and margins in all activities in the Far East and a favorable
settlement of contract claims in that area. There were also higher margins in
Middle East fabrication operations and lower general and administrative
expenses. In addition, prior period results include amortization of OPI
goodwill of $16,318,000. These increases were partially offset by lower volume
in essentially all activities in North America and the Middle East and in
worldwide engineering. There were also higher net operating expenses and a
charge to restructure foreign joint ventures.
Gain (loss) on asset disposals and impairments--net was a gain of $18,620,000
compared to a loss of $40,119,000 in the prior period. This was primarily due
to gains recognized from the termination of the McDermott-ETPM joint venture and
the sale of three Gulf of Mexico vessels, partially offset by impairment losses
on fabrication facilities and goodwill associated with worldwide engineering and
a Mexican shipyard. The loss in the prior period was primarily due to the
write-off of $262,901,000 of goodwill associated with the acquisition of OPI,
partially offset by the $224,472,000 gain recognized from the termination of the
HeereMac joint venture.
Income from investees decreased $59,566,000 to $10,670,000, primarily due to a
$61,637,000 distribution of earnings related to the termination of the HeereMac
joint venture in the prior period. There were also lower operating results from
Brown & Root McDermott Fabricators Limited and a joint venture in Mexico. These
decreases were partially offset by a gain on the sale of assets in a Malaysian
joint venture. In addition, losses were recorded by McDermott-ETPM West, Inc.
in the prior period.
Backlog for the Marine Construction Services segment at March 31, 1999 and 1998
was $406,183,000 and $1,266,310,000, respectively. Backlog decreased primarily
as a result of lower oil prices. In addition, backlog declined as a result of
JRM's withdrawal from traditional engineering markets. Finally, backlog
decreased as a result of sluggish economic conditions in the Middle and Far East
and the political instability in Asia.
Power Generation Systems
- ------------------------
Revenues decreased $76,504,000 to $1,266,310,000, primarily due to lower
revenues from fabrication and erection of fossil fuel steam and environmental
control systems, replacement nuclear steam generators and
22
<PAGE>
industrial boilers. These decreases were partially offset by higher revenues
from repair and alteration of existing fossil fuel steam systems and plant
enhancement projects.
Segment operating income increased $7,887,000 to $90,318,000, primarily due to
higher volume and margins from repair and alteration of existing fossil fuel
steam systems and operation and maintenance contracts. There were also higher
margins from industrial boilers, higher volume from plant enhancement projects
and lower net operating expenses. These increases were partially offset by
lower volume and margins from fabrication and erection of fossil fuel steam and
environmental control systems, lower volume from replacement nuclear steam
generators and higher general and administrative expenses.
Gain (loss) on asset disposals and impairments--net increased $10,551,000 to a
gain of $4,465,000 compared to a loss of $6,086,000 in the prior period. The
gain was primarily due to gains recognized from the sale of a domestic
manufacturing facility. The loss in the prior period was primarily due to asset
impairments in this facility.
Income (loss) from investees decreased $12,274,000 from income of $7,541,000 to
a loss of $4,733,000, primarily due to lower operating results from a foreign
joint venture located in Egypt and the write-off of notes and accounts
receivable from a foreign joint venture located in Turkey.
Backlog for the Power Generation Systems segment at March 31, 1999 and 1998 was
$905,283,000 and $1,070,351,000, respectively. Backlog has been adversely
impacted by suspensions of power generation projects in Southeast Asia and
Pakistan. Also, the U.S. market for industrial and utility boilers remains
weak. However, the U.S. market for services and replacement nuclear steam
generators is expected to remain strong and to make significant contributions to
operating income into the future.
Government Operations
- ---------------------
Revenues increased $12,187,000 to $382,706,000, primarily due to higher revenues
from management and operation contracts for U.S. Government-owned facilities and
from nuclear fuel assemblies and reactor components for the U.S. Government.
These increases were partially offset by lower revenues from other government
operations, commercial operations and commercial nuclear environmental services.
Segment operating income increased $3,537,000 to $39,353,000, primarily due to a
settlement relating to environmental restoration costs. In addition, there was
higher volume from management and operation contracts for U.S. Government-owned
facilities and lower general and administrative expenses. These increases were
partially offset by lower margins from commercial nuclear environmental
services and lower volume from commercial operations and other government
operations. In addition, there was an $8,000,000 settlement of punitive damage
claims relating to a civil suit associated with a Pennsylvania facility formerly
operated by B&W.
Backlog for the Government Operations segment at March 31, 1999 and 1998 was
$860,981,000 and $810,230,000, respectively. At March 31, 1999, this segment's
backlog with the U.S. Government was $760,202,000, of which $12,023,000 had not
been funded.
Industrial Operations
- ---------------------
Revenues increased $89,733,000 to $427,520,000, primarily due to higher revenues
from engineering activities in Canadian operations. This increase was partially
offset by lower revenues from domestic engineering and construction activities
and from the disposition of a non-core business.
Segment operating income increased $12,227,000 to $16,906,000, primarily due to
higher volume from engineering activities in Canadian operations and higher
margins from air-cooled heat exchangers. There were also losses in a non-core
business disposed of in the prior period. These increases were partially offset
by higher general and administrative expenses.
23
<PAGE>
Gain (loss) on asset disposals and impairments-net decreased $128,473,000 from
income of $128,239,000 to a loss of $234,000. The prior period gains were
primarily due to the sale of McDermott's interest in Sakhalin Energy Investment
Company Ltd. and Universal Fabricators Incorporated.
Income (loss) from investees decreased by $5,022,000 from income of $3,376,000
to a loss of $1,646,000, primarily due to lower operating results from a
domestic joint venture in Colorado and the shutdown of two foreign joint
ventures in the former Soviet Union.
Backlog for Industrial Operations at March 31, 1999 and 1998 was $400,649,000
and $262,339,000, respectively. Backlog increased because of significant new
bookings in Engineering and Construction.
Other Unallocated Items
- -----------------------
Other unallocated items increased $45,719,000 to $51,005,000, primarily due to
provisions for estimated future non-employee products liability asbestos claims,
higher legal expenses and higher general and administrative expenses. These
decreases were partially offset by lower employee benefit expenses.
Other Income Statement Items
- ----------------------------
Interest income increased $35,430,000 to $97,965,000, primarily due to increases
in investments in government obligations and other debt securities and interest
income on domestic tax refunds. These increases were partially offset by a
decrease in interest income due to the collection of the promissory note
received from the sale of the derrick barges 101 and 102.
Interest expense decreased $18,192,000 to $63,262,000, primarily due to changes
in debt obligations and interest rates prevailing thereon.
Other-net decreased $22,052,000 from income of $3,253,000 to expense of
$18,799,000, primarily due to a loss of $45,535,000 for insolvent insurers
providing coverage for estimated future non-employee products liability asbestos
claims, partially offset by a net gain on the settlement and curtailment of
postretirement benefit plans. (See Note 6 to the consolidated financial
statements.)
The provision for (benefit from) income taxes decreased $80,920,000 from a
provision of $76,117,000 to a benefit of $4,803,000, while income before
provision for (benefit from) income taxes and extraordinary item decreased
$104,529,000 to $187,278,000. The decrease in the provision for income taxes
was primarily the result of a benefit of $25,456,000 recorded as a result of
the decrease in the valuation allowance for deferred taxes, favorable tax
settlements totaling $30,429,000 of prior years' disputed items in various
jurisdictions and a decrease in income. McDermott operates in many different
tax jurisdictions. Within these jurisdictions, tax provisions vary because of
nominal rates, allowability of deductions, credits and other benefits, and tax
bases (for example, revenues versus income). These variances, along with
variances in the mix of income within jurisdictions, are responsible for shifts
in the effective tax rate.
FISCAL YEAR 1998 VS FISCAL YEAR 1997
Marine Construction Services
- ----------------------------
Revenues increased $447,017,000 to $1,855,486,000, primarily due to higher
volume in virtually all activities in all operating areas, except in offshore
activities in the Far East, engineering activities in the Middle East and
engineering and procurement activities in Europe and West Africa.
Segment operating income increased $96,303,000 to $107,122,000. Virtually all
activities in all operating areas, except the Far East and Engineering,
reflected this increase.
Gain (loss) on asset disposals and impairments - net decreased $69,140,000 from
a gain of $29,021,000 to a loss of $40,119,000, primarily due to the impairment
loss of $262,901,000 relating to goodwill associated with the
24
<PAGE>
acquisition of OPI. Also contributing to the decrease were: prior year gains
from the sale of the derrick barges 15 and 21; participation in a gain from the
sale of the derrick barge 100 by the HeereMac joint venture; and the realization
of a portion of the deferred gain resulting from the sale of the derrick barges
101 and 102. These decreases were partially offset by the $224,472,000 gain
recognized from the termination of the HeereMac joint venture.
Income (loss) from investees increased $78,069,000 from a loss of $7,833,000 to
income of $70,236,000, primarily due to a $61,637,000 distribution of earnings
related to the termination of the HeereMac joint venture. In addition, the loss
from the McDermott ETPM-West, Inc. joint venture decreased $9,248,000 to
$7,584,000 in fiscal year 1998.
See Note 3 to the consolidated financial statements regarding the April 3, 1998
termination of the McDermott-ETPM joint venture. See Note 17 to the
consolidated financial statements regarding the sale and intention to exit
certain European operations.
Power Generation Systems
- ------------------------
Revenues increased $157,291,000 to $1,142,721,000, primarily due to higher
revenues from fabrication and erection of fossil fuel steam and environmental
control systems, plant enhancement projects, boiler cleaning equipment, and
engineering, procurement and construction of cogeneration plants. These
increases were partially offset by lower revenues from replacement nuclear steam
generators.
Segment operating income (loss) increased $117,015,000 from a loss of
$34,584,000 to income of $82,431,000, primarily due to higher volume and margins
from fabrication and erection of fossil fuel steam and environmental control
systems, plant enhancement projects, boiler cleaning equipment and engineering,
procurement and construction of cogeneration plants. In addition, there were
higher margins from replacement nuclear steam generators and replacement parts
and lower selling and general and administrative expenses.
Loss on asset disposals and impairments - net decreased $13,119,000 to
$6,086,000, primarily due to the write-down of an equity investment in a
domestic cogeneration joint venture and an asset impairment loss on a domestic
manufacturing facility in the prior year.
Income (loss) from investees increased $7,888,000 from a loss of $347,000 to
income of $7,541,000. This represents the results of approximately twelve joint
ventures. The increase is primarily due to the favorable operating results from
three foreign joint ventures and a provision for a loss on a Canadian joint
venture in the prior year. This increase was partially offset by a favorable
termination agreement of a domestic joint venture in the prior year.
Government Operations
- ---------------------
Revenues decreased $2,532,000 to $370,519,000, primarily due to lower revenues
from nuclear fuel assemblies and reactor components for the U.S. Government,
commercial nuclear environmental services and other government-related
operations. These decreases were partially offset by higher revenues from
management and operation contracts for U.S. Government owned facilities.
Segment operating income increased $3,358,000 to $35,816,000, primarily due to
higher volume from management and operation contracts for U.S. Government-owned
facilities and higher margins from nuclear fuel assemblies and reactor
components for the U.S. Government and other government-related operations.
These increases were partially offset by lower volume and margins from
commercial nuclear environmental services and higher operating expenses.
Industrial Operations
- ---------------------
Revenues decreased $120,329,000 to $337,787,000, primarily due to lower revenues
from engineering and construction activities in Canadian operations and the
disposition of non-core businesses (domestic shipyard
25
<PAGE>
and ordnance operations). These decreases were partially offset by higher
revenues from air-cooled heat exchangers and plant maintenance activities in
Canadian operations.
Segment operating income (loss) increased $35,320,000 from a loss of $30,641,000
to income of $4,679,000. This was primarily due to cost overruns on an
engineering and construction contract in the prior period, higher volume on air-
cooled heat exchangers, lower selling and general and administrative expenses
and prior year losses in non-core businesses (domestic shipyard and ordnance
operations).
Gain (loss) on asset disposals and impairments-net increased $140,097,000 from a
loss of $11,858,000 to a gain of $128,239,000, primarily due to the sale of
McDermott's interest in Sakhalin Energy Investment Company Ltd. and Universal
Fabricators Incorporated in the current year and an asset impairment in the
prior year.
Income from investees increased $2,639,000 to $3,376,000, primarily due to
higher operating results from two foreign joint ventures.
Other Unallocated Items
- -----------------------
Other Unallocated Items decreased $67,096,000 to expense of $5,286,000,
primarily due to provisions for estimated future non-employee products liability
asbestos claims and contract claims in the prior year.
General Corporate Expenses - Net
- --------------------------------
General Corporate Expenses - Net decreased $10,205,000 to $37,251,000, primarily
due to staff reductions, other economy measures, and certain one-time costs
incurred in the prior period, which was partially offset by gains on the sale of
certain corporate aircraft in the prior period.
Other Income Statement Items
- ----------------------------
Interest income increased $15,793,000 to $62,535,000, primarily due to increases
in investments in government obligations and other debt securities.
Interest expense decreased $13,646,000 to $81,454,000, primarily due to changes
in debt obligations and interest rates prevailing thereon.
Minority interest expense increased $42,422,000 to $47,984,000, primarily due to
minority shareholder participation in the improved operating results of JRM and
MSCL.
Other-net increased $22,785,000 from expense of $19,532,000 to income of
$3,253,000. This increase was primarily due to bank fees and discounts on the
sale of certain accounts receivable and a loss of $19,446,000 for insolvent
insurers providing coverage for estimated future non-employee asbestos claims,
both in the prior year. These increases were partially offset by income in the
prior year for certain reimbursed financing costs.
The provision for (benefit from) income taxes increased $90,709,000 from a
benefit of $14,592,000 to a provision of $76,117,000, while income before
provision for income taxes increased $512,504,000 from a loss of $220,697,000 to
income of $291,807,000. The increase in income taxes is primarily due to an
increase in income. In addition, McDermott operates in many different tax
jurisdictions. Within these jurisdictions, tax provisions vary because of
nominal rates, allowability of deductions, credits and other benefits, and tax
basis (for example, revenues versus income). These variances, along with
variances in the mix of income within jurisdictions, are responsible for shifts
in the effective rate.
EFFECT OF INFLATION AND CHANGING PRICES
McDermott's financial statements are prepared in accordance with generally
accepted accounting principles, using historical dollar accounting (historical
cost). Statements based on historical cost, however, do not
26
<PAGE>
adequately reflect the cumulative effect of increasing costs and changes in the
purchasing power of the dollar, especially during times of significant and
continued inflation.
In order to minimize the negative impact of inflation on its operations,
McDermott attempts to cover the increased cost of anticipated changes in labor,
material and service costs, either through an estimate of such changes, which is
reflected in the original price, or through price escalation clauses in its
contracts.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1999, McDermott's cash and cash equivalents decreased
$96,373,000 to $181,503,000 and total debt decreased $399,582,000 to
$354,900,000, primarily due to a reduction in short-term borrowings of
$30,954,000 and repayment of $326,921,000 in long-term debt. During this
period, McDermott provided cash of $300,285,000 from operating activities, and
received cash proceeds of $176,290,000 from the net sales and maturities of
investments, and $145,161,000 from asset disposals, including $95,546,000 from
the termination of the McDermott-ETPM joint venture. McDermott used cash of
$272,061,000 for the acquisition of preferred and common stock , $78,787,000 for
additions to property, plant and equipment and $13,810,000 for dividends on
MII's common and preferred stock.
Pursuant to agreements with the majority of its principal insurers, McDermott
negotiates and settles products liability asbestos claims from non-employees and
bills these amounts to the appropriate insurers. Reimbursement of such claims
is subject to varying insurance limits based upon the year involved. Moreover,
as a result of collection delays inherent in this process and the effect of
agreed payment schedules with specific insurers, reimbursement is usually
delayed for three months or more. The average amount of these claims
(historical average of approximately $7,200 per claim over the last three years)
has continued to rise. Claims paid during the fiscal year ended March 31, 1999
were $227,176,000, of which $175,457,000 has been recovered or is due from
insurers. At March 31, 1999, receivables of $85,409,000 were due from insurers
for reimbursement of settled claims. Of the $85,409,000 due from insurers,
$37,287,000 had been included in the pool of qualified receivables sold pursuant
to a receivables purchase and sale agreement (see below). The collection
delays, and the amount of claims paid for which insurance recovery is not
probable, have not had a material adverse effect upon McDermott's liquidity.
At March 31, 1999, the estimated liability for pending and future non-employee
products liability asbestos claims was $1,562,363,000 and estimated insurance
recoveries were $1,366,863,000. Management's expectation is that new claims will
conclude within the next thirteen years, that there will be a significant
decline in new claims received after four years, and that the average cost per
claim will continue to increase only moderately. McDermott's estimates of future
asbestos products liability and probable insurance recoveries are based on prior
history and management's best estimate of cost based on all available
information. However, future costs to settle claims, as well as the number of
claims, could be adversely affected by changes in judicial rulings and
influences beyond McDermott's control. Accordingly, changes in the estimates of
future asbestos products liability and insurance recoverables and differences
between the proportion of any additional asbestos products liabilities covered
by insurance, and that experienced in the past could result in material
adjustments to the results of operations for any fiscal quarter or year, and the
ultimate loss may differ materially from amounts provided in the consolidated
financial statements.
Expenditures for property, plant and equipment increased $33,697,000 to
$78,787,000 in fiscal year 1999. The majority of fiscal year 1999 expenditures
were to maintain, replace and upgrade existing facilities and equipment.
McDermott has budgeted capital expenditures of approximately $38,236,000 during
fiscal 2000.
At March 31, 1998, McDermott had $82,783,000 in secured borrowings pursuant to a
receivables purchase and sale agreement between B&W and certain of its
affiliates and subsidiaries and a U.S. Bank. Through July 31, 1998, $25,854,000
was repaid under the agreement. Effective July 31, 1998, the receivables
purchase and sale agreement was amended and restated to provide for, among other
things, the inclusion of certain insurance recoverables in the pool of qualified
accounts receivable. It also provided for sales treatment as opposed to secured
financing treatment for this arrangement under Financial Accounting Standards
Board ("FASB")
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<PAGE>
Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." As a result, $56,929,000 was removed from notes payable and
current maturities of long-term debt on the balance sheet. This amended and
restated agreement was terminated on April 30, 1999.
On May 7, 1999, MII and JRM entered into a merger agreement pursuant to which
MII initiated a tender offer for those shares of JRM that it did not already own
for $35.62 per share in cash. Under the merger agreement, any shares not
purchased in the tender offer will be acquired for the same price in cash in a
second-step merger. MII estimates that it will require approximately
$560,000,000 to consummate the tender offer and second-step merger and to pay
related fees and expenses. MII expects to obtain the funds from cash on hand
and from a new $525,000,000 senior secured term loan facility with Citibank,
N.A. The facility will terminate and all borrowings thereunder will mature upon
the earlier of five business days after the consummation of the second merger or
September 30, 1999. When the facility terminates, JRM will declare and pay a
dividend and/or loan to MII such amounts that, together with MII's available
cash, will be used to repay all outstanding loans under the facility. Citibank,
N.A. may act either as sole lender under the facility or syndicate all or a
portion of the facility to a group of financial institutions. The facility
contains customary representations, warranties, covenants and events of default.
The facility also includes financial covenants that:
. require MII to maintain a minimum consolidated tangible net worth of not
less than $250,000,000,
. limit MII's ability to pay dividends, and,
. require MII, JRM and certain other subsidiaries to maintain cash, cash
equivalents and investments in debt securities of at least $575,000,000 at
all times.
The facility is secured by a first priority pledge of all JRM capital stock and
securities convertible into JRM capital stock held by or acquired by MII or any
of its subsidiaries.
At March 31, 1999, McDermott had total cash, cash equivalents and investments of
$1,088,402,000. McDermott's investment portfolio consists primarily of
government obligations and other investments in debt securities. The fair value
of short and long-term investments at March 31, 1999 was $921,070,000. At March
31, 1999, approximately $48,760,000 fair value of these obligations were pledged
to secure a letter of credit in connection with certain reinsurance agreements.
Management anticipates that approximately $560,000,000 of this investment
portfolio will be used to fund the tender offer, second-step merger and related
fees and expenses referred to above.
At March 31, 1999 and 1998, McDermott had available various uncommitted short-
term lines of credit from banks totaling $87,578,000 and $127,061,000,
respectively. Borrowings against these lines of credit at March 31, 1998 were
$5,100,000. There were no borrowings against these lines at March 31, 1999. At
March 31, 1998, B&W was a party to a revolving credit facility under which there
were no borrowings. In July 1998, B&W terminated its existing credit facility
and, jointly and severally with BWICO and BWXT, entered into a new $200,000,000
three-year, unsecured credit agreement (the "BWICO Credit Agreement") with a
group of banks. Borrowings by the three companies against the BWICO Credit
Agreement cannot exceed an aggregate amount of $50,000,000. The remaining
$150,000,000 is reserved for the issuance of letters of credit. In connection
with satisfying a condition to borrowing or issuing letters of credit under the
BWICO Credit Agreement, MI made a $15,000,000 capital contribution to BWICO in
August 1998. At March 31, 1999, there were no borrowings under the BWICO Credit
Agreement.
At March 31, 1998, JRM and certain of its subsidiaries were parties to a
revolving credit facility under which there were no borrowings. In June 1998,
JRM and such subsidiaries entered into a new $200,000,000 three-year, unsecured
credit agreement (the "JRM Credit Agreement") with a group of banks. Borrowings
against the JRM Credit Agreement cannot exceed $50,000,000. The remaining
$150,000,000 is reserved for the issuance of letters of credit. At March 31,
1999, there were no borrowings under the JRM Credit Agreement. Management does
not anticipate JRM will need to borrow funds under the JRM Credit Agreement
during fiscal year 2000. Subsequent to year-end, JRM elected to reduce the
commitments on the JRM Credit Agreement from $200,000,000 to $100,000,000.
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<PAGE>
MI and JRM are restricted, as a result of covenants in debt instruments, in
their ability to transfer funds to MII and certain of its subsidiaries through
cash dividends or through unsecured loans or investments. At March 31, 1999,
substantially all of the net assets of MI were subject to such restrictions. At
March 31, 1999, JRM could make unsecured loans to or investments in MII of
approximately $75,000,000 and pay dividends to MII of approximately
$146,300,000. In connection with the tender offer and merger described above,
an amendment to the JRM Credit Agreement was entered into that permits JRM to
loan to MII such amounts as may be required for MII to repay the amounts
outstanding under the $525,000,000 senior secured term loan facility with
Citibank N.A.
On March 5, 1999, JRM consummated an offer to purchase all of its outstanding
9.375% Senior Subordinated Notes at a purchase price of 113.046% of their
principal amount ($1,130.46 per $1,000 principal amount), plus accrued and
unpaid interest. On that date, JRM purchased $248,575,000 in principal amount
of the notes for a total purchase price of $284,564,000, including interest of
$3,560,000. As a result, JRM recorded an extraordinary loss of $38,719,000. In
connection with the purchase of the notes, JRM received consents to certain
amendments that amended or eliminated certain restrictive covenants and other
provisions contained in the indenture relating to the notes. Specifically, the
covenants contained in the indenture that restricted JRM's ability to pay
dividends, repurchase or redeem its capital stock, or to transfer funds through
unsecured loans to or investments in MII were eliminated.
Working capital decreased $26,475,000 from $135,430,000 at March 31, 1998 to
$108,955,000 at March 31, 1999. During the next fiscal year, McDermott's
management expects to obtain funds to meet capital expenditure, working capital
and debt maturity requirements from operating activities, cash and cash
equivalents, and short-term borrowings. Leasing agreements for equipment, which
are short-term in nature, are not expected to impact McDermott's liquidity or
capital resources.
JRM's joint ventures are largely financed through their own resources,
including, in some cases, stand-alone borrowing arrangements. In some
instances, McDermott provides guarantees on behalf of its joint ventures. (See
Note 11 to the consolidated financial statements.)
At March 31, 1999, the ratio of long-term debt to total stockholders' equity was
0.41 as compared with 0.88 at March 31, 1998.
On April 6, 1998, MII called all of the outstanding shares of its Series C
Cumulative Convertible Preferred Stock for redemption on April 21, 1998. At the
close of business on the redemption date, all 2,875,000 preferred shares then
outstanding were converted into 4,077,890 common shares.
On July 17, 1998, MI redeemed all of its 2,152,766 outstanding shares of Series
B $2.60 Cumulative Preferred Stock for $31.25, plus $0.1156 in accrued but
unpaid dividends, per share. MII made a $68,000,000 capital contribution to MI
to cover the cost of the redemption.
On September 11, 1998, MI redeemed 2,795,428 of its outstanding shares of Series
A $2.20 Cumulative Convertible Preferred Stock ("Series A Preferred Stock") for
$31.25, plus $0.43 in accrued but unpaid dividends, per share. The remaining
23,251 outstanding shares of its Series A Preferred Stock were converted into
MII common stock at a conversion ratio of one share of MII common stock, plus
$0.10, for each preferred share. MII made a $90,000,000 capital contribution to
MI to cover the cost of the redemption and conversion.
MII's quarterly dividends are $0.05 per share on its Common Stock. Prior to
redemption, MI's quarterly dividends were $0.55 per share on the Series A $2.20
Cumulative Convertible Preferred Stock and $0.65 per share on the Series B $2.60
Cumulative Preferred Stock.
During fiscal year 1998, MII's Board of Directors approved the repurchase of up
to two million shares of its common stock from time to time on the open market
or through negotiated transactions, depending on the availability of cash and
market conditions. The purpose of the repurchases was to offset dilution
created by the
29
<PAGE>
issuance of shares pursuant to MII's stock compensation and thrift plans. MII
completed its two million share repurchase program in August 1998. During the
fiscal year ended March 31, 1999, MII repurchased 1,900,000 shares of its common
stock at an average share price of $31.10.
During fiscal year 1998, JRM's Board of Directors approved the repurchase of up
to two million shares of its common stock from time to time on the open market
or through negotiated transactions, depending on the availability of cash and
market conditions. The purpose of the repurchases was to offset dilution
created by the issuance of shares pursuant to JRM's stock compensation and
thrift plans. JRM repurchased 362,500 shares at an average share price of
$37.31 during fiscal year 1998. During fiscal year 1999, JRM's Board of
Directors authorized the repurchase of up to an additional one million shares of
its common stock . JRM repurchased another 1,837,700 shares of its common stock
at an average share price of $31.67 through October 8, 1998, at which time JRM
ceased all further share repurchases. At such time, JRM had repurchased
2,200,200 of the three million shares of its common stock authorized to be
repurchased.
At March 31, 1999, MII has provided a valuation allowance for deferred tax
assets of $39,961,000 which cannot be realized through carrybacks and future
reversals of existing taxable temporary differences. Management believes that
remaining deferred tax assets are realizable through carrybacks and future
reversals of existing taxable temporary differences, future taxable income, and,
if necessary, the implementation of tax planning strategies involving sales of
appreciated assets. Uncertainties that affect the ultimate realization of
deferred tax assets are the risk of incurring losses in the future and the
possibility of declines in value of appreciated assets involved in identified
tax planning strategies. These factors have been considered in determining the
valuation allowance. Management will continue to assess the adequacy of the
valuation allowance on a quarterly basis.
IMPACT OF THE YEAR 2000
The McDermott company-wide Year 2000 Project is proceeding on schedule. The
project addresses information technology components (hardware and software) in
internal business systems and infrastructure and the embedded systems in
offices, plants and products delivered to customers. In addition, an analysis
of critical suppliers is being performed to ensure the supply of materials and
services that are strategic to business continuity. The Year 2000 Project began
company-wide with a planning phase during the latter part of 1996 followed by a
company-wide assessment, which was completed in early 1997. Based upon the
results of the assessment and the diverse nature of McDermott's product lines,
strategies for business systems were developed that fit the requirements of each
of the McDermott business units. Some entities are replacing legacy systems
with commercial enterprise systems, others are employing a combination of
proprietary and third-party client/server systems, while a third strategy is
based primarily upon remediation of legacy applications. Embedded systems and
the critical supplier analysis are being addressed with a common methodology
across McDermott.
A consistent work breakdown structure for the project is being employed
throughout McDermott:
. Business Applications and IT Infrastructure ("IT Systems")
. Facilities (office buildings)
. Embedded Systems (in plants and construction equipment)
. Customer Products (embedded systems in customer products)
. Critical Suppliers
The general phases of the project common to all of the above functions are:
(1) establish priorities,
(2) inventory items with potential Year 2000 impact,
(3) assess and create a solution strategy for those items determined to be
material to McDermott,
(4) implement solutions defined for those items assessed to have Year 2000
impact, and
(5) test and validate solutions.
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<PAGE>
At March 31, 1999, the inventory, prioritization and assessment of the critical
IT Systems' components were complete. The remediation and replacement tasks are
in progress with approximately 90% of the work completed. The Facilities and
Embedded Systems phases of the project were 90% complete and on schedule with
testing and replacement of components showing significant progress during the
quarter. The analysis of Critical Suppliers includes the determination of the
compliance status of the suppliers' businesses as well as the products they
produce. The majority of the company sites have completed this analysis and the
balance are near completion. The Customer Products phase of the project is
essentially complete with minor work outstanding at a few of the company's
smaller business units.
All Year 2000 solutions for the critical IT Systems, Facilities and Embedded
Systems that support McDermott's engineering, manufacturing and construction
operations and the corporate functions are scheduled to be substantially
completed by June 30, 1999. The analysis and the compliance tasks for Customer
Products and Critical Suppliers are on schedule and are forecast to be completed
by June 30, 1999.
As an alternative to the remediation of the legacy payroll systems, McDermott
has elected to outsource its payroll function. The transition to the payroll
service provider will be completed by October 31, 1999.
McDermott does not expect that the cost associated with the modifications to
critical systems and other compliance activities will have a material impact on
its consolidated financial condition, cash flows or results of operations. The
cost of the Year 2000 Project is estimated at $38,000,000 and is being funded
through operating cash flows. Of the total project cost, $9,000,000 is
attributable to the purchase of hardware and software, which will be
capitalized, and the remaining $29,000,000 will be expensed as incurred.
Expenditures to date include $7,000,000 of capital and $21,000,000 of expense.
The differences between the cost incurred to date and the project completion
percentage is due to certain project milestones with subcontractors for work
being performed for the corporate office. Excluding the corporate office,
approximately 90% of the total anticipated Year 2000 project cost has been
incurred through March 31, 1999.
McDermott's Year 2000 compliance is also dependent upon the Year 2000 readiness
of external agents and third-party suppliers on a timely basis. The failure of
McDermott or its agents or suppliers to achieve Year 2000 compliance could
result in, among other things, plant production interruptions, delays in the
delivery of products, delays in construction completions, delays in the receipt
of supplies, invoice and collection errors, and inaccurate inventories. These
consequences could have a material adverse impact on McDermott's results of
operations, financial condition and cash flow if it is unable to conduct its
businesses in the ordinary course.
McDermott is taking steps to mitigate the risk of a material impact of Year 2000
on its operations with the development of contingency plans. These plans focus
on the mission critical processes and third party dependencies that could be at
risk with the century date change. Contingency plans are in the early stages of
development and are being prioritized consistent with the requirements of each
operating location. All contingency planning activities are scheduled to be
completed by September 30, 1999.
Although McDermott is unable to determine at this time whether the consequences
of Year 2000 failures will have a material impact on its results of operations,
McDermott believes that its Year 2000 Project, including contingency plans,
should significantly reduce the adverse effect that any such disruptions may
have.
Statements made herein which express a belief, expectation or intention, as well
as those which are not historical fact, are forward looking. They involve a
number of risks and uncertainties which may cause actual results to differ
materially from such forward-looking statements. The dates on which McDermott
believes the Year 2000 Project will be completed are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved or that there will not be a delay in, or
increased costs associated with, the implementation of the Year 2000 Project.
Specific factors that might cause differences between the estimates and actual
results include, but are not limited to:
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. the availability and cost of personnel trained in these areas,
. the ability to locate and correct all relevant computer code,
. timely responses to and corrections by third parties and suppliers,
. the ability to implement interfaces between the new systems and the systems
not being replaced, and,
. similar uncertainties.
The general uncertainty inherent in the Year 2000 problem results in part from
the uncertainty of the Year 2000 readiness of third parties and the
interconnection of global businesses. Due to this general uncertainty,
McDermott cannot ensure its ability to timely and cost-effectively resolve
problems associated with the Year 2000 issue that may affect its operations and
business or expose it to third-party liability.
NEW ACCOUNTING STANDARDS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which is effective for fiscal years beginning after December 15,
1998. SOP 98-5 provides guidance on accounting for the costs of start-up
activities and requires that entities expense start-up costs and organization
costs as they are incurred. McDermott's adoption of SOP 98-5 will not have a
material impact on its consolidated financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 will require McDermott to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. McDermott has not yet determined what effect the
adoption of SFAS No. 133 will have on its consolidated financial position or
results of operations.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
McDermott's exposure to market risk from changes in interest rates relates
primarily to its investment portfolio, which is primarily comprised of
investments in U.S. government obligations and other highly liquid debt
securities. McDermott is averse to principal loss and ensures the safety and
preservation of its invested funds by limiting default risk, market risk and
reinvestment risk. All of McDermott's investments in debt securities are
classified as available-for-sale.
McDermott has no material future earnings or cash flow exposures from changes in
interest rates on its long-term debt obligations, as substantially all of these
obligations have fixed interest rates. McDermott has exposure to changes in
interest rates on its short-term uncommitted lines of credit and its unsecured
and committed revolving credit facilities (see Liquidity and Capital Resources).
At March 31, 1999, McDermott had no borrowings against these short-term
facilities.
McDermott has operations in many foreign locations and as a result, its
financial results could be significantly affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in those foreign
markets. In order to manage the risks associated with foreign currency exchange
fluctuations, McDermott regularly hedges such risks with foreign currency
forward exchange contracts (principally to hedge its Canadian dollar exposure).
McDermott does not enter into speculative forward exchange contracts.
The table below provides information about McDermott's market sensitive
financial instruments and constitutes a forward-looking statement.
Principal Amount by Expected Maturity
(In thousands)
<TABLE>
<CAPTION>
Fiscal Years Ending March 31, Fair Value
2000 2001 2002 2003 2004 Thereafter Total at 3/31/99
-------- -------- -------- ------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments $366,304 $294,400 $118,960 $67,000 $75,540 - $922,204 $921,070
Average Interest Rate 4.91% 5.48% 6.10% 5.47% 5.13% -
Long-term Debt-
Fixed Rate $ 30,640 - $225,000 - $ 9,500 $84,175 $349,315 $360,997
Average Interest Rate 8.22% - 9.375% - 9.00% 8.20%
Long-term Debt-
Variable Rate $ 25 $ 25 $ 25 $ 25 $ 25 $ 4,652 $ 4,777 $ 4,777
Average Interest Rate 3.25% 3.25% 3.25% 3.25% 3.25% 3.25%
</TABLE>
33
<PAGE>
Contract Amount by Expected Maturity
(In thousands)
<TABLE>
<CAPTION>
Fiscal Years Ending March 31, Fair Value
2000 2001 2002 Total at 3/31/99
------- ------ ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Forward Contracts to Purchase Foreign Currencies for U.S. Dollars:
Canadian Dollar $49,955 $9,292 $31,041 $90,288 $86,426
Average Contractual Exchange Rate 1.442 1.421 1.415
Japanese Yen $ 3,260 - - $ 3,260 $ 3,193
Average Contractual Exchange Rate 116.7
Danish Kroner $ 153 - - $ 153 $ 145
Average Contractual Exchange Rate 6.557
Forward Contracts to Sell Foreign Currencies for U.S. Dollars:
Canadian Dollar $14,880 - - $14,880 $13,920
Average Contractual Exchange Rate 1.402
French Franc $ 720 $ 604 $ 2,423 $ 3,747 $ 3,691
Average Contractual Exchange Rate 5.884 5.794 5.745
</TABLE>
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<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMPANY REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
McDermott has prepared the consolidated financial statements and related
financial information included in this report. McDermott has the primary
responsibility for the financial statements and other financial information and
for ascertaining that the data fairly reflect the financial position and results
of operations of McDermott. The financial statements were prepared in
accordance with generally accepted accounting principles, and necessarily
reflect informed estimates and judgments by appropriate officers of McDermott
with appropriate consideration given to materiality.
McDermott believes that it maintains an internal control structure designed to
provide reasonable assurance that assets are safeguarded against loss or
unauthorized use and that the financial records are adequate and can be relied
upon to produce financial statements in accordance with generally accepted
accounting principles. The concept of reasonable assurance is based on the
recognition that the cost of an internal control structure must not exceed the
related benefits. Although internal control procedures are designed to achieve
these objectives, it must be recognized that fraud, errors or illegal acts may
nevertheless occur. McDermott seeks to assure the objectivity and integrity of
its accounts by its selection of qualified personnel, by organizational
arrangements that provide an appropriate division of responsibility and by the
establishment and communication of sound business policies and procedures
throughout the organization. McDermott believes that its internal control
structure provides reasonable assurance that fraud, errors or illegal acts that
could be material to the financial statements are prevented or would be
detected.
McDermott's accompanying consolidated financial statements have been audited by
its independent accountants, who provide McDermott with advice on the
application of U.S. generally accepted accounting principles to McDermott's
business and also provide an objective assessment of the degree to which
McDermott meets its responsibility for the fairness of financial reporting.
They regularly evaluate the internal control structure and perform such tests
and other procedures as they deem necessary to reach and express an opinion on
the fairness of the financial statements. The reports of the independent
accountants appear elsewhere herein.
The Board of Directors pursues its responsibility for McDermott's consolidated
financial statements through its Audit Committee, which is composed solely of
directors who are not officers or employees of McDermott. The Audit Committee
meets periodically with the independent accountants and management to review
matters relating to the quality of financial reporting and internal control
structure and the nature, extent and results of the audit effort. In addition,
the Audit Committee is responsible for recommending the engagement of
independent accountants for McDermott to the Board of Directors, who in turn
submit the engagement to the stockholders for their approval. The independent
accountants have free access to the Audit Committee.
May 14, 1999
35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders of
McDermott International, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income (loss), comprehensive income (loss),
stockholders' equity, and cash flows present fairly, in all material respects,
the financial position of McDermott International, Inc. and subsidiaries at
March 31, 1999, and the results of their operations and their cash flows for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform an
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
May 14, 1999
36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors and Stockholders
McDermott International, Inc.
We have audited the accompanying consolidated balance sheet of McDermott
International, Inc. as of March 31, 1998, and the related consolidated
statements of income (loss), comprehensive income (loss) stockholders' equity
and cash flows for each of the two years in the period ended March 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of McDermott
International, Inc. at March 31, 1998, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
March 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New Orleans, Louisiana
May 19, 1998
37
<PAGE>
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999 and 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 181,503 $ 277,876
Investments 55,646 135
Accounts receivable trade, net 281,667 550,552
Accounts receivable - unconsolidated affiliates 165,154 52,351
Accounts receivable - other 125,631 139,864
Environmental and products liabilities recoverable - current 228,738 143,588
Contracts in progress 179,310 239,548
Inventories 52,656 63,342
Deferred income taxes 73,364 84,036
Other current assets 31,697 45,264
- ------------------------------------------------------------------------------------------
Total Current Assets 1,375,366 1,596,556
- ------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Land 22,670 29,034
Buildings 197,902 205,284
Machinery and equipment 1,198,381 1,457,630
Property under construction 41,686 23,404
- ------------------------------------------------------------------------------------------
1,460,639 1,715,352
Less accumulated depreciation 1,026,678 1,181,658
- ------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 433,961 533,694
- ------------------------------------------------------------------------------------------
Investments:
Government obligations 473,072 519,443
Other investments 378,181 553,913
- ------------------------------------------------------------------------------------------
Total Investments 851,253 1,073,356
- ------------------------------------------------------------------------------------------
Environmental and Products Liabilities Recoverable 1,167,113 604,870
- ------------------------------------------------------------------------------------------
Excess of Cost over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $104,444,000 at March 31,1999
and $107,814,000 at March 31, 1998 125,436 127,077
- ------------------------------------------------------------------------------------------
Prepaid Pension Costs 130,437 328,583
- ------------------------------------------------------------------------------------------
Other Assets 221,954 236,994
- ------------------------------------------------------------------------------------------
TOTAL $4,305,520 $4,501,130
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term debt $ 31,126 $ 156,300
Accounts payable 198,500 301,988
Environmental and products liabilities - current 259,836 181,234
Accrued employee benefits 132,105 146,839
Accrued liabilities - other 318,631 285,834
Accrued contract cost 51,619 89,321
Advance billings on contracts 240,380 268,764
U.S. and foreign income taxes payable 34,214 30,846
- -----------------------------------------------------------------------------------------------
Total Current Liabilities 1,266,411 1,461,126
- -----------------------------------------------------------------------------------------------
Long-Term Debt 323,774 598,182
- -----------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation 128,188 393,616
- -----------------------------------------------------------------------------------------------
Environmental and Products Liabilities 1,334,096 751,620
- -----------------------------------------------------------------------------------------------
Other Liabilities 263,950 271,489
- -----------------------------------------------------------------------------------------------
Commitments and Contingencies.
Minority Interest:
Subsidiary's redeemable preferred stocks - 155,358
Other minority interest 195,367 189,966
- -----------------------------------------------------------------------------------------------
Total Minority Interest 195,367 345,324
- -----------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, authorized 25,000,000 shares; outstanding
2,875,000 Series C $2.875 cumulative convertible,
par value $1.00 per share - 2,875
Common stock, par value $1.00 per share, authorized 150,000,000
shares; issued 61,147,775 at March 31, 1999 and 56,607,861
at March 31, 1998 61,148 56,608
Capital in excess of par value 1,028,393 1,012,338
Accumulated deficit (200,432) (341,916)
Treasury stock at cost, 2,000,614 shares at March 31, 1999
and 100,614 shares at March 31, 1998 (62,731) (3,575)
Accumulated other comprehensive loss (32,644) (46,557)
- -----------------------------------------------------------------------------------------------
Total Stockholders' Equity 793,734 679,773
- -----------------------------------------------------------------------------------------------
TOTAL $4,305,520 $4,501,130
- -----------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- -----------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues $3,149,985 $3,674,635 $3,150,850
- --------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of operations (excluding depreciation and amortization) 2,635,229 3,117,279 2,878,972
Depreciation and amortization 101,390 142,301 151,581
Selling, general and administrative expenses 222,239 224,045 262,918
- --------------------------------------------------------------------------------------------------------
2,958,858 3,483,625 3,293,471
- --------------------------------------------------------------------------------------------------------
Gain (Loss) on Asset Disposals and Impairments - Net 17,910 79,065 (526)
- --------------------------------------------------------------------------------------------------------
Operating Income (Loss) before Income (Loss) from Investees 209,037 270,075 (143,147)
- --------------------------------------------------------------------------------------------------------
Income (Loss) from Investees 8,379 85,382 (4,098)
- --------------------------------------------------------------------------------------------------------
Operating Income (Loss) 217,416 355,457 (147,245)
- --------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 97,965 62,535 46,742
Interest expense (63,262) (81,454) (95,100)
Minority interest (46,042) (47,984) (5,562)
Other-net (18,799) 3,253 (19,532)
- --------------------------------------------------------------------------------------------------------
(30,138) (63,650) (73,452)
- --------------------------------------------------------------------------------------------------------
Income (Loss) before Provision for (Benefit from)
Income Taxes and Extraordinary Item 187,278 291,807 (220,697)
Provision for (Benefit from) Income Taxes (4,803) 76,117 (14,592)
- --------------------------------------------------------------------------------------------------------
Income (Loss) before Extraordinary Item 192,081 215,690 (206,105)
Extraordinary Item (38,719) - -
- --------------------------------------------------------------------------------------------------------
Net Income (Loss) $153,362 $215,690 $(206,105)
- --------------------------------------------------------------------------------------------------------
Net Income (Loss) Applicable to Common Stockholders
(after Preferred Stock Dividends) $153,362 $207,424 $(214,371)
- --------------------------------------------------------------------------------------------------------
Earnings (Loss) per Common Share:
Basic:
Income (Loss) before Extraordinary Item $ 3.25 $ 3.74 $ (3.95)
Net Income (Loss) $ 2.60 $ 3.74 $ (3.95)
Diluted:
Income (Loss) before Extraordinary Item $ 3.16 $ 3.48 $ (3.95)
Net Income (Loss) $ 2.53 $ 3.48 $ (3.95)
- --------------------------------------------------------------------------------------------------------
Cash Dividends:
Per Common Share $ 0.20 $ 0.20 $ 0.60
Per Preferred Share $ - $ 2.88 $ 2.88
- --------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
40
<PAGE>
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net Income (Loss) $ 153,362 $215,690 $ (206,105)
- ------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translation adjustments (856)
Foreign currency translation adjustments, net of
reclassification adjustments (3,689) (11,271)
Reclassification adjustments for sales of investments
in foreign entities in fiscal year 1999 15,596
Minimum pension liability adjustment,
net of taxes of $791,000, $1,547,000 and $480,000
in fiscal years 1999, 1998 and 1997, respectively (1,058) (2,582) (720)
Unrealized gains (losses) on investments:
Unrealized gains (losses) arising during the period,
net of taxes of $3,000 in fiscal year 1999 1,887
Unrealized gains (losses), net of reclassification adjustments
arising during the period, net of taxes of $360,000 and
$85,000 in fiscal years 1998 and 1997, respectively 4,807 (2,257)
Reclassification adjustment for (gains) losses included in
net income, net of taxes of $11,000 in fiscal year 1999 (1,656)
- -------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 13,913 (1,464) (14,248)
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ 167,275 $214,226 $ (220,353)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1999
(In thousands, except for share amounts)
<TABLE>
<CAPTION>
Preferred Stock
Series C Common Stock
----------------------------- --------------------------
Shares Par Value Shares Par Value
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Balance March 31, 1996 2,875,000 $ 2,875 54,435,823 $ 54,436
- ----------------------------------------------------------------------------------------------------------------
Net loss - - - -
Minimum pension liability - - - -
Loss on investments - - - -
Translation adjustments - - - -
Common stock dividends - - - -
Preferred stock dividends - - - -
JRM equity transactions - - - -
Exercise of stock options - - 22,779 23
Tax benefit on stock options - - - -
Restricted stock purchases - net - - 171,290 171
Awards of common stock - - 975 1
Redemption of preferred shares - - - -
Contributions to thrift plan - - 306,089 306
Deferred career executive stock plan expense - - - -
- ----------------------------------------------------------------------------------------------------------------
Balance March 31, 1997 2,875,000 2,875 54,936,956 54,937
Net income - - - -
Minimum pension liability - - - -
Gain on investments - - - -
Translation adjustments - - - -
Common stock dividends - - - -
Preferred stock dividends - - - -
JRM equity transactions - - - -
Exercise of stock options - - 1,450,593 1,451
Tax benefit on stock options - - - -
Restricted stock purchases - net - - 90 -
Redemption of preferred shares - - 100 -
Contributions to thrift plan - - 191,058 191
Purchase of treasury shares - - - -
Deferred career executive stock plan expense - - - -
Termination of directors' retirement plan - - 32,040 32
Cancellation of shares - - (2,976) (3)
- ----------------------------------------------------------------------------------------------------------------
Balance March 31, 1998 2,875,000 2,875 56,607,861 56,608
Net income - - - -
Minimum pension liability - - - -
Loss on investments - - - -
Translation adjustments - - - -
Common stock dividends - - - -
JRM equity transactions - - - -
Exercise of stock options - - 188,768 189
Tax benefit on stock options - - - -
Restricted stock purchases - net - - 2,025 2
Directors' stock plan - - 18,735 19
Redemption of preferred shares - - 23,251 23
Conversion of Series C Preferred stock (2,875,000) (2,875) 4,077,890 4,078
Contributions to thrift plan - - 229,245 229
Purchase of treasury shares - - - -
Deferred career executive stock plan expense - - - -
- ----------------------------------------------------------------------------------------------------------------
Balance March 31, 1999 - $ - 61,147,775 $ 61,148
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Capital Other Total
in Excess Accumulated Comprehensive Treasury Stockholders'
of Par Value Deficit Income Stock Equity
------------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
$949,022 $ (290,968) $(30,845) $ - $ 684,520
- -------------------------------------------------------------------------------------
- (206,105) - - (206,105)
- - (720) - (720)
- - (2,257) - (2,257)
- - (11,271) - (11,271)
- (32,824) - - (32,824)
- (8,266) - - (8,266)
1,339 - - - 1,339
371 - - - 394
41 - - - 41
(5) - - - 166
20 - - - 21
68 - - - 68
5,724 - - - 6,030
5,865 - - - 5,865
- -------------------------------------------------------------------------------------
962,445 (538,163) (45,093) - 437,001
- 215,690 - - 215,690
- - (2,582) - (2,582)
- - 4,807 - 4,807
- - (3,689) - (3,689)
- (11,177) - - (11,177)
- (8,266) - - (8,266)
3,431 - - - 3,431
30,005 - - - 31,456
4,916 - - - 4,916
(24) - - - (24)
221 - - - 221
5,795 - - - 5,986
- - - (3,662) (3,662)
4,576 - - - 4,576
1,057 - - - 1,089
(84) - - 87 -
- -------------------------------------------------------------------------------------
1,012,338 (341,916) (46,557) (3,575) 679,773
- 153,362 - - 153,362
- - (1,058) - (1,058)
- - 231 - 231
- - 14,740 - 14,740
- (11,878) - - (11,878)
2,495 - - - 2,495
3,543 - - - 3,732
1,013 - - - 1,013
- - - - 2
421 - - - 440
701 - - - 724
(1,203) - - - -
5,813 - - - 6,042
- - - (59,156) (59,156)
3,272 - - - 3,272
- -------------------------------------------------------------------------------------
$1,028,393 $ (200,432) $(32,644) $ (62,731) $ 793,734
- -------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
McDERMOTT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1999
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 153,362 $ 215,690 $(206,105)
- ------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 101,390 142,301 151,581
Income or loss of investees, less dividends 20,271 (13,913) 17,422
(Gain) loss on asset disposals and impairments - net (17,910) (79,065) 526
Provision for (benefit from) deferred taxes (29,725) 9,521 (211)
Extraordinary loss 38,719 - -
Other 3,805 15,372 6,525
Changes in assets and liabilities, net of effects
from acquisitions and divestitures:
Accounts receivable 79,553 28,596 7,978
Accounts payable (100,835) 31,712 3,443
Inventories 10,305 1,974 123
Net contracts in progress and advance billings 31,470 152,097 139,188
Income taxes 627 (47,356) (6,026)
Accrued liabilities 41,238 30,746 (26,936)
Products and environmental liabilities 49,133 11,524 86,812
Other, net (45,670) 116,973 (32,609)
Proceeds from insurance for products liability claims 191,728 157,656 153,141
Payments of products liability claims (227,176) (196,091) (188,205)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 300,285 577,737 106,647
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions - (6,627) -
Purchases of property, plant and equipment (78,787) (45,090) (91,371)
Purchases of available-for-sale securities (827,371) (788,503) (617,464)
Maturities of available-for-sale securities 664,183 112,369 219,301
Sales of available-for-sale securities 339,478 95,430 156,827
Proceeds from asset disposals 145,161 457,337 106,304
Investments in equity investees 88 (4,391) (31,030)
Returns from investees - 2,124 24,500
Other - - (1,821)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 242,752 (177,351) (234,754)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $(326,921) $(152,116) $(31,687)
Issuance of long-term debt - - 244,375
Decrease in short-term borrowing (30,954) (208,759) (12,371)
Issuance of common stock 4,173 31,431 565
Issuance of subsidiary's stock 2,127 5,599 4,569
Acquisition of subsidiary's common stock (58,272) (13,537) -
Acquisition of subsidiary's preferred stock (154,633) (15,406) (2,250)
Dividends paid (13,810) (19,367) (51,947)
Purchase of McDermott International, Inc. stock (59,156) (3,662) -
Other (3,686) (5,102) (4,843)
- -----------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (641,132) (380,919) 146,411
- -----------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 1,722 626 816
- -----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (96,373) 20,093 19,120
- -----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 277,876 257,783 238,663
- -----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $181,503 $277,876 $257,783
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 68,317 $ 87,514 $ 85,502
Income taxes (net of refunds) $ 44,044 $ 15,571 $ 14,758
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
ACTIVITIES
Transfer of accounts receivables sold under a
purchase and sale agreement from secured
borrowings to sales treatment $ 56,929 $ - $ -
- -----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
McDERMOTT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The consolidated financial statements are presented in U.S. Dollars in
accordance with accounting principles generally accepted in the United
States("GAAP"). The consolidated financial statements include the accounts of
McDermott International, Inc. and its subsidiaries and controlled joint
ventures. Investments in joint ventures and other entities which McDermott
International, Inc. does not control, but has significant influence over, are
accounted for using the equity method. All significant intercompany transactions
and accounts have been eliminated. Certain amounts previously reported have
been reclassified to conform with the presentation at March 31, 1999.
Hereinafter, unless the context requires otherwise, the following terms shall
mean:
. MII for McDermott International, Inc., a Panama corporation,
. JRM for J. Ray McDermott, S. A., a majority-owned Panamanian subsidiary of
MII, and its consolidated subsidiaries,
. MI for McDermott Incorporated, a Delaware subsidiary of MII, and its
consolidated subsidiaries,
. BWICO for Babcock & Wilcox Investment Company, a Delaware subsidiary of MI,
. B&W for the Babcock & Wilcox Company, a Delaware subsidiary of BWICO, and
its consolidated subsidiaries,
. BWXT for BWX Technologies, Inc., a Delaware subsidiary of BWICO, and its
consolidated subsidiaries, and
. McDermott for the consolidated enterprise.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Earnings Per Share
- ------------------
Earnings (loss) per common share has been computed on the basis of the weighted
average number of common shares and, where dilutive, common share equivalents,
outstanding during the indicated periods.
Investments
- -----------
McDermott's investments, primarily government obligations and other debt
securities, are classified as available-for-sale and are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a component of
accumulated other comprehensive loss. Investments available for current
operations are classified in the balance sheet as current assets while
investments held for long-term purposes are classified as non-current assets.
The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
interest income. Realized gains and losses are included in other income. The
cost of securities sold is based on the specific identification method.
Interest on securities is included in interest income.
Foreign Currency Translation
- ----------------------------
Assets and liabilities of foreign operations, other than operations in highly
inflationary economies, are translated into U.S. Dollars at current exchange
rates, and income statement items are translated at average exchange rates for
the year. Adjustments resulting from the translation of foreign currency
financial statements are recorded as a component of accumulated other
comprehensive loss. Foreign currency transaction adjustments are reported
46
<PAGE>
in income. Included in other income (expense) are transaction gains of
$3,384,000, $5,200,000, and $3,628,000 for fiscal years 1999, 1998 and 1997,
respectively. In fiscal years 1999 and 1998, a loss of $15,596,000 and a gain of
$1,005,000, respectively, were transferred from currency translation adjustments
and included in gain (loss) on asset disposals and impairments - net due to the
sale of foreign investments.
Contracts and Revenue Recognition
- ---------------------------------
Contract revenues and related costs are principally recognized on a percentage
of completion method for individual contracts or combinations thereof based upon
work performed or a cost to cost method, as applicable to the product or
activity involved. Certain partnering contracts contain a risk and reward
element, whereby a portion of total compensation is tied to the overall
performance of the alliance partners. Revenues and related costs so recorded,
plus accumulated contract costs that exceed amounts invoiced to customers under
the terms of the contracts, are included in contracts in progress. Billings
that exceed accumulated contract costs and revenues and costs recognized under
percentage of completion are included in advance billings on contracts. Most
long-term contracts have provisions for progress payments. All unbilled
revenues will be billed. Contract price and cost estimates are reviewed
periodically as the work progresses and adjustments proportionate to the
percentage of completion are reflected in income in the period when such
estimates are revised. Provisions are made currently for all known or
anticipated losses. Variations from estimated contract performance could result
in a material adjustment to operating results for any fiscal quarter or year.
Claims for extra work or changes in scope of work are included in contract
revenues when collection is probable. Included in accounts receivable and
contracts in progress are approximately $15,535,000 and $5,790,000 relating to
commercial and U.S. Government contracts claims whose final settlement is
subject to future determination through negotiations or other procedures which
had not been completed at March 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Included in Contracts in Progress are:
Costs incurred less costs of revenue recognized $ 46,942 $ 88,519
Revenues recognized less billings to customers 132,368 151,029
--------------------------------------------------------------------------
Contracts in Progress $179,310 $239,548
--------------------------------------------------------------------------
Included in Advance Billings on Contracts are:
Billings to customers less revenues recognized $320,523 $311,302
Costs incurred less costs of revenue recognized (80,143) (42,538)
--------------------------------------------------------------------------
Advance Billings on Contracts $240,380 $268,764
--------------------------------------------------------------------------
</TABLE>
McDermott is usually entitled to financial settlements relative to the
individual circumstances of deferrals or cancellations of Power Generation
Systems' contracts. McDermott does not recognize such settlements or claims for
additional compensation until final settlement is reached.
Included in accounts receivable - trade are amounts representing retainages on
contracts as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Retainages $108,605 $70,414
------------------------------------------------------------
Retainages expected to be collected
after one year $ 29,246 $33,567
------------------------------------------------------------
</TABLE>
Of its long-term retainages at March 31, 1999, McDermott anticipates collection
of $10,946,000 in fiscal year 2001, $17,167,000 in fiscal year 2002 and
$1,133,000 in fiscal year 2003.
47
<PAGE>
Inventories
- -----------
Inventories are carried at the lower of cost or market. Cost is determined on
an average cost basis except for certain materials inventories, for which the
last-in first-out (LIFO) method is used. The cost of approximately 16% and 17%
of total inventories was determined using the LIFO method at March 31, 1999 and
1998, respectively. Inventories at March 31, 1999 and 1998 are summarized
below:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $37,481 $47,411
Work in Progress 7,606 6,720
Finished Goods 7,569 9,211
-------------------------------------------------
Total Inventories $52,656 $63,342
-------------------------------------------------
</TABLE>
Comprehensive Income (Loss)
- ---------------------------
Effective April 1, 1998, McDermott adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," to report and
display comprehensive income and its components. Under this new principle, the
accumulated other comprehensive income or loss is displayed in the consolidated
balance sheet as a component of stockholders' equity. Comprehensive income is
displayed as a separate financial statement.
The components of accumulated other comprehensive loss included in stockholders'
equity at March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Currency Translation Adjustments $(27,762) $(42,502)
Net Unrealized Gain on Investments 906 675
Minimum Pension Liability (5,788) (4,730)
----------------------------------------------------------------
Accumulated Other Comprehensive Loss $(32,644) $(46,557)
----------------------------------------------------------------
</TABLE>
Warranty Expense
- ----------------
Estimated warranty expense which may be required to satisfy contractual
requirements, primarily of the Power Generation Systems segment, is accrued
relative to revenue recognition on the respective contracts. JRM includes
warranty costs as a component of their total contract cost estimate to satisfy
contractual requirements. In addition, specific provisions are made where the
costs of warranty are expected to significantly exceed such accruals.
Environmental Clean-up Costs
- ----------------------------
McDermott accrues for future decommissioning of its nuclear facilities that will
permit the release of these facilities to unrestricted use at the end of each
facility's life, which is a condition of its licenses from the Nuclear
Regulatory Commission. Such accruals, based on the estimated cost of those
activities, are over the economic useful life of each facility, which is
estimated at 40 years. Estimated costs are adjusted as further information
develops or circumstances change and, if applicable, are net of cost-sharing
agreements. Costs of future expenditures for environmental clean-up are not
discounted to their present value. However, there is an exception at one
facility that has provisions in its government contracts pursuant to which all
of its decommissioning costs are covered by the U.S. Government. Recoveries of
environmental clean-up costs from other parties are recognized as assets when
their receipt is deemed probable.
48
<PAGE>
Research and Development
- ------------------------
Research and development activities are related to development and improvement
of new and existing products and equipment and conceptual and engineering
evaluation for translation into practical applications. The cost of research and
development which is not performed on specific contracts is charged to
operations as incurred. Such expense was approximately $12,312,000, $15,125,000
and $16,579,000 in fiscal years 1999, 1998 and 1997, respectively. In addition,
expenditures on research and development activities of approximately
$15,752,000, $22,803,000 and $34,170,000 in fiscal years 1999, 1998 and 1997,
respectively, were paid for by customers of McDermott.
Minority Interest
- -----------------
Minority interest expense includes dividends on MI preferred stock (see Note 8)
and the recognition of minority shareholder participation in the results of
operations of less than wholly-owned subsidiaries.
Long-Lived Assets
- -----------------
McDermott evaluates the realizability of its long-lived assets, including
property, plant and equipment and goodwill, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are carried at cost, reduced by provisions to
recognize economic impairment when management determines such impairment has
occurred.
Except for major marine vessels, property, plant and equipment is depreciated
using the straight-line method, over estimated economic useful lives of 8 to 40
years for buildings and 2 to 28 years for machinery and equipment. Major marine
vessels are depreciated using the units-of-production method based on the
utilization of each vessel. Depreciation expense calculated under the units-of-
production method may be less than, equal to, or greater than depreciation
expense calculated under the straight-line method in any period. The annual
depreciation based on utilization of each vessel will not be less than the
greater of 25% of annual straight-line depreciation, or 50% of cumulative
straight-line depreciation. Depreciation expense was $84,404,000, $106,305,000
and $102,486,000 for fiscal years 1999, 1998 and 1997, respectively.
Maintenance, repairs and renewals which do not materially prolong the useful
life of an asset are expensed as incurred except for drydocking costs for the
marine fleet, which are estimated and accrued over the period of time between
drydockings, generally 3 to 5 years. Such accruals are charged to operations
currently.
Intangible Assets
- -----------------
The majority of goodwill pertains to the acquisition of B&W. McDermott
amortizes goodwill associated with the acquisition of B&W on a straight-line
basis over 40 years and amortizes other goodwill over 10 to 20 years. During
fiscal year 1999, McDermott recorded $27,231,000 of additional goodwill arising
from JRM's purchase of treasury shares (see Note 2) and a reduction of goodwill
of $9,267,000 relating to the sale of McDermott Subsea Constructors Limited (see
Note 3). Impairments of goodwill of $10,461,000 and $272,610,000, respectively,
were recorded in fiscal years 1999 and 1998 (see Note 7).
Goodwill amortization expense was $8,290,000, $25,026,000 and $31,641,000 for
fiscal years 1999, 1998 and 1997, respectively.
Other intangible assets of $22,638,000 and $30,293,000 are included in other
assets at March 31, 1999 and 1998, respectively. These intangible assets
consist primarily of trademarks, rights to use technology, investments in oil
and gas properties and non-competition agreements. Amortization expense for
these intangible assets was $6,909,000, $8,229,000 and $10,187,000,
respectively, for fiscal years 1999, 1998 and 1997.
49
<PAGE>
Capitalization of Interest Cost
- -------------------------------
Interest is capitalized in accordance with SFAS No. 34, "Capitalization of
Interest Cost." In fiscal years 1999, 1998 and 1997, total interest cost
incurred was $63,839,000, $82,347,000 and $95,924,000, respectively, of which
$578,000, $893,000 and $824,000, respectively, was capitalized.
Cash Equivalents
- ----------------
Cash equivalents are highly liquid investments, with maturities of three months
or less when purchased, which are not held as part of the investment portfolio.
Derivative Financial Instruments
- --------------------------------
McDermott attempts to minimize its exposure to changes in foreign currency
exchange rates by matching foreign currency contract receipts with like foreign
currency disbursements. To the extent that it is unable to match the foreign
currency receipts and disbursements related to its contracts, McDermott enters
into derivatives, primarily forward exchange contracts, to reduce the impact of
foreign exchange rate movements on operating results. Gains and losses on
forward exchange contracts that qualify as hedges of firm purchase and sale
commitments are deferred and recognized in income or as adjustments of carrying
amounts when the hedged transactions occur. Gains and losses on forward
exchange contracts which hedge foreign currency assets or liabilities are
recognized in income as incurred. Such amounts effectively offset gains and
losses on the foreign currency assets or liabilities that are hedged.
Stock-Based Compensation
- ------------------------
McDermott follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related Interpretations in accounting
for its employee stock plans. Under APB 25, if the exercise price of the
Company's employee stock options equals or exceeds the fair value of the
underlying stock on the measurement date, no compensation expense is recognized.
If the measurement date is later than the date of grant, compensation expense is
recorded to the measurement date based on the quoted market price of the
underlying stock at the end of each period.
New Accounting Standards
- ------------------------
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which is effective for fiscal years beginning after December 15,
1998. SOP 98-5 provides guidance on accounting for the costs of start-up
activities and requires that entities expense start-up costs and organization
costs as they are incurred. McDermott's adoption of SOP 98-5 will not have a
material impact on its consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 1999. SFAS No. 133 will
require McDermott to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings. McDermott has
not yet determined what effect the adoption of SFAS No. 133 will have on its
consolidated financial position or results of operations.
NOTE 2 - ACQUISITIONS
During fiscal year 1997, an additional interest in Talleres Navales del Golfo, a
Mexican shipyard, was acquired. During fiscal year 1998, McDermott acquired the
minority ownership in Diamond Power Specialty U.K. In fiscal years 1999 and
1998, McDermott acquired a portion of the outstanding minority interest of JRM,
as a
50
<PAGE>
result of JRM's purchase of treasury shares. These acquisitions were accounted
for using the purchase method, and operating results have been included in the
Consolidated Statement of Income (Loss) from the acquisition dates. Pro forma
results of operations have not been presented because the effects of these
acquisitions were not significant.
Subsequent Event--On May 13, 1999, MII commenced a tender offer to acquire all
outstanding shares of JRM not already owned by MII for $35.62 per share. JRM
currently has approximately 39,060,000 shares outstanding, of which MII owns
approximately 63%.
NOTE 3 - INVESTMENT IN UNCONSOLIDATED AFFILIATES
Included in other assets are investments in joint ventures and other entities,
which are accounted for using the equity method, of $61,393,000 and $72,389,000
at March 31, 1999 and 1998, respectively. Undistributed earnings of equity
method investees were $38,088,000 and $40,484,000 at March 31, 1999 and 1998,
respectively.
Summarized combined balance sheet and income statement information, based on the
most recent financial information, for investments in entities accounted for
using the equity method are presented below:
<TABLE>
<CAPTION>
1999 1998
------- ---------
(In thousands)
<S> <C> <C>
Current Assets $448,558 $ 629,773
Non-Current Assets 205,562 259,694
----------------------------------------------------------------
Total Assets $654,120 $ 889,467
----------------------------------------------------------------
Current Liabilities $361,058 $ 610,694
Non-Current Liabilities 124,521 123,390
Owners' Equity 168,541 155,383
----------------------------------------------------------------
Total Liabilities and Owners' Equity $654,120 $ 889,467
----------------------------------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
Revenues $1,100,224 $1,535,987 $1,239,071
Gross Profit $ 64,645 $ 172,349 $ 120,600
Income before Provision for Income Taxes $ 37,031 $ 90,564 $ 22,050
Provision for Income Taxes 4,398 27,460 10,767
---------------------------------------------------------------------------------------
Net Income $ 32,633 $ 63,104 $ 11,283
---------------------------------------------------------------------------------------
</TABLE>
McDermott's investment in equity method investees was less that McDermott's
underlying equity in net assets of those investees based on stated ownership
percentages by $18,824,000 at March 31, 1999 and greater than McDermott's
underlying equity in net assets by $4,355,000 at March 31, 1998. These
differences are primarily related to the partial liquidation of an investee,
cumulative losses, the timing of distribution of dividends and various GAAP
adjustments.
51
<PAGE>
Reconciliation of net income per combined income statement information to income
(loss) from investees per consolidated statement of income (loss) as of
March 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Equity income based on stated
ownership percentages $12,768 $25,192 $ 594
Distribution of earnings from
HeereMac joint venture received
as part of termination - 61,637 -
Impairment of advances to
investee (4,823) - -
Recognition of joint venture
project losses - - (6,508)
All other adjustments due to
amortization of basis
differences, timing of GAAP
adjustments and other
adjustments 434 (1,447) 1,816
--------------------------------------------------------------
Income (loss) from investees $ 8,379 $85,382 $(4,098)
--------------------------------------------------------------
</TABLE>
During fiscal year 1998, JRM and its joint venture partner, Heerema Offshore
Construction Group, Inc. ("Heerema"), terminated the HeereMac joint venture.
Each party had a 50% interest in the joint venture. Heerema had responsibility
for its day-to-day operations. During fiscal year 1997, JRM changed from the
equity to the cost method of accounting for its investment in the HeereMac joint
venture because it was no longer able to exercise significant influence over
HeereMac's operating and financial policies.
Pursuant to the termination of the joint venture, Heerema acquired and assumed
JRM's 50% interest in the joint venture. JRM received $318,500,000 in cash and
title to several pieces of equipment. The cash received included a $61,637,000
distribution of earnings and approximately $100,000,000 of principal and
interest owed to JRM under the 7.75% promissory note described in the next
paragraph. The equipment received included two launch barges and the derrick
barge 101, a semi-submersible derrick barge with a 3,500-ton lift capacity. As
a result of the termination, JRM recorded a gain on asset disposal of
$224,472,000 and income from investees of $61,637,000. The $224,472,000 gain on
asset disposal includes recognition of the remaining deferred gain which had
resulted from the 1996 sale of vessels to the HeereMac joint venture described
in the next paragraph.
During fiscal year 1996, JRM sold to the HeereMac joint venture the major marine
vessels that it had been leasing to the joint venture. JRM received cash of
$135,969,000 (including a $30,000,000 advance deposit on the sale of certain
marine equipment which was completed during fiscal year 1997) and a 7.75% note
receivable of $105,000,000. JRM recorded a deferred gain on the sale of
$103,239,000. The note receivable, net of the deferred gain, was included in
investment in unconsolidated affiliates. Prior to the change to the cost method
of accounting for its investment in HeereMac, JRM was amortizing the deferred
gain over the depreciable lives of the vessels that were assigned by HeereMac.
After the change to the cost method, JRM recognized pro rata portions of the
deferred gain as payments were received on the 7.75% note. In fiscal year 1997,
JRM received a $12,500,000 principal payment on the note and recognized
$12,271,000 of the deferred gain . At March 31, 1997, the note receivable and
deferred gain balances were $92,500,000 and $90,803,000, respectively. Also, in
fiscal year 1997, JRM realized a gain of $16,682,000 on the sale of a marine
vessel by HeereMac on behalf of JRM.
On April 3, 1998, JRM and ETPM S.A. terminated their worldwide McDermott-ETPM
joint venture, and JRM recognized a gain on the termination of $37,353,000.
Pursuant to the termination, JRM received cash of approximately $105,000,000,
ETPM S.A.'s derrick/lay barge 1601 and ETPM S.A.'s interest in McDermott-ETPM
East, Inc. and McDermott-ETPM Far East, Inc. ETPM S.A. received JRM's lay barge
200 and JRM's interest in McDermott Subsea Constructors Limited ("MSCL") and
McDermott-ETPM West, Inc. The consolidated statement of income (loss) includes
revenues of $74,096,000 and $44,033,000 and operating income (loss) of
$18,751,000 and ($22,956,000) for fiscal years 1998 and 1997 , respectively,
attributable to operations transferred to ETPM S.A.
52
<PAGE>
During fiscal year 1999, JRM's Malaysian joint venture sold two combination
pipelay and derrick barges. The joint venture, in which JRM holds a 49%
interest, received approximately $47,000,000 in cash for the barges.
McDermott has investments in numerous joint ventures and other entities on a
worldwide basis. No individual investee was significant for the periods
presented.
Transactions with unconsolidated affiliates included the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Sales to $136,737 $164,501 $140,605
Leasing activities
(included in Sales to) $ 42,154 $ 10,491 $ 9,609
Purchases from $ 12,223 $ 33,544 $ 32,103
Dividends received $ 28,650 $ 9,832 $ 13,324
</TABLE>
Other assets include $2,819,000 and $4,250,000 at March 31, 1999 and 1998,
respectively, of non-current accounts receivable from unconsolidated affiliates.
Accounts payable includes $28,314,000 and $25,803,000 at March 31, 1999 and
1998, respectively, of payables to unconsolidated affiliates. Property, plant
and equipment includes cost of $63,594,000 and accumulated depreciation of
$29,497,000 at March 31, 1999 of marine equipment that was leased, on an as
needed basis, to an unconsolidated affiliate. Property, plant and equipment
includes cost of $137,513,000 and accumulated depreciation of $113,528,000 at
March 31, 1998 of marine equipment that was leased to the McDermott-ETPM joint
venture. This marine equipment was transferred to ETPM S.A. as part of the
termination of the McDermott-ETPM joint venture on April 3, 1998.
NOTE 4 - INCOME TAXES
Income taxes have been provided based upon the tax laws and rates in the
countries in which operations are conducted. All income has been earned outside
of Panama, and McDermott is not subject to income tax in Panama on income earned
outside of Panama. Therefore, there is no expected relationship between the
provision for, or benefit from, income taxes and income, or loss, before income
taxes. The major reason for the variations in such relationships is that income
is earned within and subject to the taxation laws of various countries, each of
which has a regime of taxation which varies from that of any other country. The
regimes of taxation vary not only with respect to nominal rate, but also with
respect to the allowability of deductions, credits and other benefits. The
variations are also because the proportional extent to which income is earned
in, and subject to tax by, any particular country or countries varies from year
to year. MII and certain of its subsidiaries keep books and file tax returns on
the completed contract method of accounting.
Deferred income taxes reflect the net tax effects of temporary differences
between the financial and tax bases of assets and liabilities. Significant
components of deferred tax assets and liabilities as of March 31, 1999 and 1998
were as follows:
53
<PAGE>
<TABLE>
<CAPTION>
1999 1998
---------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Accrued warranty expense $ 15,848 $ 15,582
Accrued vacation pay 8,234 10,259
Accrued liabilities for self-insurance
(including postretirement health care benefits) 69,025 169,768
Accrued liabilities for executive and employee incentive compensation 30,972 28,517
Investments in joint ventures and affiliated companies 6,419 9,498
Operating loss carryforwards 13,458 25,394
Environmental and products liabilities 620,992 363,598
Other 29,489 34,710
- ------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 794,437 657,326
- ------------------------------------------------------------------------------------------------------------------
Valuation allowance for deferred tax assets (39,961) (69,057)
- ------------------------------------------------------------------------------------------------------------------
Deferred tax assets 754,476 588,269
- ------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment 21,644 37,184
Prepaid pension costs 11,493 110,801
Investments in joint ventures and affiliated companies 15,243 13,921
Insurance and other recoverables 544,382 291,899
Other 5,526 11,694
- ------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 598,288 465,499
- ------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $156,188 $122,770
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Income (loss) before provision for (benefit from) income taxes and extraordinary
item was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
(In thousands)
<S> <C> <C> <C>
U.S. $ 63,361 $(125,441) $(164,771)
Other than U.S. 123,917 417,248 (55,926)
-------------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for (benefit from)
income taxes and extraordinary item $187,278 $ 291,807 $(220,697)
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for (benefit from) income taxes consists of:
<TABLE>
<S> <C> <C> <C>
Current:
U.S. - Federal $ 18,582 $54,340 $(13,411)
U.S. - State and local 7,983 8,541 (2,667)
Other than U.S. (1,643) 3,715 1,697
- ------------------------------------------------------------------------------------
Total current 24,922 66,596 (14,381)
- ------------------------------------------------------------------------------------
Deferred
U.S. - Federal (37,152) (147) 7,090
U.S. - State and local 2,823 69 (1,862)
Other than U.S. 4,604 9,599 (5,439)
- ------------------------------------------------------------------------------------
Total deferred (29,725) 9,521 (211)
- ------------------------------------------------------------------------------------
Provision for (benefit from) income taxes $ (4,803) $76,117 $(14,592)
- ------------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
There is no provision for (benefit from) income taxes associated with the
extraordinary item of $38,719,000 recorded by JRM.
The current provision for other than U.S. income taxes in 1999, 1998 and 1997
includes a reduction of $525,000, $10,427,000 and $2,021,000, respectively, for
the benefit of net operating loss carryforwards. Fiscal 1999 also includes a
benefit totaling approximately $25,456,000 for a reduction in the valuation
allowance for deferred taxes. This reduction is the result of tax planning
strategies, use of operating loss carrybacks and forecasted taxable income.
Included in the reduction of the valuation allowance was an amount that
generated no tax benefit which resulted from the sale of a foreign subsidiary.
In addition, fiscal 1999 also includes favorable tax settlements in U.S. and
foreign jurisdictions totaling approximately $30,429,000. Initial recognition
of OPI pre-acquisition tax benefits in fiscal year 1997 resulted in a reduction
in excess cost over fair value of assets acquired of $3,115,000.
MII and JRM would be subject to withholding taxes on distributions of earnings
from their U.S. subsidiaries and certain foreign subsidiaries. No withholding
taxes have been provided as these earnings are considered indefinitely
reinvested. It is not practicable to estimate the deferred tax liability on
those earnings.
Settlements were reached with the Internal Revenue Service ("IRS") concerning
MI's U.S. income tax liability through the fiscal year ended March 31, 1990,
disposing of all U.S. federal income tax issues. The IRS has issued notices for
fiscal years ended March 31, 1991 and March 31, 1992 asserting deficiencies in
the amount of taxes reported. The deficiencies are based on issues
substantially similar to those of earlier years. MI believes that any income
taxes ultimately assessed will not exceed amounts already provided.
McDermott has provided a valuation allowance ($39,961,000 at March 31, 1999) for
deferred tax assets which cannot be realized through carrybacks and future
reversals of existing taxable temporary differences. Management believes that
remaining deferred tax assets at March 31, 1999 are realizable through
carrybacks and future reversals of existing taxable temporary differences,
future taxable income and, if necessary, the implementation of tax planning
strategies involving the sales of appreciated assets. Uncertainties that affect
the ultimate realization of deferred tax assets are the risk of incurring losses
in the future and the possibility of declines in value of appreciated assets
involved in identified tax planning strategies. These factors have been
considered in determining the valuation allowance. Management will continue to
assess the adequacy of the valuation allowance on a quarterly basis.
McDermott has foreign net operating loss carryforwards of approximately
$15,000,000 available to offset future taxable income in foreign jurisdictions.
Pursuant to a stock purchase and sale agreement (the "Intercompany Agreement"),
MI has the right to sell to MII and MII has the right to buy from MI, 100,000
units, each unit consisting of one share of MII Common Stock and one share of
MII Series A Participating Preferred Stock. The price is based primarily upon
the stockholders' equity of MII at the close of the fiscal year preceding the
date at which the right to sell or buy, as the case may be, is exercised, and,
to a limited extent, upon the price-to-book value of the Dow Jones Industrial
Average. At April 1, 1999, the current unit value was $2,903 and the aggregate
current unit value for MI's 100,000 units was $290,336,000. The net proceeds to
MI from the exercise of any rights under the Intercompany Agreement would be
subject to U.S. federal, state and other applicable taxes. No tax provisions
have been established, since there is no present intention by either party to
exercise such rights.
55
<PAGE>
NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Long-term debt consists of:
Unsecured Debt:
Series A Medium Term Notes (maturities ranging from 1 to 5
years; interest at various rates ranging from 8.20% to 9.00%) $ 40,000 $ 40,000
Series B Medium Term Notes (maturities ranging from 1 to 25
years; interest at various rates ranging from 6.50% to 8.75%) 64,000 91,000
9.375% Notes due 2002 ($225,000,000 principal amount) 224,739 224,665
9.375% Senior Subordinated Notes due 2006
($250,000,000 principal amount) 1,397 244,986
Other notes payable through 2009 (interest at
various rates ranging to 10%) 23,667 35,484
Secured Debt:
10.375% Note payable due 1998 - 12,200
Other notes payable through 2012 and capitalized
lease obligations 1,097 18,264
- ---------------------------------------------------------------------------------------------
354,900 666,599
Less: Amounts due within one year 31,126 68,417
- ---------------------------------------------------------------------------------------------
Long-term debt $323,774 $598,182
- ---------------------------------------------------------------------------------------------
</TABLE>
Notes payable and current maturities of long-term debt consist of:
<TABLE>
<S> <C> <C>
Short-term lines of credit - unsecured $ - $ 5,100
Secured borrowings - 82,783
Current maturities of long-term debt 31,126 68,417
- ---------------------------------------------------------------------------------------------
Total $31,126 $156,300
- ---------------------------------------------------------------------------------------------
Weighted average interest rate on short-term borrowings 8.20% 5.87%
- ---------------------------------------------------------------------------------------------
</TABLE>
The Indentures for the 9.375% Notes due 2002 and the Series A and B Medium Term
Notes contain certain restrictive covenants, including limitations on
indebtedness, liens securing indebtedness and dividends and loans.
On March 5, 1999, JRM consummated an offer to purchase all of its outstanding
9.375% Senior Subordinated Notes at a purchase price of 113.046% of their
principal amount ($1,130.46 per $1,000 principal amount), plus accrued and
unpaid interest. On that date, JRM purchased $248,575,000 in principal amount
of the notes for a total purchase price of $284,564,000, including interest of
$3,560,000. As a result, JRM recorded an extraordinary loss of $38,719,000. In
connection with the purchase of the notes, JRM received consents to certain
amendments that amended or eliminated certain restrictive covenants and other
provisions contained in the indenture relating to the notes. Specifically, the
covenants contained in the indenture that restricted JRM's ability to pay
dividends, repurchase or redeem its capital stock, or to transfer funds through
unsecured loans to or investments in MII were eliminated.
Maturities of long-term debt during the five fiscal years subsequent to March
31, 1999 are as follows: 2000 - $31,126,000; 2001 - $452,000; 2002 -
$224,949,000; 2003 -$25,000; 2004 - $9,525,000.
56
<PAGE>
At March 31, 1998, McDermott had $82,783,000 in secured borrowings pursuant to a
receivables purchase and sale agreement between B&W and certain of its
affiliates and subsidiaries and a U.S. Bank. Through July 31, 1998, $25,854,000
was repaid under the agreement. Effective July 31, 1998, the receivables
purchase and sale agreement was amended and restated to provide for, among other
things, the inclusion of certain insurance recoverables in the pool of qualified
accounts receivable. It also provided for sales treatment as opposed to secured
financing treatment for this arrangement under SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
As a result, $56,929,000 was removed from notes payable and current maturities
of long-term debt on the balance sheet. This amended agreement was terminated
on April 30, 1999.
At March 31, 1999 and 1998, McDermott had available various uncommitted short-
term lines of credit from banks totaling $87,578,000 and $127,061,000,
respectively. Borrowings against these lines of credit at March 31, 1998 were
$5,100,000. There were no borrowings against these lines at March 31, 1999. At
March 31, 1998, B&W was a party to a revolving credit facility under which there
were no borrowings. In July 1998, B&W terminated its existing credit facility
and, jointly and severally with BWICO and BWXT, entered into a new $200,000,000
three-year, unsecured credit agreement (the "BWICO Credit Agreement") with a
group of banks. Borrowings by the three companies against the BWICO Credit
Agreement cannot exceed an aggregate amount of $50,000,000. The remaining
$150,000,000 is reserved for the issuance of letters of credit. In connection
with satisfying a condition to borrowing or issuing letters of credit under the
BWICO Credit Agreement, MI made a $15,000,000 capital contribution to BWICO in
August 1998. At March 31, 1999, there were no borrowings under the BWICO Credit
Agreement. Under the BWICO Credit Agreement, there are certain restrictive
covenants, including limitations on indebtedness, sales and leaseback
transactions, investments, loans and advances and the maintenance of certain
financial ratios. Commitment fees are on .40% of the unused portion of BWICO
Credit Agreement's $200,000,000 commitment. Commitment fees totaled
approximately $733,000, $412,000 and $160,000 for fiscal years 1999, 1998 and
1997, respectively.
At March 31, 1998, JRM and certain of its subsidiaries were parties to a
revolving credit facility under which there were no borrowings. In June 1998,
JRM and such subsidiaries entered into a new $200,000,000 three-year, unsecured
credit agreement (the "JRM Credit Agreement") with a group of banks. Borrowings
against the JRM Credit Agreement cannot exceed $50,000,000. The remaining
$150,000,000 is reserved for the issuance of letters of credit. At March 31,
1999, there were no borrowings under the JRM Credit Agreement. Management does
not anticipate JRM will need to borrow funds under the JRM Credit Agreement
during fiscal year 2000. Subsequent to year-end, JRM elected to reduce the
commitments on the JRM Credit Agreement from $200,000,000 to $100,000,000.
Under the JRM Credit Agreement, there are certain restrictive covenants,
including limitations on additional indebtedness, liens securing indebtedness,
sales and leaseback transactions, investments, loans and advances and the
maintenance of certain financial ratios. Commitment fees were on .35% of the
unused portion of JRM Credit Agreement's $200,000,000 commitment. Commitment
fees totaled approximately $610,000, $380,000 and $380,000 for fiscal years
1999, 1998 and 1997, respectively.
Subsequent Event - On May 7, 1999, MII and JRM entered into a merger agreement
pursuant to which MII initiated a tender offer for those shares of JRM that it
did not already own for $35.62 per share in cash. Under the merger agreement,
any shares not purchased in the tender offer will be acquired for the same price
in cash in a second-step merger. MII estimates that it will require
approximately $560,000,000 to consummate the tender offer and second-step merger
and to pay related fees and expenses. MII expects to obtain the funds from cash
on hand and from a new $525,000,000 senior secured term loan facility with
Citibank, N.A. The facility will terminate and all borrowings thereunder will
mature upon the earlier of five business days after the consummation of the
second merger or September 30, 1999. When the facility terminates, JRM will
declare and pay a dividend and/or loan to MII such amounts that, together with
MII's available cash, will be used to repay all outstanding loans under the
facility. Citibank, N.A. may act either as sole lender under the facility or
syndicate all or a portion of the facility to a group of financial institutions.
The facility contains customary representations, warranties, covenants and
events of default. The facility also includes financial covenants that:
57
<PAGE>
. require MII to maintain a minimum consolidated tangible net worth of not
less than $250,000,000,
. limit MII's ability to pay dividends, and,
. require MII, JRM and certain other subsidiaries to maintain cash, cash
equivalents and investments in debt securities of at least $575,000,000 at
all times.
The facility is secured by a first priority pledge of all JRM capital stock and
securities convertible into capital stock held by or acquired by MII or any of
its subsidiaries. Commitment fees will be approximately $3,300,000 in the next
fiscal year.
NOTE 6 - PENSION PLANS AND POSTRETIREMENT BENEFITS
McDermott provides retirement benefits, primarily through non-contributory
pension plans, for substantially all of its regular full-time employees.
McDermott does not provide retirement benefits to certain non-resident alien
employees of foreign subsidiaries who are not citizens of a European Community
country or who do not earn income in the United States, Canada, or the United
Kingdom. Salaried plan benefits are based on final average compensation and
years of service, while hourly plan benefits are based on a flat benefit rate
and years of service. McDermott's funding policy is to fund applicable pension
plans to meet the minimum funding requirements of the Employee Retirement Income
Security Act of 1974 (ERISA) and, generally, to fund other pension plans as
recommended by the respective plan actuary and in accordance with applicable
law.
Postretirement health care and life insurance benefits are supplied to union
employees based on union contracts. Effective April 1, 1998, McDermott
terminated all other postretirement benefits. On the same date, the pension
plans for the employees affected by the termination were amended to increase the
benefits payable to offset the cost of postretirement health care and life
insurance to the participants. The decrease in the postretirement benefit
obligation was measured against the increase in the projected benefit obligation
of the pension plans, and a resulting curtailment gain of $21,940,000 was
recognized in fiscal year 1999.
In February 1998, McDermott terminated its Retirement Plan for Non-Management
Directors and issued 32,040 shares of McDermott Common Stock to the directors at
that time, in full satisfaction of their accrued benefits under the terminated
plan.
Effective April 1, 1998, McDermott adopted SFAS No. 132 "Employers' Disclosure
about Pensions and Other Postretirement Benefits." SFAS No. 132 establishes new
disclosure requirements for pension and postretirement benefits. Fiscal year
1998 balances have been restated to comply with the new requirements.
58
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
1999 1998 1999 1998
----------- ----------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of fiscal year $1,411,512 $1,244,134 $ 349,288 $ 370,866
Service cost 33,341 29,002 203 3,487
Interest cost 112,822 94,182 9,478 26,480
Plan participants' contributions 136 127 - -
Curtailments 1,452 3,011 (215,751) -
Amendments 245,306 291 - -
Change in assumptions 101,387 111,592 3,012 -
Actuarial (gain) loss 9,210 (3,386) 29,049 (10,880)
Foreign currency exchange rate changes (7,014) 772 - -
Benefits paid (108,709) (68,213) (21,332) (40,665)
- ---------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 1,799,443 1,411,512 153,947 349,288
- ---------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 1,822,166 1,561,368 - -
Actual return on plan assets 190,586 320,797 - -
Company contributions 14,602 8,033 21,332 40,665
Plan participants' contributions 136 127 - -
Foreign currency exchange rate changes (12,898) 54 - -
Benefits paid (101,346) (68,213) (21,332) (40,665)
---------------------------------------------------------------------------------------------------------
Fair value of plan assets at the end of year 1,913,246 1,822,166 - -
- ---------------------------------------------------------------------------------------------------------
Funded status 113,803 410,654 (153,947) (349,288)
Unrecognized net obligation (25,456) (36,006) 2,712 -
Unrecognized prior service cost 14,689 16,035 - -
Unrecognized actuarial (gain) loss (42,866) (107,657) 1,879 (77,159)
---------------------------------------------------------------------------------------------------------
Net amount recognized $ 60,170 $ 283,026 $(149,356) $(426,447)
---------------------------------------------------------------------------------------------------------
Amounts recognized in the statement of financial
position consist of:
Prepaid benefit cost $ 130,437 $ 328,583 $ - $ -
Accrued benefit liability (81,727) (55,694) (149,356) (426,447)
Intangible asset 2,435 2,969 - -
Accumulated other comprehensive income 9,025 7,168 - -
- ---------------------------------------------------------------------------------------------------------
Net amount recognized $ 60,170 $ 283,026 $(149,356) $(426,447)
- ---------------------------------------------------------------------------------------------------------
Weighted average assumptions as of March 31:
Discount rate 7.01% 7.52% 6.60% 7.00%
Expected return on plan assets 8.13% 8.47% - -
Rate of compensation increase 4.50% 4.97% - -
</TABLE>
For measurement purposes, a 5 percent annual rate of increase in the per capita
cost of covered health care benefits was assumed for fiscal year 2000. The rate
was assumed to decrease gradually to 4 percent in 2005 and remain at that level
thereafter.
59
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
1999 1998 1997 1999 1998 1997
----------- ---------- ---------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit
income (cost):
Service cost $ 33,341 $ 29,002 $ 30,589 $ 203 $ 3,487 $ 4,737
Interest cost 112,822 94,182 86,111 9,478 26,480 30,551
Expected return on plan assets (146,990) (130,317) (175,041) - - -
Amortization of prior service cost 2,522 2,430 2,170 - - -
Recognized net actuarial (gain) loss (11,792) (7,493) 49,079 (1,109) (4,416) 751
- -----------------------------------------------------------------------------------------------------------------------
Net periodic benefit income (cost) $(10,097) $(12,196) $(7,092) $ 8,572 $25,551 $36,039
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $253,434,000, $207,549,000 and $152,700,000,
respectively, for fiscal year ended March 31, 1999 and $122,277,000, $92,724,000
and $64,231,000, respectively, for fiscal year ended March 31, 1998.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
One-Percentage- One-Percentage-
Point Increase Point Decrease
-------------- --------------
(In thousands)
<S> <C> <C>
Effect on total of service and interest
cost components $ 300 $ (288)
Effect on postretirement benefit obligation $4,286 $(4,238)
</TABLE>
Multiemployer Plans - One of MII's subsidiaries contributes to various
multiemployer plans. The plans generally provide defined benefits to
substantially all unionized workers in this subsidiary. Amounts charged to
pension cost and contributed to the plans were $11,295,000, $5,151,000 and
$4,552,000 in fiscal years 1999, 1998 and 1997, respectively.
NOTE 7 IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
Impairment losses to write-down property, plant and equipment to estimated fair
values and to write-off goodwill are summarized by segment as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- -------
(In thousands)
<S> <C> <C> <C>
Property, plant and equipment:
Assets to be held and used:
Marine Construction Services $16,458 $ 2,891 $19,228
Power Generation Systems - 8,704 11,098
Assets to be disposed of:
Marine Construction Services 877 7,000 12,162
Industrial Operations 261 - 7,295
Goodwill:
Marine Construction Services 10,461 262,901 -
Power Generation Systems - 1,611 4,859
Industrial Operations - 8,098 -
- ---------------------------------------------------------------------
Total $28,057 $291,205 $54,642
- ---------------------------------------------------------------------
</TABLE>
60
<PAGE>
Property, plant and equipment assets to be held and used
- ---------------------------------------------------------
During fiscal years 1999, 1998 and 1997, management identified certain long-
lived assets that were no longer expected to recover their entire carrying
value through future cash flows. Fair values were generally determined based on
sales prices of comparable assets. The assets include non-core, surplus and
obsolete property and equipment and fabrication facilities in the Marine
Construction Services segment, and manufacturing facilities and related
equipment in the Power Generation Systems segment.
Property, plant and equipment assets to be disposed of
- -------------------------------------------------------
In fiscal year 1999, the Marine Construction Services segment recorded a loss of
$877,000 to reduce a building located near London to its fair value less cost to
sell. Prior to recognition of the impairment loss, the building had a net book
value of approximately $7,549,000. Management decided to sell the building as a
result of its withdrawal from traditional European engineering operations. The
building is expected to be sold during the next year.
In fiscal year 1998, the Marine Construction Services segment recorded a loss of
$7,000,000 to reduce a Floating Production, Storage and Offloading System
("FPSO") to its estimated fair value less cost to sell. Prior to recognition of
the impairment loss, the FPSO had a net book value of approximately $21,500,000.
The estimated fair value was determined based upon management's best estimate,
as these types of vessels are somewhat unique in nature. Management decided to
sell the FPSO as a result of a strategic decision to exit this market.
Excluding the impairment loss, net income for fiscal year 1998 for the FPSO was
$2,774,000. The FPSO was sold during fiscal year 1999 resulting in a loss on
asset disposal of approximately $2,382,000.
In fiscal year 1997, the Marine Construction Services segment recorded losses of
$12,162,000 to reduce certain property and equipment to estimated fair values
less cost to sell. Prior to recognition of the impairment loss, the carrying
value of these assets was approximately $18,950,000. Also in fiscal year 1997,
the Industrial Operations segment recorded a loss of $7,295,000, which was
adjusted in fiscal year 1998, to reduce a building and land to its estimated
fair value less cost to sell. Prior to recognition of the impairment loss, the
property had a book value of approximately $15,795,000. The estimated fair
value was based upon prices of similar real estate. Management had begun
marketing the property that had been used as office space. Excluding the
impairment losses, results of operations for fiscal year 1997, were not
material. Substantially all of these assets were disposed of in fiscal year
1998, with no significant gain or loss recognized.
Goodwill
- ---------
In fiscal year 1999, the Marine Construction Services segment wrote off
$4,834,000 associated with the acquisition of a Mexican shipyard acquired in a
prior year. Management determined that the goodwill related to the Mexican
shipyard had no value as the facility's intended use was as a new-build
facility, and the facility had been engaged primarily in ship repair. Also in
fiscal year 1999, the Marine Construction Services segment wrote off $5,627,000
related to an engineering business acquired in a prior year. Management
determined that the business had no value as management has decided to withdraw
from the third-party engineering business. Annual amortization of this goodwill
totaled $1,524,000.
In fiscal year 1998, the Marine Construction Services segment wrote off
$262,901,000 associated with the acquisition of OPI. In December 1997,
management decided to exit the traditional shallow water business, and abandoned
OPI-type work. The decision was based upon the industry outlook, the departure
of key OPI executives, the disposal of significant OPI joint ventures and the
disposal of major OPI vessels. Annual amortization of the OPI goodwill was
approximately $21,800,000. In addition, in fiscal year 1998, the Industrial
Operations segment wrote off $8,098,000 associated with the acquisition of
McDermott Engineers and Constructors (Canada) Limited in a prior year.
Management concluded that the goodwill no longer had value due to reduced future
asset utilization and deteriorating market conditions
61
<PAGE>
Also in fiscal years 1998 and 1997, $1,611,000 and $4,859,000, respectively, of
goodwill related to Power Generation Systems segment manufacturing facilities
and related equipment classified as assets to be held and used referred to above
was written off.
NOTE 8 - SUBSIDIARIES' STOCKS
At March 31, 1998, 13,000,000 shares of MI Preferred Stock, with a par value of
$1 per share, were authorized. Of the authorized shares, 2,818,679 shares of
Series A Cumulative Convertible Preferred Stock ("Series A"), and 2,152,766
shares of Series B Cumulative Preferred Stock ("Series B"), respectively, were
outstanding (in each case, exclusive of treasury shares owned by MI) at March
31, 1998. During fiscal year 1999, the Series A and Series B stocks were
redeemed. Preferred dividends of $4,400,000, $12,722,000 and $13,243,000 were
included as a component of minority interest in other income (expense) in fiscal
years 1999, 1998 and 1997, respectively.
During fiscal year 1998, JRM's Board of Directors approved the repurchase of up
to two million shares of its common stock from time to time on the open market
or through negotiated transactions, depending on the availability of cash and
market conditions. The purpose of the repurchases was to offset dilution
created by the issuance of shares pursuant to JRM's stock compensation and
thrift plans. JRM repurchased 362,500 shares at an average share price of
$37.31 during fiscal year 1998. During fiscal year 1999, JRM's Board of
Directors authorized the repurchase of up to an additional one million shares of
its common stock . JRM repurchased another 1,837,700 shares of its common stock
at an average share price of $31.67 through October 8, 1998, at which time JRM
ceased all further share repurchases. At such time, JRM had repurchased
2,200,200 of the three million shares of its common stock authorized to be
repurchased.
At March 31, 1999 and 1998, JRM had outstanding 3,200,000 shares of Series A
$2.25 Cumulative Convertible Preferred Stock ("JRM Series A Preferred Stock" -
with an aggregate liquidation preference of $160,000,000), all of which were
owned by MII. Each share of JRM Series A Preferred Stock is convertible into
1.794 shares of JRM Common Stock at any time after either (i) a call by JRM for
redemption of any or all of the outstanding JRM Series A Preferred Stock or (ii)
January 31, 2000. At March 31, 1999, 14,538,270 shares of JRM Common Stock were
reserved for issuance in connection with the conversion of JRM Series A
Preferred Stock, the exercise of stock options and awards of restricted stock
under JRM's stock incentive plans and contributions to the Thrift Plan described
in Note 10. At March 31, 1999, 839,471 options were outstanding at a weighted
average exercise price of $26.80 per share (407,107 options exercisable at a
weighted average exercise price of $23.75 per share).
Subsequent Event On May 13, 1999, MII commenced a tender offer to acquire all
outstanding shares of JRM not already owned by MII for $35.62 per share. JRM
currently has approximately 39,060,000 shares outstanding, of which MII owns
approximately 63%.
NOTE 9 - CAPITAL STOCK
The Panamanian regulations that relate to acquisitions of securities of
companies registered with the National Securities Commission, such as MII, have
certain requirements. They require, among other matters, that detailed
disclosure concerning the offeror be finalized prior to the beneficial
acquisition of more than 5 percent of the outstanding shares of any class of
stock pursuant to a tender offer. The detailed disclosure is subject to review
by either the Panamanian National Securities Commission or the Board of
Directors of the subject company. Transfers of securities in violation of these
regulations are invalid and cannot be registered for transfer.
Common stock is issued in connection with the conversion and redemption of MI's
Series A Preferred Stock (for fiscal year 1998 only), the conversion of MII's
Series C Preferred Stock (for fiscal year 1998 only), the 1996 Officer Stock
Program (and its predecessor programs), the 1992 Director Stock Plan, the 1992
Senior Management Stock Program and contributions to the Thrift Plan. At March
31, 1999 and 1998, 10,465,688 and 18,091,414 shares of MII Common Stock,
respectively, were reserved for issuance in connection with the above.
62
<PAGE>
During fiscal year 1998, MII's Board of Directors approved the repurchase of up
to two million shares of its common stock from time to time on the open market
or through negotiated transactions, depending on the availability of cash and
market conditions. The purpose of the repurchases was to offset dilution
created by the issuance of shares pursuant to MII's stock compensation and
thrift plans. MII completed its two million share repurchase program in August
1998. During the fiscal year ended March 31, 1999, MII repurchased 1,900,000
shares of its common stock at an average share price of $31.10.
MII Preferred Stock - On April 6, 1998, MII called for redemption its non-voting
Series C Cumulative Convertible Preferred Stock. On April 21, 1998, all
2,875,000 shares of Series C Preferred Stock were converted into shares of MII
Common Stock at a rate of 1.4184 shares of MII Common Stock for each share of
Series C Preferred Stock, resulting in 4,077,890 shares of MII Common Stock
being issued.
At March 31, 1999 and 1998, 100,000 shares of non-voting Series A Participating
Preferred Stock (the "Participating Preferred Stock") and 30,000 and 40,000
shares of Series B Non-Voting Preferred Stock (the "Non-Voting Preferred
Stock"), respectively, were issued and owned by MI. The Non-Voting Preferred
Stock is currently callable by MII at $275 per share, and 10,000 shares are
being redeemed each year by MII at $250 per share. The annual per share
dividend rates for the Participating Preferred Stock and the Non-Voting
Preferred Stock are $10 and $20, respectively, payable quarterly, and dividends
on such shares are cumulative to the extent not paid. The annual per share
dividend rate for the Participating Preferred Stock is limited to no more than
ten times the amount of the per share dividend on MII Common Stock. In
addition, shares of Participating Preferred Stock are entitled to receive
additional dividends whenever dividends in excess of $3.00 per share on MII
Common Stock are declared (or deemed to have been declared) in any fiscal year.
For McDermott financial reporting purposes the Participating Preferred Stock and
the Non-Voting Preferred Stock are considered constructively retired.
On December 5, 1995, MII designated 702,652 shares of its authorized but
unissued Preferred Stock as Series D Participating Preferred Stock in connection
with its adoption of a new Stockholders Rights Plan on December 30, 1995. As of
March 31, 1999, there were no shares of Series D Participating Preferred Stock
outstanding.
The issuance of additional MII Preferred Stock in the future and the specific
terms thereof, such as the dividend rights, conversion rights, voting rights,
redemption prices and similar matters, may be authorized by the Board of
Directors of MII without stockholder approval. The issuance is limited to the
extent such approval may be required by applicable rules of the New York Stock
Exchange or applicable law. If additional Preferred Stock is issued, such
additional shares will rank senior to MII Common Stock as to dividends and upon
liquidation.
MII Rights MII has a Stockholder Rights Plan pursuant to which each holder of
Common Stock has one Right for each outstanding share of Common Stock held. The
Rights currently trade with the Common Stock and each Right entitles the holder
thereof to purchase one one-hundredth of a share of MII Series D Participating
Preferred Stock for $50 per share subject to anti-dilution adjustments. The
Rights become exercisable and detach from the Common Stock within a specified
period of time after a person or a group either becomes the beneficial owner of
15 percent or more of the outstanding Common Stock, or commences or announces an
intention to commence a tender or exchange offer for 15 percent or more of the
outstanding Common Stock (an "Acquiring Person"). Once exercisable, each Right
entitles the holder thereof (other than an Acquiring Person) to purchase at the
$50 exercise price that number of shares of Common Stock having a market value
equal to twice the exercise price. If MII merges with or transfers 50 percent
or more of its assets or earnings to any person after the Rights become
exercisable, holders of Rights may purchase that number of shares of common
stock of the acquiring entity having a market value equal to twice the exercise
price. The Rights are redeemable by MII at a price of $0.01 per Right for a
specified period of time after a person or group becomes an Acquiring Person.
The Stockholder Rights Plan, which was amended and restated on April 15, 1999,
will expire on January 2, 2001.
63
<PAGE>
NOTE 10 - STOCK PLANS
1996 Officer Long-Term Incentive Plan - A total of 1,508,164 shares of Common
Stock (including shares that were not awarded under predecessor plans) are
available for stock option grants and restricted stock awards to officers and
key employees under this plan at March 31, 1999. The plan permits the grant of
nonqualified stock options, incentive stock options and restricted stock.
Options to purchase shares are granted at not less than 100% of the fair market
value on the date of grant, become exercisable at such time or times as
determined when granted, and expire not more than ten years after the date of
the grant. Under the plan, eligible employees may be granted rights to purchase
shares of Common Stock at par value ($1.00 per share), which shares are subject
to restrictions on transfer that lapse at such times and circumstances as
specified when granted. As of March 31, 1999, 801,705 shares of Common Stock
available for award may be granted as restricted stock. During fiscal years
1999 and 1998, performance-based restricted stock awards were granted to certain
officers and key employees under the plan. Under the provisions of the
performance-based awards, no shares are issued at the time of the initial award,
and the number of shares which will ultimately be issued shall be determined
based on the change in the market value of the Common Stock over a specified
performance period. The performance-based awards in fiscal years 1999 and 1998
were represented by initial notional grants totaling 129,510 and 86,400 rights
to purchase restricted shares of Common Stock, respectively. These rights had
weighted average fair values of $28.52 and $33.00 on their respective dates of
grant during fiscal years 1999 and 1998. Through March 31, 1999, a total of
1,121,940 shares of restricted stock (including 171,930 shares issued in fiscal
year 1997 with a weighted average fair value of $19.92 per share) have been
issued under the Plan (and a predecessor plan). No restricted shares were
issued in fiscal years 1999 or 1998.
1997 Director Stock Program - A total of 91,200 shares of Common Stock
(including approved shares that were not awarded under a predecessor plan) are
available for grants of options, and rights to purchase restricted shares, to
non-employee directors under this program at March 31, 1999. Options to
purchase 900, 300 and 300 shares will be granted on the first, second, and third
years, respectively, of a Director's term at not less than 100% of the fair
market value on the date of grant. Options become exercisable, in full, six
months after the date of the grant, and expire ten years and one day after the
date of grant. Rights to purchase 450, 150, and 150 shares are granted on the
first, second, and third years, respectively, of a Director's term, at par
value, ($1.00 per share), which shares are subject to restrictions on transfer
that lapse at the end of such term. Through March 31, 1999, a total of 19,750
shares of restricted stock have been issued under the 1997 Director Stock Plan
(and its predecessor plan).
1992 Senior Management Stock Option Plan - Under this plan, senior management
employees may be granted options to purchase shares of Common Stock. The total
number of shares available for grant is determined by the Board of Directors
from time to time. Options to purchase shares are granted at not less than 100%
of the fair market value on the date of grant, become exercisable at such time
or times as determined when granted, and expire not more than ten years after
the date of grant.
In the event of a change in control of McDermott, all three programs have
provisions that may cause restrictions to lapse and accelerate the
exercisability of options outstanding.
64
<PAGE>
The following table summarizes activity for MII's stock option plans (share data
in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, April 1 3,904 $23.66 5,260 $22.55 4,449 $22.72
Granted 651 $29.40 363 $33.99 909 $21.64
Exercised (187) $19.76 (1,451) $21.68 (23) $17.27
Cancelled/forfeited (123) $21.83 (268) $26.67 (75) $23.06
- -------------------------------------------------------------------------------------------------
Outstanding, March 31 4,245 $24.76 3,904 $23.66 5,260 $22.55
- -------------------------------------------------------------------------------------------------
Exercisable, March 31 3,101 $23.82 2,358 $22.95 3,430 $22.88
- -------------------------------------------------------------------------------------------------
</TABLE>
The following tables summarize the range of exercise prices and the weighted
average remaining contractual life of the options outstanding and the range of
exercise prices for the options exercisable at March 31, 1999 (share data in
thousands):
<TABLE>
<CAPTION>
Options Outstanding
- ----------------------------------------------------------------------------------
Weighted
Average
Remaining Weighted-
Range of Contractual Average
Exercise Prices Outstanding Life in Years Exercise Price
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 19.31 - $ 24.00 1,857 6.0 $21.26
$ 24.13 - $ 29.06 1,383 4.4 $24.90
$ 29.38 - $ 38.25 1,005 4.4 $31.05
-----
$ 19.31 - $ 38.25 4,245 5.1 $24.76
=====
Options Exercisable
- ----------------------------------------------------------------------------------
Weighted-
Range of Average
Exercise Prices Exercisable Exercise Price
- ----------------------------------------------------------------------------------
$ 19.31 - $ 24.00 1,492 $21.37
$ 24.13 - $ 29.06 1,383 $24.90
$ 29.38 - $ 34.00 226 $33.31
-----
$ 19.31 - $ 34.00 3,101 $23.82
=====
</TABLE>
As discussed in Note 1, McDermott applies APB 25 and related interpretations in
accounting for its stock-based compensation plans. Charges to income related to
stock plan awards totaled approximately $4,276,000, $6,288,000 and $7,273,000
for the fiscal years ended March 31, 1999, 1998 and 1997, respectively. If
McDermott had accounted for its stock plan awards using the alternative fair
value method of accounting under SFAS 123, "Accounting for Stock-Based
Compensation," its net income (loss) and earnings (loss) per share would have
been the pro forma amounts indicated as follows:
65
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net income (loss)
As reported $153,362 $215,690 $(206,105)
Pro forma $148,629 $214,991 $(207,206)
Basic earnings (loss) per share:
As reported $ 2.60 $ 3.74 $ (3.95)
Pro forma $ 2.52 $ 3.73 $ (3.97)
Diluted earnings (loss) per share:
As reported $ 2.54 $ 3.48 $ (3.95)
Pro forma $ 2.46 $ 3.48 $ (3.97)
</TABLE>
The above pro forma information is not indicative of future pro forma amounts.
SFAS 123 does not apply to awards prior to fiscal year 1996 and additional
awards in future years are anticipated. The fair value of each option grant was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Risk-free interest rate 4.67% 5.48% 6.27%
Volatility factor of the expected market
price of MII's common stock .46 .36 .36
Expected life of the option in years 3.5 3.6 5.0
Expected dividend yield of MII's common stock 0.8% 0.6% 1.0%
</TABLE>
The weighted average fair value of the stock options granted in fiscal years
1999, 1998 and 1997 was $10.80, $10.85 and $8.23, respectively.
Thrift Plan - On November 12, 1991 and June 5, 1995, respectively, a maximum of
5,000,000 of the authorized and unissued shares of each of the MII and JRM
Common Stock were reserved for issuance. The stock was reserved for the
employer match for employee contributions to the Thrift Plan for Employees of
McDermott Incorporated and Participating Subsidiary and Affiliated Companies
(the "Thrift Plan"). Such employer contributions equal 50% of the first 6% of
compensation, as defined in the Thrift Plan, contributed by participants, and
fully vest and are non-forfeitable after five years of service or upon
retirement, death, lay-off or approved disability. During fiscal years 1999,
1998 and 1997, 229,245, 191,058 and 306,089 shares, respectively, of MII's
Common Stock were issued as employer contributions pursuant to the Thrift Plan.
During fiscal years 1999, 1998 and 1997, 68,104, 65,727 and 77,112 shares,
respectively, of JRM's Common Stock were issued as employer contributions
pursuant to the Thrift Plan. At March 31, 1999, 2,896,542 shares of MII's
Common Stock and 4,708,701 shares of JRM Common Stock remained available for
issuance.
NOTE 11 - CONTINGENCIES AND COMMITMENTS
Investigations and Litigation - In March 1997, MII and JRM, with the help of
outside counsel, began an investigation into allegations of wrongdoing by a
limited number of former employees of MII and JRM and others. The allegations
concerned the heavy-lift business of JRM's HeereMac joint venture ("HeereMac")
with Heerema Offshore Construction Group, Inc. ("Heerema"). Upon becoming aware
of these allegations, MII and JRM notified authorities, including the Antitrust
Division of the U.S. Department of Justice and the European Commission. As a
result of MII's and JRM's prompt disclosure of the allegations, both companies
and their officers, directors and employees at the time of the disclosure were
granted immunity from criminal prosecution by the Department of Justice for any
anti-competitive acts involving worldwide heavy-lift activities.
After receiving the allegations, JRM initiated action to terminate its interest
in HeereMac, and, on December 19, 1997, JRM's co-venturer in the joint venture,
Heerema, acquired JRM's interest in exchange for cash and title to
66
<PAGE>
several pieces of equipment. On December 21, 1997, HeereMac and one of its
employees pled guilty to criminal charges by the Department of Justice that they
and others had participated in a conspiracy to rig bids in connection with the
heavy-lift business of HeereMac in the Gulf of Mexico, North Sea and Far East.
HeereMac and the HeereMac employee were fined $49,000,000 and $100,000,
respectively. As part of the plea, both HeereMac and certain employees of
HeereMac agreed to cooperate fully with the Department of Justice investigation.
Neither MII, JRM nor any of their officers, directors or employees was a party
to those proceedings.
MII and JRM have cooperated and are continuing to cooperate with the Department
of Justice in its investigation. The Department of Justice also has requested
additional information from the companies relating to possible anti-competitive
activity in the marine construction business of McDermott-ETPM East, Inc., one
of the operating companies within JRM's former McDermott-ETPM joint venture with
ETPM S.A., a French company. In connection with the termination of the
McDermott-ETPM joint venture on April 3, 1998, JRM assumed 100% ownership of
McDermott-ETPM East, Inc., which has been renamed J. Ray McDermott Middle East,
Inc.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and certain related entities (the "Phillips Plaintiffs") filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema, certain Heerema affiliates, and others alleging that the defendants
engaged in anti-competitive acts in violation of Sections 1 and 2 of the Sherman
Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code,
engaged in fraudulent activity and tortiously interfered with the plaintiffs'
businesses in connection with certain offshore transportation and installation
projects in the Gulf of Mexico, North Sea and Far East (the "Phillips
Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually
and on behalf of certain of its ventures and its participants, filed a similar
lawsuit in the same court. In addition to seeking injunctive relief, actual
damages and attorneys' fees, the plaintiffs in the Phillips Litigation have
requested punitive as well as treble damages. In January 1999, the court
dismissed without prejudice, due to the court's lack of subject matter
jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries
sustained on any foreign projects.
In June 1998, Shell Offshore, Inc. and certain related entities also filed a
lawsuit in the United States District Court for the Southern District of Texas
against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac,
Heerema and others alleging that the defendants engaged in anti-competitive acts
in violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation").
Subsequent thereto, Amoco Production Company and B.P. Exploration & Oil, Inc.;
Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco
Exploration and Production Inc. and certain of its affiliates; Elf Exploration
UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc. and The Louisiana
Land & Exploration Company; Marathon Oil Company and certain of its affiliates;
VK-Main Pass Gathering Company, L.L.C., Green Canyon Pipeline Company, L.L.C.
and Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas
Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside
Energy, Ltd; and Saga Petroleum, S.A. intervened (acting for themselves and, if
applicable, on behalf of their respective co-venturers and for whom they
operate) as plaintiffs in the Shell Litigation. Also, in December 1998, Total
Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and on behalf of
their respective co-venturers, filed similar lawsuits in the same court, which
lawsuits were consolidated with the Shell Litigation. In addition to seeking
injunctive relief, actual damages and attorneys' fees, the plaintiffs in the
Shell Lawsuit request treble damages.
MII and JRM are also cooperating with a Securities and Exchange Commission
("SEC") investigation into whether the companies may have violated U.S.
securities laws in connection with, but not limited to, the matters described
above. MII and JRM are subject to a judicial order entered in 1976, with the
consent of MI (which at that time was the parent of the McDermott group of
companies), pursuant to an SEC complaint (the "Consent Decree"). The Consent
Decree prohibits the companies from making false entries in their books,
maintaining secret or unrecorded funds or using corporate funds for unlawful
purposes. Violations of the Consent Decree could result in substantial civil
and/or criminal penalties to the companies.
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<PAGE>
As a result of the initial allegations of wrongdoing in March 1997, both MII and
JRM formed and continue to maintain special committees of their Board of
Directors to monitor and oversee the companies' investigation into all of these
matters.
It is not possible to predict the ultimate outcome of the Department of Justice
investigation, the SEC investigation, the companies' internal investigation, the
above-referenced lawsuits, or any actions that may be taken by others as a
result of HeereMac's guilty plea or otherwise. However, these matters could
result in civil and criminal liability and have a material adverse effect on
McDermott's consolidated financial position and results of operations.
B&W and Atlantic Richfield Company are defendants in lawsuits filed by Donald F.
Hall, Mary Ann Hall and others in the United States District Court for the
Western District of Pennsylvania involving over 120 separate cases relating to
the operation of two former nuclear fuel processing facilities located in
Pennsylvania (the "Hall Litigation"), alleging, among other things, that they
suffered personal injury and other damages as a result of radioactive emissions
from these facilities. In September 1998, a jury found B&W and Atlantic
Richfield Company liable to the plaintiffs in the first eight cases brought to
trial, awarding $36,700,000 in compensatory damages. B&W believes that adequate
insurance is available to meet possible liability in this matter. However, the
jury verdict is not final, and a number of post trial motions are pending
contesting this contigency. Both B&W and its insurers have filed actions
seeking a judicial determination as to the amount of insurance coverage under
the insurance policies covering these facilities, available for this award and
all other claims. B&W has filed an action seeking a judicial determination of
this matter, which is currently pending in a Pennsylvania court. Management
believes that the award and all other claims will be resolved within the limits
and coverage of such insurance policies; however, no assurance on insurance
coverage or financial impact if limits of coverage are exceeded can be given.
In connection with the foregoing, B&W settled all pending and future punitive
damage claims represented by the plaintiffs' lawyers in the Hall Litigation for
$8,000,000 and seeks reimbursement of this amount from other parties.
Two purported class actions have been filed in the Civil District Court for the
Parish of Orleans, State of Louisiana, by alleged public shareholders of JRM,
challenging MII's initial proposal to acquire the publicly traded shares of JRM
Common Stock in a stock for stock merger. On May 7, 1999, MII and JRM announced
that they had entered into a merger agreement pursuant to which MII
will acquire all of such publicly traded shares of JRM Common Stock for $35.62
per share pursuant to a cash tender offer followed by a second step merger. On
the same day, the Court entered an order consolidating the two actions under the
caption In re J. Ray McDermott Shareholder Litigation. There have been no
further proceedings in either of the actions to date. JRM and MII believe that
the actions are without merit and intend to contest these suits vigorously.
Additionally, due to the nature of its business, McDermott is, from time to
time, involved in routine litigation related to its business activities. It is
management's opinion that none of this litigation will have a material adverse
effect on McDermott's consolidated financial position or results of operations.
Products Liability - McDermott has personal injury claims related to previously
sold asbestos-containing products, and expects that it will continue to receive
claims in the future. The personal injury claims are similar in nature, the
primary difference being the type of alleged injury or illness suffered by the
plaintiff.
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<PAGE>
Personal injury claim activity for the years ended March 31, 1999 and 1998 was
as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Claims outstanding, beginning of fiscal year 43,826 45,253
New claims 24,278 30,004
Settlements (26,383) (31,431)
--------------------------------------------------------------------
Claims outstanding, end of fiscal year 41,721 43,826
--------------------------------------------------------------------
</TABLE>
Estimated liabilities for pending and future non-employee products liability
asbestos claims are derived from McDermott's claims history and constitute
management's best estimate of such future cost, including recoverability from
insurers. Inherent in the estimate of such liabilities are expected trend claim
severity and frequency and other factors which may vary significantly as claims
are filed and settled.
McDermott has insurance coverage for asbestos products liability claims which is
subject to varying insurance limits that are dependent upon the year involved.
McDermott has agreements with the majority of its principal insurers concerning
the method of allocation of claim payments to the years of coverage. Pursuant
to those agreements, McDermott negotiates and settles these claims and bills the
appropriate amounts to the insurers. McDermott has recognized a provision to
the extent that recovery of these amounts from the insurers is not probable. An
analysis of insurers providing coverage of the estimated liabilities is used to
estimate insurance recoveries.
McDermott is currently in litigation with certain excess insurance carriers
disputing specific conditions of the policies' available coverage. McDermott
believes that recovery of amounts under the policies is probable based upon
McDermott's history of negotiating settlements with other insurance carriers.
By the end of fiscal year 1999, McDermott concluded that its forecast decline in
claims in the next fiscal year was not likely. As a result, during fiscal year
1999, McDermott revised its estimate of liability for pending and future non-
employee products liability asbestos claims and recorded an additional liability
of $817,662,000, additional estimated insurance recoveries of $732,477,000 and a
loss of $85,185,000 for estimated future claims in which recovery from insurance
carriers was not determined to be probable. The revised forecast includes
management's expectation that new claims will conclude within the next thirteen
years, that there will be a significant decline in new claims received after
four years, and that the average cost per claim will continue to increase only
moderately.
In fiscal year 1997, based on an increasing number of claims and management's
evaluation of the increase, McDermott recorded an additional estimated liability
and estimated related insurance recoveries for future non-employee products
asbestos claims and recorded a loss of $72,400,000 for estimated future claims
for which recovery from insurers was not determined to be probable.
McDermott had recorded the following with respect to asbestos products liability
claims and related insurance recoveries at March 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- --------
(In thousands)
<S> <C> <C>
Asbestos products liability:
Current $ 240,000 $171,300
Non-current 1,322,363 715,391
-------------------------------------------------------------------------
Total $1,562,363 $886,691
-------------------------------------------------------------------------
</TABLE>
69
<PAGE>
<TABLE>
<S> <C> <C>
Asbestos products liability insurance recoverable:
Current $ 199,750 $143,588
Non-current 1,167,113 581,070
-------------------------------------------------------------------------
Total $1,366,863 $724,658
-------------------------------------------------------------------------
</TABLE>
Future costs to settle claims, as well as the number of claims, could be
adversely affected by changes in judicial rulings and influences beyond
McDermott's control. Accordingly, changes in the estimates of future asbestos
products liability and insurance recoverables and differences between the
proportion of any additional asbestos products liabilities covered by insurance,
and that experienced in the past could result in material adjustments to the
results of operations for any fiscal quarter or year, and the ultimate loss may
differ materially from amounts provided in the consolidated financial
statements.
Environmental Matters - During fiscal year 1995, management decided to close
B&W's nuclear manufacturing facilities in Parks Township, Armstrong County,
Pennsylvania (the "Parks Facilities"). Decontamination is proceeding as
permitted by the existing NRC license. A decommissioning plan was submitted to
the NRC for review and approval during January 1996. The facilities were
transferred to BWXT in fiscal year 1998. BWXT's management reached an agreement
with the NRC in fiscal year 1999 on a plan that provides for the completion of
facilities dismantlement and soil restoration by 2001 and license termination in
2002. BWXT's management expects to request approval from the NRC to release the
site for unrestricted use at that time. At March 31, 1999, the remaining
provision for the decontamination, decommissioning and the closing of these
facilities was $15,811,000.
At March 31, 1999 and 1998, McDermott had total environmental reserves
(including provision for the facilities discussed above), of $31,568,000 and
$46,164,000, of which $19,835,000 and $9,934,000, respectively, were included in
current liabilities. Estimated recoveries of these costs are included in
environmental and products liabilities recoverable at March 31, 1999. Inherent
in the estimates of such reserves and recoveries are expected levels of
contamination, decommissioning costs and recoverability from other parties,
which may vary significantly as decommissioning activities progress.
Accordingly, changes in estimates could result in a material adjustment to
operating results, and the ultimate loss may differ materially from amounts
provided in the consolidated financial statements.
McDermott has been identified as a potentially responsible party at various
cleanup sites under the Comprehensive Environmental Response, Compensation and
Liability Act, as amended. McDermott has not been determined to be a major
contributor of waste to these sites. However, each potentially responsible
party or contributor may face assertions of joint and several liability.
Generally, however, a final allocation of costs is made based on relative
contribution of wastes to each site. Based on its relative contribution of
waste to each site, McDermott's share of the ultimate liability for the various
sites is not expected to have a material adverse effect on its consolidated
financial position or results of operations.
The Department of Environmental Protection of the Commonwealth of Pennsylvania,
("PADEP"), by letter dated March 19, 1994, advised The Babcock & Wilcox Company
that it would seek monetary sanctions, and remedial and monitoring relief,
related to the Parks Facilities. The relief sought related to potential
groundwater contamination of the previous operations of the facilities. PADEP
has advised BWXT that it does not intend to assess any monetary sanctions
provided that BWXT continues its remediation program of the Parks Facilities.
Operating Leases - Future minimum payments required under operating leases that
have initial or remaining noncancellable lease terms in excess of one year at
March 31, 1999 are as follows:
70
<PAGE>
<TABLE>
<CAPTION>
Fiscal year Amount
----------- ------------
<S> <C>
2000 $12,688,000
2001 $ 9,721,000
2002 $ 5,418,000
2003 $ 4,914,000
2004 $ 2,649,000
thereafter $36,975,000.
</TABLE>
Total rental expense for fiscal years 1999, 1998 and 1997 was $96,816,000,
$93,057,000 and $92,534,000, respectively. These expense amounts include
contingent rentals and are net of sublease income, neither of which are
material.
Other - McDermott performs significant amounts of work for the U.S. Government
under both prime contracts and subcontracts and thus is subject to continuing
reviews by governmental agencies.
McDermott maintains liability and property insurance against such risk and in
such amounts as it considers adequate. However, certain risks are either not
insurable or insurance is available only at rates which MII considers
uneconomical.
McDermott is contingently liable under standby letters of credit totaling
$402,771,000 at March 31, 1999, all of which were issued in the normal course of
business. These standby letters of credit include $16,434,000 issued on behalf
of a former unconsolidated joint venture. McDermott has guaranteed $9,243,000
of loans to and $1,168,000 of standby letters of credit issued by unconsolidated
foreign joint ventures of McDermott at March 31, 1999. In addition, McDermott
has a limited guarantee of approximately $51,000,000 of debt incurred by an
unconsolidated foreign joint venture. At March 31, 1999, McDermott had pledged
approximately $48,760,000 fair value of government obligations and corporate
bonds to secure payments under and in connection with certain reinsurance
agreements.
NOTE 12 - RELATED PARTY TRANSACTIONS
Under a non-competition agreement in connection with the acquisition of OPI, a
director of JRM, who resigned in April 1996, received $1,500,000 in each of
fiscal years 1999, 1998 and 1997 and will receive an additional payment of
$1,500,000 in the next fiscal year.
In fiscal year 1995, JRM entered into an office sublease with an affiliate of
one of its directors (who resigned in April 1996). Such sublease expired in
March 1997. During fiscal year 1997, the affiliate paid $216,000 under the
sublease. Under another agreement, JRM paid $576,000 to the affiliate in fiscal
year 1997and reimbursed the affiliate for out-of-pocket expenses for the
management and operation of JRM's offshore producing oil and gas property.
JRM entered into agreements with an affiliate of another director (whose term as
director ended in August 1997) pursuant to which JRM acquired interests in
certain offshore oil and gas property. During fiscal year 1996, JRM sold its
interest in the property to the affiliate in exchange for an $8,000,000
convertible production payment relating to such property. JRM also received a
right to a production payment that allows it to share in up to $8,000,000 of the
net proceeds on any production from the property based upon a percentage of its
original interest in such property. In December 1995, this property was placed
in production, and JRM earned approximately $174,000, $1,262,000 and $1,093,000
in fiscal years 1999, 1998 and 1997, respectively. In addition, during fiscal
year 1998, JRM sold its investment in common stock of this affiliate and its
interest in a limited partnership, which is also an affiliate of this director.
JRM also entered into agreements with two affiliates of the same former director
to design, fabricate and install several offshore pipelines and structures. The
value of these agreements was approximately $82,000,000. At March 31, 1997, all
work under these agreements had been completed and invoiced.
See Note 3 for transactions with unconsolidated affiliates.
71
<PAGE>
NOTE 13 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
McDermott's Marine Construction Services segment's principal customers are the
offshore oil, natural gas and hydrocarbon processing industries and other marine
construction companies. The principal customers of the Power Generation Systems
segment are principally the electric power generation industry (including
government-owned utilities and independent power producers), and the pulp and
paper and other process industries, such as oil refineries and steel mills. The
primary customer of the Government Operations segment is the U.S. Government
(including its contractors). The principal customers of Industrial Operations
are oil and natural gas producers, electric power generation industry and
petrochemical and chemical processing industries. These concentrations of
customers may impact McDermott's overall exposure to credit risk, either
positively or negatively, in that the customers may be similarly affected by
changes in economic or other conditions. In addition, McDermott and its
customers operated worldwide giving rise to exposure to risks associated with
the economic and political forces of various countries and geographic areas.
(See Note 17 for information about McDermott's operations in different
geographic areas.) However, McDermott's management believes that the portfolio
of receivables is well diversified and that this diversification minimizes any
potential credit risk. Receivables are generally not collateralized.
McDermott believes that its provision for possible losses on uncollectible
accounts receivable is adequate for its credit loss exposure. At March 31, 1999
and 1998, the allowance for possible losses deducted from Accounts receivable-
trade on the accompanying balance sheet was $5,544,000 and $12,140,000,
respectively.
NOTE 14 - INVESTMENTS
The following is a summary of available-for-sale debt securities at March 31,
1999:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government agencies $472,217 $2,326 $1,471 $473,072
Corporate notes and bonds 228,642 679 202 229,119
Other debt securities 136,259 104 63 136,300
--------------------------------------------------------------------------------------------
Total $837,118 $3,109 $1,736 $838,491
--------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value amounts of debt securities at March
31, 1999 include $14,171,000 in other debt securities which are reported as cash
equivalents. At March 31, 1999, McDermott's investments also included
$82,579,000 in time deposits.
The following is a summary of available-for-sale debt securities at March 31,
1998:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government agencies $519,114 $1,355 $1,026 $519,443
Corporate notes and bonds 136,329 252 91 136,490
Other debt securities 123,457 102 41 123,518
----------------------------------------------------------------------------------------------
Total $778,900 $1,709 $1,158 $779,451
----------------------------------------------------------------------------------------------
</TABLE>
At March 31, 1998, McDermott's investments also included $294,040,000 in time
deposits.
72
<PAGE>
Proceeds, gross realized gains and gross realized losses on sales of available-
for-sale debt securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Fiscal year Proceeds Realized Gains Realized Losses
------------- ---------- -------------- ---------------
<S> <C> <C> <C>
1999 $339,478,000 $1,792,000 $125,000
1998 $ 95,430,000 $ 118,000 $766,000
1997 $156,827,000 $ 290,000 $ 96,000
</TABLE>
The amortized cost and estimated fair value of available-for-sale debt
securities at March 31, 1999, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
-------------- ---------------
(In thousands)
<S> <C> <C>
Due in one year or less $ 281,701 $282,008
Due after one through three years 480,808 482,478
Due after three years 74,609 74,005
-------------------------------------------------------------------------------------------------------------------------
Total $ 837,118 $838,491
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 15 - DERIVATIVE FINANCIAL INSTRUMENTS
McDermott operates worldwide giving rise to exposure to market risks from
changes in foreign exchange rates. Derivative financial instruments, primarily
forward exchange contracts, are utilized to reduce those risks. McDermott does
not hold or issue financial instruments for trading purposes.
Forward exchange contracts are entered into primarily as hedges of certain firm
purchase and sale commitments denominated in foreign currencies. At March 31,
1999, McDermott had forward exchange contracts to purchase $93,700,000 in
foreign currencies (primarily Canadian Dollars) and to sell $18,626,000 in
foreign currencies (primarily Canadian Dollars), at varying maturities from
fiscal year 2000 through 2002. At March 31, 1998, McDermott had forward
exchange contracts to purchase $145,923,000 in foreign currencies (primarily
Canadian Dollars and Pound Sterling), and to sell $50,702,000 in foreign
currencies (primarily Canadian Dollars and Singapore Dollars), at varying
maturities from fiscal year 1999 through 2000.
Deferred realized and unrealized gains and losses from hedging firm purchase and
sale commitments are included on a net basis in the balance sheet as a component
of either contracts in progress or advance billings on contracts or as a
component of either other current assets or accrued liabilities. They are
recognized as part of the purchase or sale transaction when it is recognized, or
as other gains or losses when a hedged transaction is no longer expected to
occur. At March 31, 1999 and 1998, McDermott had deferred gains of $137,000 and
$958,000, respectively, and deferred losses of $5,377,000 and $374,000,
respectively, related to forward exchange contracts which will principally be
recognized in accordance with the percentage of completion method of accounting.
McDermott is exposed to credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments, but it does not anticipate
nonperformance by any of these counterparties. The amount of such exposure is
generally the unrealized gains in such contracts.
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by McDermott in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate their fair values.
73
<PAGE>
Investments: The fair values of investments are estimated based on quoted market
prices. For investments for which there are no quoted market prices, fair
values are derived from available yield curves for investments of similar
quality and terms.
Long and short-term debt: The fair values of debt instruments are based on
quoted market prices. Where quoted prices are not available, the fair values
are based on the present value of future cash flows discounted at estimated
borrowing rates for similar debt instruments or on estimated prices based on
current yields for debt issues of similar quality and terms.
Redeemable preferred stocks: The fair values of the redeemable preferred stocks
of MI are based on quoted market prices.
Foreign currency exchange contracts: The fair values of foreign currency forward
exchange contracts are estimated by obtaining quotes from brokers. At March 31,
1999 and 1998, McDermott had net forward exchange contracts outstanding to
purchase foreign currencies with notional values of $75,074,000 and $95,221,000
and fair values of $72,153,000 and $97,181,000, respectively.
Interest rate swap agreements: The fair values of interest rate swaps are the
amounts at which they could be settled and are estimated by obtaining quotes
from brokers. At March 31, 1999, McDermott had no interest rate swaps
outstanding. At March 31, 1998, McDermott had an interest rate swap outstanding
on current notional principal of $12,200,000 with a fair value of ($25,000),
which represented the estimated amount McDermott would have had to pay to
terminate the agreement.
The estimated fair values of McDermott's financial instruments are as follows:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
------------------------ ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------- -------------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheet Instruments
Cash and cash equivalents $181,503 $181,503 $ 277,876 $ 277,876
Investments 906,899 906,899 1,073,491 1,073,491
Debt excluding capital leases 353,803 365,774 745,524 794,296
Subsidiary's redeemable preferred stocks - - 155,358 184,191
</TABLE>
NOTE 17 - SEGMENT REPORTING
McDermott's reportable segments are Marine Construction Services, Power
Generation Systems, Government Operations and Industrial Operations. These
segments are managed separately and are unique in technology, services and
customer class.
Marine Construction Services, which includes the results of JRM, supplies
worldwide services for the offshore oil and gas exploration, production and
hydrocarbon processing industries and to other marine construction companies.
Principal activities include the design, engineering, fabrication and
installation of offshore drilling and production platforms, specialized
structures, modular facilities, marine pipelines and subsea production systems.
JRM also provides project management services, engineering services, procurement
activities, and removal, salvage and refurbishment services of offshore fixed
platforms.
Power Generation Systems supplies engineered-to-order services, products and
systems for energy conversion, and fabricates replacement nuclear steam
generators and environmental control systems. In addition, this segment
provides aftermarket services including replacement parts, engineered upgrades,
construction, maintenance and field technical services to electric power plants
and industrial facilities. This segment also
74
<PAGE>
provides power through cogeneration, refuse-fueled power plants and other
independent power producing facilities.
Government Operations supplies nuclear reactor components and nuclear fuel
assemblies to the U.S. Government, manages and operates government-owned
facilities and supplies commercial nuclear environmental services and other
government and commercial nuclear services.
Industrial Operations is comprised of the engineering and construction
activities and plant outage maintenance of certain Canadian operations and
manufacturing of auxiliary equipment such as air-cooled heat exchangers and
replacement parts. Industrial Operations also includes contract research
activities.
Intersegment sales are accounted for at prices which are generally established
by reference to similar transactions with unaffiliated customers. Reportable
segments are measured based on operating income exclusive of general corporate
expenses, non-employee products liability asbestos claims provisions, contract
and insurance claims provisions, legal expenses and gains on sales of corporate
assets. Other reconciling items to income (loss) before provision for income
taxes are interest income, interest expense, minority interest and other-net.
Assets excluded from segment assets are primarily insurance recoverables for
products liability claims, excess cost over fair value of net assets purchased,
investments in debt securities and prepaid pension costs. Amortization of the
excess of cost over fair value of net assets purchased was allocated to the
reportable segments for all years presented.
On May 7, 1998, JRM sold its interest in McDermott Engineering (Europe) Limited.
Management also intends to exit other European engineering operations. In
fiscal years 1999, 1998 and 1997, these operations had revenues of $89,347,000,
$288,687,000 and $294,780,000, respectively, and operating income (loss) of
($7,138,000), $6,177,000, and $9,739,000, respectively. Operating income (loss)
for fiscal years 1999 and 1998 include closure costs and other disposition
losses of $2,818,000 and $4,200,000, respectively.
In fiscal years 1999, 1998 and 1997, the U.S. Government accounted for
approximately 12%, 10% and 11%, respectively, of McDermott's total revenues.
These revenues are principally included in the Government Operations segment.
In fiscal year 1999, a gain of $37,353,000 recognized from the termination of
the McDermott-ETPM joint venture increased Marine Construction Services' segment
income. This increase was partially offset by a net decrease to segment income
of $17,749,000, primarily pertaining to impairment losses on fabrication
facilities and goodwill. A gain of $5,214,000 recognized from the sale of a
manufacturing facility resulted in an increase in Power Generation Systems'
segment income in fiscal 1999.
In fiscal year 1998, asset impairment losses of $280,171,000, primarily due to
the write-off of $262,901,000 of goodwill associated with the acquisition of OPI
and the write-down of marine vessels included in property, plant and equipment
in the amount of $9,891,000, decreased Marine Construction Services' segment
income. These decreases were offset by increases in segment income pertaining
to the termination of the HeereMac joint venture, a gain of $224,472,000
recognized from the termination and $61,637,000 from the distribution of
earnings. Asset impairment losses, primarily associated with manufacturing
facilities, resulted in a decrease in Power Generation Systems' segment income
of $6,395,000 in fiscal 1998. A net increase in Industrial Operations' income
of $124,816,000 was a result of gains on the sale of McDermott's interest in
Sakhalin Energy Investment Company Ltd. and Universal Fabricators Incorporated,
offset by impairment losses, primarily the write-off of goodwill associated with
the acquisition of MECL.
In fiscal year 1997, asset gains net of impairment losses resulted in a decrease
in Marine Construction Services' segment operating loss of $29,021,000. Also in
fiscal year 1997, the write-down of an equity investment and asset impairment
losses, partially offset by a gain from the sale of certain assets, resulted in
an increase in Power Generation Systems' segment loss of $20,251,000. An asset
impairment loss resulted in an increase in Industrial Operations loss of
$11,575,000 in fiscal year 1997.
75
<PAGE>
Segment Information for the Three Fiscal Years Ended March 31, 1999.
1. Information about McDermott's Operations in Different Industry Segments.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
REVENUES /(1)/
Marine Construction Services $1,279,570 $1,855,486 $1,408,469
Power Generation Systems 1,066,217 1,142,721 985,430
Government Operations 382,706 370,519 373,051
Industrial Operations 427,520 337,787 458,116
Adjustments and Eliminations (6,028) (31,878) (74,216)
-------------------------------------------------------------------------------------------
Total Revenues $3,149,985 $3,674,635 $3,150,850
-------------------------------------------------------------------------------------------
/(1)/ Segment revenues are net of the following intersegment transfers and other
adjustments:
Marine Construction Services Transfers $ 3,233 $ 20,743 $ 24,530
Power Generation Systems Transfers 731 5,027 5,057
Government Operations Transfers 506 4,070 7,032
Industrial Operations Transfers 236 5,925 18,324
Adjustments and Eliminations 1,322 (3,887) 19,273
-------------------------------------------------------------------------------------
Total $6,028 $31,878 $74,216
-------------------------------------------------------------------------------------
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS):
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Segment Operating Income (Loss):
Marine Construction Services $126,482 $107,122 $ 10,819
Power Generation Systems 90,318 82,431 (34,584)
Government Operations 39,353 35,816 32,458
Industrial Operations 16,906 4,679 (30,641)
- -----------------------------------------------------------------------------------------------------------------
Total Segment Operating Income (Loss) $273,059 $230,048 $ (21,948)
- -----------------------------------------------------------------------------------------------------------------
Gain (Loss) on Asset Disposal and Impairments - Net:
Marine Construction Services $ 18,620 $(40,119) $ 29,021
Power Generation Systems 4,465 (6,086) (19,205)
Government Operations 183 523 396
Industrial Operations (234) 128,239 (11,858)
Total Gain (Loss) on Asset Disposal
and Impairments - Net $ 23,034 $ 82,557 $ (1,646)
- ------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investees: /(1)/
Marine Construction Services $ 10,670 $ 70,236 $ (7,833)
Power Generation Systems (4,733) 7,541 (347)
Government Operations 4,088 4,236 3,630
Industrial Operations (1,646) 3,376 737
- ------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from Investees $ 8,379 $ 85,389 $ (3,813)
- ------------------------------------------------------------------------------------------------------------------
SEGMENT INCOME (LOSS): /(2)/
Marine Construction Services $155,772 $137,239 $ 32,007
Power Generation Systems 90,050 83,886 (54,136)
Government Operations 43,624 40,575 36,484
Industrial Operations 15,026 136,294 (41,762)
- ------------------------------------------------------------------------------------------------------------------
Total Segment Income (Loss) 304,472 397,994 (27,407)
- ------------------------------------------------------------------------------------------------------------------
Other Unallocated Items (51,005) (5,286) (72,382)
General Corporate Expenses-Net (36,051) (37,251) (47,456)
- ------------------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $217,416 $355,457 $(147,245)
- ------------------------------------------------------------------------------------------------------------------
/(1)/ Other unallocated items includes loss from investees of $7,000 and $285,000 for fiscal years
1998 and 1997, respectively.
/(2)/ Other unallocated items include the following:
Non-Employee Products Asbestos
Claim Provisions $(39,650) $ - $ (55,692)
Contract and Insurance Claim Provisions - - (12,506)
Employee Benefits & Insurance Income (Expense) 18,519 7,303 2,538
Legal Expenses (13,133) (4,729) (4,354)
General and Administrative Expenses (9,623) (2,422) -
Other (7,118) (5,438) (2,368)
---------------------------------------------------------------------------------------------------------
Total $(51,005) $ (5,286) $ (72,382)
---------------------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
SEGMENT ASSETS
Marine Construction Services $ 586,003 $ 874,143 $1,313,802
Power Generation Systems 558,951 559,162 537,937
Government Operations 211,683 178,958 187,031
Industrial Operations 114,656 124,547 228,280
------------------------------------------------------------------------------------------------
Total Segment Assets 1,471,293 1,736,810 2,267,050
------------------------------------------------------------------------------------------------
Other Assets 1,570,374 1,280,975 1,396,955
Corporate Assets 1,263,853 1,483,345 935,477
------------------------------------------------------------------------------------------------
Total Assets $4,305,520 $4,501,130 $4,599,482
------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES
Marine Construction Services /(1)/ $ 84,416 $ 57,704 $ 66,082
Power Generation Systems 11,847 9,315 14,886
Government Operations 11,095 4,312 4,128
Industrial Operations 4,093 3,278 7,329
------------------------------------------------------------------------------------------------
Segment Capital Expenditures 111,451 74,609 92,425
------------------------------------------------------------------------------------------------
Corporate and Other Capital Expenditures 336 1,040 767
------------------------------------------------------------------------------------------------
Total Capital Expenditures $ 111,787 $ 75,649 $ 93,192
------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
Marine Construction Services $ 56,761 $ 93,843 $ 99,675
Power Generation Systems 21,899 19,569 14,842
Government Operations 13,265 12,481 13,609
Industrial Operations 4,885 6,712 10,017
------------------------------------------------------------------------------------------------
Segment Depreciation and Amortization 96,810 132,605 138,143
------------------------------------------------------------------------------------------------
Corporate and Other Depreciation and
Amortization 4,580 9,696 13,438
------------------------------------------------------------------------------------------------
Total Depreciation and Amortization $ 101,390 $ 142,301 $ 151,581
------------------------------------------------------------------------------------------------
INVESTMENT IN UNCONSOLIDATED AFFILIATES
Marine Construction Services $ 13,648 $ 29,069 $ 72,712
Power Generation Systems 44,248 40,159 34,600
Government Operations 2,282 2,090 2,017
Industrial Operations 2,308 4,965 29,778
------------------------------------------------------------------------------------------------
Total Investment in Unconsolidated
Affiliates $ 62,486 $ 76,283 $ 139,107
------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Includes property, plant and equipment of $33,000,000 in fiscal year 1999
acquired through termination of the McDermott-ETPM joint venture and of
$30,559,000 in fiscal year 1998 acquired through termination of the
HeereMac joint venture.
78
<PAGE>
2. Information about McDermott's Product and Service Lines:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Revenues:
Marine Construction Services:
Offshore Operations $ 605,024 $ 743,114 $ 591,021
Fabrication Operations 376,450 455,306 376,257
Engineering Operations 115,594 276,422 235,672
Procurement Activities 273,308 425,440 240,108
Adjustments and Eliminations (90,806) (44,796) (34,589)
------------------------------------------------------------------------------
Total 1,279,570 1,855,486 1,408,469
------------------------------------------------------------------------------
Power Generation Systems:
Original Equipment Manufacturers'
Operations 212,999 471,363 385,000
Nuclear Equipment Operations 78,023 89,816 108,498
Aftermarket Goods and Services 791,619 508,895 477,756
Operations and Maintenance 41,602 37,988 29,260
Boiler Auxiliary Equipment 85,969 86,355 54,013
Adjustments and Eliminations (143,995) (51,696) (69,097)
------------------------------------------------------------------------------
Total 1,066,217 1,142,721 985,430
------------------------------------------------------------------------------
Government Operations:
Naval Reactor Program 209,079 202,126 222,697
Nuclear Environmental Services 19,932 26,177 42,709
Management & Operation Contracts
of U.S. Government Facilities 99,053 64,226 13,603
Other Government Operations 62,104 78,530 93,725
Other Commercial Operations 3,517 10,951 9,001
Adjustments and Eliminations (10,979) (11,491) (8,684)
------------------------------------------------------------------------------
Total 382,706 370,519 373,051
------------------------------------------------------------------------------
Industrial Operations:
Engineering & Construction 174,894 62,448 146,025
Plant Outage Maintenance 150,263 151,050 144,207
Shipbuilding Operations - 10,746 80,152
Contract Research 9,172 17,180 23,592
Auxiliary Equipment 93,065 97,640 68,028
All Others 362 31 9,468
Adjustments and Eliminations (236) (1,308) (13,356)
------------------------------------------------------------------------------
Total 427,520 337,787 458,116
------------------------------------------------------------------------------
Adjustments and Eliminations (6,028) (31,878) (74,216)
------------------------------------------------------------------------------
Total Revenues $3,149,985 $3,674,635 $3,150,850
------------------------------------------------------------------------------
</TABLE>
79
<PAGE>
3. Information about McDermott's Operations in Different Geographic Areas.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Revenues /(1)/
United States $1,573,896 $1,688,388 $1,431,868
Canada 437,363 264,846 257,285
Indonesia 220,124 230,825 95,127
United Kingdom 133,403 364,894 322,760
Qatar 132,509 264,397 99,617
Myanmar 80,130 110,692 51,014
Mexico 78,496 35,836 36,870
China 72,217 139,403 103,064
Trinidad 57,905 66,460 7,812
India 46,972 32,905 86,398
Thailand 31,674 73,223 43,498
Other Countries 285,296 402,766 615,537
-------------------------------------------------------------------------------
Total $3,149,985 $3,674,635 $3,150,850
-------------------------------------------------------------------------------
Property, Plant and Equipment, net
United States $ 259,549 $ 280,472 $ 315,682
Mexico 48,246 23,803 24,303
Indonesia 37,309 13,091 20,853
Canada 31,456 36,275 39,008
Singapore 22,787 20,012 20,974
United Kingdom 8,202 75,956 84,830
Netherlands - 45,347 33,868
Other Countries 26,412 38,738 60,227
-------------------------------------------------------------------------------
Total $ 433,961 $ 533,694 $ 599,745
-------------------------------------------------------------------------------
</TABLE>
/(1)/ Geographic revenues are allocated based on the location of the customer.
80
<PAGE>
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial
information for the fiscal years ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999
Q U A R T E R E N D E D
------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1998 1998 1999
------------------------------------------------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Revenues $819,809 $779,983 $800,825 $749,368
Operating income (loss) 118,413 65,652 46,310 (12,959)
Income (loss) before
extraordinary item 121,561 51,615 42,289 (23,384)
Net income (loss) 121,561 51,615 42,289 (62,103)
Earnings (loss) per common share:
Basic
Income (loss) before
extraordinary item $ 2.03 $ 0.88 $ 0.72 $ (0.40)
Net income (loss) $ 2.03 $ 0.88 $ 0.72 $ (1.06)
Diluted
Income (loss) before
extraordinary item $ 1.88 $ 0.85 $ 0.71 $ (0.40)
Net income (loss) $ 1.88 $ 0.85 $ 0.71 $ (1.06)
</TABLE>
Pretax results for the quarter ended June 30, 1998 include:
. a gain on the dissolution of a joint venture of $37,390,000,
. a gain on the settlement and curtailment of postretirement benefit plans of
$38,900,000,
. interest income of $12,207,000 on domestic tax refunds, and
. a gain of $12,000,000 from the sale of assets of a joint venture.
Pretax results for the quarter ended September 30, 1998 include:
. a loss on the settlement and curtailment of postretirement benefit plans of
$11,258,000,
. interest income of $6,423,000 on domestic tax refunds, and
. an $8,000,000 settlement of punitive damage claims in a civil suit
associated with a Pennsylvania facility formerly operated by McDermott.
Pretax results for the quarter ended December 31, 1998 include:
. a $9,600,000 charge to restructure foreign joint ventures.
Pretax results for the quarter ended March 31, 1999 include:
. an extraordinary loss on the retirement of debt of $38,719,000,
. a loss of $85,185,000 for estimated costs relating to estimated future non-
employee asbestos claims,
. losses of $21,897,000 related to impairment of assets and goodwill,
. various provisions of $20,327,000 related to potential settlements of
litigation and contract disputes, and
. the write-off of $12,600,000 of receivables from a joint venture.
81
<PAGE>
<TABLE>
<CAPTION>
1998
Q U A R T E R E N D E D
------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1998
------------------------------------------------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Revenues $928,087 $920,051 $901,735 $924,762
Operating income (loss) 144,794 88,777 89,366 32,520
Net income (loss) 109,860 38,161 50,992 16,677
Earnings (loss) per common share:
Basic $ 1.97 $ 0.65 $ 0.88 $ 0.26
Diluted $ 1.79 $ 0.62 $ 0.82 $ 0.25
</TABLE>
Pretax results for the quarter ended June 30, 1997 include:
. a gain of $96,059,000 from the sale of McDermott's interest in Sakhalin
Energy Investment Company, Ltd.
Pretax results for the quarter ended September 30, 1997 include:
. a gain of $33,072,000 from the sale of McDermott's interest in Universal
Fabricators Incorporated.
Pretax results for the quarter ended December 31, 1997 include:
. a gain $223,651,000 and a $61,637,000 distribution of earnings from the
termination of the HeereMac joint venture, and
. impairment losses of $275,112,000, including a write-off of goodwill
associated with the acquisition of OPI of $262,901,000.
Pretax results for the quarter ended March 31, 1998 include:
. losses of $10,315,000 related to the impairment of assets and related
goodwill, and
. a $5,419,000 provision for employee severance costs.
82
<PAGE>
NOTE 19 EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
For the Three Fiscal Years Ended
1999 1998 1997
---------------- ---------------- ----------------
(In thousands, except shares and per share amounts)
<S> <C> <C> <C>
Basic:
Income (loss) before extraordinary item $ 192,081 $ 215,690 $ (206,105)
Dividends on preferred stock, Series C - (8,266) (8,266)
----------------------------------------------------------------------------------------------------
Income (loss) for basic computation 192,081 207,424 (214,371)
Extraordinary item (38,719) - -
----------------------------------------------------------------------------------------------------
Net income (loss) for basic computation $ 153,362 $ 207,424 $ (214,371)
----------------------------------------------------------------------------------------------------
Weighted average common shares 59,015,091 55,432,949 54,322,804
----------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share:
Income (loss) before extraordinary item $ 3.25 $ 3.74 $ (3.95)
Extraordinary item (0.65) - -
----------------------------------------------------------------------------------------------------
Net Income (loss) $ 2.60 $ 3.74 $ (3.95)
----------------------------------------------------------------------------------------------------
Diluted:
Income (loss) before extraordinary item $ 192,081 $ 215,690 $ (206,105)
Dividends on preferred stock, Series C - - (8,266)
Dividends on Subsidiary's Series A $2.20
Cumulative Convertible Preferred Stock 2,752 6,200 -
----------------------------------------------------------------------------------------------------
Income (loss) for diluted computation 194,833 221,890 (214,371)
Extraordinary item (38,719) - -
----------------------------------------------------------------------------------------------------
Net income (loss) for diluted computation $ 156,114 $ 221,890 $ (214,371)
----------------------------------------------------------------------------------------------------
Weighted average common shares (basic) 59,015,091 55,432,949 54,322,804
Effect of dilutive securities:
Stock options and restricted stock 1,172,496 1,446,585 -
Subsidiary's Series A $2.20 Cumulative
Convertible Preferred Stock 1,256,151 2,818,679 -
Series C $2.875 Cumulative Convertible
Preferred Stock 190,457 4,078,014 -
----------------------------------------------------------------------------------------------------
Adjusted weighted average common shares
and assumed conversions 61,634,195 63,776,227 54,322,804
----------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share:
Income (loss) before extraordinary item $ 3.16 $ 3.48 $ (3.95)
Extraordinary item (0.63) - -
----------------------------------------------------------------------------------------------------
Net income (loss) $ 2.53 $ 3.48 $ (3.95)
----------------------------------------------------------------------------------------------------
</TABLE>
83
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Ernst & Young LLP ("E&Y") were previously the principal auditors for McDermott
International, Inc. ("MII"). On July 24, 1998, the Board of Directors selected
PricewaterhouseCoopers LLP as E&Y's replacement.
For the two fiscal years ended March 31, 1998 and 1997, there were no
disagreements with E&Y on any matters of accounting principles or practice,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to the satisfaction of E&Y, would have caused it to make a reference to
the subject matter of the disagreement in connection with this report. E&Y has
not advised MII of any reportable events. E&Y's reports on MII's financial
statements for the two fiscal years ended March 31, 1998 and 1997 did not
contain an adverse opinion or a disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope or accounting principles.
For the fiscal year ended March 31, 1999, there were no disagreements with
PricewaterhouseCoopers LLP on accounting and financial disclosure.
84
<PAGE>
P A R T I I I
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to directors and executive
officers is incorporated by reference to the material appearing under the
headings "Election of Directors" and "Executive Officers" in the Proxy Statement
for MII's 1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material
appearing under the heading "Compensation of Executive Officers" in the Proxy
Statement for MII's 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the material
appearing under the headings "Security Ownership of Directors and Executive
Officers" and "Security Ownership of Certain Beneficial Owners" in MII's Proxy
Statement for the 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
85
<PAGE>
P A R T I V
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or
incorporated by reference:
1. CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants
Consolidated Balance Sheet March 31, 1999 and 1998
Consolidated Statement of Income (Loss) For the Three Fiscal
Years Ended March 31, 1999
Consolidated Statement of Comprehensive Income (Loss) For the
Three Fiscal Years Ended March 31, 1999
Consolidated Statement of Stockholders' Equity For the Three
Fiscal Years Ended March 31, 1999
Consolidated Statement of Cash Flows For the Three Fiscal
Years Ended March 31, 1999
Notes to Consolidated Financial Statements For the Three
Fiscal Years Ended March 31, 1999
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All required financial statement schedules will be filed by
amendment to this Form 10-K on Form 10-K/A.
3. EXHIBITS
Exhibit
Number Description
2.1 Agreement and Plan of Merger dated as of May 7, 1999
between McDermott International, Inc. and J. Ray
McDermott, S.A. (incorporated by reference to Annex A of
Exhibit (a)(1) to the Schedule 14D-1 filed by McDermott
International, Inc. with the Commission on May 13, 1999).
3.1 McDermott International, Inc.'s Articles of Incorporation,
as amended (incorporated by reference to Exhibit 3.1 of
McDermott International, Inc.'s Form 10-K for the fiscal
year ended March 31, 1996).
3.2 McDermott International, Inc.'s amended and restated By-
Laws (incorporated by reference to Exhibit 3.2 of
McDermott International, Inc.'s Form 10-Q for the
quarter ended December 31, 1998).
4.1 Amended and Restated Rights Agreement
10.1* McDermott International, Inc.'s Supplemental Executive
Retirement Plan, as amended (incorporated by reference
to Exhibit 10 of McDermott International Inc.'s 10-K/A
for fiscal year end March 31, 1994 filed with the
Commission on June 27, 1994).
10.2 Intercompany Agreement (incorporated by reference to
Exhibit 10 to McDermott International, Inc.'s annual
report on Form 10-K, as amended, for the fiscal year
ended March 31, 1983).
86
<PAGE>
Exhibit
Number Description
10.3* Trust for Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10 to McDermott
International, Inc.'s annual report on Form 10-K, as
amended, for the fiscal year ended March 31, 1990).
10.4* McDermott International, Inc.'s 1994 Variable
Supplemental Compensation Plan (incorporated by
reference to Exhibit A to McDermott International,
Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on August 9, 1994 as filed with the
Commission under a Schedule 14A).
10.5* McDermott International, Inc.'s 1987 Long-Term
Performance Incentive Compensation Program (incorporated
by reference to Exhibit 10 to McDermott International,
Inc.'s annual report of Form 10-K, as amended, for the
fiscal year ended March 31, 1988).
10.6* McDermott International, Inc.'s 1992 Senior Management
Stock Option Plan (incorporated by reference to Exhibit
10 of McDermott International, Inc.'s 10-K/A for fiscal
year ended March 31, 1994 filed with the Commission on
June 27, 1994).
10.7* McDermott International, Inc.'s 1992 Officer Stock
Incentive Program (incorporated by reference to Exhibit
10 to McDermott International, Inc.'s annual report on
Form 10-K, as amended for the fiscal year ended March 31,
1992).
10.8* McDermott International, Inc.'s 1992 Director Stock
Program (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s annual report on Form
10-K, as amended, for the fiscal year ended March 31,
1992).
10.9* McDermott International, Inc.'s Restated 1996 Officer
Long-Term Incentive Plan (incorporated by reference to
Appendix A to McDermott International, Inc.'s Proxy
Statement for its Annual Meeting of Stockholders held on
August 6, 1996 as filed with the Commission under a
Schedule 14A).
10.10* McDermott International, Inc.'s 1997 Director Stock
Program (incorporated by reference to Appendix A to
McDermott International, Inc.'s Proxy Statement for its
Annual Meeting of Stockholders held on September 2, 1997
as filed with the Commission under a Schedule 14A).
21 Significant Subsidiaries of the Registrant
23 Consents of Independent Accountants
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to the requirements of Item 14(c)
of Form 10-K.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed by MII during the three months
ended March 31, 1999.
87
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
McDERMOTT INTERNATIONAL, INC.
/s/Roger E. Tetrault
----------------------------------
June 9, 1999 By: Roger E. Tetrault
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated and on the date indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Roger E. Tetrault Chairman of the Board, Chief Executive Officer
- ------------------------------- and Director (Principal Executive Officer)
Roger E. Tetrault
/s/ Daniel R. Gaubert Senior Vice President and Chief Financial Officer
- ------------------------------- (Principal Financial and Accounting Officer)
Daniel R. Gaubert
- ------------------------------- Director
Theodore H. Black
/s/ Phillip J. Burguieres Director
- -------------------------------
Phillip J. Burguieres
/s/ Bruce Demars Director
- -------------------------------
Bruce Demars
/s/ Robert L. Howard Director
- -------------------------------
Robert L. Howard
/s/ John William Johnstone, Jr. Director
- -------------------------------
John William Johnstone, Jr.
/s/ William McCollam, Jr. Director
- -------------------------------
William McCollam, Jr.
/s/ Kathryn D. Sullivan Director
- -------------------------------
Kathryn D. Sullivan
/s/ John N. Turner Director
- -------------------------------
John N. Turner
/s/ Richard E. Woolbert Director
- -------------------------------
Richard E. Woolbert
</TABLE>
June 9, 1999
88
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Pages
- ------ ----------- ------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated as of May 7, 1999 between McDermott
International, Inc. and J. Ray McDermott, S.A. (incorporated by reference to
Annex A of Exhibit (a)(1) to the Schedule 14D-1 filed by McDermott
International, Inc. with the Commission on May 13, 1999).
3.1 McDermott International, Inc.'s Articles of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 of McDermott International,
Inc.'s Form 10-K for the fiscal year ended March 31, 1996).
3.2 McDermott International, Inc.'s amended and restated By-Laws (incorporated
by reference to Exhibit 3.2 of McDermott International, Inc.'s Form
10-Q for the quarter ended December 31, 1996).
4.1 Amended and Restated Rights Agreement
10.1* McDermott International, Inc.'s Supplemental Executive Retirement Plan,
as amended (incorporated by reference to Exhibit 10 of McDermott
International, Inc.'s 10-K/A for fiscal year ended March 31, 1994
filed with the Commission on June 27, 1994).
10.2 Intercompany Agreement (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s annual report on Form 10-K, as
amended, for the fiscal year ended March 31, 1983).
10.3* Trust for Supplemental Executive Retirement Plan (incorporated by
reference to Exhibit 10 to McDermott International, Inc.'s annual
report on Form 10-K, as amended, for the fiscal year ended March 31,
1990).
10.4* McDermott International, Inc.'s 1994 Variable Supplemental Compensation
Plan (incorporated by reference to Exhibit A to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on August 9, 1994 as filed with the Commission
under a Schedule 14A).
10.5* McDermott International, Inc.'s 1987 Long-Term Performance Incentive
Compensation Program (incorporated by reference to Exhibit 10 to
McDermott International, Inc.'s annual report on Form 10-K, as
amended, for the fiscal year ended March 31, 1988).
10.6* McDermott International Inc.'s 1992 Senior Management Stock Option Plan
(incorporated by reference to Exhibit 10 of McDermott International,
Inc.'s 10-K/A for fiscal year ended March 31, 1994 filed with the
Commission on June 27, 1994).
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Pages
- ------ ----------- ------
<S> <C> <C>
10.7* McDermott International, Inc.'s 1992 Officer Stock Incentive Program
(incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s annual report on Form 10-K, as amended for the fiscal year
ended March 31, 1992).
10.8* McDermott International, Inc.'s 1992 Directors Stock Program
(Incorporated by reference to Exhibit 10 to McDermott International,
Inc.'s annual report on Form 10-K, as amended, for the fiscal year
ended March 31, 1992).
10.9* McDermott International, Inc.'s Restated 1996 Officer Long-Term Incentive
Plan, as amended (incorporated by reference to Appendix B to McDermott
International, Inc.'s Proxy Statement for its Annual Meeting of
Stockholders held on July 28, 1997 as filed with the Commission under
a Schedule 14A).
10.10* McDermott International, Inc.'s 1997 Director Stock Program
(incorporated by reference to Appendix A to McDermott International,
Inc.'s Proxy Statement for its Annual Meeting of Stockholders held on
September 2, 1997 as filed with the Commission under a Schedule 14A).
21 Significant Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ernst & Young LLP
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
</TABLE>
90
<PAGE>
EXHIBIT 4.1
AMENDED AND RESTATED
RIGHTS AGREEMENT
dated as of
April 15, 1999
between
McDermott International, Inc.
and
First Chicago Trust Company of New York
as Rights Agent
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Definitions..................................................... 1
Section 2. Appointment of Rights Agent..................................... 5
Section 3. Issue of Right Certificates..................................... 5
Section 4. Form of Right Certificates...................................... 7
Section 5. Countersignature and Registration............................... 7
Section 6. Transfer and Exchange of Right Certificates; Mutilated
Destroyed, Lost or Stolen Right Certificates.................... 8
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights... 9
Section 8. Cancellation and Destruction of Right Certificates.............. 10
Section 9. Reservation and Availability of Capital Stock................... 11
Section 10. Preferred Stock Record Date..................................... 12
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights................................................ 13
Section 12. Certificate of Adjusted Purchase Price or Number of Shares...... 21
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power........................................................... 21
Section 14. Fractional Rights and Fractional Shares......................... 24
Section 15. Rights of Action................................................ 25
Section 16. Agreement of Right Holders...................................... 26
Section 17. Right Certificate Holder Not Deemed a Stockholder............... 27
Section 18. Concerning the Rights Agent..................................... 27
Section 19. Merger or Consolidation or Change of Name of Rights Agent....... 27
Section 20. Duties of Rights Agent.......................................... 28
Section 21. Change of Rights Agent.......................................... 30
Section 22. Issuance of New Right Certificates.............................. 31
Section 23. Redemption...................................................... 32
Section 24. Exchange........................................................ 32
Section 25. Notice of Proposed Actions...................................... 33
Section 26. Notices......................................................... 34
Section 27. Supplements and Amendments...................................... 35
Section 28. Successors...................................................... 35
Section 29. Determinations and Actions by the Board of Directors, etc....... 35
Section 30. Benefits of this Agreement...................................... 35
Section 31. Severability.................................................... 36
Section 32. Governing Law................................................... 36
Section 33. Counterparts.................................................... 36
Section 34. Descriptive Headings............................................ 36
EXHIBIT A - Form of Certificate of Designation of Preferred Stock
EXHIBIT B - Form of Right Certificate
EXHIBIT C - Summary Description of the Stockholder Rights Plan
</TABLE>
<PAGE>
AMENDED AND RESTATED RIGHTS AGREEMENT
AMENDED AND RESTATED AGREEMENT dated as of April 15, 1999 between McDermott
International, Inc., a Panama corporation (the "Company"), and First Chicago
Trust Company of New York, as Rights Agent (the "Rights Agent"),
W I T N E S S E T H
WHEREAS, on December 5, 1995 the Board of Directors of the Company
authorized and declared a dividend of one preferred stock purchase right (a
"Right") for each share of Common Stock (as hereinafter defined) outstanding at
the close of business on January 2, 1996 (the "Record Date") and authorized the
issuance of one Right in respect of each share of Common Stock issued after the
Record Date, each Right representing the right to purchase, upon the terms and
subject to the conditions hereinafter set forth, one one-hundredth of a share of
Preferred Stock (as hereinafter defined), subject to the terms and provisions of
the Rights Agreement dated as of December 5, 1995, between the Company and the
Rights Agent;
WHEREAS, the Company and the Rights Agent entered into an amendment dated
as of July 31, 1997 to such Rights Agreement pursuant to which the term of such
Rights Agreement was reduced by 5 years; and
WHEREAS, the Company and the Rights Agent have on the date hereof entered
into a further amendment dated as of the date hereof to such Rights Agreement
and the Company and the Rights Agent desire to restate the Rights Agreement in
its entirety to reflect all such amendments;
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Definitions. The following terms, as used herein, have the
following meanings:
"Acquiring Person" means any Person who, together with all Affiliates and
Associates of such Person, shall be the Beneficial Owner of 15% or more of the
shares of Common Stock then outstanding; provided, however, that an Acquiring
Person shall not include:
(a) any Person that the Board of Directors of the Company determines in
good faith became the Beneficial Owner of shares of Common Stock that would
otherwise cause such Person to be an "Acquiring Person" inadvertently
(including, without limitation, because such Person was unaware of the extent of
its Beneficial Ownership or had no actual knowledge of the consequences of its
Beneficial Ownership under this Agreement) and without any intention of changing
or influencing control of the Company, unless and until such Person shall have
failed to divest itself, as promptly as practicable (as determined, in good
faith, by the Board of Directors of the Company), of Beneficial Ownership of a
sufficient number of shares of Common Stock so that such Person would no longer
otherwise qualify as an "Acquiring Person";
(b) any Person who is the Beneficial Owner of shares of Common Stock
that would otherwise cause such Person to be an Acquiring Person solely as a
result of a repurchase of shares of Common Stock by the Company unless and
<PAGE>
until such Person becomes the Beneficial Owner of any additional shares of
Common Stock (other than pursuant to a dividend or distribution paid or made by
the Company on the outstanding Common Stock or pursuant to a split or
subdivision of the outstanding Common Stock) and at such time would be the
Beneficial Owner of shares of Common Stock that would otherwise cause it to be
an "Acquiring Person"; and
(c) any Exempt Person.
"Affiliate" and "Associate" have the respective meanings ascribed to such
terms in Rule 12b-2 under the Exchange Act as in effect on the date hereof.
A Person shall be deemed the "Beneficial Owner" of, and shall be deemed to
"beneficially own", any securities:
(a) which such Person or any of its Affiliates or Associates, directly
or indirectly, beneficially owns (as determined pursuant to Rule 13d-3 under the
Exchange Act as in effect on the date hereof);
(b) which such Person or any of its Affiliates or Associates, directly
or indirectly, has
(i) the right to acquire (whether such right is exercisable
immediately or only upon the occurrence of certain events or the passage of
time or both) pursuant to any agreement, arrangement or understanding
(whether or not in writing) or otherwise (other than pursuant to the Rights
or customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities);
provided that a Person shall not be deemed the "Beneficial Owner" of or to
"beneficially own" securities tendered pursuant to a tender or exchange
offer made by or on behalf of such Person or any of its Affiliates or
Associates until such tendered securities are accepted for payment or
exchange; or
(ii) the right to vote (whether such right is exercisable
immediately or only upon the occurrence of certain events or the passage of
time or both) pursuant to any agreement, arrangement or understanding
(whether or not in writing) or otherwise; provided that a Person shall not
be deemed the "Beneficial Owner" of or to "beneficially own" any security
under this clause (ii) as a result of an agreement, arrangement or
understanding to vote such security if such agreement, arrangement or
understanding (A) arises solely from a revocable proxy or consent given in
response to a public proxy or consent solicitation made pursuant to the
applicable rules and regulations under the Exchange
2
<PAGE>
Act and (B) is not also then reportable by such Person on Schedule 13D
under the Exchange Act (or any comparable or successor report); or
(c) which are beneficially owned, directly or indirectly, by any other
Person (or any Affiliate or Associate thereof) with which such Person or any of
its Affiliates or Associates has any agreement, arrangement or understanding
(whether or not in writing) (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities) for the purpose of acquiring, holding, voting (except
pursuant to a revocable proxy as described in subparagraph (b)(ii) immediately
above) or disposing of any such securities;
provided, however, that no Person who is an officer, director or employee of an
Exempt Person shall be deemed, solely by reason of such Person's status or
authority as such, to be the "Beneficial Owner" of, to have "Beneficial
Ownership" of or to "beneficially own" any securities that are "beneficially
owned", including, without limitation, in a fiduciary capacity, by an Exempt
Person or by any other such officer, director or employee of an Exempt Person.
"Business Day" means any day other than a Saturday, Sunday or a day on
which banking institutions in the State of New York are authorized or obligated
by law or executive order to close.
"Close of business" on any given date means 5:00 P.M., New York City time,
on such date; provided that if such date is not a Business Day "close of
business" means 5:00 P.M., New York City time, on the next succeeding Business
Day.
"Common Stock" means the Common Stock, par value $1.00 per share, of the
Company, except that, when used with reference to any Person other than the
Company, "Common Stock" means the capital stock of such Person with the greatest
voting power, or the equity securities or other equity interest having power to
control or direct the management, of such Person.
"Distribution Date" means the earlier of (a) the close of business on the
tenth day after the Stock Acquisition Date and (b) the close of business on the
tenth Business Day (or such later day as may be designated prior to any Person
becoming an Acquiring Person by action of the Board of Directors of the Company)
after the date of the commencement of a tender or exchange offer by any Person
if, upon consummation thereof, such Person would be an Acquiring Person.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exempt Person" shall mean the Company or any Subsidiary of the Company, in
each case including, without limitation, in its fiduciary capacity, or any
employee benefit plan of the Company or of any Subsidiary of the Company, or any
entity or trustee holding Common Stock for or pursuant to the terms of any such
plan or for the purpose of funding any such plan or funding other employee
benefits for employees of the Company or of any Subsidiary of the Company.
"Expiration Date" means the earlier of (a) the Final Expiration Date and
(b) the time at which all Rights are redeemed as provided in Section 23 or
exchanged as provided in Section 24.
"Final Expiration Date" means the close of business on January 2, 2001.
3
<PAGE>
"Person" means an individual, corporation, partnership, association, trust
or any other entity or organization.
"Preferred Stock" means the Series D Participating Preferred Stock, par
value $1.00 per share, of the Company, having the terms set forth in the form of
certificate of designation attached hereto as Exhibit A.
"Purchase Price" means the price (subject to adjustment as provided herein)
at which a holder of a Right may purchase one one-hundredth of a share of
Preferred Stock (subject to adjustment as provided herein) upon exercise of a
Right, which price shall initially be $50.00.
"Section 11(a)(ii) Event" means any event described in the first clause of
Section 11(a)(ii).
"Section 13 Event" means any event described in clauses (x), (y) or (z) of
Section 13(a).
"Securities Act" means the Securities Act of 1933, as amended.
"Stock Acquisition Date" means the date of the first public announcement
(including the filing of a report on Schedule 13D under the Exchange Act (or any
comparable or successor report)) by the Company or an Acquiring Person
indicating that an Acquiring Person has become such.
"Subsidiary" of any Person means any other Person of which securities or
other ownership interests having ordinary voting power, in the absence of
contingencies, to elect a majority of the board of directors or other Persons
performing similar functions are at the time directly or indirectly owned by
such first Person.
"Trading Day" means a day on which the principal national securities
exchange on which the shares of Common Stock are listed or admitted to trading
is open for the transaction of business or, if the shares of Common Stock are
not listed or admitted to trading on any national securities exchange, a
Business Day.
"Triggering Event" means any Section 11(a)(ii) Event or any Section 13
Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights in
accordance with the terms and conditions hereof, and the Rights Agent hereby
accepts such appointment. The Company may from time to time appoint such Co-
Rights Agents as it may deem necessary or desirable. If the Company appoints
one or more Co-Rights Agents, the respective duties of the Rights Agent and any
Co-Rights Agents shall be as the Company shall determine.
Section 3. Issue of Right Certificates. (a) Prior to the Distribution
Date, (i) the Rights will be evidenced by the certificates for the Common Stock
and not by separate Right Certificates (as hereinafter defined) and the
registered holders of the Common Stock shall be deemed to be the registered
holders of the associated Rights, and (ii) the Rights will be transferable only
in connection with the transfer of the underlying shares of Common Stock. As
soon as practicable after the Record Date, the Company will send a summary of
the Rights substantially in the form of Exhibit C hereto, by first-class,
postage prepaid mail, to each record holder of the Common Stock as of the close
of business on the Record Date at the address of such holder shown on the
records of the Company.
4
<PAGE>
(b) As soon as practicable after the Company has notified the Rights
Agent of the occurrence of the Distribution Date, the Rights Agent will send, by
first-class, insured, postage prepaid mail, to each record holder of the Common
Stock as of the close of business on the Distribution Date, at the address of
such holder shown on the records of the Company, one or more Right Certificates
evidencing one Right (subject to adjustment as provided herein) for each share
of Common Stock so held. If an adjustment in the number of Rights per share of
Common Stock has been made pursuant to Section 11(p), the Company shall, at the
time of distribution of the Right Certificates, make the necessary and
appropriate rounding adjustments (in accordance with Section 14(a)) so that
Right Certificates representing only whole numbers of Rights are distributed and
cash is paid in lieu of any fractional Rights. From and after the Distribution
Date, the Rights will be evidenced solely by such Right Certificates.
(c) Rights shall be issued in respect of all shares of Common Stock
outstanding as of the Record Date or issued (on original issuance or out of
treasury) after the Record Date but prior to the earlier of the Distribution
Date and the Expiration Date. In addition, in connection with the issuance or
sale of shares of Common Stock following the Distribution Date and prior to the
Expiration Date, the Company (i) shall, with respect to shares of Common Stock
so issued or sold (x) pursuant to the exercise of stock options or under any
employee plan or arrangement or (y) upon the exercise, conversion or exchange of
other securities issued by the Company prior to the Distribution Date and (ii)
may, in any other case, if deemed necessary or appropriate by the Board of
Directors of the Company, issue Right Certificates representing the appropriate
number of Rights in connection with such issuance or sale; provided that no such
Right Certificate shall be issued if, and to the extent that, (i) the Company
shall be advised by counsel that such issuance would create a significant risk
of material adverse tax consequences to the Company or the Person to whom such
Right Certificate would be issued or (ii) appropriate adjustment shall otherwise
have been made in lieu of the issuance thereof.
(d) Certificates for the Common Stock issued after the Record Date but
prior to the earlier of the Distribution Date and the Expiration Date shall have
impressed on, printed on, written on or otherwise affixed to them the following
legend:
This certificate also evidences certain Rights as set forth in a
Rights Agreement between McDermott International, Inc. and First
Chicago Trust Company of New York dated as of December 5, 1995, as
amended (the "Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on file at the
principal executive offices of the Company. The Company will mail to
the holder of this certificate a copy of the Rights Agreement without
charge promptly after receipt of a written request therefor.
5
<PAGE>
Under certain circumstances, as set forth in the Rights Agreement,
such Rights may be evidenced by separate certificates and no longer be
evidenced by this certificate, may be redeemed or exchanged or may
expire. As set forth in the Rights Agreement, Rights issued to, or
held by, any Person who is, was or becomes an Acquiring Person or an
Affiliate or Associate thereof (as such terms are defined in the
Rights Agreement), whether currently held by or on behalf of such
Person or by any subsequent holder, may be null and void.
Section 4. Form of Right Certificates. (a) The certificates evidencing
the Rights (and the forms of assignment, election to purchase and certificates
to be printed on the reverse thereof) (the "Right Certificates") shall be
substantially in the form of Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law, rule or regulation or with any rule or regulation of any stock
exchange on which the Rights may from time to time be listed, or to conform to
usage. The Right Certificates, whenever distributed, shall be dated as of the
Record Date.
(b) Any Right Certificate representing Rights beneficially owned by any
Person referred to in clauses (i), (ii) or (iii) of the first sentence of
Section 7(d) shall (to the extent feasible) contain the following legend:
The Rights represented by this Right Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person
or an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). This Right Certificate and the
Rights represented hereby may be or may become null and void in the
circumstances specified in Section 7(d) of such Agreement.
Section 5. Countersignature and Registration. (a) The Right Certificates
shall be executed on behalf of the Company by its Chairman of the Board, its
President or any Vice President, either manually or by facsimile signature, and
shall have affixed thereto the Company's seal or a facsimile thereof which shall
be attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. The Right Certificates shall be manually
countersigned by the Rights Agent and shall not be valid for any purpose unless
so countersigned. In case any officer of the Company whose manual or facsimile
signature is affixed to the Right Certificates shall cease to be such officer of
the Company before countersignature by the Rights Agent and issuance and
delivery by the Company, such Right Certificates may, nevertheless, be
countersigned by the Rights Agent and issued and delivered with the same force
and effect as though the Person who signed such Right Certificates had not
ceased to be such officer of the Company. Any Right Certificate may be signed
on behalf of the Company by any Person who, at the actual date of the execution
of such Right Certificate, shall be a proper officer of the Company to sign such
Right Certificate, although at the date of the execution of this Rights
Agreement any such Person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or cause
to be kept, at its principal office or offices designated as the place for
surrender of Right Certificates upon exercise, transfer or exchange, books for
registration and transfer of the Right Certificates. Such books shall show with
respect to each Right Certificate the name and address of the registered holder
6
<PAGE>
thereof, the number of Rights indicated on the certificate and the certificate
number.
Section 6. Transfer and Exchange of Right Certificates; Mutilated
Destroyed, Lost or Stolen Right Certificates. (a) At any time after the
Distribution Date and prior to the Expiration Date, any Right Certificate or
Certificates may, upon the terms and subject to the conditions set forth below
in this Section 6(a), be transferred or exchanged for another Right Certificate
or Certificates evidencing a like number of Rights as the Right Certificate or
Certificates surrendered. Any registered holder desiring to transfer or
exchange any Right Certificate or Certificates shall surrender such Right
Certificate or Certificates (with, in the case of a transfer, the form of
assignment and certificate on the reverse side thereof duly executed) to the
Rights Agent at the principal office or offices of the Rights Agent designated
for such purpose. Neither the Rights Agent nor the Company shall be obligated
to take any action whatsoever with respect to the transfer of any such
surrendered Right Certificate or Certificates until the registered holder of the
Rights has complied with the requirements of Section 7(e). Upon satisfaction of
the foregoing requirements, the Rights Agent shall, subject to Sections 4(b),
7(d), 14 and 24, countersign and deliver to the Person entitled thereto a Right
Certificate or Certificates as so requested. The Company may require payment of
a sum sufficient to cover any transfer tax or other governmental charge that may
be imposed in connection with any transfer or exchange of any Right Certificate
or Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will issue and deliver a new
Right Certificate of like tenor to the Rights Agent for countersignature and
delivery to the registered owner in lieu of the Right Certificate so lost,
stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) The registered holder of any Right Certificate may exercise the Rights
evidenced thereby (except as otherwise provided herein, including Sections 7(d)
and (e), 9(c), 11(a) and 24) in whole or in part at any time after the
Distribution Date and prior to the Expiration Date upon surrender of the Right
Certificate, with the form of election to purchase and the certificate on the
reverse side thereof duly executed, to the Rights Agent at the principal office
or offices of the Rights Agent designated for such purpose, together with
payment (in lawful money of the United States of America by certified check or
bank draft payable to the order of the Company) of the aggregate Purchase Price
with respect to the Rights then to be exercised and an amount equal to any
applicable transfer tax or other governmental charge.
(b) Upon satisfaction of the requirements of Section 7(a) and subject to
Section 20(k), the Rights Agent shall thereupon promptly (i)(A) requisition from
any transfer agent of the Preferred Stock (or make available, if the Rights
Agent is the transfer agent therefor) certificates for the total number of one
one-hundredths of a share of Preferred Stock to be purchased (and the Company
hereby irrevocably authorizes its transfer agent to comply with all such
requests) or (B) if the Company shall have elected to deposit the shares of
Preferred Stock issuable upon exercise of the Rights with a depositary agent,
requisition from the depositary agent depositary receipts representing such
number of one
7
<PAGE>
one-hundredths of a share of Preferred Stock as are to be purchased (in which
case certificates for the shares of Preferred Stock represented by such receipts
shall be deposited by the transfer agent with the depositary agent) and the
Company will direct the depositary agent to comply with such request, (ii)
requisition from the Company the amount of cash, if any, to be paid in lieu of
issuance of fractional shares in accordance with Section 14 and (iii) after
receipt of such certificates or depositary receipts and cash, if any, cause the
same to be delivered to or upon the order of the registered holder of such Right
Certificate (with such certificates or receipts registered in such name or names
as may be designated by such holder). If the Company is obligated to deliver
Common Stock, other securities or assets pursuant to this Agreement, the Company
will make all arrangements necessary so that such other securities and assets
are available for delivery by the Rights Agent, if and when appropriate.
(c) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing the number of Rights remaining unexercised shall be issued by the
Rights Agent and delivered to, or upon the order of, the registered holder of
such Right Certificate, registered in such name or names as may be designated by
such holder, subject to the provisions of Section 14.
(d) Notwithstanding anything in this Agreement to the contrary, from and
after the first occurrence of a Section 11(a)(ii) Event, any Rights beneficially
owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring
Person, (ii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person becomes such or
(iii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee prior to or concurrently with the Acquiring
Person becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from the Acquiring Person (or any such
Associate or Affiliate) to holders of equity interests in such Acquiring Person
(or in any such Associate or Affiliate) or to any Person with whom the Acquiring
Person (or any such Associate or Affiliate) has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (B) a transfer
which is part of a plan, arrangement or understanding which has as a primary
purpose or effect the avoidance of this Section 7(d) shall become null and void
without any further action, and no holder of such Rights shall have any rights
whatsoever with respect to such Rights, whether under any provision of this
Agreement or otherwise. The Company shall use all reasonable efforts to insure
that the provisions of this Section 7(d) and Section 4(b) are complied with, but
shall have no liability to any holder of Right Certificates or other Person as a
result of its failure to make any determinations with respect to an
8
<PAGE>
Acquiring Person or its Affiliates and Associates or any transferee of any of
them hereunder.
(e) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder of Rights upon the occurrence of any purported
transfer pursuant to Section 6 or exercise pursuant to this Section 7 unless
such registered holder (i) shall have completed and signed the certificate
contained in the form of assignment or election to purchase, as the case may be,
set forth on the reverse side of the Right Certificate surrendered for such
transfer or exercise, as the case may be, (ii) shall not have indicated an
affirmative response to clause 1 or 2 thereof and (iii) shall have provided such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company shall
reasonably request.
Section 8. Cancellation and Destruction of Right Certificates. All Right
Certificates surrendered for exercise, transfer or exchange shall, if
surrendered to the Company or to any of its agents, be delivered to the Rights
Agent for cancellation or in canceled form, or, if surrendered to the Rights
Agent, shall be canceled by it, and no Right Certificates shall be issued in
lieu thereof except as expressly permitted by this Agreement. The Company shall
deliver to the Rights Agent for cancellation, and the Rights Agent shall cancel,
any other Right Certificate purchased or acquired by the Company otherwise than
upon the exercise thereof. The Rights Agent shall deliver all canceled Right
Certificates to the Company, or shall, at the written request of the Company,
destroy such canceled Right Certificates, and in such case shall deliver a
certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Stock. (a) The Company
covenants and agrees that it will cause to be reserved and kept available a
number of shares of Preferred Stock which are authorized but not outstanding or
otherwise reserved for issuance sufficient to permit the exercise in full of all
outstanding Rights as provided in this Agreement.
(b) So long as the Preferred Stock issuable upon the exercise of Rights
may be listed on any national securities exchange, the Company shall use its
best efforts to cause, from and after such time as the Rights become
exercisable, all securities reserved for such issuance to be listed on any such
exchange upon official notice of issuance upon such exercise.
(c) The Company shall use its best efforts (i) to file, as soon as
practicable following the earliest date after the occurrence of a Section
11(a)(ii) Event as of which the consideration to be delivered by the Company
upon exercise of the Rights has been determined in accordance with Section
11(a)(iii), or as soon as is required by law following the Distribution Date, as
the case may be, a registration statement under the Securities Act with respect
to the securities issuable upon exercise of the Rights, (ii) to cause such
registration statement to
9
<PAGE>
become effective as soon as practicable after such filing and (iii) to cause
such registration statement to remain effective (with a prospectus at all times
meeting the requirements of the Securities Act) until the earlier of (A) the
date as of which the Rights are no longer exercisable for such securities and
(B) the Expiration Date. The Company will also take such action as may be
appropriate under, or to ensure compliance with, the securities or blue sky laws
of the various states in connection with the exercisability of the Rights. The
Company may temporarily suspend, for a period of time not to exceed 90 days
after the date set forth in clause (i) of the first sentence of this Section
9(c), the exercisability of the Rights in order to prepare and file such
registration statement and permit it to become effective. Upon any such
suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect.
Notwithstanding any such provision of this Agreement to the contrary, the Rights
shall not be exercisable for securities in any jurisdiction if the requisite
qualification in such jurisdiction shall not have been obtained, such exercise
therefor shall not be permitted under applicable law or a registration statement
in respect of such securities shall not have been declared effective.
(d) The Company covenants and agrees that it will take all such action as
may be necessary to insure that all one one-hundredths of a share of Preferred
Stock issuable upon exercise of Rights shall, at the time of delivery of the
certificates for such securities (subject to payment of the Purchase Price), be
duly and validly authorized and issued and fully paid and nonassessable.
(e) The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and other governmental
charges which may be payable in respect of the issuance or delivery of the Right
Certificates and of any certificates for Preferred Stock upon the exercise of
Rights. The Company shall not, however, be required to pay any transfer tax or
other governmental charge which may be payable in respect of any transfer
involved in the issuance or delivery of any Right Certificates or of any
certificates for Preferred Stock to a Person other than the registered holder of
the applicable Right Certificate, and prior to any such transfer, issuance or
delivery any such tax or other governmental charge shall have been paid by the
holder of such Right Certificate or it shall have been established to the
Company's satisfaction that no such tax or other governmental charge is due.
Section 10. Preferred Stock Record Date. Each Person (other than the
Company) in whose name any certificate for Preferred Stock is issued upon the
exercise of Rights shall for all purposes be deemed to have become the holder of
record of such Preferred Stock represented thereby on, and such certificate
shall be dated, the date upon which the Right Certificate
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evidencing such Rights was duly surrendered and payment of the Purchase Price
(and any transfer taxes or other governmental charges) was made; provided that
if the date of such surrender and payment is a date upon which the transfer
books of the Company relating to the Preferred Stock are closed, such Person
shall be deemed to have become the record holder of such shares on, and such
certificate shall be dated, the next succeeding Business Day on which the
applicable transfer books of the Company are open. Prior to the exercise of the
Rights evidenced thereby, the holder of a Right Certificate shall not be
entitled to any rights of a stockholder of the Company with respect to shares
for which the Rights shall be exercisable, including the right to vote, to
receive dividends or other distributions or to exercise any preemptive rights,
and shall not be entitled to receive any notice of any proceedings of the
Company except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. (a)(i) If the Company shall at any time after the date of
this Agreement (A) pay a dividend on the Preferred Stock payable in shares of
Preferred Stock, (B) subdivide the outstanding Preferred Stock into a greater
number of shares, (C) combine the outstanding Preferred Stock into a smaller
number of shares or (D) issue any shares of its capital stock in a
reclassification of the Preferred Stock (including any such reclassification in
connection with a consolidation or merger involving the Company), the Purchase
Price in effect immediately prior to the record date for such dividend or of the
effective date of such subdivision, combination or reclassification, and the
number and kind of shares of Preferred Stock or other capital stock issuable on
such date shall be proportionately adjusted so that each holder of a Right shall
(except as otherwise provided herein, including Section 7(d)) thereafter be
entitled to receive, upon exercise thereof at the Purchase Price in effect
immediately prior to such date, the aggregate number and kind of shares of
Preferred Stock or other capital stock, as the case may be, which, if such Right
had been exercised immediately prior to such date and at a time when the
applicable transfer books of the Company were open, such holder would have been
entitled to receive upon such exercise and by virtue of such dividend,
subdivision, combination or reclassification. If an event occurs which requires
an adjustment under both this Section 11(a)(i) and Section 11(a)(ii), the
adjustment provided for in this Section 11(a)(i) shall be in addition to, and
shall be made prior to, any adjustment required pursuant to Section 11(a)(ii).
(ii) If any Person, alone or together with its Affiliates and Associates,
shall, at any time after the date of this Agreement, become an Acquiring Person,
then proper provision shall promptly be made so that each holder of a Right
shall (except as otherwise provided herein, including Section 7(d)) thereafter
be entitled to receive, upon exercise thereof at the Purchase Price in effect
immediately prior to the first occurrence of a Section 11(a)(ii) Event, in lieu
of Preferred Stock, such number of duly authorized, validly issued, fully paid
and nonassessable shares of Common Stock of the Company (such shares being
referred to herein as the "Adjustment Shares") as shall be equal to the result
obtained by dividing
(x) the product obtained by multiplying the Purchase Price in effect
immediately prior to the first occurrence of a Section 11(a)(ii) Event by
the number of one one-hundredths of a share of Preferred Stock for which a
Right was exercisable immediately prior to such first occurrence (such
product being thereafter referred to as the "Purchase Price" for each Right
and for all purposes of this Agreement) by
(y) 50% of the current market price (determined pursuant to Section
11(d)(i)) per share of Common Stock on the date of such first occurrence;
provided that if the transaction that would otherwise give rise to the foregoing
adjustment is also subject to the provisions of Section 13, then only the
provisions of Section 13 shall apply and no adjustment shall be made pursuant to
this Section 11(a)(ii).
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(iii) If the number of shares of Common Stock which are authorized by the
Company's articles of incorporation but not outstanding or reserved for issuance
other than upon exercise of the Rights is not sufficient to permit the exercise
in full of the Rights in accordance with Section 11(a)(ii), the Company shall,
with respect to each Right, make adequate provision to substitute for the
Adjustment Shares, upon payment of the Purchase Price then in effect, (A) (to
the extent available) Common Stock and then, (B) (to the extent available) other
equity securities of the Company which are essentially equivalent to shares of
Common Stock in respect to dividend, liquidation and voting rights (such
securities being referred to herein as "common stock equivalents") and then, if
necessary, (C) other equity or debt securities of the Company, cash or other
assets, a reduction in the Purchase Price or any combination of the foregoing,
having an aggregate value (based upon the advice of a nationally recognized
investment banking firm) equal to the value of the Adjustment Shares; provided
that (x) the Company may, and (y) if the Company shall not have made adequate
provision as required above to deliver value within 30 days following the later
of the first occurrence of a Section 11(a)(ii) Event and the first date that the
right to redeem the Rights pursuant to Section 23 shall expire (such 30-day
period, the "Substitution Period"), then the Company shall be obligated to,
deliver, upon the surrender for exercise of a Right and without requiring
payment of the Purchase Price, (1) (to the extent available) Common Stock and
then (2) (to the extent available) common stock equivalents and then, if
necessary, (3) other equity or debt securities of the Company, cash or other
assets or any combination of the foregoing, having an aggregate value (based
upon the advice of a nationally recognized investment banking firm) equal to the
excess of the value of the Adjustment Shares over the Purchase Price. To the
extent that the Company determines that some action is to be taken pursuant to
the preceding sentence of this Section 11(a)(iii), the Company (X) shall
provide, subject to Section 7(d), that such action shall apply uniformly to all
outstanding Rights and (Y) may suspend the exercisability of the Rights until
the expiration of the Substitution Period in order to seek any authorization for
additional shares and/or to decide the appropriate form and value of any
consideration to be delivered as referred to in such preceding sentence. If any
such suspension occurs, the Company shall issue a public announcement stating
that the exercisability of the Rights has been temporarily suspended, as well as
a public announcement at such time as the suspension is no longer in effect.
For purposes of this Section 11(a)(iii), the value of the Common Stock shall be
the current market price per share of Common Stock (as determined pursuant to
Section 11(d)) on the later of the date of the first occurrence of a Section
11(a)(ii) Event and the first date that the right to redeem the Rights pursuant
to Section 23 shall expire; any common stock equivalent shall be deemed to have
the same value as the Common Stock on such date; and the value of other
securities or assets shall be determined pursuant to Section 11(d)(iii).
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Stock entitling them to
subscribe for or purchase (for a period expiring within 45 calendar days after
such record date) Preferred Stock (or securities having the same rights,
privileges and preferences as the shares of Preferred Stock ("equivalent
preferred stock")) or securities convertible into or exercisable for Preferred
Stock (or equivalent preferred stock) at a price per share of Preferred Stock
(or equivalent preferred stock) (in each case, taking account of any conversion
or exercise price) less than the current market price (as determined pursuant to
Section 11(d)) per share of Preferred Stock on such record date, the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such date by a fraction, the
numerator of which shall be the number of shares of Preferred Stock outstanding
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<PAGE>
on such record date, plus the number of shares of Preferred Stock which the
aggregate price (taking account of any conversion or exercise price) of the
total number of shares of Preferred Stock (and/or equivalent preferred stock) so
to be offered would purchase at such current market price and the denominator of
which shall be the number of shares of Preferred Stock outstanding on such
record date plus the number of additional shares of Preferred Stock (and/or
equivalent preferred stock) so to be offered. In case such subscription price
may be paid by delivery of consideration part or all of which shall be in a form
other than cash, the value of such consideration shall be as determined in good
faith by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be conclusive for
all purposes. Shares of Preferred Stock owned by or held for the account of the
Company shall not be deemed outstanding for the purpose of any such computation.
Such adjustment shall be made successively whenever such a record date is fixed,
and if such rights, options or warrants are not so issued, the Purchase Price
shall be adjusted to be the Purchase Price which would then be in effect if such
record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of Preferred Stock (including any such distribution
made in connection with a consolidation or merger involving the Company) of
evidences of indebtedness, equity securities other than Preferred Stock, assets
(other than a regular periodic cash dividend out of the earnings or retained
earnings of the Company) or rights, options or warrants (excluding those
referred to in Section 11(b)), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the current market price (as determined pursuant to Section 11(d)) per
share of Preferred Stock on such record date, less the value (as determined
pursuant to Section 11(d)(iii)) of such evidences of indebtedness, equity
securities, assets, rights, options or warrants so to be distributed with
respect to one share of Preferred Stock and the denominator of which shall be
such current market price per share of Preferred Stock. Such adjustment shall
be made successively whenever such a record date is fixed, and if such
distribution is not so made, the Purchase Price shall be adjusted to be the
Purchase Price which would then be in effect if such record date had not been
fixed.
(d)(i) For the purpose of any computation hereunder other than
computations made pursuant to Section 11(a)(iii) or 14, the "current market
price" per share of Common Stock on any date shall be deemed to be the average
of the daily closing prices per share of such Common Stock for the 30
consecutive Trading Days immediately prior to such date; for purposes of
computations made pursuant to Section 11(a)(iii), the "current market price" per
share of Common Stock on any date shall be deemed to be the average of the daily
closing prices per share of such Common Stock for the 10 consecutive Trading
Days immediately following such date; and for purposes of
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<PAGE>
computations made pursuant to Section 14, the "current market price" per share
of Common Stock for any Trading Day shall be deemed to be the closing price per
share of Common Stock for such Trading Day; provided that if the current market
price per share of the Common Stock is determined during a period following the
announcement by the issuer of such Common Stock of (A) a dividend or
distribution on such Common Stock payable in shares of such Common Stock or
securities exercisable for or convertible into shares of such Common Stock
(other than the Rights), or (B) any subdivision, combination or reclassification
of such Common Stock, and prior to the expiration of the requisite 30 Trading
Day or 10 Trading Day period, as set forth above, after the ex-dividend date for
such dividend or distribution, or the record date for such subdivision,
combination or reclassification, then, and in each such case, the "current
market price" shall be properly adjusted to take into account ex-dividend
trading. The closing price for each day shall be the last sale price, regular
way, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the shares
of Common Stock are not listed or admitted to trading on the New York Stock
Exchange, on the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading or, if the shares of Common Stock
are not listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or
such other system then in use or, if on any such date the shares of Common Stock
are not quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in the
Common Stock selected by the Board of Directors of the Company. If on any such
date no market maker is making a market in the Common Stock, the fair value of
such shares on such date as determined in good faith by the Board of Directors
of the Company (or, if at the time of such determination there is an Acquiring
Person, by a nationally recognized investment banking firm) shall be used. If
the Common Stock is not publicly held or not so listed or traded, the "current
market price" per share means the fair value per share as determined in good
faith by the Board of Directors of the Company, or, if at the time of such
determination there is an Acquiring Person, by a nationally recognized
investment banking firm, which determination shall be described in a statement
filed with the Rights Agent and shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the "current market
price" per share of Preferred Stock shall be determined in the same manner as
set forth above for the Common Stock in Section 11(d)(i) (other than the last
sentence thereof). If the current market price per share of Preferred Stock
cannot be determined in such manner, the "current market price" per share of
Preferred Stock shall be conclusively deemed to be an amount equal to 100 (as
such number may be appropriately adjusted for such events as stock splits, stock
dividends and recapitalizations with respect to the Common Stock occurring after
the date of this Agreement) multiplied by the current market price per share of
Common Stock (as determined pursuant to Section 11(d)(i) (other than the last
sentence thereof)). If neither the Common Stock nor the Preferred Stock is
publicly held or so listed or traded, the "current market price" per share of
the Preferred Stock shall be determined in the same manner as set forth in the
last sentence of Section 11(d)(i). For all purposes of this Agreement, the
"current market price" of one one-hundredth of a share of Preferred Stock shall
be equal to the "current market price" of one share of Preferred Stock divided
by 100.
(iii) For the purpose of any computation hereunder, the value of any
securities or assets other than Common Stock or Preferred Stock shall be the
fair value as determined in good faith by the Board of Directors of the Company,
or, if at the time of such determination there is an Acquiring Person, by a
nationally recognized investment banking firm, which determination shall be
described in a statement filed with the Rights Agent and shall be conclusive for
all purposes.
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(e) Anything herein to the contrary notwithstanding, no adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Purchase Price; provided that any
adjustments which by reason of this Section 11(e) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 11 shall be made to the nearest cent or to
the nearest ten-thousandth of a share of Common Stock or other share or one-
millionth of a share of Preferred Stock, as the case may be.
(f) If at any time, as a result of an adjustment made pursuant to
Section 11(a)(ii) or Section 13(a), the holder of any Right shall be entitled to
receive upon exercise of such Right any shares of capital stock other than
Preferred Stock, thereafter the number of such other shares so receivable upon
exercise of any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Stock contained in
Section 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and the
provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Stock
shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made hereunder shall evidence the right to purchase, at the Purchase
Price then in effect, the then applicable number of one one-hundredths of a
share of Preferred Stock and other capital stock of the Company issuable from
time to time hereunder upon exercise of the Rights, all subject to further
adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Section 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-hundredths of a
share of Preferred Stock (calculated to the nearest one-millionth) obtained by
(i) multiplying (x) the number of one one-hundredths of a share for which a
Right was exercisable immediately prior to this adjustment by (y) the Purchase
Price in effect immediately prior to such adjustment of the Purchase Price and
(ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in lieu of any adjustment in the
number of one one-hundredths of a share of Preferred Stock issuable upon
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<PAGE>
the exercise of a Right. Each of the Rights outstanding after such adjustment of
the number of Rights shall be exercisable for the number of one one-hundredths
of a share of Preferred Stock for which such Right was exercisable immediately
prior to such adjustment. Each Right held of record prior to such adjustment of
the number of Rights shall become that number of Rights (calculated to the
nearest ten-thousandth) obtained by dividing the Purchase Price in effect
immediately prior to adjustment of the Purchase Price by the Purchase Price in
effect immediately after adjustment of the Purchase Price. The Company shall
make a public announcement of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date on which
the Purchase Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least 10 days later than the date of
the public announcement. If Right Certificates have been issued, upon each
adjustment of the number of Rights pursuant to this Section 11(i), the Company
shall, as promptly as practicable, cause to be distributed to holders of record
of Right Certificates on such record date Right Certificates evidencing, subject
to Section 14, the additional Rights to which such holders shall be entitled as
a result of such adjustment, or, at the option of the Company, shall cause to be
distributed to such holders of record in substitution and replacement for the
Right Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Right Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Right Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Purchase Price) and shall be registered in the
names of the holders of record of Right Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-hundredths of a share of Preferred Stock issuable upon the
exercise of the Rights, the Right Certificates theretofore and thereafter issued
may continue to express the Purchase Price per one one-hundredth of a share and
the number of shares which were expressed in the initial Right Certificates
issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below the par value, if any, of the number of one one-hundredths
of a share of Preferred Stock issuable upon exercise of the Rights, the Company
shall take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally
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<PAGE>
issue fully paid and nonassessable such number of one one-hundredths of a share
of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of one one-hundredths of a share of Preferred Stock or other capital
stock of the Company, if any, issuable upon such exercise over and above the
number of one one-hundredths of a share of Preferred Stock or other capital
stock of the Company, if any, issuable upon such exercise on the basis of the
Purchase Price in effect prior to such adjustment; provided that the Company
shall deliver to such holder a due bill or other appropriate instrument
evidencing such holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it, in its sole discretion, shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Stock, issuance
wholly for cash of any Preferred Stock at less than the current market price,
issuance wholly for cash of Preferred Stock or securities which by their terms
are convertible into or exercisable for Preferred Stock, stock dividends or
issuance of rights, options or warrants referred to in this Section 11,
hereafter made by the Company to the holders of its Preferred Stock, shall not
be taxable to such stockholders.
(n) The Company covenants and agrees that it will not at any time after
the Distribution Date (i) consolidate, merge or otherwise combine with or (ii)
sell or otherwise transfer (and/or permit any of its Subsidiaries to sell or
otherwise transfer), in one transaction or a series of related transactions,
assets or earning power aggregating more than 50% of the assets or earning power
of the Company and its Subsidiaries, taken as a whole, to any other Person or
Persons if (x) at the time of or immediately after such consolidation, merger,
combination or sale there are any rights, warrants or other instruments or
securities outstanding or any agreements or arrangements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger, combination or sale, the stockholders of a Person
who constitutes, or would constitute, the "Principal Party" for the purposes of
Section
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13 shall have received a distribution of Rights previously owned by such Person
or any of its Affiliates and Associates.
(o) The Company covenants and agrees that after the Distribution Date,
it will not, except as permitted by Sections 23, 24 and 27, take (or permit any
Subsidiary to take) any action if at the time such action is taken it is
reasonably foreseeable that such action will substantially diminish or otherwise
eliminate the benefits intended to be afforded by the Rights.
(p) Notwithstanding anything in this Agreement to the contrary, if at
any time after the date hereof and prior to the Distribution Date the Company
shall (i) pay a dividend on the outstanding shares of Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock into a
larger number of shares or (iii) combine the outstanding Common Stock into a
smaller number of shares, the number of Rights associated with each share of
Common Stock then outstanding, or issued or delivered thereafter as contemplated
by Section 3(c), shall be proportionately adjusted so that the number of Rights
thereafter associated with each share of Common Stock following any such event
shall equal the result obtained by multiplying the number of Rights associated
with each share of Common Stock immediately prior to such event by a fraction
the numerator of which shall be the total number of shares of Common Stock
outstanding immediately prior to the occurrence of the event and the denominator
of which shall be the total number of shares of Common Stock outstanding
immediately following the occurrence of such event.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares .
Whenever an adjustment is made as provided in Sections 11 and 13, the Company
shall (a) promptly prepare a certificate setting forth such adjustment and a
brief statement of the facts accounting for such adjustment, (b) promptly file
with the Rights Agent and with each transfer agent for the Preferred Stock and
the Common Stock a copy of such certificate and (c) mail a brief summary thereof
to each holder of a Right Certificate (or, if prior to the Distribution Date, to
each holder of a certificate representing shares of Common Stock) in the manner
set forth in Section 26. The Rights Agent shall be fully protected in relying
on any such certificate and on any adjustment therein contained.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power. (a) If, following the Stock Acquisition Date, directly or indirectly,
(x) the Company shall consolidate with, merge into, or otherwise
combine with, any other Person, and the Company shall not be the
continuing or surviving corporation of such consolidation, merger or
combination,
(y) any Person shall merge into, or otherwise combine with, the
Company, and the Company shall be the continuing or surviving
corporation of such merger or combination and, in connection with such
merger or
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combination, all or part of the outstanding shares of Common Stock
shall be changed into or exchanged for other stock or securities of
the Company or any other Person, cash or any other property, or
(z) the Company and/or one or more of its Subsidiaries shall
sell or otherwise transfer, in one transaction or a series of related
transactions, assets or earning power aggregating more than 50% of the
assets or earning power of the Company and its Subsidiaries, taken as
a whole, to any other Person or Persons,
then, and in each such case, proper provision shall promptly be made so
that
(i) each holder of a Right shall thereafter be entitled to receive,
upon exercise thereof at the Purchase Price in effect immediately prior to
the first occurrence of any Triggering Event, such number of duly
authorized, validly issued, fully paid and nonassessable shares of freely
tradeable Common Stock of the Principal Party (as hereinafter defined), not
subject to any rights of call or first refusal, liens, encumbrances or
other claims, as shall be equal to the result obtained by dividing
(A) the product obtained by multiplying the Purchase Price in
effect immediately prior to the first occurrence of any Triggering
Event by the number of one one-hundredths of a share of Preferred
Stock for which a Right was exercisable immediately prior to such
first occurrence (such product being thereafter referred to as the
"Purchase Price" for each Right and for all purposes of this
Agreement) by
(B) 50% of the current market price (determined pursuant to
Section 11(d)(i)) per share of the Common Stock of such Principal
Party on the date of consummation of such consolidation, merger,
combination, sale or transfer;
(ii) the Principal Party shall thereafter be liable for, and shall
assume, by virtue of such consolidation, merger, combination, sale or
transfer, all the obligations and duties of the Company pursuant to this
Agreement;
(iii) the term "Company" shall thereafter be deemed to refer to
such Principal Party, it being specifically intended that the provisions of
Section 11 shall apply only to such Principal Party following the first
occurrence of a Section 13 Event; and
(iv) such Principal Party shall take such steps (including the
authorization and reservation of a sufficient number of shares of its
Common Stock to permit exercise of all outstanding Rights in accordance
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with this Section 13(a)) in connection with the consummation of any such
transaction as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to
the shares of its Common Stock thereafter deliverable upon the exercise of
the Rights.
(b) "Principal Party" means
(i) in the case of any transaction described in Section 13(a)(x) or
(y), the Person that is the issuer of any securities into which shares of
Common Stock of the Company are converted in such merger, consolidation or
combination, and if no securities are so issued, the Person that survives
or results from such merger, consolidation or combination; and
(ii) in the case of any transaction described in Section 13(a)(z),
the Person that is the party receiving the greatest portion of the assets
or earning power transferred pursuant to such transaction or transactions;
provided that in any such case, (A) if the Common Stock of such Person is not at
such time and has not been continuously over the preceding 12-month period
registered under Section 12 of the Exchange Act, and such Person is a direct or
indirect Subsidiary of another Person the Common Stock of which is and has been
so registered, "Principal Party" shall refer to such other Person; and (B) in
case such Person is a Subsidiary, directly or indirectly, of more than one
Person, the Common Stocks of two or more of which are and have been so
registered, "Principal Party" shall refer to whichever of such Persons is the
issuer of the Common Stock having the greatest aggregate market value.
(c) The Company shall not consummate any such consolidation, merger,
combination, sale or transfer unless the Principal Party shall have a sufficient
number of authorized shares of its Common Stock which are not outstanding or
otherwise reserved for issuance to permit the exercise in full of the Rights in
accordance with this Section 13 and unless prior thereto the Company and such
Principal Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing for the terms set forth in Section 13(a) and
(b) and providing that, as soon as practicable after the date of any
consolidation, merger, combination, sale or transfer mentioned in Section 13(a),
the Principal Party will
(i) prepare and file a registration statement under the Securities
Act with respect to the securities issuable upon exercise of the Rights,
and will use its best efforts to cause such registration statement (A) to
become effective as soon as practicable after such filing and (B) to
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remain effective (with a prospectus at all times meeting the requirements
of the Securities Act) until the Expiration Date and
(ii) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates which comply
in all respects with the requirements for registration on Form 10 under the
Exchange Act.
The provisions of this Section 13 shall similarly apply to successive
mergers, consolidations, combinations, sales or other transfers. If any Section
13 Event shall occur at any time after the occurrence of a Section 11(a)(ii)
Event, the Rights which have not theretofore been exercised shall thereafter
become exercisable in the manner described in Section 13(a).
Section 14. Fractional Rights and Fractional Shares. (a) The Company
shall not be required to issue fractions of Rights, except prior to the
Distribution Date as provided in Section 11(p), or to distribute Right
Certificates which evidence fractional Rights. In lieu of any such fractional
Rights, the Company shall pay to the registered holders of the Right
Certificates with regard to which such fractional Rights would otherwise be
issuable an amount in cash equal to the same fraction of the current market
price of a whole Right. For purposes of this Section 14(a), the current market
price of a whole Right shall be the closing price of a Right for the Trading Day
immediately prior to the date on which such fractional Rights would otherwise
have been issuable. The closing price of a Right for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, on the principal national securities exchange on which the Rights are
listed or admitted to trading or, if the Rights are not listed or admitted to
trading on any national securities exchange, the last quoted price, or, if not
so quoted, the average of the high bid and low asked prices in the over-the-
counter market, as reported by NASDAQ or such other system then in use or, if on
any such date the Rights are not quoted by any such organization, the average of
the closing bid and asked prices as furnished by a professional market maker
making a market in the Rights selected by the Board of Directors of the Company.
If on any such date no such market maker is making a market in the Rights, the
current market price of the Rights on such date shall be as determined in good
faith by the Board of Directors of the Company, or, if at the time of such
determination there is an Acquiring Person, by a nationally recognized
investment banking firm.
(b The Company shall not be required to issue fractions of shares of
Preferred Stock (other than fractions which are multiples of one one-hundredth
of a share of Preferred Stock) upon exercise of the Rights or to distribute
certificates which evidence fractional shares of Preferred Stock (other than
fractions which are multiples of one one-hundredth of a share of Preferred
Stock). In lieu of any such fractional shares of Preferred Stock, the Company
shall pay to the registered holders of Right Certificates at the time such
Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market price of one one-hundredth of a share of
Preferred Stock. For purposes of this Section 14(b), the current market price
of one one-hundredth of a share of Preferred Stock shall be one one-hundredth of
the
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closing price of a share of Preferred Stock (as determined pursuant to Section
11(d)) for the Trading Day immediately prior to the date of such exercise.
(c Following the occurrence of any Triggering Event or upon any
exchange pursuant to Section 24, the Company shall not be required to issue
fractions of shares of Common Stock upon exercise of the Rights or to distribute
certificates which evidence fractional shares of Common Stock. In lieu of
fractional shares of Common Stock, the Company shall pay to the registered
holders of Right Certificates at the time such Rights are exercised or exchanged
as herein provided an amount in cash equal to the same fraction of the current
market price of a share of Common Stock. For purposes of this Section 14(c),
the current market price of a share of Common Stock shall be the closing price
of a share of Common Stock (as determined pursuant to Section 11(d)(i)) for the
Trading Day immediately prior to the date of such exercise or exchange.
(d The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of this
Agreement are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of
certificates representing Common Stock); and any registered holder of any Right
Certificate (or, prior to the Distribution Date, of any certificate representing
Common Stock), without the consent of the Rights Agent or of the holder of any
other Right Certificate (or, prior to the Distribution Date, of any certificate
representing Common Stock), may, in his own behalf and for his own benefit,
enforce, and may institute and maintain any suit, action or proceeding against
the Company to enforce, or otherwise act in respect of, his right to exercise
the Rights evidenced by such Right Certificate in the manner provided in such
Right Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and will be entitled to specific performance of the
obligations under, and injunctive relief against actual or threatened violations
of the obligations of, any Person subject to this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a Right that:
(a prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of Common Stock;
(b after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of transfer and
with the appropriate forms and certificates fully executed;
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(c subject to Sections 6 and 7, the Company and the Rights Agent may
deem and treat the Person in whose name a Right Certificate (or, prior to the
Distribution Date, a certificate representing shares of Common Stock) is
registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Right Certificate
or the certificate representing shares of Common Stock made by anyone other than
the Company or the Rights Agent) for all purposes whatsoever, and neither the
Company nor the Rights Agent, subject to the last sentence of Section 7(d),
shall be affected by any notice to the contrary; and
(d notwithstanding anything in this Agreement to the contrary, neither
the Company nor the Rights Agent shall have any liability to any holder of a
Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority prohibiting or otherwise restraining
performance of such obligation; provided that the Company must use its best
efforts to have any such order, decree or ruling lifted or otherwise overturned
as soon as possible.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No holder,
as such, of any Right Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the shares of capital stock which may
at any time be issuable on the exercise of the Rights represented thereby, nor
shall anything contained herein or in any Right Certificate be construed to
confer upon the holder of any Right Certificate, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting stockholders (except as provided in Section 25), or to
receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by such Right Certificate shall have been exercised in
accordance with the provisions hereof.
Section 18. Concerning the Rights Agent. (a The Company agrees to pay to
the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and disbursements and other disbursements incurred in
the execution or administration of this Agreement and the exercise and
performance of its duties hereunder. The Company also agrees to indemnify the
Rights Agent for, and to hold it harmless against, any loss, liability, or
expense, incurred without negligence, bad faith or willful misconduct on the
part of the Rights Agent, for anything done or omitted by the Rights Agent in
connection with the administration of this Agreement or the exercise or
performance of its duties hereunder, including the costs and expenses of
defending against any claim of liability.
(b The Rights Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered or omitted by it in connection
with the administration of this Agreement or the exercise or performance of its
duties
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hereunder in reliance upon any Right Certificate or certificate for Common Stock
or for other securities of the Company, instrument of assignment or transfer,
power of attorney, endorsement, affidavit, letter, notice, instruction,
direction, consent, certificate, statement, or other paper or document believed
by it to be genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights Agent. (a
Any corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the corporate trust or
stock transfer business of the Rights Agent or any successor Rights Agent, shall
be the successor to the Rights Agent under this Agreement without the execution
or filing of any paper or any further act on the part of any of the parties
hereto; provided that such corporation would be eligible for appointment as a
successor Rights Agent under the provisions of Section 21. In case at the time
such successor Rights Agent shall succeed to the agency created by this
Agreement, any of the Right Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of a
predecessor Rights Agent and deliver such Right Certificates so countersigned;
and in case at that time any of the Right Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent; and in all such cases such Right Certificates
shall have the full force provided in the Right Certificates and in this
Agreement.
(b In case at any time the name of the Rights Agent shall be changed
and at such time any of the Right Certificates shall have been countersigned but
not delivered, the Rights Agent may adopt the countersignature under its prior
name and deliver Right Certificates so countersigned; and in case at that time
any of the Right Certificates shall not have been countersigned, the Rights
Agent may countersign such Right Certificates either in its prior name or in its
changed name; and in all such cases such Right Certificates shall have the full
force provided in the Right Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:
(a The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any "Acquiring Person" and the
determination of "current market price") be proved or established by the
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Company prior to taking, suffering or omitting to take any action hereunder,
such fact or matter (unless other evidence in respect thereof be herein
specifically prescribed) may be deemed to be conclusively proved and established
by a certificate signed by the Chairman of the Board, the President or any Vice
President and by the Treasurer or any Assistant Treasurer or the Secretary or
any Assistant Secretary of the Company and delivered to the Rights Agent; and
such certificate shall be full authorization to the Rights Agent for any action
taken, suffered or omitted in good faith by it under the provisions of this
Agreement in reliance upon such certificate.
(c The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
(d The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 7(d)) or any adjustment in the terms of
the Rights (including the manner, method or amount thereof) provided for in
Sections 3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that
would require any such adjustment (except with respect to the exercise of Rights
evidenced by Right Certificates after actual notice of any such adjustment); nor
shall it by any act hereunder be deemed to make any representation or warranty
as to the authorization or reservation of any shares of Common Stock or
Preferred Stock to be issued pursuant to this Agreement or any Right Certificate
or as to whether any shares of Common Stock or Preferred Stock will, when
issued, be duly authorized, validly issued, fully paid and nonassessable.
(f The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
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(g The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President or any Vice President or the Secretary or
any Assistant Secretary or the Treasurer or any Assistant Treasurer of the
Company, and to apply to such officers for advice or instructions in connection
with its duties, and it shall not be liable for any action taken, suffered or
omitted to be taken by it in good faith in accordance with instructions of any
such officer.
(h The Rights Agent and any stockholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not the Rights
Agent under this Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other Person.
(i The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company or to any holders of Rights resulting from
any such act, default, neglect or misconduct, provided that reasonable care was
exercised in the selection and continued employment thereof.
(j No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k If, with respect to any Right Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the cases may be, has either not
been completed or indicates an affirmative response to clause 1 or 2 thereof,
the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Stock and Preferred Stock by
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registered or certified mail, and, subsequent to the Distribution Date, to the
holders of the Right Certificates by first-class mail. The Company may remove
the Rights Agent or any successor Rights Agent upon 30 days' notice in writing,
mailed to the Rights Agent or successor Rights Agent, as the case may be, and to
each transfer agent of the Common Stock and Preferred Stock by registered or
certified mail, and, subsequent to the Distribution Date, to the holders of the
Right Certificates by first-class mail. If the Rights Agent shall resign or be
removed or shall otherwise become incapable of acting, the Company shall appoint
a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of 30 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the holder of a Right Certificate
(who shall, with such notice, submit his Right Certificate for inspection by the
Company), then the registered holder of any Right Certificate may apply to any
court of competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be (a) a corporation organized and doing business under the laws of the
United States or of any state of the United States, in good standing, having a
principal office in the State of New York, which is authorized under such laws
to exercise stock transfer or corporate trust powers and is subject to
supervision or examination by federal or state authority and which has at the
time of its appointment as Rights Agent a combined capital and surplus of at
least $50,000,000 or (b) an Affiliate of a corporation described in clause (a)
of this sentence. After appointment, the successor Rights Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Common Stock and the Preferred Stock, and, subsequent to the Distribution
Date, mail a notice thereof in writing to the registered holders of the Right
Certificates. Failure to give any notice provided for in this Section 21, or any
defect therein, shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent, as
the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares of stock
issuable upon exercise of the Rights made in accordance with the provisions of
this Agreement.
Section 23. Redemption. (a The Board of Directors of the Company may, at
its option, at any time prior to the earlier of (i) the close of business on the
tenth day after the Stock Acquisition Date and (ii) the Final Expiration Date,
redeem all but not less than all the then outstanding Rights at a redemption
price of $.01 per Right, as such amount may be appropriately adjusted to reflect
any stock split, stock dividend or similar transaction occurring after the date
hereof (such redemption price being hereinafter referred to as the "Redemption
Price"). Notwithstanding anything in this Agreement to the contrary, the Rights
shall not be exercisable after the first occurrence of a Section 11(a)(ii) Event
until such time as the Company's right of redemption hereunder has expired.
(b Immediately upon the action of the Board of Directors of the
Company electing to redeem the Rights and without any further action and without
any notice, the right to exercise the Rights will terminate and thereafter the
only right of the holders of Rights shall be to receive the Redemption Price
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for each Right so held. The Company shall promptly thereafter give notice of
such redemption to the Rights Agent and the holders of the Rights in the manner
set forth in Section 26; provided that the failure to give, or any defect in,
such notice shall not affect the validity of such redemption. Any notice which
is mailed in the manner herein provided shall be deemed given, whether or not
the holder receives the notice. Each such notice of redemption will state the
method by which the payment of the Redemption Price will be made. Neither the
Company nor any of its Affiliates or Associates may redeem, acquire or purchase
for value any Rights at any time in any manner other than that specifically set
forth in Section 23 or 24, and other than in connection with the purchase,
acquisition or redemption of shares of Common Stock prior to the Distribution
Date.
Section 24. Exchange. (a At any time after the occurrence of a Section
11(a)(ii) Event, the Board of Directors of the Company may, at its option,
exchange all or part of the then outstanding and exercisable Rights (which shall
not include Rights that have become void pursuant to Section 7(d)) for shares of
Common Stock at an exchange ratio of one share of Common Stock per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio"). Notwithstanding the
foregoing, the Board of Directors shall not be empowered to effect such exchange
at any time after any Person (other than any Exempt Person), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or
more of the shares of Common Stock then outstanding.
(b Immediately upon the action of the Board of Directors of the
Company electing to exchange any Rights pursuant to Section 24(a) and without
any further action and without any notice, the right to exercise such Rights
will terminate and thereafter the only right of a holder of such Rights shall be
to receive that number of shares of Common Stock equal to the number of such
Rights held by such holder multiplied by the Exchange Ratio. The Company shall
promptly thereafter give notice of such exchange to the Rights Agent and the
holders of the Rights to be exchanged in the manner set forth in Section 26;
provided that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the
exchange of the shares of Common Stock for Rights will be effected and, in the
event of any partial exchange, the number of Rights which will be exchanged.
Any partial exchange shall be effected pro rata based on the number of Rights
(other than Rights which have become void pursuant to Section 7(d)) held by each
holder of Rights.
(c In any exchange pursuant to this Section 24, the Company, at its
option, may substitute common stock equivalents (as defined in Section
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11(a)(iii)) for shares of Common Stock exchangeable for Rights, at the initial
rate of one common stock equivalent for each share of Common Stock.
Section 25. Notice of Proposed Actions. (a In case the Company shall
propose, at any time after the Distribution Date, (i) to pay any dividend
payable in stock of any class to the holders of Preferred Stock or to make any
other distribution to the holders of Preferred Stock (other than a regular
quarterly cash dividend out of earnings or retained earnings of the Company), or
(ii) to offer to the holders of its Preferred Stock rights or warrants to
subscribe for or to purchase any additional shares of Preferred Stock or shares
of stock of any class or any other securities, rights or options, or (iii) to
effect any reclassification of its Preferred Stock (other than a
reclassification involving only the subdivision or combination of outstanding
shares of Preferred Stock) or (iv) to effect any consolidation or merger with
any other Person, or to effect and/or to permit one or more of its Subsidiaries
to effect any sale or other transfer, in one transaction or a series of related
transactions, of assets or earning power aggregating more than 50% of the assets
or earning power of the Company and its Subsidiaries, taken as a whole, to any
other Person or Persons, or (v) to effect the liquidation, dissolution or
winding up of the Company, then, in each such case, the Company shall give to
each holder of a Right, to the extent feasible and in accordance with Section
26, a notice of such proposed action, which shall specify the record date for
the purposes of any such dividend, distribution or offering of rights or
warrants, or the date on which any such reclassification, consolidation, merger,
sale, transfer, liquidation, dissolution or winding up is to take place and the
date of participation therein by the holders of Preferred Stock, if any such
date is to be fixed, and such notice shall be so given in the case of any action
covered by clause (i) or (ii) above at least 20 days prior to the record date
for determining holders of the Preferred Stock entitled to participate in such
dividend, distribution or offering, and in the case of any such other action, at
least 20 days prior to the date of the taking of such proposed action or the
date of participation therein by the holders of Preferred Stock, whichever shall
be the earlier. The failure to give notice required by this Section or any
defect therein shall not affect the legality or validity of the action taken by
the Company or the vote upon any such action.
(b Notwithstanding anything in this Agreement to the contrary, prior
to the Distribution Date a public filing by the Company with the Securities and
Exchange Commission shall constitute sufficient notice to the holders of
securities of the Company, including the Rights, for purposes of this Agreement
and no other notice need be given to such holders.
(c If a Triggering Event shall occur, then, in any such case, (i) the
Company shall as soon as practicable thereafter give to each holder of a Right,
in accordance with Section 26, a notice of the occurrence of such event, which
shall specify the event and the consequences of the event to holders of Rights
under Section 11(a)(ii) or 13, as the case may be, and (ii) all references in
Section 25(a) to Preferred Stock shall be deemed thereafter to refer to Common
Stock or other capital stock, as the case may be.
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right to or on the
Company shall be sufficiently given or made if sent by first-class mail (postage
prepaid) to the address of the Company indicated on the signature page hereof or
such other address as the Company shall specify in writing to the Rights Agent.
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Right to or
on the Rights
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Agent shall be sufficiently given or made if sent by first-class mail (postage
prepaid) to the address of the Rights Agent indicated on the signature page
hereof or such other address as the Rights Agent shall specify in writing to the
Company. Notices or demands authorized by this Agreement to be given or made by
the Company or the Rights Agent to the holder of any Right Certificate (or,
prior to the Distribution Date, to the holder of any certificate representing
shares of Common Stock) shall be sufficiently given or made if sent by first-
class mail (postage prepaid) to the address of such holder shown on the registry
books of the Company.
Section 27. Supplements and Amendments. For so long as the Rights are
redeemable, the Company may, and the Rights Agent shall, if the Company so
directs, supplement or amend any provision of this Agreement in any respect
without the approval of any holders of certificates representing shares of
Common Stock. At any time when the Rights are no longer redeemable, the Company
may, and the Rights Agent shall if the Company so directs, supplement or amend
this Agreement without the approval of any holders of Rights; provided that no
such supplement or amendment may (a) adversely affect the interests of the
holders of Rights as such (other than an Acquiring Person or an Affiliate or
Associate of an Acquiring Person), (b) cause this Agreement again to become
amendable other than in accordance with this sentence, or (c) cause the Rights
again to become redeemable. Upon the delivery of a certificate from an
appropriate officer of the Company which states that the proposed supplement or
amendment is in compliance with the terms of this Section, the Rights Agent
shall execute such supplement or amendment.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of Directors, etc .
For all purposes of this Agreement, any calculation of the number of shares of
Common Stock outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding shares of Common Stock
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(1)(i) under the Exchange Act as in effect on
the date of this Agreement. The Board of Directors of the Company shall have
the exclusive power and authority to administer this Agreement and to exercise
all rights and powers specifically granted to the Board or to the Company, or as
may be necessary or advisable in the administration of this Agreement, including
the right and power to (i) interpret the provisions of this Agreement and (ii)
make all determinations deemed necessary or advisable for the administration of
this Agreement (including a determination to redeem or exchange or not to redeem
or exchange the Rights or to amend the Agreement). All such actions,
calculations, interpretations and determinations (including, for purposes of
clause (y) below, all omissions with respect to the foregoing) which are done or
made by the Board in good faith shall (x) be final, conclusive and binding on
the Company, the Rights Agent, the holders of the Rights and all other parties,
and (y) not subject the Board of Directors of the Company to any liability to
the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Right Certificates (and, prior to the Distribution
Date, the certificates representing the shares of Common Stock) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Right Certificates (and, prior to the Distribution
Date, the certificates representing the shares of Common Stock).
Section 31. Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or
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unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
Section 32. Governing Law. This Agreement, each Right and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the Republic of Panama and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and performed entirely within such State, except that the rights and
obligations of the Rights Agent shall be governed by the law of the State of New
York.
Section 33. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute one and the
same instrument.
Section 34. Descriptive Headings. The captions herein are included for
convenience of reference only, do not constitute a part of this Agreement and
shall be ignored in the construction and interpretation hereof.
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
MCDERMOTT INTERNATIONAL, INC.
By:
-----------------------------------
Name: S.W. Murphy
Title: Senior Vice President, General Counsel
and Secretary
1450 Poydras Street
New Orleans, Louisiana 70161
Attention: Senior Vice President, General Counsel
and Secretary
FIRST CHICAGO TRUST COMPANY OF NEW YORK
By:
-----------------------------------
Name: Gerard O'Leary
Title: Vice President
525 Washington Boulevard
Jersey City, New Jersey 07310
Attention: Gerard O'Leary
32
<PAGE>
EXHIBIT A
FORM OF
CERTIFICATE OF DESIGNATION
OF
SERIES D PARTICIPATING
PREFERRED STOCK
OF
MCDERMOTT INTERNATIONAL, INC.
Pursuant to the laws of the Republic of Panama
I, Lawrence R. Purtell, Senior Vice President and Corporate Secretary, of
McDermott International, Inc., a corporation organized and existing under laws
of the Republic of Panama, in accordance with the provisions thereof, DO HEREBY
CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Articles of Incorporation of the Corporation, the Board of Directors on December
5, 1995, adopted the following resolution creating a series of Preferred Stock
in the amount and having the designation, voting powers, preferences and
relative, participating, optional and other special rights and qualifications,
limitations and restrictions thereof as follows:
Section 1. Designation and Number of Shares. Designation and Number of
Shares. The shares of such series shall be designated as "Series D
Participating Preferred Stock" (the "Series D Preferred Stock"), and the number
of shares constituting such series shall be 702,652. Such number of shares of
the Series D Preferred Stock may be increased or decreased by resolution of the
Board of Directors; provided that no decrease shall reduce the number of shares
of Series D Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares issuable upon exercise or conversion of
outstanding rights, options or other securities issued by the Corporation.
Section 2. Dividends and Distributions.
(a The holders of shares of Series D Preferred Stock shall be entitled
to receive, when, as and if declared by the Board of Directors out of funds
legally available for the purpose, quarterly dividends payable on January 1,
April 1, July 1 and October 1 of each year (each such date being referred to
herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of any share or
fraction of a share of Series D Preferred Stock, in an amount per share (rounded
to the nearest cent) equal to the greater of (a) $1.00 and (b) subject to the
provision for adjustment hereinafter set forth, 100 times the aggregate
A-1
<PAGE>
per share amount of all cash dividends or other distributions and 100 times the
aggregate per share amount of all non-cash dividends or other distributions
(other than (i) a dividend payable in shares of Common Stock, par value $1.00
per share, of the Corporation (the "Common Stock") or (ii) a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise)), declared
on the Common Stock since the immediately preceding Quarterly Dividend Payment
Date, or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series D Preferred Stock.
If the Corporation shall at any time after December 5, 1995 (the "Rights
Declaration Date") pay any dividend on Common Stock payable in shares of Common
Stock or effect a subdivision or combination of the outstanding shares of Common
Stock (by reclassification or otherwise) into a greater or lesser number of
shares of Common Stock, then in each such case the amount to which holders of
shares of Series D Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(b The Corporation shall declare a dividend or distribution on the
Series D Preferred Stock as provided in paragraph (a) above immediately after it
declares a dividend or distribution on the Common Stock (other than as described
in clauses (i) and (ii) of the first sentence of paragraph (a)); provided that
if no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date (or, with respect to the first
Quarterly Dividend Payment Date, the period between the first issuance of any
share or fraction of a share of Series D Preferred Stock and such first
Quarterly Dividend Payment Date), a dividend of $1.00 per share on the Series D
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(c Dividends shall begin to accrue and be cumulative on outstanding
shares of Series D Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series D Preferred Stock, unless
the date of issue of such shares is on or before the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue and be cumulative from the date of issue of such shares, or
unless the date of issue is a date after the record date for the determination
of holders of shares of Series D Preferred Stock entitled to receive a quarterly
dividend and on or before such Quarterly Dividend Payment Date, in which case
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
A-2
<PAGE>
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on shares of Series D Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series D Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall not be more
than 60 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. In addition to any other voting rights required
by law, the holders of shares of Series D Preferred Stock shall have the
following voting rights:
(a Subject to the provision for adjustment hereinafter set forth, each
share of Series D Preferred Stock shall entitle the holder thereof to 100 votes
on all matters submitted to a vote of stockholders of the Corporation. If the
Corporation shall at any time after the Rights Declaration Date pay any dividend
on Common Stock payable in shares of Common Stock or effect a subdivision or
combination of the outstanding shares of Common Stock (by reclassification or
otherwise) into a greater or lesser number of shares of Common Stock, then in
each such case the number of votes per share to which holders of shares of
Series D Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b Except as otherwise provided herein or by law, the holders of
shares of Series D Preferred Stock and the holders of shares of Common Stock
shall vote together as a single class on all matters submitted to a vote of
stockholders of the Corporation.
(c (i If at any time dividends on any Series D Preferred Stock shall
be in arrears in an amount equal to six quarterly dividends thereon, the
occurrence of such contingency shall mark the beginning of a period (herein
called a "default period") which shall extend until such time when all accrued
and unpaid dividends for all previous quarterly dividend periods and for the
current quarterly dividend period on all shares of Series D Preferred Stock then
outstanding shall have been declared and paid or set apart for payment. During
each default period, all holders of Preferred Stock and any other series of
Preferred Stock then entitled as a class to elect directors, voting together as
a single class, irrespective of series, shall have the right to elect two
Directors.
A-3
<PAGE>
(ii During any default period, such voting right of the holders
of Series D Preferred Stock may be exercised initially at a special meeting
called pursuant to subparagraph (iii) of this Section 3(c) or at any annual
meeting of stockholders, and thereafter at annual meetings of stockholders,
provided that neither such voting right nor the right of the holders of any
other series of Preferred Stock, if any, to increase, in certain cases, the
authorized number of Directors shall be exercised unless the holders of 10%
in number of shares of Preferred Stock outstanding shall be present in
person or by proxy. The absence of a quorum of holders of Common Stock
shall not affect the exercise by holders of Preferred Stock of such voting
right. At any meeting at which holders of Preferred Stock shall exercise
such voting right initially during an existing default period, they shall
have the right, voting as a class, to elect Directors to fill such
vacancies, if any, in the Board of Directors as may then exist up to two
Directors or, if such right is exercised at an annual meeting, to elect
two Directors. If the number which may be so elected at any special
meeting does not amount to the required number, the holders of the
Preferred Stock shall have the right to make such increase in the number of
Directors as shall be necessary to permit the election by them of the
required number. After the holders of the Preferred Stock shall have
exercised their right to elect Directors in any default period and during
the continuance of such period, the number of Directors shall not be
increased or decreased except by vote of the holders of Preferred Stock as
herein provided or pursuant to the rights of any equity securities ranking
senior to or pari passu with the Series D Preferred Stock.
(iii) Unless the holders of Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or
stockholders owning in the aggregate not less than 10% of the total number
of shares of Preferred Stock outstanding, irrespective of series, may
request, the calling of special meeting of holders of Preferred Stock,
which meeting shall thereupon be called by the President, a Vice President
or the Secretary of the Corporation. Notice of such meeting and of any
annual meeting at which holders of Preferred Stock are entitled to vote
pursuant to this paragraph (c)(iii) shall be given to each holder of record
of Preferred Stock by mailing a copy of such notice to him at his last
address as the same appears on the books of the Corporation. Such meeting
shall be called for a time not earlier than 20 days and not later than 60
days after such order or request or in default of the calling of such
meeting within 60 days after such order or request,
A-4
<PAGE>
such meeting may be called on similar notice by any stockholder or
stockholders owning in the aggregate not less than 10% of the total number
of shares of Preferred Stock outstanding, irrespective of series.
Notwithstanding the provisions of this paragraph (c)(iii), no such special
meeting shall be called during the period within 60 days immediately
preceding the date fixed for the next annual meeting of stockholders.
(iv) In any default period, the holders of Common Stock, and other
classes of stock of the Corporation if applicable, shall continue to be
entitled to elect the whole number of Directors until the holders of
Preferred Stock shall have exercised their right to elect two Directors
voting as a class, after the exercise of which right (x) the Directors so
elected by the holders of Preferred Stock shall continue in office until
their successors shall have been elected by such holders or until the
expiration of the default period, and (y) any vacancy in the Board of
Directors may (except as provided in paragraph (C)(ii) of this Section 3)
be filled by vote of a majority of the remaining Directors theretofore
elected by the holders of the class of stock which elected the Director
whose office shall have become vacant. References in this paragraph (C) to
Directors elected by the holders of a particular class of stock shall
include Directors elected by such Directors to fill vacancies as provided
in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Preferred Stock as a class to elect Directors shall
cease, (y) the term of any Directors elected by the holders of Preferred
Stock as a class shall terminate, and (z) the number of Directors shall be
such number as may be provided for in the Articles of Incorporation or
bylaws irrespective of any increase made pursuant to the provisions of
paragraph (c)(ii) of this Section 3 (such number being subject, however, to
change thereafter in any manner provided by law or in the Articles of
Incorporation or bylaws). Any vacancies in the Board of Directors effected
by the provisions of clauses (y) and (z) in the preceding sentence may be
filled by a majority of the remaining Directors.
(d) The Articles of Incorporation of the Corporation shall not be
amended in any manner (whether by merger or otherwise) so as to adversely affect
the powers, preferences or special rights of the Series D Preferred Stock
without the affirmative vote of the holders of a majority of the outstanding
shares of Series D Preferred Stock, voting separately as a class.
A-5
<PAGE>
(e) Except as otherwise provided herein, holders of Series D Preferred
Stock shall have no special voting rights, and their consent shall not be
required for taking any corporate action.
Section 4. Certain Restrictions. (a) Whenever quarterly dividends or
other dividends or distributions payable on the Series D Preferred Stock as
provided in Section 2 are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on outstanding
shares of Series D Preferred Stock shall have been paid in full, the Corporation
shall not:
(i) declare or pay dividends on, or make any other distributions
on, any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series D Preferred Stock;
(ii) declare or pay dividends on, or make any other distributions
on, any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series D Preferred Stock,
except dividends paid ratably on the Series D Preferred Stock and all such
other parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are
then entitled;
(iii) redeem, purchase or otherwise acquire for value any shares
of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series D Preferred Stock; provided that
the Corporation may at any time redeem, purchase or otherwise acquire
shares of any such junior stock in exchange for shares of stock of the
Corporation ranking junior (as to dividends and upon dissolution,
liquidation or winding up) to the Series D Preferred Stock; or
(iv) redeem, purchase or otherwise acquire for value any shares of
Series D Preferred Stock, or any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up)
with the Series D Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board of
Directors) to all holders of Series D Preferred Stock and all such other
parity stock upon such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective
series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for value any shares of stock of the
A-6
<PAGE>
Corporation unless the Corporation could, under paragraph (a) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series D Preferred Stock
redeemed, purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock without designation as to series and may be reissued
as part of a new series of Preferred Stock to be created by resolution or
resolutions of the Board of Directors as permitted by the Articles of
Incorporation or as otherwise permitted under Panamanian law.
Section 6. Liquidation, Dissolution or Winding up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made (i)
to the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series D Preferred Stock unless,
prior thereto, the holders of shares of Series D Preferred Stock shall have
received $1.00 per share, plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment;
provided that the holders of shares of Series D Preferred Stock shall be
entitled to receive an aggregate amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 100 times the aggregate amount to be
distributed per share to holders of Common Stock, or (ii) to the holders of
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series D Preferred Stock, except
distributions made ratably on the Series D Preferred Stock and all such other
parity stock in proportion to the total amounts to which the holders of all such
shares are entitled upon such liquidation, dissolution or winding up. If the
Corporation shall at any time after the Rights Declaration Date pay any dividend
on Common Stock payable in shares of Common Stock or effect a subdivision or
combination of the outstanding shares of Common Stock (by reclassification or
otherwise) into a greater or lesser number of shares of Common Stock, then in
each such case the aggregate amount to which holders of shares of Series D
Preferred Stock were entitled immediately prior to such event under the proviso
in clause (i) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
Section 7. Consolidation, Merger, Etc. If the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash or any other property, then in any such case the shares of
Series D Preferred Stock shall at the same time be similarly exchanged for or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash or any other property, as the case may be, into which or for
which each share of Common Stock is changed or exchanged. If the Corporation
shall at any time after the Rights Declaration Date pay any dividend on Common
Stock payable in shares of Common Stock or effect a subdivision or combination
of the outstanding shares of Common Stock (by reclassification or otherwise)
into a greater or lesser number of shares of Common Stock, then in each such
case the amount set forth in the preceding sentence with respect to the exchange
or change of shares of Series D Preferred Stock shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
Section 8. No Redemption. The Series D Preferred Stock shall not be
redeemable.
A-7
<PAGE>
Section 9. Rank. The Series D Preferred Stock shall rank junior (as to
dividends and upon liquidation, dissolution and winding up) to all other series
of the Corporation's preferred stock except any series that specifically
provides that such series shall rank junior to the Series D Preferred Stock.
Section 10. Fractional Shares. Series D Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series D Preferred Stock.
IN WITNESS WHEREOF, we have executed and subscribed this Certificate this
__ day of December, 1995.
--------------------------------------
[Title]
Attest:
--------------------------------------
[Title]
A-8
<PAGE>
EXHIBIT B
[Form of Right Certificate]
No. R- ____________Rights
NOT EXERCISABLE AFTER THE EARLIER OF JANUARY 2, 2001 AND THE DATE ON WHICH
THE RIGHTS EVIDENCED HEREBY ARE REDEEMED OR EXCHANGED BY THE COMPANY AS SET
FORTH IN THE RIGHTS AGREEMENT. AS SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS
ISSUED TO, OR HELD BY, ANY PERSON WHO IS, WAS OR BECOMES AN ACQUIRING PERSON OR
AN AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT), WHETHER CURRENTLY HELD BY OR ON BEHALF OF SUCH PERSON OR BY ANY
SUBSEQUENT HOLDER, MAY BE NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHT
CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN
ACQUIRING PERSON OR AN AFFILIATE OR AN ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH
TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). THIS RIGHT CERTIFICATE AND THE
RIGHTS REPRESENTED HEREBY MAY BE OR MAY BECOME NULL AND VOID IN THE
CIRCUMSTANCES SPECIFIED IN SECTION 7(d) OF THE RIGHTS AGREEMENT.]/1/
RIGHT CERTIFICATE
MCDERMOTT INTERNATIONAL, INC.
This Right Certificate certifies that ______________________, or registered
assigns, is the registered holder of the number of Rights set forth above, each
of which entitles the holder (upon the terms and subject to the conditions set
forth in the Rights Agreement dated as of December 5, 1995 (as amended from time
to time, the "Rights Agreement") between McDermott International, Inc., a
Delaware corporation (the "Company"), and First Chicago Trust Company of New
York (the "Rights Agent") to purchase from the Company, at any time after the
Distribution Date and prior to the Expiration Date, ___ one-hundredth[s] of a
fully paid, nonassessable share of Series D Participating Cumulative Preferred
Stock (the "Preferred Stock") of the Company at a purchase price of $50.00 per
one one-hundredth of a share (the "Purchase Price"), payable in lawful money of
the United States of America, upon surrender of this Right Certificate, with the
form of election to purchase and related certificate duly executed, and payment
of the Purchase Price at an office of the Rights Agent designated for such
purpose.
Terms used herein and not otherwise defined herein have the meanings
assigned to them in the Rights Agreement.
_____________________
/1/ If applicable, insert this portion of the legend and delete the preceding
sentence.
B-1
<PAGE>
The number of Rights evidenced by this Right Certificate (and the number
and kind of shares issuable upon exercise of each Right) and the Purchase Price
set forth above are as of January 2, 1996, and may have been or in the future be
adjusted as a result of the occurrence of certain events, as more fully provided
in the Rights Agreement.
Upon the occurrence of a Section 11(a)(ii) Event, if the Rights evidenced
by this Right Certificate are beneficially owned by (a) an Acquiring Person or
an Associate or Affiliate of an Acquiring Person, (b) a transferee of an
Acquiring Person (or any such Associate or Affiliate) who becomes a transferee
after the Acquiring Person becomes such, or (c) under certain circumstances
specified in the Rights Agreement, a transferee of an Acquiring Person (or any
such Associate or Affiliate) who becomes a transferee prior to or concurrently
with the Acquiring Person becoming such, such Rights shall become null and void,
and no holder hereof shall have any right with respect to such Rights from and
after the occurrence of such Section 11(a)(ii) Event.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Upon surrender at the principal office or offices of the Rights Agent
designated for such purpose and subject to the terms and conditions set forth in
the Rights Agreement, any Rights Certificate or Certificates may be transferred
or exchanged for another Rights Certificate or Certificates evidencing a like
number of Rights as the Rights Certificate or Certificates surrendered.
Subject to the provisions of the Rights Agreement, the Board of Directors
of the Company may, at its option,
(a) at any time prior to the earlier of (i) the occurrence of a Section
11(a)(ii) Event and (ii) the Final Expiration Date, redeem all but not less than
all the then outstanding Rights at a redemption price of $.01 per Right; or
(b) at any time after any Person becomes an Acquiring Person (but before
such Person becomes the Beneficial Owner of 50% or more of the shares of Common
Stock then outstanding), exchange all or part of the then outstanding Rights
(other than Rights held by the Acquiring Person and certain related Persons) for
shares of Common Stock at an exchange ratio of one share of Common Stock per
Right. If the Rights shall be exchanged in part, the holder of this Right
Certificate shall be entitled to receive upon surrender hereof another Right
Certificate or Certificates for the number of whole Rights not exchanged.
No fractional shares of Preferred Stock are required to be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which are
multiples of one one-hundredth of a share of Preferred Stock, which may, at the
election of the Company, be evidenced by depositary receipts), but in lieu
thereof a cash payment will be made, as provided in the Rights
B-2
<PAGE>
Agreement. If this Right Certificate shall be exercised in part, the holder
shall be entitled to receive upon surrender hereof another Right Certificate or
Certificates for the number of whole Rights not exercised.
No holder of this Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the shares of capital stock
which may at any time be issuable on the exercise hereof, nor shall anything
contained in the Rights Agreement or herein be construed to confer upon the
holder hereof, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in the Rights Agreement), or to receive
dividends or subscription rights, or otherwise, until the Right or Rights
evidenced by this Right Certificate shall have been exercised as provided in the
Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal by its authorized officers.
Dated as of ________________, 19__
MCDERMOTT INTERNATIONAL, INC.
By:
-----------------------------------
Title:
[SEAL]
Attest:
-------------------------------
Secretary
Countersigned:
FIRST CHICAGO TRUST
COMPANY OF NEW YORK
as Rights Agent
By:
---------------------------------
Authorized Signature
B-3
<PAGE>
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed if the registered holder
desires to transfer the Right Certificate.)
FOR VALUE RECEIVED _____________________________________________________
hereby sells, assigns and transfers unto _______________________________
________________________________________________________________________
(Please print name and address of transferee)
________________________________________________________________________
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint ______________________ Attorney,
to transfer the within Right Certificate on the books of the within-named
Company, with full power of substitution.
Dated: _____________________, 19__
--------------------------------
Signature
Signature Guaranteed:
B-4
<PAGE>
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Right Certificate ___are ___are not being
assigned by or on behalf of a Person who is or was an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined
in the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it
___did ___did not acquire the Rights evidenced by this Right Certificate from
any Person who is, was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person.
Dated: __________, 19 __ ---------------------------------
Signature
__________
The signatures to the foregoing Assignment and Certificate must correspond
to the name as written upon the face of this Right Certificate in every
particular, without alteration or enlargement or any change whatsoever.
__________
B-5
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if the registered holder desires to exercise
Rights represented by the Right Certificate.)
To: McDermott International, Inc.
The undersigned hereby irrevocably elects to exercise _______________
Rights represented by this Right Certificate to purchase shares of Preferred
Stock issuable upon the exercise of the Rights (or such other securities of the
Company or of any other person which may be issuable upon the exercise of the
Rights) and requests that certificates for such securities be issued in the name
of and delivered to:
Please insert social security
or other identifying number
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this
Right Certificate, a new Right Certificate for the balance of such Rights shall
be registered in the name of and delivered to:
Please insert social security
or other identifying number
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
Dated: ________________, 19__ _________________________
Signature
Signature Guaranteed:
B-6
<PAGE>
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Right Certificate ___are ___are not being
exercised by or on behalf of a Person who is or was an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined
in the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it
___did ___did not acquire the Rights evidenced by this Right Certificate from
any Person who is, was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person.
Dated: __________, 19 __ _____________________________
Signature
__________
The signature to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Right Certificate in
every particular, without alteration or enlargement or any change whatsoever.
__________
B-7
<PAGE>
EXHIBIT C
MCDERMOTT INTERNATIONAL, INC.
STOCKHOLDER RIGHTS PLAN
Summary of Terms
Form of Security: The Board of Directors has declared a dividend of one
preferred stock purchase right for each outstanding share of
the Company's Common Stock, payable to holders of record as
of the close of business on January 2, 1996 (each a "Right"
and collectively, the "Rights")
Transfer: Prior to the Distribution Date/1/, the Rights will be
evidenced by the certificates for and will be transferred
with the Common Stock, and the registered holders of the
Common Stock will be deemed to be the registered holders of
the Rights.
________________________
/1/ "Distribution Date" means the earlier of:
(1) the 10th day after public announcement that any person or
group has become the beneficial owner of 15% or more of the
Company's Common Stock and
(2) the 10th business day (or such later day as may be
designated prior to any Person becoming an Acquiring Person by
action of the Board of Directors of the Company) after the date
of the commencement of a tender or exchange offer by any person
which would, if consummated, result in such person becoming the
beneficial owner of 15% or more of the Company's Common Stock.
C-1
<PAGE>
After the Distribution Date, the Rights Agent will mail separate
certificates evidencing the Rights to each record holder of the
Common Stock as of the close of business on the Distribution
Date, and thereafter the Rights will be transferable separately
from the Common Stock.
Exercise: Prior to the Distribution Date, the Rights will not be
exercisable. After the Distribution Date, each Right will be
exercisable to purchase, for $50.00 (the "Purchase Price"), one
one-hundredth of a share of Series D Participating Cumulative
Preferred Stock, par value $1.00 per share, of the Company.
Flip-In: If any person or group (an "Acquiring Person") becomes the
beneficial owner of 15% or more of the Company's Common Stock,
then each Right (other than Rights beneficially owned by the
Acquiring Person and certain affiliated persons) will entitle the
holder to purchase, for the Purchase Price, a number of shares of
the Company's Common Stock having a market value of twice the
Purchase Price.
Flip-Over: If, after any person has become an Acquiring Person, (1) the
Company is involved in a merger or other business combination in
which the Company is not the surviving corporation or its Common
Stock is exchanged for other securities or assets or (2) the
Company and/or one or more of its subsidiaries sell or otherwise
transfer assets or earning power aggregating more than 50% of the
assets or earning power of the Company and its subsidiaries,
taken as a whole, then each Right will entitle the holder to
purchase, for the Purchase Price, a number of shares of common
stock of the other party to such business combination or sale (or
in certain circumstances, an affiliate) having a market value of
twice the Purchase Price.
Exchange: At any time after any person has become an Acquiring Person (but
before any person becomes the beneficial owner of 50% or more of
the Company's Common Stock), the Board of Directors may exchange
all or part of the Rights (other than the Rights beneficially
owned by the Acquiring Person and certain affiliated persons) for
shares of Common Stock at an exchange ratio of one share of
Common Stock per Right.
Redemption: The Board of Directors may redeem all of the Rights at a price of
$.01 per Right at any time prior to the earlier of (i) the close
of business on the tenth day after the Stock Acquisition Date and
(ii) January 2, 2001.
Expiration: The Rights will expire on January 2, 2001, unless earlier
exchanged or redeemed.
Amendments: For so long as the Rights are redeemable, the Rights Agreement
may be amended in any respect.
At any time after the Rights are no longer redeemable, the Rights
Agreement may be amended by the Board of Directors in any respect
that does not (i) adversely affect the Rights holders (other than
any Acquiring Person and certain affiliated persons), (ii) cause
the Rights Agreement again to become amendable other than in
accordance with this paragraph or (iii) cause the Rights again to
become redeemable.
C-2
<PAGE>
Voting Rights: Rights holders have no rights as a stockholder of the Company,
including the right to vote and to receive dividends.
Antidilution The Rights Agreement includes antidilution provisions
Provisions: designed to prevent efforts to diminish the efficacy of
the Rights.
Taxes: While the dividend of the Rights will not be taxable to
stockholders or to the Company, stockholders or the Company
may, depending upon the circumstances, recognize taxable income
in the event that the Rights become exercisable as set forth
above.
_______________
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 8-A. A
copy of the Rights Agreement is available free of charge from the Company. This
summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement.
C-3
<PAGE>
EXHIBIT 21
McDERMOTT INTERNATIONAL, INC.
SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
FISCAL YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
JURISDICTION PERCENTAGE
OF OF OWNERSHIP
NAME OF COMPANY ORGANIZATION INTEREST
<S> <C> <C>
J. Ray McDermott, S.A. Panama 63
Hydro Marine Services, Inc. Panama 100
McDermott Holdings (U.K.) Limited United Kingdom 100
McDermott Marine Construction Limited United Kingdom 100
McDermott Far East, Inc. Panama 100
P.T. McDermott Indonesia Indonesia 100
McDermott South East Asia Pte. Ltd. Singapore 100
J. Ray McDermott Holdings, Inc. Delaware 100
J. Ray McDermott, Inc. Delaware 100
J. Ray McDermott International, Inc. Panama 100
J. Ray McDermott Contractors, Inc. Panama 100
J. Ray McDermott Middle East, Inc. Panama 100
J. Ray McDermott Far East, Inc. Panama 100
McDermott Incorporated Delaware 100
Babcock & Wilcox Investment Company Delaware 100
BWX Technologies, Inc. Delaware 100
B&W Services, Inc. Delaware 100
B&W Federal Services, Inc. Delaware 100
The Babcock & Wilcox Company Delaware 100
Americon, Inc. Delaware 100
Diamond Power International, Inc. Delaware 100
</TABLE>
The subsidiaries omitted from the foregoing list do not, considered in the
aggregate as a single subsidiary, constitute a significant subsidiary.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 2-83692, No. 33-16680, No. 33-51892, No. 33-51894,
No. 33-63832, No. 33-55341, No. 33-60499, No. 333-12531, No. 333-39087, and No.
333-39089) of McDermott International, Inc. and the Registration Statement on
Form S-3 (No. 33-54940) of McDermott Incorporated and in the related
Prospectuses of our report dated May 14, 1999 relating to the consolidated
financial statements of McDermott International, Inc. which appears in this Form
10-K.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
June 9, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 2-83692, No. 33-16680, No. 33-51892, No. 33-51894, No. 33-63832,
No. 33-55341, No. 33-60499, No. 333-12531, No. 333-39087, and No. 333-39089) of
McDermott International, Inc. and the Registration Statement (Form S-3
No. 33-54940) of McDermott Incorporated and in the related Prospectuses of our
report dated May 19, 1998 with respect to the consolidated financial statements
of McDermott International, Inc. included in this Annual Report (Form 10-K) for
the year ended March 31, 1999.
ERNST & YOUNG LLP
New Orleans, Louisiana
June 9, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MCDERMOTT
INTERNATIONAL'S MARCH 31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 181,503
<SECURITIES> 55,646
<RECEIVABLES> 514,404
<ALLOWANCES> 67,584
<INVENTORY> 231,966
<CURRENT-ASSETS> 1,375,366
<PP&E> 1,460,639
<DEPRECIATION> 1,026,678
<TOTAL-ASSETS> 4,305,520
<CURRENT-LIABILITIES> 1,266,411
<BONDS> 323,774
0
0
<COMMON> 61,148
<OTHER-SE> 732,586
<TOTAL-LIABILITY-AND-EQUITY> 4,305,520
<SALES> 3,149,985
<TOTAL-REVENUES> 3,149,985
<CGS> 2,958,858
<TOTAL-COSTS> 2,958,858
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,262
<INCOME-PRETAX> 187,278
<INCOME-TAX> (4,803)
<INCOME-CONTINUING> 192,081
<DISCONTINUED> 0
<EXTRAORDINARY> (38,719)
<CHANGES> 0
<NET-INCOME> 153,362
<EPS-BASIC> 2.60
<EPS-DILUTED> 2.53
</TABLE>
