<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 1998
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 No. 1-13570
J. RAY McDERMOTT, S.A.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
REPUBLIC OF PANAMA 72-1278896
-------------------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1450 Poydras Street, New Orleans, Louisiana 70112-6050
------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (504) 587-5300
--------------
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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
The number of shares outstanding of the Company's common stock at October 29,
1998 was 39,020,373.
<PAGE>
J. RAY M c D E R M O T T, S.A.
I N D E X - F O R M 1 0 - Q
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet
September 30, 1998 and March 31, 1998 4
Condensed Consolidated Statement of Income
Three and Six Months Ended September 30, 1998 and 1997 6
Condensed Consolidated Statement of Comprehensive Income
Three and Six Months Ended September 30, 1998 and 1997 7
Condensed Consolidated Statement of Cash Flows
Six months Ended September 30, 1998 and 1997 8
Notes to Condensed Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
PART II - OTHER INFORMATION
Item 3 - Legal Proceedings 27
Item 4 - Submission of Matters to a Vote of Security Holders 29
Item 6 - Exhibits and Reports on Form 8-K 29
SIGNATURES 30
Exhibit 27.1 - Financial Data Schedule (6 months ending 9/30/98) 32
Exhibit 27.2 - Financial Data Schedule (Restated 6 months
ending 9/30/97)
</TABLE>
2
<PAGE>
PART I
J. RAY McDERMOTT, S.A.
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
3
<PAGE>
J. RAY McDERMOTT, S.A.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
ASSETS
<TABLE>
<CAPTION>
9/30/98 3/31/98
---------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 140,356 $ 152,011
Accounts receivable - trade 208,338 227,538
Accounts receivable - unconsolidated affiliates 32,385 45,072
Accounts receivable - other 18,995 26,327
Contracts in progress 33,410 71,084
Other current assets 29,671 45,634
- ---------------------------------------------------- ---------- ----------
Total Current Assets 463,155 567,666
- ---------------------------------------------------- ---------- ----------
Property, Plant and Equipment, at Cost 981,936 1,182,448
Less accumulated depreciation 693,246 839,298
- ---------------------------------------------------- ---------- ----------
Net Property, Plant and Equipment 288,690 343,150
- ---------------------------------------------------- ---------- ----------
Investments in Debt Securities 708,127 543,658
- ---------------------------------------------------- ---------- ----------
Excess of Cost over Fair Value of Net Assets
of Purchased Businesses Less Accumulated
Amortization of $2,853,000 at September 30, 1998
and $8,542,000 at March 31, 1998 12,101 22,153
- ---------------------------------------------------- ---------- ----------
Investment in Unconsolidated Affiliates 34,657 29,069
- ---------------------------------------------------- ---------- ----------
Other Assets 37,467 43,024
- ---------------------------------------------------- ---------- ----------
TOTAL $1,544,197 $1,548,720
==================================================== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
9/30/98 3/31/98
---------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term debt $ 28,772 $ 31,272
Accounts payable 147,674 171,180
Accrued contract costs 86,166 88,518
Accrued liabilities - other 102,924 110,345
Advance billings on contracts 41,452 91,549
Accrued employee benefits 44,154 44,572
U.S. and foreign income taxes 30,005 23,057
- ---------------------------------------------------------- ---------- ----------
Total Current Liabilities 481,147 560,493
- ---------------------------------------------------------- ---------- ----------
Long-Term Debt 245,729 245,822
- ---------------------------------------------------------- ---------- ----------
Deferred and Non-Current Income Taxes 46,852 46,989
- ---------------------------------------------------------- ---------- ----------
Other Liabilities 63,915 78,854
- ---------------------------------------------------------- ---------- ----------
Commitments and Contingencies.
Stockholders' Equity:
Preferred stock, authorized 10,000,000 shares;
outstanding 3,200,000 Series A $2.25 cumulative
convertible, par value $0.01 per share,
(liquidation preference $160,000,000) 32 32
Common stock, par value $0.01 per share, authorized
60,000,000 shares; issued 41,220,573 at
September 30, 1998 and 41,130,328 at March 31, 1998 412 411
Capital in excess of par value 618,577 615,515
Retained earnings 163,132 35,418
Treasury stock at cost, 2,100,200 shares at
September 30, 1998 and 362,500 shares
at March 31, 1998 (69,097) (13,537)
Accumulated other comprehensive loss (6,502) (21,277)
- ---------------------------------------------------------- ---------- ----------
Total Stockholders' Equity 706,554 616,562
- ---------------------------------------------------------- ---------- ----------
TOTAL $1,544,197 $1,548,720
========================================================== ========== ==========
</TABLE>
5
<PAGE>
J. RAY McDERMOTT, S.A.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/98 9/30/97 9/30/98 9/30/97
-------- -------- -------- --------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues $349,099 $506,046 $719,651 $984,269
- ---------------------------------------------- -------- -------- -------- --------
Costs and Expenses:
Cost of operations (excluding depreciation
and amortization) 258,110 415,265 552,654 813,596
Depreciation and amortization 12,902 28,309 27,184 55,538
Selling, general and
administrative expenses 26,232 26,360 54,142 54,199
- ---------------------------------------------- -------- -------- -------- --------
297,244 469,934 633,980 923,333
-------- -------- -------- --------
Gain (Loss) on Asset Disposals and
Impairments - Net (1,969) (570) 43,078 24
- ---------------------------------------------- -------- -------- -------- --------
Operating Income before
Income (Loss) from Investees 49,886 35,542 128,749 60,960
Income (Loss) from Investees (3,782) 1,772 9,733 (2,627)
- ---------------------------------------------- -------- -------- -------- --------
Operating Income 46,104 37,314 138,482 58,333
- ---------------------------------------------- -------- -------- -------- --------
Other Income (Expense):
Interest income 11,538 4,939 22,992 9,588
Interest expense (6,440) (7,429) (12,854) (17,044)
Other-net (188) 71 11,225 1,292
- ---------------------------------------------- -------- -------- -------- --------
4,910 (2,419) 21,363 (6,164)
-------- -------- -------- --------
Income before Provision for Income Taxes 51,014 34,895 159,845 52,169
Provision for Income Taxes 8,140 16,001 28,531 25,165
- ---------------------------------------------- -------- -------- -------- --------
Net Income $ 42,874 $ 18,894 $131,314 $ 27,004
============================================== ======== ======== ======== ========
Net Income Applicable to Common Stock
(after Preferred Stock Dividends) $ 41,074 $ 17,094 $127,714 $ 23,404
============================================== ======== ======== ======== ========
Earnings per Common Share
Basic $ 1.04 $ 0.42 $ 3.18 $ 0.57
Diluted $ 0.94 $ 0.40 $ 2.84 $ 0.57
============================================== ======== ======== ======== ========
Cash Dividends:
Per Preferred Share $0.5625 $0.5625 $1.1250 $ 1.1250
============================================== ======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
J. RAY McDERMOTT, S.A.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/98 9/30/97 9/30/98 9/30/97
-------- -------- -------- --------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Net Income $ 42,874 $ 18,894 $131,314 $ 27,004
- ------------------------------------------------ -------- -------- -------- --------
Other Comprehensive Income:
Currency translation adjustments:
Foreign currency translation adjustments,
excluding the effect of the purchase of an
equity investment from McDermott
International, Inc. of $10,262,000 4,888 28,612 4,572 13,142
Sales of investments in foreign entities - - 15,596 -
Unrealized gains on investments:
Unrealized gains arising during the period,
net of taxes 4,875 80 4,868 169
- ------------------------------------------------ -------- -------- -------- --------
Other Comprehensive Income 9,763 28,692 25,036 13,311
- ------------------------------------------------ -------- -------- -------- --------
Comprehensive Income $ 52,637 $ 47,586 $156,350 $ 40,315
================================================ ======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
J. RAY McDERMOTT, S.A.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SEPTEMBER 30, 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
9/30/98 9/30/97
--------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 131,314 $ 27,004
- ------------------------------------------------------ --------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 27,184 55,538
(Income) loss from investees,
less dividends (9,733) 4,439
Gain on asset disposals and
impairments - net (43,078) (24)
Benefit from deferred taxes (6,293) (6,840)
Other (626) 475
Changes in assets and liabilities, net of effects
from divestitures:
Accounts receivable 10,164 (20,427)
Net contracts in progress and advance billings (12,294) 35,545
Accounts payable (23,665) 44,742
Accrued contract costs (2,352) 19,528
Accrued and other current liabilities 35,837 5,656
Income taxes 7,672 28,036
Other, net (20,114) 2,147
- ------------------------------------------------------ --------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 94,016 195,819
- ------------------------------------------------------ --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (21,679) (17,703)
Proceeds from asset disposals 127,340 7,639
Purchases of investments (281,466) -
Sales and maturities of investments 124,749 76,400
Acquisition of equity investment from
McDermott International, Inc. (8,984) -
Other - (550)
- ------------------------------------------------------ --------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (60,040) 65,786
- ------------------------------------------------------ --------- --------
</TABLE>
8
<PAGE>
CONTINUED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
9/30/98 9/30/97
-------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt $ (4,503) $ (80,763)
Increase (decrease) in short-term borrowings 18,564 (25,008)
Issuance of common stock 1,281 4,929
Preferred dividends paid (3,600) (3,600)
Purchases of treasury stock (55,560) -
Other (2,471) -
- ----------------------------------------------------- -------- ---------
NET CASH USED IN FINANCING ACTIVITIES (46,289) (104,442)
- ----------------------------------------------------- -------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 658 (3,663)
- ----------------------------------------------------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (11,655) 153,500
- ----------------------------------------------------- -------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 152,011 136,795
- ----------------------------------------------------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $140,356 $ 290,295
===================================================== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 12,878 $ 18,878
Income taxes $ 18,847 $ 9,580
===================================================== ======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE>
J. RAY McDERMOTT, S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - BASIS OF PRESENTATION
J. Ray McDermott, S.A. ("JRM") is a majority-owned subsidiary of McDermott
International, Inc. ("MII").
The accompanying unaudited condensed consolidated financial statements are
presented in U.S. Dollars, and have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Such adjustments are of a normal,
recurring nature except for a gain on the dissolution of a joint venture of
$37,390,000, a gain of $12,000,000 from the sale of assets of a joint venture
and a gain on the settlement and curtailment of postretirement benefit plans of
$3,624,000 during the six months ended September 30, 1998. Operating results for
the six months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending March 31, 1999. Results for the
three and six months ended September 30, 1997 have been restated to reflect the
acquisitions from MII during fiscal year 1998 of a controlling interest in
Talleres Navales del Golfo, S.A. de C.V., a Mexican shipyard, a 100% interest in
Menck GmbH, a manufacturer of marine hammers, and the remaining interest in
McDermott Engineering Houston, LLC, an engineering joint venture. These
acquisitions have been accounted for in a manner similar to a pooling of
interests. For further information, refer to the consolidated financial
statements and footnotes thereto included in JRM's annual report on Form 10-K
for the fiscal year ended March 31, 1998.
NOTE 2 - CHANGE IN ACCOUNTING POLICY
Effective April 1, 1998, JRM adopted Statement of Financial Accounting Standards
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 Condensed Consolidated Balance
Sheet as a component of stockholders' equity. Accumulated balances for each
classification in accumulated other comprehensive loss are disclosed in Note 3.
Comprehensive income is displayed in a separate Condensed Consolidated Statement
of Comprehensive Income included in the financial statements.
10
<PAGE>
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss included in stockholders'
equity at September 30 and March 31, 1998 are as follows:
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
-------------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
Currency Translation Adjustments $(11,055) $(20,962)
Net Unrealized Gain (Loss) on Investments 4,553 (315)
- -------------------------------------------- -------- --------
$ (6,502) $(21,277)
======== ========
</TABLE>
NOTE 4 - DISPOSITIONS
On April 3, 1998, JRM and ETPM S.A. terminated their worldwide McDermott-ETPM
joint venture. 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 Condensed Consolidated Statement of
Income includes revenues of $10,486,000 and $37,356,000 and operating income of
$9,634,000 and $11,360,000 for the three and six months, respectively, ended
September 30, 1997, attributable to operations transferred to ETPM S.A.
On May 7, 1998, JRM's subsidiary McDermott Marine Construction Limited ("MMCL")
sold its European brownfield engineering operations and received net cash of
approximately $2,210,000. Management also intends to exit MMCL's European
greenfield engineering operations. In the three and six months ended September
30, 1998, these operations had revenues of $13,878,000 and $48,025,000,
respectively, and operating losses of $94,000 and $2,176,000, respectively. In
the three and six months ended September 30, 1997, these operations had revenues
of $112,435,000 and $188,399,000, respectively, and operating income of
$3,773,000 and $5,074,000, respectively.
During the six months ended September 30, 1998, 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.
NOTE 5 - SETTLEMENT AND CURTAILMENT OF POSTRETIREMENT BENEFIT PLANS
Effective April 1, 1998, JRM terminated all postretirement health care benefits
and substantially all postretirement life insurance benefits for employees. As
a result of the termination, the total
11
<PAGE>
accumulated postretirement benefit obligation of JRM decreased $20,173,000. On
the same date, the pension plan for the employees affected by the termination
was amended to increase the benefits payable to the participants to offset the
cost of postretirement health care and life insurance. As a result of the
amendment to the plan, the total projected benefit obligation of JRM increased
$16,549,000. The decrease in the accumulated postretirement benefit obligation
was measured against the increase in the projected benefit obligation of the
pension plan and the resulting gain of $3,624,000 was recognized in the six
months ended September 30, 1998.
NOTE 6 - INVESTIGATIONS AND LITIGATION
In March 1997, JRM and MII, with the help of outside counsel, began an
investigation into allegations of wrongdoing by a limited number of former
employees of JRM and MII 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,
JRM and MII notified authorities, including the Antitrust Division of the U.S.
Department of Justice and the European Commission. As a result of JRM's and
MII's prompt disclosure of the allegations, both companies and the individuals
who were officers, directors and employees of JRM or MII 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 JRM, MII nor any of their officers, directors or employees was a party
to those proceedings.
JRM and MII have cooperated and are continuing to cooperate with the Department
of Justice in its investigation. Near the end of calendar 1997, the Department
of Justice 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.
12
<PAGE>
JRM and MII are also cooperating with the Securities and Exchange Commission
("SEC"), which also requested information and documents from the companies with
respect to certain of the matters described above. JRM and MII are subject to a
judicial order entered in 1976, with the consent of McDermott Incorporated
(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.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and certain related entities filed a complaint in the United
States District Court for the Southern District of Texas against JRM, MII,
McDermott Incorporated, McDermott-ETPM, Inc. and certain JRM subsidiaries
(collectively, the "McDermott Defendants"), HeereMac, Heerema, certain Heerema
affiliates, and others (the "Phillips Lawsuit"). The complaint alleges 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. In
addition to seeking actual damages and attorneys' fees, the plaintiffs have
requested punitive as well as treble damages. In October 1998, the McDermott
Defendants filed a motion to dismiss those claims in the Phillips Lawsuit that
relate to alleged injuries sustained solely in overseas markets due to the
court's lack of subject matter jurisdiction.
In June 1998, Shell Offshore, Inc. and certain related entities also filed a
complaint in the United States District Court for the Southern District of Texas
against JRM, MII, HeereMac, Heerema and others (the "Shell Lawsuit") alleging
that the defendants engaged in anti-competitive acts in violation of Sections 1
and 2 of the Sherman Act. In September and October 1998, Amoco Production
Company and Amerada Hess Corporation intervened in the Shell Lawsuit as
plaintiffs. In addition to seeking actual damages, among other things, the
plaintiffs in the Shell Lawsuit request treble damages.
It is not possible to predict the ultimate outcome of the Department of Justice
investigation, the SEC inquiry, or the companies' internal investigation, the
above-referenced lawsuits, or the 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/or criminal liability and have a material adverse effect on
JRM's consolidated financial position and results of operations.
13
<PAGE>
Additionally, JRM is, from time to time, involved in routine litigation related
to its business activity. It is management's opinion that none of this routine
litigation will have a material adverse effect on JRM's consolidated financial
position or results of operations.
NOTE 7 - SEGMENT REPORTING
JRM supplies worldwide services for the offshore oil and gas exploration and
production and hydrocarbon processing industries. 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 subsea trenching
services, diving services, procurement activities, and removal, salvage and
refurbishment services for offshore fixed platforms. These activities are
managed and results are evaluated primarily on a geographic area basis.
Engineering Operations, which includes project management services and
engineering services, is primarily managed and evaluated on a worldwide basis.
Other is comprised of chartering activity as well as consolidating adjustments
that pertain to operations but are excluded from management's evaluation of
segment performance.
Intersegment sales are accounted for at prices that are generally established by
reference to similar transactions with unaffiliated customers. Reportable
segments are measured based on operating income exclusive of general corporate
expenses. Other reconciling items before provision for income taxes are
interest income, interest expense, and other-net. Segment assets of Europe and
West Africa Operations decreased approximately $154,000,000 since March 31,
1998, primarily as a result of the dispositions of MSCL and MMCL described in
Note 4.
14
<PAGE>
Segment Information for the Three and Six Months Ended September 30, 1998 and
1997:
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/98 9/30/97 9/30/98 9/30/97
-------- ------- ------- -------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
North American Operations $169,352 $196,649 $339,140 $354,980
Middle East Operations 74,180 83,211 133,523 181,992
Far East Operations 74,795 74,656 170,162 164,939
Europe and West Africa Operations 18,823 125,617 57,485 232,388
Engineering Operations 17,141 40,406 37,990 73,934
Other 8,129 6,640 15,398 14,721
Eliminations (1) (13,321) (21,133) (34,047) (38,685)
- ------------------------------------ -------- -------- -------- --------
Total Revenues $349,099 $506,046 $719,651 $984,269
==================================== ======== ======== ======== ========
</TABLE>
(1) Segment revenues are net of the following intersegment transfers:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
North American Operations $ 34 $ - $ 1,051 $ -
Middle East Operations 6 - 1,048 -
Far East Operations 1 - 128 -
Europe and West Africa Operations - 54 - 192
Engineering Operations 10,715 16,278 24,234 31,132
Other 2,565 4,801 7,586 7,361
- -------------------------------------- ------- ------- ------- -------
Total $13,321 $21,133 $34,047 $38,685
====================================== ======= ======= ======= =======
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/98 9/30/97 9/30/98 9/30/97
-------- -------- -------- --------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
OPERATING INCOME:
Segment Operating Income (Loss):
- --------------------------------
North American Operations $ 27,672 $ 30,497 $ 44,862 $ 44,188
Middle East Operations 9,527 10,794 19,010 21,423
Far East Operations 22,229 (12,674) 41,660 (14,864)
Europe and West Africa Operations 730 7,664 (171) 8,147
Engineering Operations 712 5,041 (882) 8,069
Other (5,842) (284) (12,212) 1,674
- -------------------------------------------------------- -------- -------- -------- --------
Total Segment Operating Income $ 55,028 $ 41,038 $ 92,267 $ 68,637
- -------------------------------------------------------- -------- -------- -------- --------
Gain (Loss) on Asset Disposals and Impairments - Net:
- -----------------------------------------------------
North American Operations $ (1,819) $ 1,970 $ (860) $ 2,496
Middle East Operations - 386 - 136
Far East Operations - 581 (14) 814
Europe and West Africa Operations (205) 874 36,135 881
Other 55 (4,381) 7,817 (4,303)
- -------------------------------------------------------- -------- -------- -------- --------
Total Gain (Loss) on Asset Disposals
and Impairments - Net $ (1,969) $ (570) $ 43,078 $ 24
- -------------------------------------------------------- -------- -------- -------- --------
Income (Loss) from Investees:
- -----------------------------
North American Operations $ (1,505) $ 1,024 $ (707) $ (892)
Far East Operations (1,378) 1,150 10,658 1,583
Europe and West Africa Operations (842) (738) 301 (3,581)
Other (57) 336 (519) 263
- -------------------------------------------------------- -------- -------- -------- --------
Total Income (Loss) from Investees $ (3,782) $ 1,772 $ 9,733 $ (2,627)
- -------------------------------------------------------- -------- -------- -------- --------
SEGMENT INCOME (LOSS):
- ----------------------
North American Operations $ 24,348 $ 33,491 $ 43,295 $ 45,792
Middle East Operations 9,527 11,180 19,010 21,559
Far East Operations 20,851 (10,943) 52,304 (12,467)
Europe and West Africa Operations (317) 7,800 36,265 5,447
Engineering Operations 712 5,041 (882) 8,069
Other (5,844) (4,329) (4,914) (2,366)
- -------------------------------------------------------- -------- -------- -------- --------
Total Segment Income 49,277 42,240 145,078 66,034
- -------------------------------------------------------- -------- -------- -------- --------
General Corporate Expenses (3,173) (4,926) (6,596) (7,701)
- -------------------------------------------------------- -------- -------- -------- --------
Total Operating Income $ 46,104 $ 37,314 $138,482 $ 58,333
======================================================== ======== ======== ======== ========
</TABLE>
16
<PAGE>
NOTE 8 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
9/30/98 9/30/97 9/30/98 9/30/97
----------- ----------- ----------- -----------
(Unaudited)
(In thousands, except shares
and per share amounts)
<S> <C> <C> <C> <C>
Basic:
Net income $ 42,874 $ 18,894 $ 131,314 $ 27,004
Dividends on preferred stock (1,800) (1,800) (3,600) (3,600)
- ----------------------------------------- ----------- ----------- ----------- -----------
Net income for basic computation $ 41,074 $ 17,094 $ 127,714 $ 23,404
========================================= =========== =========== =========== ===========
Weighted average common shares 39,654,840 40,972,518 40,179,828 40,827,300
========================================= =========== =========== =========== ===========
Basic earnings per common share $ 1.04 $ 0.42 $ 3.18 $ 0.57
========================================= =========== =========== =========== ===========
Diluted:
Net income $ 42,874 $ 18,894 $ 131,314 $ 27,004
Dividends on preferred stock - - - (3,600)
- ----------------------------------------- ----------- ----------- ----------- -----------
Net income for diluted computation $ 42,874 $ 18,894 $ 131,314 $ 23,404
========================================= =========== =========== =========== ===========
Weighted average common shares (basic) 39,654,840 40,972,518 40,179,828 40,827,300
Effect of dilutive securities:
Stock options and restricted stock 240,286 297,728 306,760 277,113
Series A $2.25 Cumulative
Preferred Stock 5,740,940 5,740,940 5,740,940 -
- ----------------------------------------- ----------- ----------- ----------- -----------
Adjusted weighted average common
shares and assumed conversions 45,636,066 47,011,186 46,227,528 41,104,413
========================================= =========== =========== =========== ===========
Diluted earnings per common share $ 0.94 $ 0.40 $ 2.84 $ 0.57
========================================= =========== =========== =========== ===========
</TABLE>
17
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
J. Ray McDermott, S.A. ("JRM") is a majority-owned subsidiary of McDermott
International, Inc. ("MII").
Revenues of JRM 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. During fiscal year 1998, U.S. and North Sea markets
remained steady while Far East and Middle East markets started to weaken.
Management expects low oil prices and economic and political instability in
Indonesia and political turmoil on the Indian subcontinent will have an adverse
effect on exploration and production spending in the short to intermediate term.
A significant portion of JRM's revenues and operating results are derived from
its foreign operations. As a result, JRM's operations and financial results are
affected by international factors, such as changes in foreign currency exchange
rates. JRM attempts to minimize its exposure to changes in foreign currency
exchange rates by attempting to match 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, it
enters into foreign currency forward exchange contracts to reduce the impact of
foreign exchange rate movements on operating results.
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. These risks and uncertainties
include, but are not limited to: decisions about offshore developments to be
made by oil and gas companies; the highly competitive nature of the marine
constructions services business; operating risks associated with the marine
construction services business; economic and political instability in Indonesia
and on the Indian subcontinent; the results of the ongoing investigation by JRM
and MII and the U. S. Department of Justice into possible anti-competitive
practices by JRM and MII; and the other lawsuits disclosed in Item 3, Legal
Proceedings.
18
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 VS. THREE MONTHS
ENDED SEPTEMBER 30, 1997
Revenues decreased $156,947,000 to $349,099,000, primarily due to lower volume
in Europe as a result of the withdrawal from the European engineering markets
and from lower volume in all activities in North America and in worldwide
engineering.
Segment operating income increased $13,990,000 to $55,028,000, primarily due to
higher margins in virtually all activities and a favorable settlement of
contract claims in the Far East. This increase was partially offset by lower
volume in European engineering markets and worldwide engineering. In addition,
there was lower volume in all activities in North America and higher net
operating expenses.
Income (loss) from investees decreased $5,554,000 from income of $1,772,000 to a
loss of $3,782,000, primarily due to lower operating results from Brown & Root
McDermott Fabricators Limited as well as joint ventures in the Far East and Gulf
of Mexico. These decreases were partially offset by losses recorded by
McDermott-ETPM West, Inc. in the prior year.
Interest income increased $6,599,000 to $11,538,000, primarily due to increases
in investments in government obligations and other debt securities.
Interest expense decreased $989,000 to $6,440,000, primarily due to changes in
debt obligations and interest rates prevailing thereon.
The provision for income taxes decreased $7,861,000 to $8,140,000, while income
before provision for income taxes increased $16,119,000 to $51,014,000. The
change in the relationship of pretax income to the provision for income taxes
was primarily the result of an increase in the proportion of income earned in
non-taxable jurisdictions. JRM 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
tax rate.
RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1998 VS. SIX MONTHS ENDED
SEPTEMBER 30, 1997
Revenues decreased $264,618,000 to $719,651,000, primarily due to lower volume
in Europe as a result of the withdrawal from the European engineering markets
and from lower volume in all activities in the Middle East, North America and in
worldwide engineering. These decreases were partially offset by higher volume
in virtually all activities in the Far East.
19
<PAGE>
Segment operating income increased $23,630,000 to $92,267,000, primarily due to
higher volume and margins in virtually all activities and a favorable settlement
of contract claims in the Far East and higher margins in North America. These
increases were partially offset by lower volume in the Middle East, European
engineering markets, worldwide engineering and higher net operating expenses.
Gain on asset disposals and impairments-net increased $43,054,000 to
$43,078,000. This was primarily due to the gain recognized from the termination
of the McDermott-ETPM joint venture and the sale of three Gulf of Mexico
vessels.
Income (loss) from investees increased $12,360,000 from a loss of $2,627,000 to
income of $9,733,000, primarily due to the gain on the sale of assets in a
Malaysian joint venture and losses recorded by McDermott-ETPM West, Inc. in the
prior year. These increases were partially offset by lower operating results
from Brown & Root McDermott Fabricators Limited.
Interest income increased $13,404,000 to $22,992,000, primarily due to increases
in investments in government obligations and other debt securities.
Interest expense decreased $4,190,000 to $12,854,000, primarily due to changes
in debt obligations and interest rates prevailing thereon.
Other-net increased $9,933,000 to $11,225,000, primarily due to a net gain on
the settlement and curtailment of postretirement benefit plans (see Note 5 to
the condensed consolidated financial statements) and minority shareholder
participation resulting from the increased losses of a consolidated foreign
joint venture.
The provision for income taxes increased $3,366,000 to $28,531,000, while income
before provision for income taxes increased $107,676,000 to $159,845,000. The
change in the relationship of pretax income to the provision for income taxes
was primarily the result of an increase in the proportion of income earned in
non-taxable jurisdictions. JRM 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
tax rate.
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Backlog 9/30/98 3/31/98
- ------------------------------------ -------- ----------
(In thousands)
North American Operations $460,653 $ 629,374
Middle East Operations 102,994 181,127
Far East Operations 231,686 367,454
Europe and West Africa Operations 45,948 86,611
Engineering Operations 13,049 10,657
Other (15,902) (8,075)
- ------------------------------------ -------- ----------
TOTAL BACKLOG $838,428 $1,267,148
==================================== ======== ==========
</TABLE>
In general, JRM's business is capital intensive and relies on large contracts
for a substantial amount of its revenues.
JRM's backlog declined in all operating areas as a result of lower oil prices.
In addition, backlog in Europe and West Africa declined as a result of the
withdrawal from the European engineering markets. Finally, backlog decreased as
a result of sluggish economic environments in the Middle and Far East and the
political instability in the Far East.
Liquidity and Capital Resources
- -------------------------------
During the six months ended September 30, 1998, JRM's cash and cash equivalents
decreased $11,655,000 to $140,356,000 and total debt decreased $2,593,000 to
$274,501,000, primarily due to repayment of $4,503,000 in long-term debt and the
settlement of a note payable of $14,565,000 pursuant to the termination of the
ETPM joint venture, offset by an increase in short-term borrowings of
$18,564,000. During this period, JRM provided cash of $94,016,000 from
operating activities and received cash of $127,340,000 from asset disposals,
including $95,546,000 from the termination of the ETPM joint venture, and
$1,281,000 from the issuance of stock upon exercise of stock options. JRM used
cash of $156,717,000 for net purchases of investments, $21,679,000 for additions
to property, plant and equipment, $55,560,000 for stock repurchases and
$3,600,000 for dividends on preferred stock.
During the six months ended September 30, 1998, JRM used cash of $8,984,000 to
purchase from MII its equity investment in a Mexican joint venture. The excess
of the purchase price over the net book value of the net assets acquired of
$322,000 was included in capital in excess of par value.
Expenditures for property, plant and equipment increased $3,976,000 to
$21,679,000. The majority of these expenditures was to maintain, replace and
upgrade existing facilities and equipment.
21
<PAGE>
At September 30 and March 31, 1998, JRM had available various uncommitted
short-term lines of credit from banks totaling $23,410,000 and $25,234,000,
respectively. Borrowings against these lines of credit at March 31, 1998 were
$2,251,000. There were no borrowings against these lines at September 30, 1998.
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 September
30, 1998, 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 1999.
JRM is restricted, as a result of covenants in its indenture relating to its
$250,000,000 9.375% Senior Subordinated Notes due July 2006, from paying cash
dividends on, or repurchasing or redeeming, its capital stock (including the
shares of its Common Stock and Series A $2.25 Cumulative Preferred Stock held by
MII), or in transferring funds through unsecured loans to or investments in MII.
At September 30, 1998, JRM could pay cash dividends on, or repurchase shares of,
its capital stock (including shares held by MII) in the amount of $19,780,000,
could pay up to an additional $9,600,000 of cash dividends on its Series A
Preferred Stock held by MII and could make unsecured loans to or investments in
MII of approximately $30,000,000. Additionally under such indenture, JRM is
required to offer to purchase its outstanding 9.375% Senior Subordinated Notes
at 100% of their principal amount, plus accrued and unpaid interest, to the
extent that it has proceeds from certain asset sales and dispositions equal to
or exceeding $25,000,000 that it has not used to permanently reduce certain
senior or other indebtedness or reinvested in its business within a specified
time period, generally 18 months, following each such asset sale or disposition.
Currently, JRM has approximately $231,000,000 in proceeds from such asset sales
and dispositions, which, if not used for repayment of debt or reinvested as
described above, would be subject to this obligation commencing June 1999.
JRM maintains an investment portfolio of government obligations and other
investments. The fair value of long-term investments in debt securities at
September 30, 1998 was $708,127,000.
Working capital decreased $25,165,000 from $7,173,000 at March 31, 1998 to a
deficit of $17,992,000 at September 30, 1998. During the remainder of fiscal
year 1999, JRM expects to obtain funds to meet capital expenditure, working
capital and debt maturity requirements from
22
<PAGE>
operating activities and cash and cash equivalents. Leasing agreements for
equipment, which are short-term in nature, are not expected to impact JRM's
liquidity or capital resources.
During fiscal year 1998, JRM's Board of Directors approved the repurchase of up
to three 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. Shares repurchased by JRM are also dependent on its ability
to satisfy its debt covenants. During the six months ended September 30, 1998,
JRM repurchased 1,737,700 shares of its common stock at an average share price
of $31.94. At September 30, 1998, JRM had repurchased 2,100,200 of the three
million shares of its common stock authorized to be repurchased.
JRM has provided a valuation allowance for deferred tax assets of $17,196,000
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. An uncertainty that affects the ultimate
realization of deferred tax assets is the risk of incurring losses in the
future. This factor has 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 JRM company-wide Year 2000 Project is proceeding on schedule. The project
addresses information technology components (hardware and software) in internal
business systems and the 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
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, a common approach as outlined below was developed that fit the
requirements of each JRM operating location.
A consistent work breakdown structure for the project is being employed
throughout JRM:
. 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
23
<PAGE>
The general phases of the project common to all of the above functions are: (1)
inventory items with potential Year 2000 impact, (2) establish priorities, (3)
assess and create a solution strategy for those items determined to be material
to JRM, (4) implement solutions defined for those items assessed to have Year
2000 impact, and (5) test and validate solutions.
At September 30, 1998, the inventory, prioritization and assessment of the IT
Systems and Facilities were complete. The implementation is in progress with
approximately 60% of the work completed. The inventory of internal Embedded
Systems is near completion and the inventory, prioritization and assessment of
Customer Products are approximately 40% complete. The Critical Suppliers
analysis is in the early stages with each JRM operating location developing its
list of suppliers that may have a material impact on continuing operations.
The IT Systems, Facilities and Embedded Systems that support JRM's engineering,
fabrication and marine operations are on schedule and are forecast to be
completed by June 30, 1999. The IT Systems and Facilities that support the
corporate office functions are scheduled to be Year 2000 compliant by June 30,
1999. The analysis and the compliance tasks for JRM Customer Products and
Critical Suppliers are on schedule and are forecast to be completed by June 30,
1999.
JRM 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 $6,000,000 and is being funded through
operating cash flows. The cost incurred to date is approximately $2,000,000.
JRM's Year 2000 compliance is also dependent upon Year 2000 readiness of
external agents and third-party suppliers on a timely basis. The failure of JRM
or its agents or suppliers to achieve Year 2000 compliance could result in,
among other things, production interruptions, delays in the delivery of
products, delays in the receipt of supplies, invoice and collection errors, and
inaccurate inventories. These consequences could have a material adverse impact
on JRM's results of operations, financial condition and cash flow if it is
unable to conduct its businesses in the ordinary course.
Contingency plans are being defined and, in some cases, already initiated where
there is high risk associated with the implementation of the primary compliance
strategy. Examples of contingency projects are: remediation of legacy systems
concurrent with the implementation of third-party replacement software where
there is little margin for delay in the vendor's delivery of the software; and
outsourcing of certain functions where the remediation of a major legacy system
has subsequently evolved to be a high-risk project. Contingency plans are being
developed consistent
24
<PAGE>
with the priorities and requirements of each business unit and will be
continually refined as additional information becomes available.
Although JRM is unable to determine at this time whether the consequences of
Year 2000 failures will have a material impact on its results of operations, JRM
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 JRM
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, 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. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third parties and the interconnection of global
businesses, JRM 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. JRM has not yet finalized its review of SOP 98-5,
but it is not expected to have a material impact on its consolidated financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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 JRM
25
<PAGE>
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. JRM has not yet determined what effect the
adoption of SFAS No. 133 will have on its consolidated financial position or
results of operations.
26
<PAGE>
PART II
J. RAY McDERMOTT, S.A.
OTHER INFORMATION
Item 3. LEGAL PROCEEDINGS
In March 1997, JRM and MII, with the help of outside counsel, began an
investigation into allegations of wrongdoing by a limited number of former
employees of JRM and MII 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,
JRM and MII notified authorities, including the Antitrust Division of the U.S.
Department of Justice and the European Commission. As a result of JRM's and
MII's prompt disclosure of the allegations, both companies and the individuals
who were officers, directors and employees of JRM or MII 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 JRM, MII nor any of their officers, directors or employees was a party
to those proceedings.
JRM and MII have cooperated and are continuing to cooperate with the Department
of Justice in its investigation. Near the end of calendar 1997, the Department
of Justice 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.
JRM and MII are also cooperating with the Securities and Exchange Commission
("SEC"), which also requested information and documents from the companies with
respect to certain of the
27
<PAGE>
matters described above. JRM and MII are subject to a judicial order entered in
1976, with the consent of McDermott Incorporated (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.
In June 1998, Phillips Petroleum Company (individually and on behalf of certain
co-venturers) and certain related entities filed a complaint in the United
States District Court for the Southern District of Texas against JRM, MII,
McDermott Incorporated, McDermott-ETPM, Inc. and certain JRM subsidiaries
(collectively, the "McDermott Defendants"), HeereMac, Heerema, certain Heerema
affiliates, and others (the "Phillips Lawsuit"). The complaint alleges 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. In
addition to seeking actual damages and attorneys' fees, the plaintiffs have
requested punitive as well as treble damages. In October 1998, the McDermott
Defendants filed a motion to dismiss those claims in the Phillips Lawsuit that
relate to alleged injuries sustained solely in overseas markets due to the
court's lack of subject matter jurisdiction.
In June 1998, Shell Offshore, Inc. and certain related entities also filed a
complaint in the United States District Court for the Southern District of Texas
against JRM, MII, HeereMac, Heerema and others (the "Shell Lawsuit") alleging
that the defendants engaged in anti-competitive acts in violation of Sections 1
and 2 of the Sherman Act. In September and October 1998, Amoco Production
Company and Amerada Hess Corporation intervened in the Shell Lawsuit as
plaintiffs. In addition to seeking actual damages, among other things, the
plaintiffs in the Shell Lawsuit request treble damages.
It is not possible to predict the ultimate outcome of the Department of Justice
investigation, the SEC inquiry, or the companies' internal investigation, the
above-referenced lawsuits, or the 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/or criminal liability and have a material adverse effect on
JRM's consolidated financial position and results of operations.
28
<PAGE>
Additionally, JRM is, from time to time, involved in routine litigation related
to its business activity. It is management's opinion that none of this routine
litigation will have a material adverse effect on JRM's consolidated financial
position or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on August 7, 1998, the stockholders
of JRM elected the following individuals as Class I Directors for a three year
term:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C>
William J. Johnson 41,218,140 53,003
Robert H. Rawle 41,218,266 52,877
Roger E. Tetrault 41,219,747 51,396
</TABLE>
Messrs. Rick L. Burdick, Robert L. Howard, Sean C. O'Keefe, Cedric E. Ritchie
and Richard E. Woolbert also continued as directors immediately after the
meeting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 - Financial Data Schedule (6 months ending 9/30/98)
Exhibit 27.2 - Financial Data Schedule (Restated 6 months ending 9/30/97)
(b) Reports on Form 8-K
A current report on Form 8-K, Item 4, dated July 29, 1998 was filed on
July 30, 1998.
29
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
J. RAY McDERMOTT, S.A.
----------------------
/s/ Daniel R. Gaubert
----------------------
By: Daniel R. Gaubert
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer and Duly Authorized Representative)
November 10, 1998
30
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27.1 Financial Data Schedule (6 months ending 9/30/98)
27.2 Financial Data Schedule (Restated 6 months ending 9/30/97)
31
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM J. RAY
MCDERMOTT'S SEPTEMBER 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
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