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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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SCHEDULE 14D-9
Solicitation/Recommendation Statement
Pursuant to Section 14(d)(4) of the
Securities Exchange Act of 1934
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J. RAY McDERMOTT, S.A.
(Name of Subject Company)
J. RAY McDERMOTT, S.A.
(Name of Person Filing Statement)
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Common Stock, par value $.01 per share
(Title of Class of Securities)
P 64658 10 0
(CUSIP Number of Class of Securities)
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S. W. Murphy
Senior Vice President, General Counsel
and Corporate Secretary
J. Ray McDermott, S.A.
1450 Poydras Street
New Orleans, Louisiana 70112-6050
(504) 587-5300
(Name, address and telephone number of person
authorized to receive notice and communications
on behalf of the person filing statement)
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COPY TO:
R. Joel Swanson
BAKER & BOTTS, L.L.P.
3000 One Shell Plaza
Houston, Texas 77002-4995
(713) 229-1234
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Item 1--Security and Subject Company.
The name of the subject company is J. Ray McDermott, S.A., a Panama
corporation (the "Company"), and the address of the principal executive
offices of the Company is 1450 Poydras Street, New Orleans, Louisiana 70112-
6050. The title of the class of equity securities to which this statement
relates is the Company's common stock, par value $.01 per share (the
"Shares").
Item 2--Tender Offer of the Bidder.
This statement relates to the tender offer (the "Offer") disclosed in the
Tender Offer Statement on Schedule 14D-1 dated May 13, 1999 (the "Schedule
14D-1"), filed by McDermott Acquisition Company, Inc. ("Purchaser"), a Panama
corporation and a wholly owned subsidiary of McDermott International, Inc., a
Panama corporation ("Parent"), to purchase all of the Company's outstanding
Shares at a price of $35.62 per share, net to the seller in cash (the "Offer
Price"), without interest thereon.
The Offer is being made pursuant to the Agreement and Plan of Merger, dated
as of May 7, 1999 (the "Merger Agreement"), between Parent and the Company.
The Merger Agreement also provides that, in accordance with the terms and
subject to the conditions thereof, following the consummation of the Offer,
Purchaser will be merged with and into the Company (the "Merger"), and the
Company will continue as the surviving corporation (the "Surviving
Corporation") and become a wholly owned subsidiary of Parent. A copy of the
Merger Agreement is filed as Exhibit (c)(1) to this Schedule 14D-9 and is
incorporated by reference herein.
The Schedule 14D-1 indicates that the principal executive offices of
Purchaser and Parent are located at 1450 Poydras Street, New Orleans,
Louisiana 70112-6050.
Item 3--Identity and Background.
(a) The name and address of the Company, which is the person filing this
statement, are set forth in Item 1 above. Unless the context otherwise
requires, references to the Company in this statement are to the Company and
its subsidiaries and predecessors, viewed as a single entity.
(b) Certain contracts, agreements, arrangements or understandings between
the Company or its affiliates and certain of its executive officers, directors
or affiliates are described in the sections entitled "Director's Attendance
and Compensation," "Security Ownership of Directors and Executive Officers,"
"Security Ownership of Certain Beneficial Owners," "Compensation of Executive
Officers" and "Certain Transactions" of the Company's Proxy Statement dated
July 1, 1998, relating to its August 7, 1998 Annual Meeting of Stockholders
(the "Proxy Statement"). A copy of such sections of the Proxy Statement is
filed as Exhibit (c)(3) to this Schedule 14D-9, and the portions of such Proxy
Statement referred to above are incorporated herein by reference. Set forth
below is a description of certain other contracts, agreements, arrangements,
understandings and actual or potential conflicts of interest between the
Company or its affiliates and (1) the executive officers, directors and
affiliates of the Company and (2) Parent, its executive officers, directors or
affiliates.
The Merger Agreement
The following is a summary of the material provisions of the Merger
Agreement, a copy of which is filed as Exhibit (c)(1) to this Schedule 14D-9.
The summary is qualified by reference to the Merger Agreement. Shareholders
are urged to read the Merger Agreement in its entirety.
The Offer
The Merger Agreement provides for the making of the Offer. The obligation of
Purchaser to accept for payment and pay for Shares tendered pursuant to the
Offer is subject to the satisfaction or waiver of certain conditions that are
described in "The Merger Agreement--Conditions of the Offer," including that
there shall have been validly tendered and not withdrawn prior to expiration
of the Offer a number of Shares equal to
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at least a majority of the outstanding Shares other than Shares beneficially
owned by Parent (the "Minimum Condition"). Pursuant to the Merger Agreement,
Purchaser may waive any condition to the Offer or change any of the terms or
conditions of the Offer, except that, without the prior written consent of the
Company, Purchaser may not waive the Minimum Condition or make any change in
the Offer which changes the form of consideration to be paid or decreases the
price per Share or the number of Shares sought in the Offer or which imposes
conditions to the Offer in addition to those set forth in "The Merger
Agreement--Conditions of the Offer."
Upon the consummation of the Offer, Parent will be entitled to designate a
number of directors (rounded to the nearest whole number) to the Board of
Directors of the Company (the "Company Board") that equals the product of (i)
the total number of directors on the Company Board and (ii) the percentage
that the number of Shares beneficially owned by Parent bears to the total
number of outstanding Shares, and the Company shall take all action necessary
to cause Parent's designees to be elected or appointed to the Company Board,
including, without limitation, increasing the number of directors, and seeking
and accepting resignations of incumbent directors. Parent has indicated to the
Company that it has no present intention to replace or elect any new director
to the Company Board during the period between the consummation of the Offer
and the consummation of the Merger, although Parent could change its intention
at any time, subject to compliance with applicable legal requirements
including Rule 14(f) of the Securities Exchange Act of 1934 (the "1934 Act")
and the rules and regulations promulgated thereunder.
Until the Merger is consummated or abandoned, Parent has agreed to take all
actions necessary to permit the Independent Committee of the Company Board
(the "Independent Committee") to continue in existence without diminution of
its powers or duties and its members to consist solely of the members on May
7, 1999, or any successors selected (with the written consent of a majority of
the members of the Independent Committee) by the Company Board who are not
otherwise employed by Parent or its affiliates.
The Merger
The Merger Agreement provides that as promptly as practicable after all
conditions to the Merger set forth therein have been satisfied or, to the
extent permitted thereunder, waived, Purchaser will be merged into the Company
in accordance with the laws of the Republic of Panama ("Panama Law"). As a
result of the Merger, the separate existence of Purchaser will cease, and the
Company will continue as the Surviving Corporation. Pursuant to the Merger,
each Share outstanding immediately prior to the effective time of the Merger
(the "Effective Time") (other than Shares beneficially owned by Parent) will
be converted into the right to receive $35.62 or such higher price per Share
paid in the Offer in cash, without interest (the "Merger Consideration").
Each of Purchaser and Parent will be entitled to deduct and withhold from
the consideration otherwise payable to any person pursuant to the Merger
Agreement such amounts as it is required to deduct and withhold with respect
to the making of such payment under any provision of federal, state, local or
foreign tax law.
Stock Options
The Company has outstanding options to purchase Shares ("Company Stock
Options") under certain employee and director stock compensation plans,
including a Restated 1994 Executive Long-Term Incentive Compensation Plan (the
"1994 Plan") and a Non-Employee Director Stock Plan (the "Directors Plan").
Under the Merger Agreement, Company Stock Options, whether or not
exercisable or vested, will be adjusted as necessary so that, at the Effective
Time, each Company Stock Option outstanding immediately prior to the Effective
Time shall be deemed to constitute an option to purchase shares of common
stock, $1.00 par value, of Parent ("Parent Stock"), on the same terms and
conditions as were applicable under such Company Stock Option, except as set
forth below (each, as so adjusted, an "Adjusted Option"). Each Adjusted Option
shall be fully vested and will entitle the holder to purchase a number of
shares of Parent Stock having an aggregate market value, as of the Effective
Time, equal to the product of the number of Shares purchasable pursuant to the
applicable Company Stock Option and the Merger Consideration. The exercise
price per share of Parent Stock under each Adjusted Option shall be equal to
(A) the aggregate exercise price for the Shares
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purchasable pursuant to the applicable Company Stock Option divided by (B) the
aggregate number of shares of Parent Stock deemed purchasable pursuant to such
Adjusted Stock Option. Any fractional share of Parent Stock resulting from the
foregoing adjustment of a Company Stock Option shall be rounded down to the
nearest whole share.
Restricted Shares
Under the 1994 Plan and Directors Plan, the Company granted to its officers
and directors Shares subject to transfer restrictions and forfeiture
provisions ("Restricted Shares"). Restricted Shares granted to officers
generally vest 50% at the end of five years with the remaining 50% vesting
between the third and tenth anniversary of the date of grant based upon the
Company's financial performance. Restricted Shares granted to directors vest
at the end of the director's term. Officers and directors pay $1.00 for each
Restricted Share and receive dividends paid on and are entitled to vote such
shares prior to vesting.
Under the Merger Agreement, the Company will provide, as soon as
practicable, each person who holds Restricted Shares the opportunity to make
an irrevocable election either to (i) receive a cash payment, as of the
Effective Time, in respect of such Restricted Shares (whether or not vested)
or (ii) receive a replacement award (a "Replacement Restricted Award"), as of
the Effective Time, of Parent Stock having an aggregate fair market value (as
of the Effective Time) equal to the product of (A) the number of Restricted
Shares to which such Replacement Restricted Award relates and (B) the Merger
Consideration. Each Replacement Restricted Award will be issued on the same
terms, and subject to identical restrictions, as applied to the Restricted
Shares to which such Replacement Restricted Award relates (without taking into
account any accelerated vesting as a result of the Merger).
Performance Shares
Under the 1994 Plan, the Company made notional grants of Restricted Shares,
which are subject to adjustment based upon future stock performance
("Performance Shares"), to its officers. No Restricted Shares are issued by
the Company at the time of the grant. The number of Restricted Shares actually
received by an officer, if any, is determined on the second anniversary of the
grant date by calculating the difference between the fair market value of a
Share (based upon the preceding 30 trading day average) and the fair market
value of the Shares on the grant date. The difference is multiplied by that
number of Restricted Shares in an officer's notional grant and the resulting
product is divided by the fair market value of a Share as of the second
anniversary of the grant date, calculated as described above. The resulting
number is added to (in the case of an increase in share price) or subtracted
from (in the case of a decrease in share price) the number of Restricted
Shares in an officer's notional grant. The notional grant, as adjusted (to the
extent not reduced to zero), is then issued to the officer as Restricted
Shares on the second anniversary of the grant date, for which the officer is
required to pay $1.00 per share. The Restricted Shares vest two years
thereafter, during which they are nontransferable and are subject to
forfeiture prior to vesting.
Under the Merger Agreement, the Company will provide, as soon as
practicable, each person who holds Performance Shares the opportunity to make
an irrevocable election either to (i) receive a cash payment, as of the
Effective Time, in respect of such Performance Shares or (ii) receive a
replacement award (a "Replacement Performance Award"), as of the Effective
Time, of Restricted Shares of Parent Stock and having the following terms.
Each Replacement Performance Award will represent that number of shares of
Parent Stock having an aggregate fair market value, as of the Effective Time,
equal to the product of (A) the number of notional Performance Shares
originally granted and (B) the Merger Consideration. Each Replacement
Performance Award will be subject to a two-year vesting period upon terms
identical to those that apply, under the 1994 Plan, to Performance Shares as
of the end of the initial two-year measurement period.
The Board of Directors of Parent (the "Parent Board") or the Compensation
Committee of the Parent Board will at or prior to the Effective Time adopt
resolutions specifically approving, for purposes of Rule 16b-3 under the 1934
Act, the receipt pursuant to this section of Parent Stock and Adjusted Options
by officers and directors of the Company who will become officers or directors
of the Parent subject to Rule 16b-3.
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For purposes of the immediately preceding three sections ("The Merger
Agreement--Stock Options", "--Restricted Shares" and "--Performance Shares"),
the market value of a share of Parent Stock as of the Effective Time will be
deemed to be the closing sale price of such share on the NYSE on the trading
day immediately preceding the Effective Time.
Representations and Warranties
The Merger Agreement contains various customary representations and
warranties of the parties thereto, including, without limitation,
representations (i) by the Company and Parent as to corporate status, the
authorization and the enforceability of the Merger Agreement against each such
party, and absence of contravention due to execution and performance under the
Merger Agreement, (ii) by the Company as to its governmental authorization,
capitalization, compliance with law, the accuracy of financial statements and
filings with the Securities and Exchange Commission (the "Commission"),
absence of undisclosed material liabilities or litigation and the absence of
certain changes or events concerning the Company's business from December 31,
1998 and (iii) by Parent as to its governmental authorization, the accuracy of
the Purchaser's Offer to Purchase, and the availability at the expiration of
the Offer of cash sufficient to consummate the Offer and the Merger and to pay
all expenses in connection with the Offer and Merger. The representations and
warranties contained in the Merger Agreement will not survive the Effective
Time.
Covenants
The Merger Agreement contains various customary covenants of the parties
thereto. A description of certain of these covenants follows:
Conduct of Business. From the date of the Merger Agreement until the
Effective Time, the Company and its subsidiaries will conduct their
business in the ordinary course consistent with past practice and will use
their commercially reasonable efforts to preserve intact their business
organizations and relationships with third parties and to keep available
the services of their present officers and employees. Without limiting the
generality of the foregoing, from the date of the Merger Agreement until
the Effective Time, except as consented to in writing by Parent, the
Company has agreed that:
(a) the Company will not adopt or propose any change to its
certificate of incorporation or bylaws;
(b) the Company will not, and will not permit any of its subsidiaries
to, merge or consolidate with any other person or acquire a material
amount of stock or assets of any other person;
(c) the Company will not, and will not permit any of its subsidiaries
to, sell, lease, license or otherwise dispose of any significant
subsidiary or any material amount of assets or property except pursuant
to existing contracts or commitments and in the ordinary course
consistent with past practice;
(d) the Company will not, and will not permit any of its subsidiaries
to, take any action that would make any representation and warranty of
the Company under the Merger Agreement inaccurate in any respect at, or
as of any time prior to, the Effective Time; and
(e) the Company will not, and will not permit any of its subsidiaries
to, agree or commit to do any of the foregoing.
Shareholder Meeting. The Company will cause a meeting of its shareholders
(the "Company Shareholder Meeting") to be duly called and held as soon as
reasonably practicable after consummation of the Offer for the purpose of
voting on the approval and adoption of the Merger Agreement and the Merger. In
connection with such meeting, the Company will use its commercially reasonable
efforts to obtain the necessary approvals by its shareholders of the Merger
Agreement and the transactions contemplated thereby and otherwise comply with
all legal requirements applicable to such meeting.
Except as provided in the next sentence, the Company Board will recommend
the Offer and the approval and adoption of the Merger Agreement and the Merger
by the Company's shareholders. The Independent Committee shall be permitted to
withdraw, or modify in a manner adverse to Parent, its recommendation to its
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shareholders, if (i) the Company has complied with the terms of the "No
Solicitation" covenant below, (ii) the Independent Committee determines in
good faith (after consultation with independent legal counsel) that failure to
take such action would be reasonably likely to be inconsistent with its
fiduciary duties under applicable law and (iii) the Independent Committee
shall have delivered to Parent a prior written notice advising Parent that it
intends to take such action.
No Solicitation. From the date of the Merger Agreement until the termination
thereof, the Company will not, and will cause its subsidiaries and the
officers, directors, employees and other agents and advisors of the Company
and its subsidiaries not to, directly or indirectly, (i) take any action to
solicit, initiate or encourage the submission of any Acquisition Proposal or
(ii) disclose any nonpublic information relating to, or afford access to the
properties, books or records of, the Company or any of its subsidiaries to, or
engage in any discussions or negotiations with, any person who is considering
making or has made an Acquisition Proposal; provided that the Company may
furnish nonpublic information or afford access to properties, books and
records to any person who is considering making or has made an Acquisition
Proposal and may negotiate or otherwise engage in substantive discussions with
any person who has made an Acquisition Proposal if (w) the Company has
complied with the foregoing terms of this covenant, (x) the Independent
Committee determines in good faith (after consultation with independent legal
counsel) that failure to take such action would be reasonably likely to be
inconsistent with its fiduciary duties under applicable law, (y) such person
executes a confidentiality agreement on terms no less favorable to the Company
than those contained in the Merger Agreement and (z) the Company shall have
delivered to Parent a prior written notice advising Parent that it intends to
take such action. Nothing contained in the Merger Agreement shall prevent the
Company Board from complying with Rule 14e-2 under the 1934 Act with respect
to any Acquisition Proposal. "Acquisition Proposal" means any offer or
proposal for a merger, consolidation, share exchange, business combination or
other similar transaction involving the Company or any of its subsidiaries or
the acquisition of any substantial equity interest in or substantial portion
of the assets of the Company or any of its subsidiaries, other than the
transactions contemplated by the Merger Agreement.
The Company will notify Parent promptly (but in no event later than 24
hours) after receipt by the Company, or any of its advisors, of any
Acquisition Proposal or any request for nonpublic information relating to, or
access to the properties, books or records of, the Company or any of its
subsidiaries by any person who is considering making or has made an
Acquisition Proposal. The Company shall identify the person making, and the
terms and conditions of, any such Acquisition Proposal or request. The Company
shall keep Parent fully informed, on a current basis, of the status and
details of any such Acquisition Proposal or request.
Director and Officer Liability. After the Effective Time, the Surviving
Corporation will indemnify and hold harmless the present and former officers
and directors of the Company (each an "Indemnified Person") in respect of acts
or omissions occurring at or prior to the Effective Time to the extent
required under Panama Law or provided under the Company's certificate of
incorporation and bylaws or any agreement any Indemnified Person may have with
the Company, in each case, as in effect on the date of the Merger Agreement;
provided that such indemnification will be subject to any limitation imposed
from time to time under applicable law.
For six years after the Effective Time, the Surviving Corporation will
provide officers' and directors' liability insurance in respect of acts or
omissions occurring prior to the Effective Time covering each such Indemnified
Person currently covered by the Company's officers' and directors' liability
insurance policy on terms with respect to coverage and amount no less
favorable than those of such policy in effect on the date of the Merger
Agreement; provided that, in satisfying its obligation under this covenant,
the Surviving Corporation will not be obligated to pay premiums in excess of
200% of the amount per annum the Company paid in its last full fiscal year.
The rights of each Indemnified Person under this covenant shall be in
addition to any rights such person may have under the certificate of
incorporation or bylaws of the Company or any of its subsidiaries, under
Panama Law or under any agreement any Indemnified Person may have with the
Company. These rights shall
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survive consummation of the Merger and are intended to benefit, and shall be
enforceable by, each Indemnified Person.
Best Efforts. Pursuant to the terms and conditions of the Merger Agreement,
the Company and Parent shall use their best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate the
transactions contemplated by the Merger Agreement.
Public Announcements. The Merger Agreement provides that Parent and the
Company will consult with each other before issuing any press release or
making any public statement with respect to the Merger Agreement and the
transactions contemplated thereby and, except as may be required by applicable
law or any listing agreement with any national securities exchange, will not
issue any such press release or make any such public statement prior to such
consultation.
Other
Parent will not, and will cause its subsidiaries not to, directly or
indirectly, take any action to knowingly cause the Company to violate its
representations, warranties or covenants under the Merger Agreement.
Conditions of the Offer
Notwithstanding any other provision of the Offer, Purchaser shall not be
required to accept for payment or, subject to any applicable rules and
regulations of the Commission, including Rule 14e-1(c) promulgated under the
1934 Act (relating to Purchaser's obligation to pay for or return tendered
Shares promptly after expiration or termination of the Offer), pay for any
Shares, and may, subject to the terms of the Merger Agreement, terminate the
Offer, if (i) at the expiration of the Offer, the Minimum Condition has not
been satisfied or (ii) at any time on or after May 7, 1999 and prior to the
expiration of the Offer, any of the following conditions exist:
(a) any injunction, judgment, order or decree of a court of competent
jurisdiction shall have been entered and not withdrawn or any law or
regulation shall exist that prohibits the consummation of the Offer or the
Merger; or
(b) the Company shall have breached its representations and warranties
set forth in the Merger Agreement or failed to perform any of its
obligations, covenants or agreements under the Merger Agreement (other than
any breaches or failures to perform that, in the aggregate, do not have a
material adverse effect on the Company); or
(c) the Merger Agreement shall have been terminated in accordance with
its terms.
Except for the Minimum Condition (which may be waived only with the consent
of the Company, Parent and Purchaser), the foregoing conditions are for the
sole benefit of Parent and Purchaser and may, subject to the terms of the
Merger Agreement, be waived by Parent and Purchaser in whole or in part at any
time and from time to time in their discretion.
Conditions to the Merger
The Merger Agreement provides that the obligations of the Company, Parent
and Purchaser to consummate the Merger are subject to the satisfaction of the
following conditions:
(a) the Merger Agreement shall have been approved and adopted by the
shareholders of the Company in accordance with Panama Law and applicable
listing requirements;
(b) Purchaser shall have purchased Shares pursuant to the Offer;
(c) no preliminary or permanent injunction or other order, decree or
ruling by any court or governmental body or regulatory authority in the
United States or the Republic of Panama, which prevents
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consummation of the Merger or the payment of the Merger Consideration, will
have been issued and remain in effect (each party agreeing to use its
reasonable efforts to have any such injunction, order, decree or ruling
lifted); and
(d) no statute, rule or regulation of any government or governmental
agency in the United States or the Republic of Panama will prevent the
consummation of the Merger or the payment of the Merger Consideration or
make the consummation of the Merger or the payment of the Merger
Consideration illegal.
Termination
The Merger Agreement provides that it may be terminated and the Merger may
be abandoned at any time prior to the Effective Time (notwithstanding any
approval of the Merger Agreement by the shareholders of the Company):
(a) by mutual written agreement of the Company and Parent;
(b) by either the Company or Parent, if:
(i) the Offer has not been consummated on or before July 31, 1999,
provided that the right to terminate the Merger Agreement under this
subparagraph will not be available to any party whose breach of any
provision of the Merger Agreement results in the failure of the Offer
to be consummated by such time; or
(ii) there shall be any law or regulation that makes acceptance for
payment of, and payment for, the Shares pursuant to the Offer or
consummation of the Merger illegal or otherwise prohibited or any
judgment, injunction, order or decree of any court or governmental body
having competent jurisdiction enjoining Purchaser from accepting for
payment of, and paying for, the Shares pursuant to the Offer or Company
or Parent from consummating the Merger and such judgment, injunction,
order or decree shall have become final and nonappealable; provided,
however, that the party seeking to terminate the Merger Agreement under
this subparagraph will have used commercially reasonable best efforts
to remove any such judgment, injunction, order or decree; or
(c) by Parent, if prior to the acceptance for payment of Shares under the
Offer, (i) the Company Board will have failed to recommend, or will have
withdrawn or modified in a manner adverse to Parent its approval or
recommendation of the Offer or the Merger or (ii) the Company will have
failed to perform in all material respects its obligations hereunder.
The Merger Agreement provides that if it is terminated, it will become void
and of no effect with no liability on the part of any party (or any
shareholder, director, officer, employee or other agent or advisor of such
party) to the other party thereto, except that, if such termination is the
result from the willful failure of either party to fulfill a condition to the
performance of the obligations of the other party or the failure of either
party to perform a covenant under the Merger Agreement, such party shall be
fully liable for any and all liabilities and damages incurred or suffered by
the other party as a result of such failure.
Fees and Expenses
Except as provided in the following sentence, all costs and expenses
incurred in connection with the Merger Agreement shall be paid by the party
incurring such cost or expense.
The Merger Agreement provides that the Company will pay Parent a fee in
immediately available funds equal to $10 million promptly, but in no event
later than two business days, after a termination of the Merger Agreement by
Parent pursuant to subparagraph (c) above under "Termination".
Amendments and Waivers
Any provision of the Merger Agreement may be amended or waived prior to the
Effective Time if, but only if, such amendment or waiver is in writing and is
signed, in the case of an amendment, by each party to the
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Merger Agreement or, in the case of a waiver, by each party against whom the
waiver is to be effective; provided that, after the adoption of the Merger
Agreement by the Company's shareholders and without their further approval, no
such amendment or waiver shall reduce the amount or change the kind of
consideration to be received in exchange for any Shares.
No failure or delay by any party in exercising any right, power or privilege
under the Merger Agreement will operate as a waiver thereof nor will any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies provided in the Merger Agreement shall be cumulative and not
exclusive of any rights or remedies provided by law.
Interests of Certain Persons in the Offer and the Merger
In considering the recommendation of the Company Board, shareholders of the
Company should be aware that certain officers of the Company and members of
the Company Board have certain interests that present actual or potential
conflicts of interest in connection with the Offer and the Merger. The
Independent Committee and the Company Board were aware of these actual or
potential conflicts of interest and considered them in connection with such
recommendation.
Independent Committee Fees
At a meeting of the Company Board held on March 11, 1999, the Company Board
considered a proposal to pay the Chairman of the Independent Committee a fee
of $20,000 and the other members of the Independent Committee a fee of $10,000
for their services as members on the Independent Committee in evaluating any
proposed business combination between Parent and the Company, in addition to
any other fees payable to them as directors of the Company or as members of
the Independent Committee. The Company Board determined to postpone its action
on this proposal, pending confirmation from the Company's General Counsel that
the proposed fees were within the range of fees paid to members of independent
or special committees involved in similar transactions. The General Counsel of
the Company subsequently confirmed that the fee proposal was within such
range. The Company Board expects to act on the fee proposal at its meeting
scheduled for June 4, 1999.
Finance Committee Fees
At a meeting of the Parent Board held on March 9, 1999, the Parent Board
considered a proposal to pay Mr. Johnstone, the Chairman of the Finance
Committee of the Parent Board (the "Finance Committee"), a fee of $20,000 and
Mr. Burguieres a fee of $17,500 and each of the other members of the Finance
Committee a fee of $10,000 for their services as members on the Finance
Committee in evaluating any proposed business combination between Parent and
the Company, in addition to any other fees payable to them as directors of the
Parent or as members of the Finance Committee. The Parent Board determined to
postpone its action on this proposal, pending confirmation from the Parent's
General Counsel that the proposed fees were within the range of fees paid to
members of independent or special committees involved in similar transactions.
The General Counsel of the Parent subsequently confirmed that the fee proposal
was within such range. The Parent Board expects to act on the fee proposal at
its meeting scheduled for June 2, 1999.
Indemnification Agreements
On March 11, 1999, the Company entered into indemnification agreements with
each of its directors (the "Indemnification Agreements"). The Indemnification
Agreements provide that the Company will indemnify and hold harmless any
director of the Company to the fullest extent permitted by the Company's
Certificate of Incorporation or Bylaws, Panama Law or other applicable law, as
in effect as of the date of the agreement or to such greater extent as the
Company's Certificate of Incorporation or Bylaws, Panama Law or applicable law
may thereafter permit, from and against all losses, liabilities, claims,
damages, judgments, penalties, fines, amounts paid in settlement and expenses
(including attorneys' fees) arising out of a business combination transaction
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between Parent and the Company. The Indemnification Agreements further provide
that, in the event of any threatened, or pending action, suit or proceeding
arising out of a business combination between Parent and the Company in which
a director is a party and that may give rise to a right of indemnification
under the Indemnification Agreements or in which a director is involved as a
witness, following written request by such person, the Company will promptly
pay to such person amounts to cover expenses reasonably incurred by such
person in such proceeding in advance of its final disposition upon the receipt
by the Company of (i) a written undertaking executed by or on behalf of such
person providing that such person will repay the advance if it is ultimately
determined that such person is not entitled to be indemnified by the Company
as provided in the Indemnification Agreements and (ii) satisfactory evidence
as to the amount of such expenses. The Indemnification Agreements also include
provisions meant to facilitate the indemnitee's receipt of benefits. These
provisions cover, among other things: (i) specification of the method of
determining entitlement to indemnification and the selection of independent
counsel that will in some cases make such determination, (ii) specification of
certain time periods by which certain payments or determinations must be made
and actions must be taken and (iii) the establishment of certain presumptions
in favor of an indemnitee. The benefits of certain of these provisions are
available to an indemnitee only if there has been a change in control of the
Company (as defined in the Indemnification Agreements). On May 6, 1999, the
Company entered into indemnification agreements with Messrs. Johnson, Burdick,
O'Keefe and Ritchie substantially the same as the agreements entered into on
March 11, 1999, except that rights to indemnification and advancement of
expenses thereunder cover losses, liabilities, claims, damages, judgments,
penalties, fines, amounts paid in settlement and expenses incurred by reason
of their status as a director of the Company and are not limited to those
arising out of a business combination between Parent and the Company.
Stock Options, Restricted Stock and Performance Shares
Certain Executive Officers and Directors hold awards of Stock Options,
Restricted Stock and Performance Shares. The treatment of those awards is
described above under "The Merger Agreement--Stock Options", "--Restricted
Shares" and "--Performance Shares", respectively.
Consummation of Offer and Change of Control. The Company previously granted
to its directors (including members of the Independent Committee) and
executive officers (including Roger E. Tetrault, Daniel R. Gaubert and S.
Wayne Murphy, who are also executive officers of Parent) Company Stock
Options, Restricted Shares and Performance Shares under the 1994 Plan and
Directors Plan. Under these plans, a "change in control" of the Company
results in all Company Stock Options becoming fully exercisable, all transfer
restrictions and forfeiture provisions on the Restricted Shares lapsing and
the conversion of all Performance Shares into a pro-rata cash payout based
upon the assumed achievement of performance objectives at target levels (if
not otherwise exceeded) and the length of time elapsed during their two-year
measurement period through the Effective Time. The consummation of the Offer
and Merger will constitute an effective change in control of the Company.
Under the Merger Agreement, each Company Stock Option outstanding as of the
Effective Time will become an Adjusted Option, and each person who holds
Restricted Shares or Performance Shares will be given the opportunity to
receive replacement stock awards in Parent Stock, in lieu of the cash payment
that such person would otherwise be entitled to receive at the Effective Time.
See "The Merger Agreement--Stock Options", "--Restricted Shares" and "--
Performance Shares," respectively.
Beneficial Ownership of the Shares
Schedules I and II of the Purchaser's Offer to Purchase dated May 13, 1999,
a copy of which is filed as Exhibit (a)(4) to this Schedule 14D-9 set forth
information concerning beneficial ownership of the Shares as of March 31, 1999
by each of the directors and executive officers of the Company and Parent and
Purchaser, respectively.
No director or executive officer of Parent (other than Messrs. Tetrault,
Gaubert, Murphy, Rawle, Howard and Woolbert, who are also officers or
directors of the Company) owns any Shares. The Company has been informed that
all of its directors and executive officers intend to tender all Shares
beneficially owned by each of
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them pursuant to the Offer, other than Shares that may be acquired upon the
exercise of Company Stock Options, Restricted Shares and Performance Shares,
which are subject to certain arrangements under the Merger Agreement. See "The
Merger Agreement."
Parent owns approximately 63% of the outstanding Shares and all of the
Series A $2.25 Cumulative Convertible Preferred Stock, $.01 par value, of the
Company (the "Preferred Stock"), which collectively represents approximately
66% of the voting stock of the Company.
Related Party Transactions
Parent, either directly or through its subsidiaries and affiliates (other
than the Company and its subsidiaries), has provided and, subject to the
continuing approval of the Independent Committee, will continue to provide
various services to the Company and its subsidiaries in an effort to reduce
duplicative costs, overhead and resources.
Services Agreement and Other Administrative Charges. Under the terms of a
services agreement between Parent and the Company, Parent provides certain
services to the Company, based primarily upon a predetermined annual fee for
each such service. Such services include accounting and financial reporting,
treasury and financing, tax administration and research, human resources, risk
management, public and investor relations, executive officer, legal and
corporate secretary, business planning and analysis, purchasing and
procurement, and project management services. For fiscal years 1996, 1997 and
1998, the Company paid to Parent approximately $11.9 million, $11.9 million
and $13.1 million, respectively, under the Services Agreement.
For fiscal years 1996, 1997 and 1998, Parent and other affiliated entities
also provided other administrative services, including investment portfolio
management, data processing development, telecommunication and lobbying
services, and shared office space to the Company for which the Company paid to
Parent approximately $6.6 million, $6.6 million and $5.2 million,
respectively.
The Independent Committee reviews the services provided by Parent to the
Company and its subsidiaries on an annual basis. After consultation with
Parent and giving due consideration to the legal obligations of Parent, the
Company may seek the provision of any of the above described services from
third parties if the Company Board, after receiving the recommendation of the
Independent Committee, determines that obtaining such services from third
parties would be in the best interests of the Company.
Other Arrangements and Transactions. For fiscal years 1996, 1997 and 1998,
the Company and its subsidiaries purchased from Parent and other affiliated
entities approximately $24.3 million, $16.2 million and $8.9 million of other
services on an as requested basis, the costs of which were based on charges to
unrelated parties for similar work. Such services relate primarily to
technology development and research, and engineering, procurement and
construction services on a power plant project. For fiscal years 1996, 1997
and 1998, the Company and its subsidiaries provided marine construction and
engineering services to Parent and other affiliated entities, on the same
basis, for which the Company recognized revenue in the amount of approximately
$45.2 million, $32 million and $22 million, respectively.
Parent, through wholly-owned insurance subsidiaries, reinsures substantially
all of the Company's employee liability exposure and insures significant
deductibles under the Company's other insurance programs. The insurance
premiums charged by such insurance subsidiaries of Parent are primarily based
on claims experience and forecasted future activities of the Company and its
subsidiaries. Management believes that this approach is more cost-effective
than other alternatives as there is generally no commercial market for
insurance on the same economic terms for these types of exposures.
The Company has acquired several businesses from Parent, including in fiscal
year 1998, the Parent's 60% interest in Tallares Navales del Golfo S.A. de
C.V., a shipbuilding and repair business in Vera Cruz, Mexico, for
approximately $19.7 million.
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During fiscal year 1997, the Company paid a $231 million note payable to
Parent.
All of these transactions were negotiated at arm's-length by the parties
and, to the extent required, approved by the Independent Committee.
Series A Preferred Stock
During each of fiscal years 1996, 1997 and 1998, Parent as the sole holder
of all of the Preferred Stock received quarterly dividend payments totaling
$7.2 million from the Company.
Confidentiality Agreement
On February 17, 1999, Parent and the Company entered into a confidentiality
agreement (the "Confidentiality Agreement"), under which Parent agreed to
provide to the Company certain confidential information. Pursuant to the
Confidentiality Agreement, the Company agreed that it and its representatives
would treat all nonpublic information received from Parent under the
Confidentiality Agreement in confidence, except to the extent that disclosure
would be required in connection with a transaction under applicable securities
laws and as would be consistent with applicable fiduciary duties. A copy of
the Confidentiality Agreement is filed as Exhibit (c)(2) to this Schedule 14D-
9 and incorporated herein by reference, and the foregoing summary of the
Confidentiality Agreement is qualified in its entirety by reference thereto.
Item 4--The Solicitation or Recommendation.
(a) Recommendation of the Board of Directors.
On May 5, 1999, the Independent Committee met to consider the proposed
transaction. Members of the Independent Committee discussed the terms of the
Merger Agreement, and representatives of Simmons & Company International
("Simmons") reviewed their analysis of the fairness of the proposal and
rendered an oral opinion (subsequently confirmed by delivery of a written
opinion dated May 6, 1999, a copy of which is attached as Annex A to this
Schedule 14D-9) to the effect that, as of such date and based upon and subject
to certain matters stated in such opinion, the consideration to be paid in the
Offer and the Merger was fair to the holders of Shares (other than Parent)
from a financial point of view. The Independent Committee then unanimously
determined that the terms of the Offer and the Merger are fair to and in the
best interests of the Company's shareholders (other than Parent), and
unanimously voted to recommend that the Company Board approve the Merger
Agreement and the transactions contemplated thereby, including the Offer and
the Merger.
On May 6, 1999, the Company Board met to consider the Merger Agreement and
the transactions contemplated thereby. Mr. Bill Johnson (Chairman of the
Independent Committee) described the terms of the Merger Agreement and
indicated that the Independent Committee had unanimously approved the Merger
Agreement and recommended that the Company Board approve the Merger Agreement.
Representatives of Simmons described their review and analysis of the
transaction and confirmed its oral fairness opinion provided to the
Independent Committee on May 5, 1999. Representatives of Baker & Botts, L.L.P.
("Baker & Botts") then described the principal terms of the Merger Agreement.
After a full discussion, the Company Board accepted the recommendation of the
Independent Committee and (i) determined that the terms of the Offer and the
Merger were fair to and in the best interests of the Company's shareholders
(other than Parent), (ii) approved the Merger Agreement and authorized the
execution and delivery thereof and (iii) determined to recommend that the
shareholders of the Company tender their Shares pursuant to the Offer and
approve the Merger Agreement. Prior to participating in the determinations and
recommendations of the Company Board, the members of the Company Board who
were also directors or officers of Parent identified their affiliations with
Parent and noted that as a result of such affiliations they had a potential
conflict of interest. As a result, Roger E. Tetrault, Robert L. Howard and
Richard E. Woolbert elected to abstain. The Company's recommendation is
contained in its letter to stockholders dated May 7, 1999. A copy of such
letter, which will accompany this Schedule 14D-9, is attached hereto as
Exhibit (a)(2) and is incorporated by reference herein.
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(b) Background of the Offer; Reasons for the Recommendation.
Background of the Offer; Recommendation of the Independent Committee and the
Company Board
On January 31, 1995, Parent and Offshore Pipelines, Inc. ("OPI") consummated
a transaction (the "OPI Merger") pursuant to which Parent contributed its
worldwide marine construction businesses to the Company, a newly-formed Panama
corporation, and OPI was merged into a wholly-owned subsidiary of the Company.
As a result of the OPI Merger, the shareholders of OPI acquired approximately
36% of the outstanding Shares, and Parent retained the remaining 64% of the
outstanding Shares and all of the Preferred Stock.
In connection with the OPI Merger, the Company Board established the
Independent Committee, comprised of directors who were not present or former
officers or employees of Parent or the Company as an oversight committee to
review the fairness to the Company and its public shareholders of certain
transactions between the Company and Parent. At the same time, Parent and the
Company agreed that the Company would not take certain actions without the
approval of the Independent Committee or the affirmative vote of the holders
of a majority of the outstanding voting stock of the Company owned by persons
other than Parent and its subsidiaries. Although this agreement expired in
January 1998, the Independent Committee continued to review and approve all
significant transactions between the Company and Parent.
Over the last four years, representatives of the Company, the Independent
Committee and Parent have had general conversations from time to time
concerning the Company's strategic alternatives and Parent's investment in the
Company.
At a meeting of the Company Board on November 11, 1998, Mr. Roger E.
Tetrault, Chairman and Chief Executive Officer of Parent and the Company,
advised the Company Board that Parent was considering various strategic
alternatives, including the possible acquisition of the publicly-held Shares.
No terms were discussed. Mr. Tetrault identified possible benefits that could
result from a combination of the two companies. He also indicated that if
Parent decided to make such a proposal, it would likely be made in late
February or early March 1999 and that Parent would advise the Company Board
upon completion of its review. The Company Board determined that any such
proposal would be considered by the Independent Committee. The Independent
Committee consisted of Messrs. William J. (Bill) Johnson (Chairman), Rick L.
Burdick, Sean C. O'Keefe, Cedric E. Ritchie and Robert L. Howard. It was
determined that Mr. Howard would recuse himself from participation on the
Independent Committee in connection with its consideration of any proposal
made by Parent because of his position as a member of the Parent Board. None
of the four members of the Independent Committee who participated in the
consideration of the proposals from Parent were present or former employees,
officers or directors of Parent or employees or officers of the Company.
On November 13, 1998, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") made a presentation to the Parent Board about various
strategic alternatives, including a possible acquisition by Parent of the
publicly-held Shares of the Company. During the meeting, the Parent Board
empaneled a Finance Committee, consisting of Messrs. John W. Johnstone, Jr.
(Chairman), Philip J. Burguieres, William McCollam, Jr. and Bruce DeMars (the
"Finance Committee").
On November 25, 1998, the Finance Committee discussed several strategic
initiatives of Parent. The Finance Committee reaffirmed its commitment to
complete its review of all of the strategic initiatives currently under
consideration by the Finance Committee, prior to making a decision whether or
not to seek to acquire the publicly-held Shares of the Company. Each member of
the Finance Committee confirmed that he did not own any Shares.
In December 1998, Parent engaged Davis Polk & Wardwell ("Davis Polk") as its
legal advisor with respect to the strategic initiatives under review.
In early December 1998, Mr. Tetrault suggested that the Independent
Committee should consider engaging financial and legal advisors in
anticipation of a possible proposal from Parent.
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The Independent Committee engaged Baker & Botts as its legal advisor on
December 17, 1998 and Simmons as its financial advisor on January 5, 1999.
On January 4, 1999, the Finance Committee concluded that it should analyze
and develop alternatives for acquiring the publicly-held Shares. On January
20, 1999, the Finance Committee engaged Merrill Lynch as its financial
advisor.
The Independent Committee met with its legal and financial advisors in
Houston, Texas, on January 12, 1999. At that meeting, Baker & Botts addressed
the Independent Committee concerning their duties and responsibilities under
applicable law. The members of the Independent Committee acknowledged that in
considering and negotiating any transaction with Parent their responsibility
was to act in the best interests of the Company's public shareholders. The
members of the Independent Committee determined that consideration of any
business combination between the Company and Parent was within the Independent
Committee's scope of authority, but indicated that the Company Board should
consider a resolution confirming the Independent Committee's authority to act
on any such transaction. During this meeting, Simmons outlined the scope of
their anticipated activities in advising the Independent Committee, including
providing a financial analysis of any proposals which may be received from
Parent and an evaluation of possible alternative transactions, providing, if
requested, a fairness opinion as to a business combination between the Company
and Parent and assisting the Independent Committee in negotiating with Parent.
The Independent Committee decided to wait until it received a proposal from
Parent before beginning discussions with Parent.
On February 1, 1999, the Finance Committee met with Merrill Lynch to discuss
alternatives for acquiring the publicly-held Shares of the Company. Merrill
Lynch reviewed with the Finance Committee its study and evaluation of the
Company, Parent and several proposed transactions, which included analyses of
comparable companies, comparable transactions, the values of the Company and
Parent, the relative values of the two companies, premiums in a stock for
stock transaction and premiums in similar public transactions. This
information was presented on the following day to the Parent Board.
On February 17, 1999, Parent and the Company executed a confidentiality
agreement (the "Confidentiality Agreement"), under which Parent agreed to
provide to the Company certain confidential information relating to its
operations and the Company agreed to keep all nonpublic information received
from Parent in confidence, subject to certain exceptions.
On March 4, 1999, Simmons met with Messrs. Johnson and O'Keefe to discuss
their analysis to date, including preliminary analysis of the business and
prospects of the Company and Parent, analysis of the values of the Company and
Parent, the relative values of the two companies, premiums in a stock
transaction, and possible alternative transactions for the holders of the
Shares. On March 9, 1999, Simmons met with Mr. Burdick to review the foregoing
preliminary analysis.
At a meeting on March 9, 1999, the Finance Committee considered various
alternatives for acquiring the publicly-held Shares and determined to make a
specific proposal to the Independent Committee.
On March 10, 1999, the Finance Committee delivered its initial proposal to
the Independent Committee. The proposal involved a merger of a newly-formed
subsidiary of Parent into the Company, whereby each Share not owned by Parent
would become 1.15 shares of Parent Stock and the Company would become a
wholly-owned subsidiary of Parent (the "Initial Proposal"). The Initial
Proposal was disclosed to the public on March 10, 1999. In response, the
Independent Committee announced that it would consider the Initial Proposal.
On March 11, 1999, the Company Board adopted resolutions confirming the
Independent Committee's authority to act with respect to any proposal for a
business combination between Parent and the Company.
On March 15, 1999, representatives of Merrill Lynch and Simmons met to
discuss the Initial Proposal. During this meeting, Merrill Lynch presented an
overview of the merits of the Initial Proposal. Merrill Lynch
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and Simmons discussed, among other things, the small public float in the
Shares, the confusion in the market perception of Parent and the rationale for
the combination (including cost savings and increased analyst and
institutional interest in Parent).
Because the Initial Proposal involved an exchange of stock, both companies
and their advisors requested and undertook due diligence. On March 17, 1999,
management of Parent made a presentation and answered questions posed by the
Company's advisors. On March 22, 1999, the Company's management made a similar
presentation. Further due diligence was conducted during the following weeks.
The Independent Committee met with its advisors on April 1, 1999. At that
meeting, representatives of Baker & Botts discussed the duties and
responsibilities of the members of the Independent Committee in connection
with their consideration of a business combination with Parent, stressing the
importance of actively and independently representing the interests of the
minority shareholders of the Company. Representatives of Simmons began a
discussion of the Initial Proposal by indicating that a valuation of Parent
was complicated because of Parent's contingent liabilities. Simmons indicated
that these contingent liabilities were not easily quantified, but should be
considered in any evaluation of Parent. Simmons then reviewed with the
Independent Committee its study and evaluation of the Company, Parent and the
Initial Proposal, which included analyses of comparable companies, comparable
transactions, ranges of values for the Company and Parent, the relative values
of the two companies, premiums in a stock for stock transaction and premiums
in similar public transactions and possible alternative transactions. After an
extensive discussion of the Simmons analysis and the terms of the Initial
Proposal, the Independent Committee determined that the Initial Proposal was
inadequate because of, among other things, the substantial increase in the
market price for oil service stocks since the date the Initial Proposal was
delivered and the Independent Committee's belief that sufficient value had not
been given to the Company's substantial excess cash. The Independent Committee
authorized Mr. Bill Johnson (Chairman of the Independent Committee) to contact
Mr. John Johnstone (Chairman of the Finance Committee) to arrange a meeting
between the financial advisors of each Committee.
Unable to reach Mr. Johnstone, Mr. Johnson contacted Mr. Philip Burguieres,
another member of the Finance Committee, on April 1, 1999 to inform him that
the Independent Committee had determined that the Initial Proposal was
inadequate and to suggest that Simmons and Merrill Lynch meet to discuss their
valuations. Mr. Burguieres agreed to authorize Merrill Lynch to meet with
Simmons, and Mr. Johnson instructed Simmons to arrange the meeting.
On April 6, 1999, Simmons and Merrill Lynch met to discuss their respective
valuations of the Company and Parent. They discussed the Initial Proposal and
alternatives, including combinations that would involve cash and stock or all
cash as consideration. Simmons indicated that it could not recommend the
Initial Proposal. Merrill Lynch left the meeting with the impression that
Simmons would be willing to recommend to the Independent Committee an offer of
1.15 shares of Parent Stock plus $4 in cash for each Share.
On April 8, 1999, the Finance Committee met to review the results of the
meeting between Merrill Lynch and Simmons. Based on Merrill Lynch's
understanding of the position of the Independent Committee, the Finance
Committee decided to increase its offer to 1.15 shares of Parent Stock plus
$1.50 in cash for each Share.
On April 9, 1999, Merrill Lynch informed Simmons that the Finance Committee
had increased its offer to 1.15 shares of Parent Stock plus $1.50 in cash per
Share. Merrill Lynch also told Simmons that the Finance Committee was very
concerned about the possibility that any transaction with the Company might
cause dilution to Parent's per share earnings. Simmons communicated this to
the Independent Committee, which instructed Simmons to develop an analysis of
the dilution to Parent's per share earnings assuming that the Company's excess
cash was invested at a rate of return greater than money market rates of
return.
On April 9, 1999, Baker & Botts and the Independent Committee received from
Davis Polk an initial draft of a proposed merger agreement.
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Concerned that the valuations of the two committees may still be too far
apart for a transaction to materialize, the Independent Committee instructed
Simmons to contact Merrill Lynch to determine if Parent would consider selling
its Shares and, if so, at what price. Simmons was informed that Parent was not
interested in soliciting offers to purchase its Shares.
On April 13, 1999, the Independent Committee convened by telephone with its
advisors. Simmons' dilution analysis was reviewed and discussed. The dilution
analysis indicated that under certain rate of return assumptions, Parent could
significantly reduce its pro forma projected earnings per share dilution by
investing the Company's excess cash in capital projects or acquisitions rather
than continuing to earn money market rates of return. The Independent
Committee also discussed its concern about the proper valuation of Parent's
contingent liabilities. After this discussion, the Independent Committee
decided to present to the Finance Committee a counteroffer of 1.15 shares of
Parent Stock and $5 in cash per Share. The Independent Committee also
instructed Baker & Botts on several points to be included in the Independent
Committee's comments on the proposed merger agreement, the most important of
which was that the proposed transaction should be conditioned upon the
affirmative vote of holders of a majority of the outstanding Shares other than
Shares beneficially owned by Parent.
On April 14, 1999, Simmons met with Merrill Lynch to review the dilution
analysis and present the Independent Committee's counteroffer. Simmons
suggested that members of the two committees and their financial advisors meet
to discuss their differences and try to reach a resolution.
On April 15, 1999, the Independent Committee's comments on the initial draft
of the merger agreement were delivered to Davis Polk.
On April 16, 1999, the Finance Committee met to discuss the counteroffer
from the Independent Committee. At the end of the meeting, the Finance
Committee asked its advisors to seek clarification of the terms of the
counteroffer from the advisors to the Independent Committee.
On April 16, 1999, Merrill Lynch and Simmons discussed the terms of the
counteroffer.
On April 19, 1999, the Finance Committee reconvened to hear the report from
its advisors concerning their discussions with the advisors to the Independent
Committee. After extended discussions, the Finance Committee unanimously
determined to terminate discussions with the Independent Committee.
Promptly after the meeting, Davis Polk informed Baker & Botts that the
Finance Committee had decided to terminate the merger discussions with the
Independent Committee because of a failure to reach agreement on the financial
terms of the transaction. A press release to that effect was issued the
following day.
After discussions with individual members of the Independent Committee and
with its legal and financial advisors, Mr. Bill Johnson contacted Mr. Philip
Burguieres on April 22, 1999 in an attempt to restart discussions between the
two committees.
On April 29, 1999 Mr. Johnson and Simmons met to discuss certain analyses
Simmons had prepared, including analysis of the pro forma effect on Parent's
projected earnings per share of an all cash acquisition of the publicly-held
Shares at different transaction values.
On April 30, 1999, the Finance Committee convened and decided to authorize
Mr. Burguieres to meet with Mr. Johnson.
On May 1, 1999, Mr. Burguieres and Merrill Lynch met to discuss certain
analyses Merrill Lynch had prepared, including an analysis of the pro forma
effect on Parent's projected earnings per share of an all cash acquisition of
the publicly-held Shares at various consideration values.
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Messrs. Johnson and Burguieres met on May 4, 1999. They discussed the recent
increase in the price of the Shares, the valuation of the Company's excess
cash and the opportunity to earn higher returns, the possible dilution to
Parent's earnings per share and other factors relating to value. After further
discussion, Messrs. Johnson and Burguieres agreed to recommend to their
respective committees an all cash transaction at $35.62 per Share.
Later that day, the Finance Committee met to review the report and
recommendation from Mr. Burguieres. Merrill Lynch advised the Finance
Committee that they were of the opinion that the consideration proposed to be
paid to the holders of Shares (other than Parent) was fair from a financial
point of view to Parent. Based on the foregoing, the Finance Committee voted
unanimously to recommend the $35.62 all cash proposal to the full Board of
Parent.
The Independent Committee met by telephone during the afternoon of May 4,
1999 with its legal and financial advisors. Mr. Johnson presented the proposal
to the Independent Committee, and Simmons provided certain updated analyses of
the Company and the terms of the proposed transaction, including analyses of
the premiums and multiples implied by the $35.62 per Share offer and
comparisons of these results to comparable companies and comparable
transactions. Simmons informed the Independent Committee that it was prepared
to deliver a fairness opinion with respect to a transaction priced at $35.62
per Share. Members of the Independent Committee noted that an all cash
transaction removed the risk associated with Parent's contingent liabilities,
a major concern raised by the Initial Proposal. Representatives of Baker &
Botts informed the Independent Committee of discussions with Davis Polk
regarding the revised terms of the proposed merger. The Independent Committee
instructed Baker & Botts regarding its comments on the revised merger
agreement, including that the proposed transaction should be structured as a
two step transaction with a tender offer followed by a merger and that the
tender offer should be conditioned upon there being validly tendered and not
withdrawn prior to the expiration of the tender offer a number of Shares equal
to at least a majority of the outstanding Shares other than Shares
beneficially owned by Parent. After further discussion, the Independent
Committee decided to defer action to a later date allowing the Independent
Committee members an additional opportunity to consider the proposal and
further review the extensive materials provided by Simmons during the
negotiation process.
On May 5, 1999, the full Board of Parent met to consider the $35.62 all cash
proposal, the recommendation of the Finance Committee and the advice of
Merrill Lynch and Davis Polk. After a full discussion, the Board of Parent
approved the proposal subject to Mr. Tetrault being satisfied that the
financing necessary to consummate the transaction was available. Three
directors who were also directors of the Company (Messrs. Tetrault, Woolbert
and Howard) indicated that they were in favor of the proposal but, on advice
of counsel, abstained from voting.
Promptly thereafter, Parent commenced discussions with Citibank about
providing a $525 million facility to finance the transaction. On May 7, 1999,
Citibank issued to Parent a commitment letter for the financing. Mr. Tetrault
determined that he was now satisfied that the necessary financing was
available.
On May 5, 1999, the Independent Committee met to again consider the proposed
transaction. Members of the Independent Committee discussed the terms of the
Merger Agreement, and representatives of Simmons reviewed their analysis of
the fairness of the proposal and rendered an oral opinion (subsequently
confirmed by delivery of a written opinion dated May 6, 1999) to the effect
that, as of such date and based upon and subject to certain matters stated in
such opinion, the consideration to be paid in the Offer and the Merger was
fair to the holders of Shares (other than Parent) from a financial point of
view. The Independent Committee then unanimously determined that the terms of
the Offer and the Merger are fair to and in the best interests of the
Company's shareholders (other than Parent), and unanimously voted to recommend
that the Company Board approve the Merger Agreement and the transactions
contemplated thereby, including the Offer and the Merger. At the meeting, the
Independent Committee requested that Simmons update its analysis for purposes
of a summary presentation and confirmation of its oral opinion at a meeting of
the Company Board to be held on the following day.
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On May 6, 1999, the Company Board met to consider the Merger Agreement and
the transactions contemplated thereby. Mr. Johnson described the terms of the
Merger Agreement and indicated that the Independent Committee had unanimously
approved the Merger Agreement and recommended that the Company Board approve
the Merger Agreement. Representatives of Simmons described their review and
analysis of the transaction and confirmed its oral fairness opinion provided
to the Independent Committee on May 5, 1999. Representatives of Baker & Botts
then described the principal terms of the Merger Agreement. After a full
discussion, the Company Board accepted the recommendation of the Independent
Committee and (i) determined that the terms of the Offer and the Merger were
fair to and in the best interests of the Company's shareholders (other than
Parent), (ii) approved the Merger Agreement and authorized the execution and
delivery thereof and (iii) determined to recommend that the shareholders of
the Company tender their Shares pursuant to the Offer and approve the Merger
Agreement. Prior to participating in the determinations and recommendations of
the Company Board, the members of the Company Board who were also directors or
officers of Parent identified their affiliations with Parent and noted that as
a result of such affiliations they had a potential conflict of interest. As a
result, Roger E. Tetrault, Robert L. Howard and Richard E. Woolbert elected to
abstain.
Fairness of the Offer and the Merger
Independent Committee. In reaching its determinations referred to above, the
Independent Committee considered the factors listed below, each of which, in
the view of the Independent Committee, supported such determinations. The
following discussion of the factors considered by the Independent Committee is
not intended to be exhaustive but summarizes the material factors considered.
(i) The fact that the per Share price ($35.62) to be paid in the Offer
and the Merger represents (a) a premium of approximately 12.6% over the
closing price of the Shares ($31.63) on the New York Stock Exchange
("NYSE") on May 4, 1999 (the day prior to the Independent Committee's
recommendation to the Company Board) and an effective premium of 21.4% over
such price per Share if no premium were attributed to the Company's excess
cash, estimated by Simmons at $12.95 per share (Simmons determined the
effective premium by subtracting the excess cash per share from both the
$35.62 Offer Price and from the closing price of the Shares on May 4, 1999
and calculating the premium of the adjusted Offer Price to the adjusted
price on May 4, 1999), (b) a premium of approximately 19.2% over the per
Share price estimated by Simmons ($29.89) that would have prevailed on May
4, 1999, recognizing the recent significant recovery in oil and gas service
industry equities but excluding any speculative activity occasioned by the
recent negotiations had been built into the Share price and the effective
premium (calculated in a similar manner as above) of 33.8% over such price
if no premium were attributed to the Company's excess cash, and (c) a
premium of 58.8% over the 20-day average trading price of the Shares
through March 9, 1999 ($22.43) (the day before the announcement of the
Initial Proposal before oil service stocks began their general uptrend
associated with improved crude prices) and the effective premium
(calculated in a similar manner as above) of 139.1% over such price if no
premium were attributed to the Company's excess cash.
(ii) The fact that the per Share price to be received in the Offer and
the Merger is payable in cash, thereby eliminating any uncertainties in
valuing the consideration.
(iii) The Company's shareholder profile, the percentage of the
outstanding Shares owned by Parent, the absence of contractual restrictions
on the acquisition of additional Shares by Parent, and Parent's stated
unwillingness to solicit offers to purchase its Shares to a third party,
all of which led the Independent Committee to conclude that exploration of
a business combination with a third party was not practicable.
(iv) The Independent Committee's belief, based upon Company management
and Simmons presentations, that the per Share price to be paid in the Offer
and the Merger was fair in light of the financial condition, results of
operations, business and prospects of the Company as a separate company.
(v) The knowledge of the members of the Independent Committee of various
risks and uncertainties associated with a decision to continue to operate
the Company as an independent entity, including, but not limited to, trends
in the offshore construction industry and the declining backlog at the
Company.
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(vi) The arm's-length negotiations between the Independent Committee and
its representatives and the Finance Committee and its representatives,
including that the negotiations resulted in (a) an increase in the price at
which Parent was prepared to acquire the Shares and a change in the
structure of the transaction and the form of consideration to be received
by the Company's shareholders, and (b) the Independent Committee's belief
that $35.62 per Share was the highest price that could be obtained from
Parent under the circumstances.
(vii) The opinion of Simmons, dated May 6, 1999, that, as of the date of
the opinion and based on and subject to certain matters stated in the
opinion, the consideration to be paid in the Offer and the Merger is fair
to holders of the Shares (other than Parent) from a financial point of
view, and the analyses presented to the Independent Committee by Simmons
with respect thereto. See "Opinion of Financial Advisor to the Independent
Committee."
(viii) The fact that the Minimum Condition requires that the Offer not be
consummated unless at least a majority of the outstanding Shares other than
shares beneficially owned by Parent are validly tendered pursuant to the
Offer and not withdrawn.
(ix) The terms and conditions of the Offer, the Merger and the Merger
Agreement, including provisions that no change may be made that, without
the consent of the Company, (a) waives the Minimum Condition, (b) changes
the form of consideration to be paid, (c) decreases the per Share price or
the number of Shares sought in the Offer or (d) adds conditions.
(x) The fact that the Merger Agreement does not preclude the Independent
Committee from withdrawing or modifying its recommendation to shareholders
if failure to do so would be inconsistent with its fiduciary duties.
(xi) The provision of the Merger Agreement permitting the Company to
negotiate with third parties that make unsolicited Acquisition Proposals
(as defined in the Merger Agreement) if there is a reasonable likelihood
that the directors' fiduciary duties would otherwise be breached.
(xii) The possibility that the timing of the transaction is at a down
cycle in the offshore construction and oil service industry and that
shareholders might not be able to participate fully in the recovery (unless
they took the proceeds and reinvested in the industry).
(xiii) The fact that other transaction structures, including a
transaction that would be predominately stock for stock, would be generally
nontaxable, but would expose the Company's shareholders to the market and
other risks inherent in owning Parent Stock.
(xiv) The issues associated with the fact that the Company has
significant excess cash, including the following:
(1) after taking into account the excess cash (for which a purchaser
is unlikely to pay more than dollar for dollar), the actual premium
paid for the underlying business is substantially higher than the
premium on the whole transaction;
(2) the risks associated with deploying substantial excess cash in
the oil service industry in a period of cyclical downtrend or
diversifying into new lines of business in which the Company does not
have experience; and
(3) the possibility that Purchaser might be deemed to be paying for
the purchase with the Company's own assets.
(xv) The likelihood that the Offer and the Merger will be consummated in
light of the facts that the Offer and the Merger are not subject to any
financing condition, that Parent has represented that the funds necessary
to consummate the Offer and Merger will be available and the limited nature
of the other conditions to the Offer and the Merger.
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Company Board. In reaching its determinations referred to above, the Company
Board considered the following factors: (i) the determinations and
recommendations of the Independent Committee; (ii) the factors referred to
above as having been taken into account by the Independent Committee; and
(iii) the fact that the price to be paid in the Offer and the Merger and the
terms and conditions of the Merger Agreement were the result of arm's-length
negotiations between the Independent Committee and the Finance Committee.
The description set forth above of the factors considered by the Company
Board, including members of the Independent Committee, is not intended to be
exhaustive, but summarizes the primary factors considered. The members of the
Company Board, including the members of the Independent Committee, evaluated
the Offer and the Merger in light of their knowledge of the business,
financial condition and prospects of the Company, and based upon the advice of
financial and legal advisors. In light of the number and variety of factors
that the Company Board and the Independent Committee considered in connection
with their evaluation of the Offer and the Merger, neither the Company Board
nor the Independent Committee found it practicable to assign relative or
specific weights to the foregoing factors, and, accordingly, neither the
Company Board nor the Independent Committee did so. Individual members of the
Company Board and the Independent Committee may have given differing weights
to different factors and may have viewed certain factors more positively or
negatively than others.
The Company Board, including the members of the Independent Committee,
believes that the Offer and the Merger are procedurally fair because, among
other things: (i) the Independent Committee consisted entirely of directors
who were neither employees or officers of the Company nor employees, officers
or directors of Parent and were appointed to represent the interests of the
minority shareholders of the Company; (ii) the Independent Committee retained
and was advised by independent legal counsel; (iii) the Independent Committee
retained Simmons as its independent financial advisor to assist it in
evaluating a potential transaction with Parent and received advice from
Simmons; (iv) the Minimum Condition which may not be waived by Purchaser
without the consent of the Company and which has the effect of requiring that
in order for the Offer to be successful, a majority of the publicly-held
Shares must be tendered and not withdrawn; (v) the Independent Committee
engaged in extensive deliberations in evaluating the Offer and the Merger and
alternatives thereto; and (vi) the fact that the $35.62 per Share price and
the other terms and conditions of the Merger Agreement resulted from active
arm's-length bargaining between the Independent Committee and its
representatives, on the one hand, and the Finance Committee and its
representatives, on the other hand. The Company's executive officers have not
been asked to make a recommendation as to the Offer or the Merger.
Opinion of Financial Advisor to the Independent Committee
The Independent Committee engaged Simmons to act as its financial advisor in
connection with the proposed Merger Agreement and the transactions
contemplated thereby (including the Offer and the Merger). On May 5, 1999, at
a meeting of the Independent Committee held to evaluate the proposed Offer and
Merger, Simmons rendered to the Independent Committee an oral opinion
(subsequently confirmed by delivery of a written opinion dated May 6, 1999) to
the effect that, as of such date and based upon and subject to certain matters
stated in such opinion, the consideration to be paid in the Offer and the
Merger is fair to the holders of Shares (other than Parent) from a financial
point of view. As indicated above, the oral opinion of Simmons as of May 5,
1999 was only one of many factors taken into consideration by the Independent
Committee in making its determination to approve the Merger Agreement.
The full text of Simmons' written opinion dated as of May 6, 1999, which
sets forth, among other things, assumptions made, matters considered, and
scope and limitations on the review undertaken (the "Opinion"), is attached as
Annex A and is incorporated herein by reference. Holders of Shares are urged
to, and should, read the Opinion carefully and in its entirety. The Opinion is
directed to the Independent Committee, is limited to the fairness, from a
financial point of view, of the cash consideration to be received in the Offer
and the Merger by the Company's shareholders (other than Parent) and is not a
recommendation to such shareholders as regards to the Offer and the Merger.
The opinion does not address the underlying decision of the Company to engage
in the transactions contemplated by the Merger
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Agreement. The summary of the Opinion set forth herein is qualified in its
entirety by reference to the full text of such opinion.
In connection with its Opinion, Simmons has, among other things, (1)
reviewed and analyzed certain publicly available business and financial
information relating to the Company that it deemed relevant, including
estimates of the future operating performance of the Company prepared by
industry analysts unaffiliated with either the Company or Parent; (2) reviewed
certain business and financial information provided to Simmons by the Company,
including certain limited financial forecasts prepared by management of the
Company, relating to its business, earnings, cash flow, assets, liabilities
and prospects; (3) reviewed certain publicly available information concerning
the trading of, and the trading market for, the Shares, including trading
multiples, and compared such information with that of certain other publicly-
traded companies that it deemed to be relevant; (4) compared the proposed
financial terms of the transactions contemplated by the Merger Agreement with
the financial terms of other transactions that it deemed to be relevant; (5)
participated in certain discussions and negotiations among representatives of
the Company and Parent; (6) reviewed the Merger Agreement; and (7) reviewed
such other financial studies and analyses and took into account such other
matters as it deemed necessary, including its assessment of general economic,
market and monetary conditions.
In arriving at its Opinion, Simmons, with the consent of the Independent
Committee, assumed and relied upon the accuracy and completeness of all the
foregoing information (other than the limited financial forecasts) and did not
independently verify any of such information. With respect to such financial
forecasts, Simmons utilized certain information set forth therein and assumed
that such information was reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of the Company
as to the future financial performance of the Company. Simmons did not conduct
a physical inspection of any of the assets, operations or facilities of the
Company and did not make or receive any independent evaluation or appraisal of
any assets or liabilities (contingent or otherwise) of the Company. Simmons
noted in its Opinion that the Company is subject to the governmental
investigations and litigation described in note (6) (the "HeereMac
Litigation") to the interim financial statements of the Company included in
its Quarterly Report on Form 10-Q for the quarter ended December 31, 1998, and
that, upon consummation of the Merger, the shareholders of the Company (other
than Parent) will be relieved of the exposure to the potential risk that the
Company will be forced to pay damages in connection with the HeereMac
Litigation in excess of any current accruals therefor. Simmons expressed no
opinion with respect to any matter relating to any of such litigation. Simmons
was not requested to approach and did not approach any unaffiliated persons or
entities with respect to the acquisition of the Company or any of its
subsidiaries or any of their assets. Simmons' Opinion is necessarily based
upon market, economic and other conditions as they existed and could be
evaluated on, and the information made available to it as of, the date of its
Opinion.
In preparing its Opinion for the Independent Committee, Simmons performed a
variety of financial and comparative analyses, including those described
below. The summary of the analyses performed by Simmons as set forth below
does not purport to be a complete description of the analyses underlying the
Opinion. The presentation of a fairness opinion is a complex analytic process
involving various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to partial or summary description. No company or transaction used
in such analyses as a comparison is identical to the Company or the
transactions contemplated by the Merger Agreement, nor is an evaluation of the
results of such analyses entirely mathematical; rather, it involves complex
considerations and judgments concerning financial and operational
characteristics and other factors that could affect the acquisitions, public
trading or other values of the companies or transactions being analyzed. The
estimates contained in such analyses and the ranges of valuations resulting
from any particular analysis are not necessarily indicative of actual values
or predictive of future results or values, which may be significantly more or
less favorable than those suggested by such analyses. In addition, analyses
relating to the value of the business or securities do not purport to be
appraisals or to reflect the prices at which businesses, companies or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty.
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In arriving at its Opinion, Simmons made qualitative judgments as to the
significance and relevance of each analysis and factor it considered.
Accordingly, Simmons believes that its analyses must be considered as a whole
and that selecting portions of its analyses and factors, without considering
all analyses and factors, could create an incomplete view of the processes
underlying such analyses and its Opinion. In its analyses, Simmons made
numerous assumptions with respect to general business, economic, market and
financial conditions, as well as other matters, many of which are beyond the
control of the Company and involve the application of complex methodologies
and experienced and educated judgment.
The following is a summary of the material analyses performed by Simmons in
connection with its Opinion.
Premium Analyses
In order to determine the magnitude of the premium implicit in the Offer
Price, Simmons compared the Offer Price to three different per share prices of
the Shares: (i) the closing sales price of the Shares on the NYSE on May 6,
1999, the day next preceding public announcement of the Merger Agreement (the
"May 6 Closing Price"), of $30.50; (ii) the estimated Share price on May 6,
1999, estimated in the manner described below, in the absence of any
announcement regarding a proposed transaction (the "Estimated May 6 Price") of
$29.38; and (iii) the average of the closing sales prices for the Shares for
the 20 trading days ending on March 9, 1999 (the "Pre-announcement Date"), the
day preceding Parent's public announcement of its offer to acquire the Company
for Parent Stock (the "Pre-announcement Price") of $22.43. Simmons found that
the Offer Price implied a premium of 16.8% over the May 6 Closing Price, 21.2%
over the Estimated May 6 Price and 58.8% over the Pre-announcement Price.
In addition, Simmons compared the Offer Price to the May 6 Closing Price,
the Estimated May 6 Price and the Pre-announcement Price, in each case as
adjusted to eliminate any premium on the Company's excess cash. It was
Simmons' judgment that the Company's cash and cash equivalents and investments
in debt securities exceeded the Company's cash needs at May 6 by an amount
equal to $12.95 per Share. In order to gauge the premium implied by the Offer
Price over the May 6 Closing Price as adjusted to eliminate any premium on
excess cash, Simmons subtracted the per share amount of the excess cash
($12.95) from each of the May 6 Closing Price (to yield an adjusted price per
Share of $17.55) and the Offer Price (to yield $22.67 per Share) and compared
the adjusted Offer Price to the adjusted May 6 Closing Price. This calculation
resulted in a 29.2% premium. In like fashion, Simmons adjusted both the
Estimated May 6 Price and the Pre-announcement Price to exclude the excess
cash and determined that the premium so implied with respect to the adjusted
Estimated May 6 Price was 38.0% and the premium so implied with respect to the
adjusted Pre-announcement Price was 139.1%.
Simmons utilized the Estimated May 6 Price in order include a measure for
comparison purposes that was not influenced by the announcement of Parent's
offer to acquire the Company but did recognize the recent significant recovery
in the value of oil and gas service industry equities. In order to derive this
price, Simmons calculated the average increase during various periods ending
on May 6, 1999 for three separate indices consisting of comparable companies,
i.e., the OSX Index (an index of 15 large oil service companies used to price
options on the Philadelphia Exchange); an index of "Offshore Construction
Comparable Companies" (as defined below); and an index of "Oil Service
Comparables" (as defined below). For each index, Simmons calculated the
average increase (derived from changes in stock prices of the companies
comprising each index) through May 6, 1999 based on (i) the closing prices on
the Pre-announcement Date (the "One Day Price"), (ii) the average closing
prices for the 20 trading day period ending on the Pre-announcement Date (the
"20 Day Price") and (iii) the average closing prices for the three months
ending on the Pre-announcement Date (the "Three Month Price"). Simmons then
averaged the increase in each index and found that the average increases were
47.3% (One Day Price), 59.1% (20 Day Price) and 53.7% (Three Month Price).
Simmons then subtracted the amount of the excess cash ($12.95 per Share) from
the One Day Price, the 20 Day Price and the Three Month Price for the Shares
yielding net prices of $11.43, $9.48 and $11.31, respectively. Simmons then
increased each such net price for the Shares by the average industry
percentage price recovery indicated above applicable to each price
determination period, added back the excess cash ($12.95), yielding estimated
Share prices, reflecting
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the recovery in oil service industry equities but unaffected by Parent's
public announcement, of $29.78 (One Day Price), $28.04 (20 Day Price) and
$30.33 (Three Month Price). Based on that range, Simmons determined the
Estimated May 6 Price of $29.38.
The "Offshore Construction Comparable Companies" are: Bouygues Offshore
S.A., Cal Dive International, Inc., Coflexip S.A., Global Industries, Ltd.,
Horizon Offshore, Inc., Gulf Island Fabrication, Inc., Oceaneering
International, Inc., and Stolt Comex Seaway S.A. The "Oil Service Comparables"
are BJ Services Company, Cooper Cameron Corporation, National-Oilwell, Inc.,
Smith International, Inc., and Tidewater, Inc.
Based on the foregoing, Simmons determined that the premium implied by the
Offer Price ranged from 16.8% to 58.8% in the cases of the unadjusted prices
and from 29.2% to 139.1% in the cases of the adjusted prices.
Analysis of Comparable Transactions
Simmons reviewed publicly available information with respect to various
transactions in which minority stock holdings of publicly-held corporations
were acquired for cash by a controlling stockholder. In particular, Simmons
examined thirteen such transactions that have occurred since January 1, 1994
that were in the range of $100 million to $1 billion. The source of the data
was Securities Data Corporation and the specific transactions ranged in size
from $107.6 million to $462.3 million. Simmons determined that the median
transaction value was $190.7 million, the median percentage of the outstanding
common stock acquired was 29.9% and that the median closing valuation premium
relative to the pre-announcement price of the common stock in each such
transaction was 26.3% (one day prior to announcement), 23.6% (one week prior
to announcement) and 26.8% (four weeks prior to announcement) and the mean
closing valuation premium relative to the pre-announcement price of the common
stock in each such transaction was 32.6% (one day prior to announcement),
31.3% (one week prior to announcement) and 32.3% (four weeks prior to
announcement).
Simmons compared these transaction values and premiums to the transactions
contemplated by the Merger Agreement. In their analysis, Simmons calculated
the premiums implied by the Offer Price on a basis where no premium was
attributed to the Company's excess cash, as described above. It found a
transaction value of $520.3 million, that the percentage of outstanding Shares
to be acquired was 37.2% and that the implied premiums were as follows: based
on one day prior to announcement of the all cash offer of $35.62 per Share
(May 6, 1999), the premium was 29.2%; based on one week prior to announcement
(April 29, 1999), the premium was 22.2%; and based on four weeks prior to
announcement (April 8, 1999), the premium was 41.8%. Simmons then calculated
the premium implied in the Offer Price relative to the prices for the Shares
one day prior to the first announcement by Parent of an offer to acquire the
Shares (other than Shares owned by Parent) on March 10, 1999 (March 9, 1999),
one week prior (March 3, 1999) and four weeks prior (February 10, 1999)
adjusted in the same fashion as described above for the Estimated May 6 Price.
The implied premiums so calculated were 34.7% (March 9, 1999), 64.9% (March 3,
1999) and 27.0% (February 10, 1999).
Simmons compared the premiums implied by the Offer Price on an unadjusted
basis (ranging from 22.2% to 41.8%) and on an adjusted basis (ranging from
27.0% to 64.9%) to the premiums implied by the median of the comparable
transactions (ranging from 23.6% to 26.8%) and the mean of the comparable
transactions (ranging from 31.3% to 32.6%).
Analysis of Selected Publicly-traded Comparable Companies
Using publicly available information, Simmons compared selected valuation
multiples for the Company calculated using the Offer Price with respective
corresponding multiples of certain similar publicly-traded companies. Simmons
selected a group of companies from the universe of possible companies based on
its views as to the comparability of the financial and operating
characteristics of offshore construction and oil field service companies to
the Company. With respect to each such analysis, Simmons made such comparisons
with the following companies (the "Comparable Companies"): Aker Maritime
Corporation, Coflexip S.A., Cooper
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Cameron Corporation, Dril-Quip, Inc., Det Sondenfjelds - Norske
Dampskibsselskab, IHC Caland N.V., Global Industries, Ltd., Oceaneering
International, Inc., Saipem S.p.A. and Stolt Comex Seaway, S.A.
The two primary multiples derived by Simmons were (i) an enterprise value,
calculated as the sum of the aggregate market value of the outstanding common
stock of an enterprise plus its debt and preferred stock (the "Enterprise
Value") divided by its earnings before depreciation, interest and taxes
("EBDIT") and (ii) the price per share of common stock divided by the earnings
per share of common stock. Simmons made these determinations for the Company
for the years ending March 31, 2000 and March 31, 2001 based on limited
financial forecasts prepared by the Company and provided to Simmons, and for
the Comparable Companies for similar fiscal periods using financial
projections from publicly-available sources, including First Call.
EBDIT. Simmons determined that the Enterprise Value of the Company implied
by the Offer Price represented a multiple of 16.9 times the Company's forecast
EBDIT of $82.8 million for fiscal year 2000 and a multiple of 13.1 times the
Company's forecast EBDIT of $107.3 million for fiscal year 2001. Simmons made
further determinations after adjusting to exclude the value of the Company's
excess cash, as estimated by Simmons, from the Enterprise Value implied by the
Offer Price to calculate an adjusted Enterprise Value. Simmons then calculated
that the adjusted Enterprise Value of the Company represented a multiple of
EBDIT for fiscal years 2000 and 2001 of 10.8x and 8.3x, respectively.
Simmons then derived the multiples of EBDIT for each of the Comparable
Companies by dividing the adjusted Enterprise Value for each company by its
respective projected EBDIT for the calendar years ending December 31, 1999 and
December 31, 2000. Simmons concluded that the average EBDIT multiples of the
Comparable Companies for calendar years 1999 and 2000 were 8.9x and 7.8x,
respectively.
Simmons compared the EBDIT multiples for the Company implied by the Offer
Price on an unadjusted basis for the fiscal years ending March 31, 2000
(16.9x) and March 31, 2001 (13.1x) and on an adjusted basis for such years
(10.8x and 8.3x, respectively) with the EBDIT multiples for the Comparable
Companies for the calendar years ending December 31, 1999 (8.9x) and December
31, 2000 (7.8x).
P/E RATIO. Simmons determined that, based on nominal earnings per share of
the Company's common stock forecast by the Company for the fiscal years ending
March 31, 2000 and March 31, 2001 of $1.10 and $1.82, respectively, the Offer
Price implied price/earnings ratios for those years of 32.4x and 19.6x,
respectively. Simmons made further determinations after adjusting to exclude
from the earnings per share forecast by the Company the interest income earned
on the Company's excess cash as estimated by Simmons. To do so, Simmons
subtracted such interest income from the forecast earnings per share to obtain
an adjusted earnings per share of the Company's common stock and subtracted
the excess cash ($12.95 per Share) from the Offer Price to obtain an adjusted
per share price. Simmons thereby estimated that the price/earnings ratios
calculated using the adjusted per share price and the adjusted earnings per
share for fiscal years 2000 and 2001 were 39.7x and 17.6x, respectively.
Simmons then derived the price/earnings ratios for each of the Comparable
Companies by dividing the share price for each company by its respective
projected earnings per share for the calendar years 1999 and 2000. Simmons
determined that the average price/earnings ratios for the Comparable Companies
for calendar years 1999 and 2000 were 21.6x and 16.7x, respectively.
Simmons then compared the unadjusted price/earnings ratios for the Shares
implied by the Offer Price for fiscal years 2000 (32.4x) and 2001 (19.6x) and
on an adjusted basis for such fiscal years (39.7x and 17.6x, respectively)
with the price/earnings ratios for the Comparable Companies for the calendar
years 1999 and 2000 (21.6x and 16.7x, respectively).
Other Factors and Analyses
In the course of preparing its Opinion, Simmons performed certain other
analyses and reviewed certain other matters, including, among other things,
the trading characteristics of the Shares.
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<PAGE>
Simmons is an internationally recognized investment banking firm and, as
part of its investment banking business, is regularly engaged in the valuation
of businesses and securities in connection with mergers and acquisitions. The
Independent Committee selected Simmons as its financial advisor because of
Simmons' experience and expertise.
Item 5--Persons Retained, Employed or to be Compensated.
The Company has retained Simmons as its financial advisor in connection with
the delivery of a fairness opinion pursuant to an engagement letter dated
January 5, 1999.
Pursuant to the terms of the engagement of Simmons by the Independent
Committee, the Company has agreed to pay Simmons for its financial advisory
services in connection with the transactions contemplated by the Merger
Agreement: (i) a retainer of $250,000 payable on the date of the engagement;
(ii) a fee of $500,000 payable upon delivery of Simmons' initial study and
opinion to the Independent Committee; and (iii) a fee, contingent upon the
closing of the transactions contemplated by the Merger Agreement, equal to 2%
of any improvement in value of the minority stock calculated at the time of
closing over the 20 trading day moving average pre-announcement price. The
Initial Proposal was publicly announced by Parent on March 10, 1999. Following
the announcement of the transactions contemplated by the Merger Agreement on
May 7, 1999, Simmons agreed to cap the contingent portion of its fee at $3.5
million. In addition, the Company has agreed to reimburse Simmons for its
reasonable out-of-pocket expenses, including the fees and expenses of its
legal counsel, incurred in connection with the engagement, and to indemnify
Simmons against certain liabilities, including certain liabilities under the
federal securities laws, relating to, or arising out of its engagement, or to
contribute to payments Simmons may be required to make in respect thereof.
In 1995, Simmons was retained by Parent to perform a strategic consulting
assignment for which it received customary compensation. Simmons has also been
retained from time to time by the Company to perform investment banking
services for which it has received customary fees.
Except as set forth above, neither the Company nor any person acting on its
behalf currently intends to employ, retain or compensate any person to make
solicitations or recommendations to security holders on its behalf concerning
the Offer or the Merger.
Item 6--Recent Transactions and Intent with Respect to Securities.
(a) To the best of the Company's knowledge, no transactions in the Shares
have been effected during the past 60 days by the Company or by any executive
officer, director or affiliate of the Company.
(b) To the best of the Company's knowledge, all of the Company's executive
officers and directors who own Shares currently intend to tender all of their
Shares pursuant to the Offer.
Item 7--Certain Negotiations and Transactions by the Subject Company.
(a) Except as set forth in this Schedule 14D-9, no negotiation is being
undertaken or is underway by the Company in response to the Offer which
relates to or would result in (i) an extraordinary transaction, such as a
merger or reorganization, involving the Company or any subsidiary thereof;
(ii) a purchase, sale or transfer of a material amount of assets by the
Company or any subsidiary thereof, (iii) a tender offer for or other
acquisition of securities by or of the Company; or (iv) any material change in
the present capitalization or dividend policy of the Company.
(b) Except as described in this Schedule 14D-9, there are no transactions,
board resolutions, agreements in principle or signed contracts in response to
the Offer that relate to or would result in one or more of the events referred
to in Item 7(a) above.
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Item 8--Additional Information to be Furnished.
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
the Company, which challenge negotiations between the Company and Parent
concerning a potential transaction.
On or around March 17, 1999, an action styled Pasternac, et al. v. William
J. Johnson, Robert H. Rawle, Roger E. Tetrault, Rick L. Burdick, Richard E.
Woolbert, Robert L. Howard, Sean C. O'Keefe, Cedric Ritchie, McDermott
International, Inc. and J. Ray McDermott, S.A., No. 99-4195, was filed in the
Parish of Orleans Civil District Court by certain alleged shareholders of the
Company. The complaint in the Pasternac action challenges Parent's Initial
Proposal in which each share of the Company not already owned by Parent would
have been exchanged for 1.15 shares of common stock of Parent. The Pasternac
complaint alleges that, as an approximately 63% shareholder of the Company,
Parent owed fiduciary duties to the public shareholders of the Company and
that the proposal breached those duties, allegedly because the proposal placed
undue pressure on the Company board of directors, Parent used confidential
information of the Company in formulating the proposal and the consideration
offered by Parent in the proposal was unfair and inadequate. The complaint
also alleges that the members of the Company board of directors are not
independent of Parent and are therefore incapable of representing the
Company's public shareholders in any negotiations with Parent. The complaint
seeks to proceed as a class action, seeks preliminary and permanent injunctive
relief against the transaction proposed by Parent, seeks compensatory and
rescissory damages in an unspecified amount and seeks plaintiffs' costs in
bringing the action. By agreement with plaintiffs' counsel, the time for a
response to the complaint in the Pasternac action has been adjourned, subject
to reinstatement by plaintiffs on twenty-days' notice.
On or around April 7, 1999, a second action styled Hill v. J. Ray McDermott,
S.A., McDermott International, Inc., Roger E. Tetrault, Rick L. Burdick,
Robert L. Howard, William J. Johnson, Sean Charles O'Keefe, Robert H. Rawle,
Cedric E. Ritchie, Richard E. Woolbert and John Doe, No. 99-5595, was filed in
the Parish of Orleans Civil District Court. The complaint in the Hill action
makes allegations similar to those of the Pasternac complaint, and also
alleges that certain members of the Company board of directors have conflicts
of interest in considering any transaction with Parent because of their
alleged shareholdings in Parent. As in the Pasternac action, the Hill
complaint seeks to proceed as a class action, seeks preliminary and permanent
injunctive relief against the transaction proposed by Parent, seeks
compensatory and rescissory damages in an unspecified amount and seeks
plaintiffs' costs in bringing the action. By agreement with plaintiffs'
counsel, the time for a response to the complaint in the Hill action has been
adjourned, subject to reinstatement by plaintiffs on twenty-one days' notice.
On or around May 5, 1999, plaintiffs' counsel in the Hill action served a
request for production of documents on JRM and McDermott.
On May 7, 1999, 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. Parent and the
Company believe that the actions are without merit and intend to contest these
suits vigorously.
Item 9--Material to Be Filed as Exhibits.
(a)(1) Press Release issued by Parent and the Company dated May 7, 1999
(a)(2) Letter to shareholders of the Company dated May 13, 1999
(a)(3) Opinion of Simmons & Company International dated May 6, 1999 (included
as Annex A)
(a)(4) Offer to Purchase dated May 13, 1999
(a)(5) Letter of Transmittal dated May 13, 1999
(a)(6) Press Release issued by Parent dated May 13, 1999
(b) None
(c)(1) Agreement and Plan of Merger dated May 7, 1999 between Parent and the
Company
(c)(2) Confidentiality Agreement dated February 17, 1999 between Parent and the
Company
(c)(3) Selected Sections of the Company's Proxy Statement dated July 1, 1998
25
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
May 13, 1999
J. RAY MCDERMOTT, S.A.
By: /s/ S. W. Murphy
----------------------------------
S. W. Murphy
Senior Vice President, General
Counsel and
Corporate Secretary
26
<PAGE>
[SIMMONS & COMPANY INTERNATIONAL LETTERHEAD APPEARS HERE]
Annex A
May 6, 1999
Independent Committee of the Board of Directors
J. Ray McDermott, S.A.
1450 Poydras Street
New Orleans, LA 70112-6050
Members of the Independent Committee:
You have requested the opinion of Simmons & Company International
("Simmons") as investment bankers as to the fairness, from a financial point
of view, to the holders (the "Public Stockholders") of common stock ("Company
Common Stock") of J. Ray McDermott, S.A. (the "Company"), other than McDermott
International, Inc. ("McDermott") or its affiliates, of the consideration to
be received by them pursuant to the terms of that certain Agreement and Plan
of Merger to be dated May 7, 1999 between the Company and McDermott (the
"Merger Agreement") which, among other things, (i) requires a wholly owned
subsidiary ("Newco") of McDermott to offer to purchase all the outstanding
shares of Company Common Stock (other than shares owned by McDermott) at a net
cash price of $35.62 per share (the "Tender Offer") and (ii) provides,
following completion of the Tender Offer, for the merger (the "Merger") of
Newco with and into the Company pursuant to which each then outstanding share
of Company Common Stock (other than shares owned by McDermott and Newco) will
be converted into the right to receive $35.62 in cash. Unless the context
otherwise requires, references in this opinion to the Company and McDermott
include their respective subsidiaries.
Consummation of the Tender Offer is subject, among other things, to the
condition that a majority of the shares of Company Common Stock held by the
Public Stockholders shall have been tendered and not withdrawn (the "Minimum
Condition"). The conditions precedent to consummation of the Merger include
(i) consummation of the Tender Offer, (ii) approval of the Merger Agreement
and the Merger by the holders (including McDermott and Newco) of two-thirds of
the outstanding shares of Company Common Stock at a meeting of the holders of
the Company Common Stock called for such purpose, (iii) the condition that the
Tender Offer shall be consummated on or before July 31, 1999 and (iv)
fulfillment of the covenant that there shall have been no waiver or
modification of certain specified Tender Offer conditions, including no change
that waives the Minimum Condition, decreases the consideration to be paid per
share of Company Common Stock or the number of shares of Company Common Stock
sought in the Tender Offer.
Simmons is acting as financial adviser to the Independent Committee of the
Board of Directors of the Company in connection with the Merger Agreement.
Simmons, as a specialized, energy-related investment banking firm, is engaged,
among other things, in the valuation of businesses and their securities in
connection with mergers and acquisitions, in the management and underwriting
of sales of equity and debt to the public and in private placements of equity
and debt. In addition, in the ordinary course of business, Simmons may
actively trade the securities of the Company and McDermott for its own account
and for the accounts of customers and, accordingly, may at any time hold a
long or short position in such securities. Simmons has from time to time been
engaged by the Company and McDermott to provide general corporate financial
advisory services.
Before rendering this opinion, Simmons reviewed and analyzed, among other
things, the following: (i) the most recent draft (dated May 5, 1999) of the
Merger Agreement and certain amendments thereto (dated May 6, 1999); (ii) the
financial statements and other information concerning the Company contained in
the Company's Annual Reports on Form 10-K for each of the three fiscal years
ended March 31, 1998, the Company's Quarterly Reports on Form 10-Q for the
quarters ended June 30, 1998, September 30, 1998 and December 31, 1998, the
A-1
<PAGE>
[SIMMONS & COMPANY INTERNATIONAL LOGO APPEARS HERE]
Independent Committee of the Board of Directors
May 6, 1999
Page 2
Company's Current Report on Form 8-K dated July 30, 1998, and the Company's
Proxy Statement dated July 1, 1998; (iii) certain business and financial
information relating to the Company, including certain limited financial
forecasts prepared by management of the Company, provided to Simmons by the
Company; (iv) certain publicly available information concerning the trading
of, and the trading market for, the Company Common Stock; (v) certain publicly
available information with respect to certain other companies that we believe
to be comparable to the Company and the trading markets for certain of such
other companies' securities; (vi) certain publicly available information
concerning estimates of the future operating performances of the Company and
the comparable companies prepared by industry analysts unaffiliated with
either the Company or McDermott; and (vii) certain publicly available
information concerning the nature and terms of certain other transactions we
considered relevant to the inquiry. We also met with certain officers and
employees of the Company and McDermott to discuss the foregoing, as well as
other matters we believed to be relevant to this opinion. We were not
requested to approach and we did not approach any unaffiliated persons or
entities with respect to the acquisition of the Company, any of its
subsidiaries, any of their assets, or the shares of Company Common Stock held
by the Public Stockholders.
In arriving at this opinion, we, with your consent, assumed and relied upon
the accuracy and completeness of all the foregoing information (other than
financial forecasts) and did not independently verify any of such information.
With respect to the limited financial forecasts, we utilized certain
information set forth therein and assumed that such information was reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of the Company as to the future financial
performance of the Company. We did not conduct a physical inspection of any of
the assets, operations or facilities of the Company and did not make or
receive any independent evaluation or appraisal of any assets or liabilities
(contingent or otherwise) of the Company. Without limiting the foregoing, we
note that the Company is subject to the governmental investigations and
litigation described in note (6) (the "HeereMac Litigation") to the interim
financial statements of the Company included in its Quarterly Report on Form
10-Q for the quarter ended December 31, 1998, and that, upon consummation of
the Merger, the Public Stockholders will be relieved of the exposure to the
potential risk that the Company will be forced to pay damages in connection
with the HeereMac Litigation in excess of any current accruals therefor. We
express no opinion with respect to any matter relating to any of such
litigation.
In conducting our analysis and arriving at our opinion expressed herein, we
considered such financial and other factors as we deemed appropriate under the
circumstances including, without limitation, the following: (i) the historical
and current financial position and results of operations of the Company; (ii)
the business prospects of the Company; (iii) the historical and current market
for the Company Common Stock and for the equity securities of certain other
companies we believed to be comparable to the Company; and (iv) the nature and
terms of certain other acquisition transactions that we believe to be
relevant. In rendering our opinion, we took into account the fact that
McDermott owns 63% of the outstanding Company Common Stock. We also took into
account our assessment of general economic, market and financial conditions
and our experience in connection with similar transactions and securities'
valuations generally. The opinion expressed herein is necessarily based upon
conditions as they exist and can be evaluated on, and on the information made
available at, the date hereof.
In its capacity as financial adviser to the Independent Committee, Simmons
will receive a customary fee for its services which is in part contingent upon
effectuation of the transactions contemplated by the Merger Agreement. This
opinion is for the use and benefit of the Independent Committee. This opinion
does not address the merits of the underlying decision by the Company to enter
into the Merger Agreement and does not constitute a recommendation to any
stockholder as to how such stockholder should respond to the Tender Offer or
vote on
A-2
<PAGE>
[SIMMONS & COMPANY INTERNATIONAL LOGO APPEARS HERE]
Independent Committee of the Board of Directors
May 6, 1999
Page 3
the Merger Agreement or Merger or on any matter related thereto. We are not
expressing any opinion herein as to the prices at which the Company Common
Stock will trade following announcement of the Tender Offer or the Merger.
Based upon and subject to the foregoing, we are of the opinion that the
consideration to be received by the Public Stockholders pursuant to the Tender
Offer and the Merger in accordance with the Merger Agreement is fair, from a
financial point of view, to the Public Stockholders.
Very truly yours,
SIMMONS & COMPANY INTERNATIONAL
/s/ Frederick W. Charlton
Frederick W. Charlton
Managing Director
A-3
<PAGE>
[LOGO OF
McDERMOTT PRESS RELEASE
APPEARS -----------------------------------------------------------------
HERE] FOR IMMEDIATE RELEASE
New Orleans May 7, 1999
McDERMOTT INTERNATIONAL, INC. TO ACQUIRE PUBLICLY HELD SHARES OF
J. RAY McDERMOTT COMMON STOCK AT $35.62 PER SHARE IN CASH
McDermott International, Inc., a Panama corporation (NYSE: MDR),
and its majority-owned subsidiary, J. Ray McDermott, S.A., a Panama
corporation (NYSE: JRM), today jointly announced that they have
executed a definitive merger agreement pursuant to which McDermott
International will acquire all shares of J. Ray McDermott not
already owned by McDermott International for $35.62 per share in
cash or an aggregate of approximately $513 million.
The merger agreement provides that McDermott International will
make a tender offer for all shares of J. Ray McDermott common stock
at $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. The tender offer will be subject to the condition that a
majority of the publicly held shares are validly tendered pursuant
to the offer, as well as other customary conditions. McDermott has
obtained a commitment from Citibank, N.A., a member of Citigroup,
for the necessary financing under acceptable terms, subject to
execution of a definitive agreement and other conditions.
J. Ray McDermott currently has approximately 39.0 million shares
outstanding. Approximately 24.7 million shares (or 63% of the
outstanding shares) are owned by McDermott International, and
approximately 14.4 million are publicly held.
The merger agreement was approved by the Boards of Directors of J.
Ray McDermott and McDermott International following, in each case,
the unanimous recommendation of a committee of independent
directors of each company. The Finance Committee of McDermott
International was advised by Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Davis Polk & Wardwell. The Independent Committee
of J. Ray McDermott was advised by Simmons & Company International
and Baker & Botts L.L.P.
"Recombining these two companies is an important step in our effort
to simplify our organization and prepare for future growth," said
Roger Tetrault, chairman of the Board of Directors and chief
executive officer of both J. Ray McDermott and McDermott
International. Tetrault said the consolidated company will continue
to seek growth opportunities in all areas of operation, including
oil services, power generation and its U.S. government business.
"We are pleased that the Finance Committee of McDermott
International and the Independent Committee of J. Ray McDermott
were able to reopen discussions and reach an agreement that they
feel is in the best interest of the shareholders of both companies.
We look forward to continuing to create value for our shareholders
and to provide superior products and services for our customers,"
Tetrault said.
McDermott International, Inc. is a leading worldwide energy
services company. The company and its subsidiaries manufacture
steam-generating equipment, environmental equipment, and products
for the U.S. government. They also provide engineering and
construction services for industrial, utility, and hydrocarbon
processing facilities, and to the offshore oil and natural gas
industry.
For additional information please contact:
Don Washington
<PAGE>
McDermott International, Inc.
P.O. Box 61961
New Orleans, LA 70161
(504) 587-4080
Don W. [email protected]
<PAGE>
EXHIBIT (a)(2)
[LETTERHEAD OF J. RAY McDERMOTT, S.A. APPEARS HERE]
May 13, 1999
Dear Stockholder:
We are pleased to announce that on May 7, 1999, J. Ray McDermott, S.A. (the
"Company") and McDermott International, Inc. ("MII") entered into an agreement
providing for the acquisition of all outstanding shares of common stock of the
Company at a price of $35.62 per share in cash.
MII has today commenced a cash tender offer for all outstanding shares of
common stock of the Company at a price of $35.62 per share. The tender offer is
conditioned upon, among other things, there being validly tendered and not
withdrawn a number of shares of the Company's common stock that represents at
least a majority of the outstanding shares of common stock not owned by MII.
MII currently owns approximately 63% of the Company's common stock. The
acquisition agreement provides that, as soon as practicable after the purchase
of shares of the Company's common stock pursuant to the tender offer, all
shares of the Company's common stock that are not acquired pursuant to the
tender offer will (subject to stockholder approval) be acquired through a
merger at the same $35.62 cash price.
Based upon, among other things, (i) the opinion of Simmons & Company
International to the effect that the consideration to be paid in the tender
offer and the merger is fair to the holders of common stock (other than MII)
from a financial point of view, and (ii) the unanimous recommendation of the
Independent Committee of the Board of Directors, the Board has determined that
the tender offer and the merger are in the best interests of the stockholders
of the Company. Accordingly, the Board has approved the tender offer and the
merger and recommends that the stockholders of the Company accept the offer and
tender their shares pursuant to the tender offer.
Enclosed for your consideration are copies of MII's tender offer materials
and the Company's Solicitation/Recommendation Statement on Schedule 14D-9 being
filed today with the Securities and Exchange Commission. All of these documents
should be read carefully. In particular, we call your attention to Item 4 of
the Company's Schedule 14D-9, which describes the reasons for the Board's
recommendation and which stockholders may wish to consider before taking action
with respect to the offer.
Sincerely,
/s/ William J. Johnson
William J. Johnson
Chairman of the Independent Committee of
the Board of Directors
<PAGE>
Offer to Purchase for Cash
All Outstanding Shares of Common Stock
of
J. Ray McDermott, S.A.
at
$35.62 Net Per Share
by
McDermott Acquisition Company, Inc.
a wholly-owned subsidiary of
McDermott International, Inc.
--------------------------------------------------------------------------
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK
CITY TIME, ON THURSDAY, JUNE 10, 1999, UNLESS THE OFFER IS EXTENDED.
--------------------------------------------------------------------------
THE BOARD OF DIRECTORS OF J. RAY MCDERMOTT, S.A. (THE "COMPANY") HAS APPROVED
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND DETERMINED
THAT THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING
THE OFFER AND THE MERGER, ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE HOLDERS
OF SHARES (AS DEFINED HEREIN) (OTHER THAN MCDERMOTT INTERNATIONAL, INC.
("PARENT")). THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT THE
COMPANY'S SHAREHOLDERS TENDER THEIR SHARES PURSUANT TO THE OFFER AND APPROVE AND
ADOPT THE MERGER AGREEMENT. THE APPROVAL OF THE COMPANY BOARD IS BASED UPON,
AMONG OTHER THINGS, THE UNANIMOUS RECOMMENDATION OF THE OFFER AND THE MERGER BY
THE INDEPENDENT COMMITTEE OF THE COMPANY BOARD COMPRISED ENTIRELY OF DIRECTORS
WHO ARE NEITHER OFFICERS OR EMPLOYEES OF THE COMPANY NOR DIRECTORS, OFFICERS OR
EMPLOYEES OF PARENT.
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER A NUMBER OF THE
SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE (THE "SHARES"), OF THE COMPANY
EQUAL TO AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OTHER THAN SHARES
BENEFICIALLY OWNED BY PARENT (THE "MINIMUM CONDITION"). SEE "CERTAIN CONDITIONS
OF THE OFFER."
SIMMONS & COMPANY INTERNATIONAL ("SIMMONS") HAS DELIVERED TO THE INDEPENDENT
COMMITTEE ITS WRITTEN OPINION AS INVESTMENT BANKERS THAT, AS OF THE DATE OF SUCH
OPINION AND BASED ON AND SUBJECT TO THE MATTERS STATED IN SUCH OPINION, THE
CONSIDERATION TO BE PAID IN THE OFFER AND THE MERGER IS FAIR FROM A FINANCIAL
POINT OF VIEW TO THE HOLDERS OF SHARES (OTHER THAN PARENT). SEE "OPINION OF
FINANCIAL ADVISOR TO THE INDEPENDENT COMMITTEE" FOR FURTHER INFORMATION
CONCERNING THE OPINION OF SIMMONS.
IMPORTANT
Any shareholder who desires to tender all or any portion of such shareholder's
Shares should either (1) complete and sign the Letter of Transmittal (or a
facsimile thereof) that accompanies this Offer to Purchase in accordance with
the instructions in such Letter of Transmittal, have such shareholder's
signature thereon guaranteed if required by Instruction 1 to such Letter of
Transmittal, and mail or deliver the Letter of Transmittal (or such facsimile)
together with the certificate(s) ("Share Certificates") representing the
tendered Shares and any other required documents to First Chicago Trust Company
of New York (the "Depositary") (at the Depositary's address set forth on the
back cover of this Offer to Purchase) or tender such shareholder's Shares
pursuant to the procedure for book-entry transfer set forth in "Procedures for
Accepting the Offer and Tendering Shares" or (2) request such shareholder's
broker, dealer, commercial bank, trust company or other nominee to effect the
transaction for such shareholder. A shareholder whose Shares are registered in
the name of a broker, dealer, bank, trust company or other nominee must contact
such broker, dealer, bank, trust company or other nominee if such shareholder
desires to tender such Shares.
A shareholder who desires to tender such shareholder's Shares and whose Share
Certificates are not immediately available, or who cannot comply with the
procedure for book-entry transfer on a timely basis, or who cannot deliver all
required documents to the Depositary prior to the expiration of the Offer, may
tender such Shares by following the procedures for guaranteed delivery set forth
under the caption "Procedures for Accepting the Offer and Tendering Shares."
Questions or requests for assistance may be directed to Morrow & Co., Inc.
(the "Information Agent") or Merrill Lynch, Pierce, Fenner & Smith Incorporated
(sometimes referred to herein as the "Dealer Manager") at their respective
addresses and telephone numbers set forth on the back cover of this Offer to
Purchase. Additional copies of this Offer to Purchase, the Letter of
Transmittal and other related materials may be obtained from the Information
Agent or the Dealer Manager.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF
THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
---------------------
The Dealer Manager for the Offer is:
MERRILL LYNCH & CO.
May 13, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INTRODUCTION.......................................................................................... 1
SPECIAL FACTORS....................................................................................... 3
Background of the Offer; Recommendation of the Independent Committee and the Company Board.......... 3
Fairness of the Offer and the Merger................................................................ 8
Opinion of Financial Advisor to the Independent Committee........................................... 10
Opinion of Financial Advisor to the Finance Committee............................................... 15
Position of Parent and Purchaser Regarding Fairness of the Offer and the Merger..................... 18
Purpose and Structure of the Offer and the Merger; Reasons of Parent for the Offer and the Merger... 19
Plans for the Company after the Offer and the Merger................................................ 20
Rights of Shareholders in the Offer and the Merger.................................................. 21
The Merger Agreement................................................................................ 21
Interests of Certain Persons in the Offer and the Merger............................................ 27
Confidentiality Agreement........................................................................... 30
THE TENDER OFFER...................................................................................... 30
Terms of the Offer.................................................................................. 30
Acceptance for Payment and Payment for Shares....................................................... 31
Procedures for Accepting the Offer and Tendering Shares............................................. 32
Withdrawal Rights................................................................................... 35
United States Federal Income Tax Consequences....................................................... 35
Price Range of Shares; Dividends.................................................................... 37
Certain Information Concerning the Company.......................................................... 38
Certain Information Concerning Parent and Purchaser................................................. 40
Financing of the Offer and the Merger............................................................... 41
Dividends and Distributions......................................................................... 43
Certain Effects of the Offer........................................................................ 43
Certain Conditions of the Offer..................................................................... 44
Certain Legal Matters; Regulatory Approvals......................................................... 45
Certain Litigation.................................................................................. 45
Fees and Expenses................................................................................... 46
Miscellaneous....................................................................................... 47
SCHEDULES
SCHEDULE I -- Directors and Executive Officers of the Company
SCHEDULE II -- Directors and Executive Officers of Parent and Purchaser
ANNEX A -- Agreement and Plan of Merger
ANNEX B -- Opinion of Simmons & Company International
ANNEX C -- Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
ANNEX D -- Audited Financial Statements (and Related Notes) for the Company for the Years Ended
March 31, 1997 and March 31, 1998
ANNEX E -- Unaudited Financial Statements (and Related Notes) for the Company for the Three-Month and
Nine-Month Periods Ended December 31, 1998
</TABLE>
i
<PAGE>
INTRODUCTION
To the Holders of Shares of Common Stock
of J. Ray McDermott, S.A.
McDermott Acquisition Company, Inc. ("Purchaser"), a Panama corporation and a
wholly-owned subsidiary of McDermott International, Inc. ("Parent"), hereby
offers to purchase all outstanding shares of common stock, par value $0.01 per
share (the "Shares"), of J. Ray McDermott, S.A. (the "Company") (other than
Shares beneficially owned by Parent) at a price of $35.62 per Share, net to the
seller in cash (the "Offer Price"), upon the terms and subject to the conditions
set forth in this Offer to Purchase and in the related Letter of Transmittal
(which, together with any amendments or supplements thereto, constitute the
"Offer").
Tendering shareholders will not be obligated to pay brokerage fees or
commissions or, except as otherwise provided in Instruction 6 of the Letter of
Transmittal, stock transfer taxes with respect to the purchase of Shares by
Purchaser pursuant to the Offer. Parent or Purchaser will pay all charges and
expenses of Merrill Lynch, Pierce, Fenner & Smith Incorporated, as dealer
manager (the "Dealer Manager"), First Chicago Trust Company of New York, as
depositary (the "Depositary"), and Morrow & Co., Inc., as information agent (the
"Information Agent"), incurred in connection with the Offer. See "Fees and
Expenses."
As of May 6, 1999, Parent beneficially owned 24,668,297 Shares, or
approximately 63% of the outstanding Shares.
THE BOARD OF DIRECTORS OF THE COMPANY (THE "COMPANY BOARD") HAS APPROVED THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND DETERMINED THAT
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE
OFFER AND THE MERGER, ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE HOLDERS OF
SHARES OTHER THAN PARENT. THE COMPANY BOARD RECOMMENDS THAT THE COMPANY'S
SHAREHOLDERS TENDER THEIR SHARES PURSUANT TO THE OFFER AND APPROVE AND ADOPT THE
MERGER AGREEMENT.
Simmons & Company International ("Simmons") has delivered to the Independent
Committee of the Company Board (the "Independent Committee") its written opinion
as investment bankers that, as of the date of such opinion and based on and
subject to the matters stated in such opinion, the consideration to be paid in
the Offer and the Merger is fair from a financial point of view to the holders
of Shares (other than Parent). See "Opinion of Financial Advisor to the
Independent Committee" for further information concerning the opinion of
Simmons.
The Company has been advised that all of its directors and executive officers
intend to tender or cause the tender of all Shares beneficially owned by them
pursuant to the Offer, other than Shares that may be acquired upon the exercise
of Company Stock Options, Restricted Shares and Performance Shares (all as
hereinafter defined), which are subject to separate arrangements under the
Merger Agreement. See "The Merger Agreement."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Solicitation/Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9"), which is being mailed to shareholders herewith.
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER A NUMBER OF
SHARES EQUAL TO AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OTHER THAN SHARES
BENEFICIALLY OWNED BY PARENT (THE "MINIMUM CONDITION"). SEE "CERTAIN CONDITIONS
OF THE OFFER."
As of the close of business on May 6, 1999, there were outstanding 39,077,385
Shares and options to purchase an aggregate of 826,063 Shares at an average
exercise price of $26.91 per Share (of which 393,699 were vested and
exercisable). As of such date, Parent beneficially owned 24,668,297 Shares.
Based upon the foregoing, Parent believes that the Minimum Condition will be
satisfied if at least 7,204,545 Shares (other than Shares held by Parent) are
validly tendered and not withdrawn prior to the Expiration Date (as defined
herein) (assuming that no options to purchase Shares are exercised prior to the
Expiration Date).
1
<PAGE>
The Offer is being made pursuant to the Agreement and Plan of Merger dated as
of May 7, 1999 (the "Merger Agreement") between the Company and Parent. The
Merger Agreement provides that as promptly as practicable after the purchase of
Shares pursuant to the Offer and the satisfaction (or waiver, to the extent
permissible under the Merger Agreement) of the conditions to the Merger,
Purchaser shall, in accordance with the laws of the Republic of Panama ("Panama
Law"), be merged into the Company (the "Merger"), whereupon the separate
existence of the Purchaser shall cease, and the Company shall continue as the
surviving corporation (the "Surviving Company"). Pursuant to the Merger, each
Share outstanding immediately prior to the effective time of the Merger (the
"Effective Time") (other than Shares beneficially owned by Parent) shall be
converted into the right to receive the per Share price paid in the Offer in
cash, without interest (the "Merger Consideration"). The Merger Agreement is
more fully described in "The Merger Agreement."
The Merger is subject to the satisfaction or waiver of certain conditions,
including the approval and adoption of the Merger Agreement by the requisite
vote of the shareholders of the Company. See "The Merger Agreement." Under
Panama Law and the articles of incorporation of the Company, the affirmative
vote of (i) the holders of two-thirds of the outstanding Shares, voting
separately as a class, and (ii) the holders of two-thirds of the outstanding
shares of the Series A $2.25 Cumulative Convertible Preferred Stock, $.01 par
value, of the Company ("Preferred Stock"), voting separately as a class, are
required to approve and adopt the Merger Agreement and the Merger. Parent, as
the beneficial holder of all of the Preferred Stock, has agreed to vote its
shares of Preferred Stock in favor of the Merger and the Merger Agreement. If
Parent and Purchaser own two-thirds of the outstanding Shares as a result of the
Offer or otherwise, Parent and Purchaser would have sufficient voting power to
and could approve the Merger without the affirmative vote of any other
shareholder of the Company. The Company has agreed to cause a meeting of its
shareholders to be held as soon as reasonably practicable after consummation of
the Offer for the purpose of voting on the approval and adoption of the Merger
and the Merger Agreement. Parent and Purchaser have agreed to vote their Shares
in favor of the Merger.
No appraisal rights are available in connection with the Offer or the Merger.
See "Rights of Shareholders in the Offer and the Merger."
THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION THAT SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE WITH
RESPECT TO THE OFFER.
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SPECIAL FACTORS
BACKGROUND OF THE OFFER; RECOMMENDATION OF THE INDEPENDENT COMMITTEE AND THE
COMPANY BOARD
On January 31, 1995, Parent and Offshore Pipelines, Inc. ("OPI") consummated a
transaction (the "OPI Merger") pursuant to which Parent contributed its
worldwide marine construction businesses to the Company, a newly-formed Panama
corporation, and OPI was merged into a wholly-owned subsidiary of the Company.
As a result of the OPI Merger, the shareholders of OPI acquired approximately
36% of the outstanding Shares, and Parent retained the remaining 64% of the
outstanding Shares and all of the Preferred Stock.
In connection with the OPI Merger, the Company Board established the
Independent Committee, comprised of directors who were not present or former
officers or employees of Parent or the Company as an oversight committee to
review the fairness to the Company and its public shareholders of certain
transactions between the Company and Parent. At the same time, Parent and the
Company agreed that the Company would not take certain actions without the
approval of the Independent Committee or the affirmative vote of the holders of
a majority of the outstanding voting stock of the Company owned by persons other
than Parent and its subsidiaries. Although this agreement expired in January
1998, the Independent Committee continued to review and approve all significant
transactions between the Company and Parent.
Over the last four years, representatives of the Company, the Independent
Committee and Parent have had general conversations from time to time concerning
the Company's strategic alternatives and Parent's investment in the Company.
At a meeting of the Company Board on November 11, 1998, Mr. Roger E. Tetrault,
Chairman and Chief Executive Officer of Parent and the Company, advised the
Company Board that Parent was considering various strategic alternatives,
including the possible acquisition of the publicly-held Shares. No terms were
discussed. Mr. Tetrault identified possible benefits that could result from a
combination of the two companies. He also indicated that if Parent decided to
make such a proposal, it would likely be made in late February or early March
1999 and that Parent would advise the Company Board upon completion of its
review. The Company Board determined that any such proposal would be considered
by the Independent Committee. The Independent Committee consisted of Messrs.
William J. (Bill) Johnson (Chairman), Rick L. Burdick, Sean C. O'Keefe, Cedric
E. Ritchie and Robert L. Howard. It was determined that Mr. Howard would recuse
himself from participation on the Independent Committee in connection with its
consideration of any proposal made by Parent because of his position as a member
of the Parent Board of Directors (the "Parent Board"). None of the four members
of the Independent Committee who participated in the consideration of the
proposals from Parent were present or former employees, officers or directors of
Parent or employees or officers of the Company.
On November 13, 1998, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") made a presentation to the Parent Board about various
strategic alternatives, including a possible acquisition by Parent of the
publicly-held Shares of the Company. During the meeting, the Parent Board
empaneled a Finance Committee, consisting of Messrs. John W. Johnstone, Jr.
(Chairman), Philip J. Burguieres, William McCollam, Jr. and Bruce DeMars (the
"Finance Committee").
On November 25, 1998, the Finance Committee discussed several strategic
initiatives of Parent. The Finance Committee reaffirmed its commitment to
complete its review of all of the strategic initiatives currently under
consideration by the Finance Committee, prior to making a decision whether or
not to seek to acquire the publicly-held Shares of the Company. Each member of
the Finance Committee confirmed that he did not own any Shares.
In December 1998, Parent engaged Davis Polk & Wardwell ("Davis Polk") as its
legal advisor with respect to the strategic initiatives under review.
In early December 1998, Mr. Tetrault suggested that the Independent Committee
should consider engaging financial and legal advisors in anticipation of a
possible proposal from Parent.
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The Independent Committee engaged Baker & Botts, L.L.P. ("Baker & Botts") as
its legal advisor on December 17, 1998 and Simmons as its financial advisor on
January 5, 1999.
On January 4, 1999, the Finance Committee concluded that it should analyze and
develop alternatives for acquiring the publicly-held Shares. On January 20,
1999, the Finance Committee engaged Merrill Lynch as its financial advisor.
The Independent Committee met with its legal and financial advisors in
Houston, Texas, on January 12, 1999. At that meeting, Baker & Botts addressed
the Independent Committee concerning their duties and responsibilities under
applicable law. The members of the Independent Committee acknowledged that in
considering and negotiating any transaction with Parent their responsibility was
to act in the best interests of the Company's public shareholders. The members
of the Independent Committee determined that consideration of any business
combination between the Company and Parent was within the Independent
Committee's scope of authority, but indicated that the Company Board should
consider a resolution confirming the Independent Committee's authority to act on
any such transaction. During this meeting, Simmons outlined the scope of their
anticipated activities in advising the Independent Committee, including
providing a financial analysis of any proposals which may be received from
Parent and an evaluation of possible alternative transactions, providing, if
requested, a fairness opinion as to a business combination between the Company
and Parent and assisting the Independent Committee in negotiating with Parent.
The Independent Committee decided to wait until it received a proposal from
Parent before beginning discussions with Parent.
On February 1, 1999, the Finance Committee met with Merrill Lynch to discuss
alternatives for acquiring the publicly-held Shares of the Company. Merrill
Lynch reviewed with the Finance Committee its study and evaluation of the
Company, Parent and several proposed transactions, which included analyses of
comparable companies, comparable transactions, the values of the Company and
Parent, the relative values of the two companies, premiums in a stock for stock
transaction and premiums in similar public transactions. This information was
presented on the following day to the Parent Board.
On February 17, 1999, Parent and the Company executed a confidentiality
agreement (the "Confidentiality Agreement"), under which Parent agreed to
provide to the Company certain confidential information relating to its
operations and the Company agreed to keep all nonpublic information received
from Parent in confidence, subject to certain exceptions.
On March 4, 1999, Simmons met with Messrs. Johnson and O'Keefe to discuss
their analysis to date, including preliminary analysis of the business and
prospects of the Company and Parent, analysis of the values of the Company and
Parent, the relative values of the two companies, premiums in a stock
transaction, and possible alternative transactions for the holders of the
Shares. On March 9, 1999, Simmons met with Mr. Burdick to review the foregoing
preliminary analysis.
At a meeting on March 9, 1999, the Finance Committee considered various
alternatives for acquiring the publicly-held Shares and determined to make a
specific proposal to the Independent Committee.
On March 10, 1999, the Finance Committee delivered its initial proposal to the
Independent Committee. The proposal involved a merger of a newly-formed
subsidiary of Parent into the Company, whereby each Share not owned by Parent
would become 1.15 shares of common stock of Parent ("Parent Stock") and the
Company would become a wholly-owned subsidiary of Parent (the "Initial
Proposal"). The Initial Proposal was disclosed to the public on March 10, 1999.
In response, the Independent Committee announced that it would consider the
Initial Proposal.
On March 11, 1999, the Company Board adopted resolutions confirming the
Independent Committee's authority to act with respect to any proposal for a
business combination between Parent and the Company.
On March 15, 1999, representatives of Merrill Lynch and Simmons met to discuss
the Initial Proposal. During this meeting, Merrill Lynch presented an overview
of the merits of the Initial Proposal. Merrill Lynch and Simmons discussed,
among other things, the small public float in the Shares, the confusion in the
market perception of Parent and the rationale for the combination (including
cost savings and increased analyst and institutional interest in Parent).
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Because the Initial Proposal involved an exchange of stock, both companies and
their advisors requested and undertook due diligence. On March 17, 1999,
management of Parent made a presentation and answered questions posed by the
Company's advisors. On March 22, 1999, the Company's management made a similar
presentation. Further due diligence was conducted during the following weeks.
The Independent Committee met with its advisors on April 1, 1999. At that
meeting, representatives of Baker & Botts discussed the duties and
responsibilities of the members of the Independent Committee in connection with
their consideration of a business combination with Parent, stressing the
importance of actively and independently representing the interests of the
minority shareholders of the Company. Representatives of Simmons began a
discussion of the Initial Proposal by indicating that a valuation of Parent was
complicated because of Parent's contingent liabilities. Simmons indicated that
these contingent liabilities were not easily quantified, but should be
considered in any evaluation of Parent. Simmons then reviewed with the
Independent Committee its study and evaluation of the Company, Parent and the
Initial Proposal, which included analyses of comparable companies, comparable
transactions, ranges of values for the Company and Parent, the relative values
of the two companies, premiums in a stock for stock transaction and premiums in
similar public transactions and possible alternative transactions. After an
extensive discussion of the Simmons analysis and the terms of the Initial
Proposal, the Independent Committee determined that the Initial Proposal was
inadequate because of, among other things, the substantial increase in the
market price for oil service stocks since the date the Initial Proposal was
delivered and the Independent Committee's belief that sufficient value had not
been given to the Company's substantial excess cash. The Independent Committee
authorized Mr. Bill Johnson (Chairman of the Independent Committee) to contact
Mr. John Johnstone (Chairman of the Finance Committee) to arrange a meeting
between the financial advisors of each Committee.
Unable to reach Mr. Johnstone, Mr. Johnson contacted Mr. Philip Burguieres,
another member of the Finance Committee, on April 1, 1999 to inform him that the
Independent Committee had determined that the Initial Proposal was inadequate
and to suggest that Simmons and Merrill Lynch meet to discuss their valuations.
Mr. Burguieres agreed to authorize Merrill Lynch to meet with Simmons, and Mr.
Johnson instructed Simmons to arrange the meeting.
On April 6, 1999, Simmons and Merrill Lynch met to discuss their respective
valuations of the Company and Parent. They discussed the Initial Proposal and
alternatives, including combinations that would involve cash and stock or all
cash as consideration. Simmons indicated that it could not recommend the
Initial Proposal. Merrill Lynch left the meeting with the impression that
Simmons would be willing to recommend to the Independent Committee an offer of
1.15 shares of Parent Stock plus $4 in cash for each Share.
On April 8, 1999, the Finance Committee met to review the results of the
meeting between Merrill Lynch and Simmons. Based on Merrill Lynch's
understanding of the position of the Independent Committee, the Finance
Committee decided to increase its offer to 1.15 shares of Parent Stock plus
$1.50 in cash for each Share.
On April 9, 1999, Merrill Lynch informed Simmons that the Finance Committee
had increased its offer to 1.15 shares of Parent Stock plus $1.50 in cash per
Share. Merrill Lynch also told Simmons that the Finance Committee was very
concerned about the possibility that any transaction with the Company might
cause dilution to Parent's per share earnings. Simmons communicated this to the
Independent Committee, which instructed Simmons to develop an analysis of the
dilution to Parent's per share earnings assuming that the Company's excess cash
was invested at a rate of return greater than money market rates of return.
On April 9, 1999, Baker & Botts and the Independent Committee received from
Davis Polk an initial draft of a proposed merger agreement.
Concerned that the valuations of the two committees may still be too far apart
for a transaction to materialize, the Independent Committee instructed Simmons
to contact Merrill Lynch to determine if Parent would consider selling its
Shares and, if so, at what price. Simmons was informed that Parent was not
interested in soliciting offers to purchase its Shares.
On April 13, 1999, the Independent Committee convened by telephone with its
advisors. Simmons' dilution analysis was reviewed and discussed. The dilution
analysis indicated that under certain rate of return assumptions,
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Parent could significantly reduce its pro forma projected earnings per share
dilution by investing the Company's excess cash in capital projects or
acquisitions rather than continuing to earn money market rates of return. The
Independent Committee also discussed its concern about the proper valuation of
Parent's contingent liabilities. After this discussion, the Independent
Committee decided to present to the Finance Committee a counteroffer of 1.15
shares of Parent Stock and $5 in cash per Share. The Independent Committee also
instructed Baker & Botts on several points to be included in the Independent
Committee's comments on the proposed merger agreement, the most important of
which was that the proposed transaction should be conditioned upon the
affirmative vote of holders of a majority of the outstanding Shares other than
Shares beneficially owned by Parent.
On April 14, 1999, Simmons met with Merrill Lynch to review the dilution
analysis and present the Independent Committee's counteroffer. Simmons
suggested that members of the two committees and their financial advisors meet
to discuss their differences and try to reach a resolution.
On April 15, 1999, the Independent Committee's comments on the initial draft
of the merger agreement were delivered to Davis Polk.
On April 16, 1999, the Finance Committee met to discuss the counteroffer from
the Independent Committee. At the end of the meeting, the Finance Committee
asked its advisors to seek clarification of the terms of the counteroffer from
the advisors to the Independent Committee.
On April 16, 1999, Merrill Lynch and Simmons discussed the terms of the
counteroffer.
On April 19, 1999, the Finance Committee reconvened to hear the report from
its advisors concerning their discussions with the advisors to the Independent
Committee. After extended discussions, the Finance Committee unanimously
determined to terminate discussions with the Independent Committee.
Promptly after the meeting, Davis Polk informed Baker & Botts that the Finance
Committee had decided to terminate the merger discussions with the Independent
Committee because of a failure to reach agreement on the financial terms of the
transaction. A press release to that effect was issued the following day.
After discussions with individual members of the Independent Committee and
with its legal and financial advisors, Mr. Bill Johnson contacted Mr. Philip
Burguieres on April 22, 1999 in an attempt to restart discussions between the
two committees.
On April 29, 1999 Mr. Johnson and Simmons met to discuss certain analyses
Simmons had prepared, including analysis of the pro forma effect on Parent's
projected earnings per share of an all cash acquisition of the publicly-held
Shares at different transaction values.
On April 30, the Finance Committee convened and decided to authorize Mr.
Burguieres to meet with Mr. Johnson.
On May 1, 1999, Mr. Burguieres and Merrill Lynch met to discuss certain
analyses Merrill Lynch had prepared, including an analysis of the pro forma
effect on Parent's projected earnings per share of an all cash acquisition of
the publicly-held Shares at various consideration values.
Messrs. Johnson and Burguieres met on May 4, 1999. They discussed the recent
increase in the price of the Shares, the valuation of the Company's excess cash
and the opportunity to earn higher returns, the possible dilution to Parent's
earnings per share and other factors relating to value. After further
discussion, Messrs. Johnson and Burguieres agreed to recommend to their
respective committees an all cash transaction at $35.62 per Share.
Later that day, the Finance Committee met to review the report and
recommendation from Mr. Burguieres. Merrill Lynch advised the Finance Committee
that they were of the opinion that the consideration proposed to be paid to the
holders of Shares (other than Parent) was fair from a financial point of view to
Parent. Based on the foregoing, the Finance Committee voted unanimously to
recommend the $35.62 all cash proposal to the full Board of Parent.
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The Independent Committee met by telephone during the afternoon of May 4, 1999
with its legal and financial advisors. Mr. Johnson presented the proposal to
the Independent Committee, and Simmons provided certain updated analyses of the
Company and the terms of the proposed transaction, including analyses of the
premiums and multiples implied by the $35.62 per Share offer and comparisons of
these results to comparable companies and comparable transactions. Simmons
informed the Independent Committee that it was prepared to deliver a fairness
opinion with respect to a transaction priced at $35.62 per Share. Members of
the Independent Committee noted that an all cash transaction removed the risk
associated with Parent's contingent liabilities, a major concern raised by the
Initial Proposal. Representatives of Baker & Botts informed the Independent
Committee of discussions with Davis Polk regarding the revised terms of the
proposed merger. The Independent Committee instructed Baker & Botts regarding
its comments on the revised merger agreement, including that the proposed
transaction should be structured as a two step transaction with a tender offer
followed by a merger and that the tender offer should be conditioned upon there
being validly tendered and not withdrawn prior to the expiration of the tender
offer a number of Shares equal to at least a majority of the outstanding Shares
other than Shares beneficially owned by Parent. After further discussion, the
Independent Committee decided to defer action to a later date allowing the
Independent Committee members an additional opportunity to consider the proposal
and further review the extensive materials provided by Simmons during the
negotiation process.
On May 5, 1999, the full Board of Parent met to consider the $35.62 all cash
proposal, the recommendation of the Finance Committee and the advice of Merrill
Lynch and Davis Polk. After a full discussion, the Board of Parent approved the
proposal subject to Mr. Tetrault being satisfied that the financing necessary to
consummate the transaction was available. Three directors who were also
directors of the Company (Messrs. Tetrault, Woolbert and Howard) indicated that
they were in favor of the proposal but, on advice of counsel, abstained from
voting.
Promptly thereafter, Parent commenced discussions with Citibank about
providing a $525 million facility to finance the transaction. On May 7, 1999,
Citibank issued to Parent a commitment letter for the financing. See "Financing
of the Offer and the Merger." Mr. Tetrault determined that he was now satisfied
that the necessary financing was available.
On May 5, 1999, the Independent Committee met to again consider the proposed
transaction. Members of the Independent Committee discussed the terms of the
Merger Agreement, and representatives of Simmons reviewed their analysis of the
fairness of the proposal and rendered an oral opinion (subsequently confirmed by
delivery of a written opinion dated May 6, 1999) to the effect that, as of such
date and based upon and subject to certain matters stated in such opinion, the
consideration to be paid in the Offer and the Merger was fair to the holders of
Shares (other than Parent) from a financial point of view. The Independent
Committee then unanimously determined that the terms of the Offer and the Merger
are fair to and in the best interests of the Company's shareholders (other than
Parent), and unanimously voted to recommend that the Company Board approve the
Merger Agreement and the transactions contemplated thereby, including the Offer
and the Merger. At the meeting, the Independent Committee requested that
Simmons update its analysis for purposes of a summary presentation and
confirmation of its oral opinion at a meeting of the Company Board to be held on
the following day.
On May 6, 1999, the Company Board met to consider the Merger Agreement and the
transactions contemplated thereby. Mr. Johnson described the terms of the
Merger Agreement and indicated that the Independent Committee had unanimously
approved the Merger Agreement and recommended that the Company Board approve the
Merger Agreement. Representatives of Simmons described their review and
analysis of the transaction and confirmed its oral fairness opinion provided to
the Independent Committee on May 5, 1999. Representatives of Baker & Botts then
described the principal terms of the Merger Agreement. After a full discussion,
the Company Board accepted the recommendation of the Independent Committee and
(i) determined that the terms of the Offer and the Merger were fair to and in
the best interests of the Company's shareholders (other than Parent), (ii)
approved the Merger Agreement and authorized the execution and delivery thereof
and (iii) determined to recommend that the shareholders of the Company tender
their Shares pursuant to the Offer and approve the Merger Agreement. Prior to
participating in the determinations and recommendations of the Company Board,
the members of the Company Board who were also directors or officers of Parent
identified their affiliations with Parent and noted that as a result of such
affiliations they had a potential conflict of interest. As a result, Roger E.
Tetrault, Robert L. Howard and Richard E. Woolbert elected to abstain.
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FAIRNESS OF THE OFFER AND THE MERGER
Independent Committee. In reaching its determinations referred to above, the
Independent Committee considered the factors listed below, each of which, in the
view of the Independent Committee, supported such determinations. The following
discussion of the factors considered by the Independent Committee is not
intended to be exhaustive but summarizes the material factors considered.
(i) The fact that the per Share price ($35.62) to be paid in the Offer and
the Merger represents (a) a premium of approximately 12.6% over the closing
price of the Shares ($31.63) on the New York Stock Exchange ("NYSE") on May 4,
1999 (the day prior to the Independent Committee's recommendation to the Company
Board) and an effective premium of 21.4% over such price per Share if no premium
were attributed to the Company's excess cash, estimated by Simmons at $12.95 per
share (Simmons determined the effective premium by subtracting the excess cash
per share from both the $35.62 Offer Price and from the closing price of the
Shares on May 4, 1999 and calculating the premium of the adjusted Offer Price to
the adjusted price on May 4, 1999), (b) a premium of approximately 19.2% over
the per Share price estimated by Simmons ($29.89) that would have prevailed on
May 4, 1999, recognizing the recent significant recovery in oil and gas service
industry equities but excluding any speculative activity occasioned by the
recent negotiations had been built into the Share price and the effective
premium (calculated in a similar manner as above) of 33.8% over such price if no
premium were attributed to the Company's excess cash, and (c) a premium of 58.8%
over the 20-day average trading price of the Shares through March 9, 1999
($22.43) (the day before the announcement of the Initial Proposal before oil
service stocks began their general uptrend associated with improved crude
prices) and the effective premium (calculated in a similar manner as above) of
139.1% over such price if no premium were attributed to the Company's excess
cash.
(ii) The fact that the per Share price to be received in the Offer and the
Merger is payable in cash, thereby eliminating any uncertainties in valuing the
consideration.
(iii) The Company's shareholder profile, the percentage of the outstanding
Shares owned by Parent, the absence of contractual restrictions on the
acquisition of additional Shares by Parent, and Parent's stated unwillingness to
solicit offers to purchase its Shares to a third party, all of which led the
Independent Committee to conclude that exploration of a business combination
with a third party was not practicable.
(iv) The Independent Committee's belief, based upon Company management and
Simmons presentations, that the per Share price to be paid in the Offer and the
Merger was fair in light of the financial condition, results of operations,
business and prospects of the Company as a separate company.
(v) The knowledge of the members of the Independent Committee of various
risks and uncertainties associated with a decision to continue to operate the
Company as an independent entity, including, but not limited to, trends in the
offshore construction industry and the declining backlog at the Company.
(vi) The arm's-length negotiations between the Independent Committee and its
representatives and the Finance Committee and its representatives, including
that the negotiations resulted in (a) an increase in the price at which Parent
was prepared to acquire the Shares and a change in the structure of the
transaction and the form of consideration to be received by the Company's
shareholders, and (b) the Independent Committee's belief that $35.62 per Share
was the highest price that could be obtained from Parent under the
circumstances.
(vii) The opinion of Simmons, dated May 6, 1999, that, as of the date of the
opinion and based on and subject to certain matters stated in the opinion, the
consideration to be paid in the Offer and the Merger is fair to holders of the
Shares (other than Parent) from a financial point of view, and the analyses
presented to the Independent Committee by Simmons with respect thereto. See
"Opinion of Financial Advisor to the Independent Committee."
(viii) The fact that the Minimum Condition requires that the Offer not be
consummated unless at least a majority of the outstanding Shares other than
shares beneficially owned by Parent are validly tendered pursuant to the Offer
and not withdrawn.
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(ix) The terms and conditions of the Offer, the Merger and the Merger
Agreement, including provisions that no change may be made that, without the
consent of the Company, (a) waives the Minimum Condition, (b) changes the form
of consideration to be paid, (c) decreases the per Share price or the number of
Shares sought in the Offer or (d) adds conditions.
(x) The fact that the Merger Agreement does not preclude the Independent
Committee from withdrawing or modifying its recommendation to shareholders if
failure to do so would be inconsistent with its fiduciary duties.
(xi) The provision of the Merger Agreement permitting the Company to
negotiate with third parties that make unsolicited Acquisition Proposals (as
defined in the Merger Agreement) if there is a reasonable likelihood that the
directors' fiduciary duties would otherwise be breached.
(xii) The possibility that the timing of the transaction is at a down cycle
in the offshore construction and oil service industry and that shareholders
might not be able to participate fully in the recovery (unless they took the
proceeds and reinvested in the industry).
(xiii) The fact that other transaction structures, including a transaction
that would be predominately stock for stock, would be generally nontaxable, but
would expose the Company's shareholders to the market and other risks inherent
in owning Parent Stock.
(xiv) The issues associated with the fact that the Company has significant
excess cash, including the following:
(1) after taking into account the excess cash (for which a purchaser is
unlikely to pay more than dollar for dollar), the actual premium paid
for the underlying business is substantially higher than the premium
on the whole transaction;
(2) the risks associated with deploying substantial excess cash in the
oil service industry in a period of cyclical downtrend or
diversifying into new lines of business in which the Company does not
have experience; and
(3) the possibility that Purchaser might be deemed to be paying for the
purchase with the Company's own assets.
(xv) The likelihood that the Offer and the Merger will be consummated in light
of the facts that the Offer and the Merger are not subject to any financing
condition, that Parent has represented that the funds necessary to consummate
the Offer and Merger will be available and the limited nature of the other
conditions to the Offer and the Merger.
Company Board. In reaching its determinations referred to above, the Company
Board considered the following factors: (i) the determinations and
recommendations of the Independent Committee; (ii) the factors referred to above
as having been taken into account by the Independent Committee; and (iii) the
fact that the price to be paid in the Offer and the Merger and the terms and
conditions of the Merger Agreement were the result of arm's-length negotiations
between the Independent Committee and the Finance Committee.
The description set forth above of the factors considered by the Company
Board, including members of the Independent Committee, is not intended to be
exhaustive, but summarizes the primary factors considered. The members of the
Company Board, including the members of the Independent Committee, evaluated the
Offer and the Merger in light of their knowledge of the business, financial
condition and prospects of the Company, and based upon the advice of financial
and legal advisors. In light of the number and variety of factors that the
Company Board and the Independent Committee considered in connection with their
evaluation of the Offer and the Merger, neither the Company Board nor the
Independent Committee found it practicable to assign relative or specific
weights to the foregoing factors, and, accordingly, neither the Company Board
nor the Independent Committee did so. Individual
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members of the Company Board and the Independent Committee may have given
differing weights to different factors and may have viewed certain factors more
positively or negatively than others.
The Company Board, including the members of the Independent Committee,
believes that the Offer and the Merger are procedurally fair because, among
other things: (i) the Independent Committee consisted entirely of directors who
were neither employees or officers of the Company nor employees, officers or
directors of Parent and were appointed to represent the interests of the
minority shareholders of the Company; (ii) the Independent Committee retained
and was advised by independent legal counsel; (iii) the Independent Committee
retained Simmons as its independent financial advisor to assist it in evaluating
a potential transaction with Parent and received advice from Simmons; (iv) the
Minimum Condition which may not be waived by Purchaser without the consent of
the Company and which has the effect of requiring that in order for the Offer to
be successful, a majority of the publicly-held Shares must be tendered and not
withdrawn; (v) the Independent Committee engaged in extensive deliberations in
evaluating the Offer and the Merger and alternatives thereto; and (vi) the fact
that the $35.62 per Share price and the other terms and conditions of the Merger
Agreement resulted from active arm's-length bargaining between the Independent
Committee and its representatives, on the one hand, and the Finance Committee
and its representatives, on the other hand. The Company's executive officers
have not been asked to make a recommendation as to the Offer or the Merger.
OPINION OF FINANCIAL ADVISOR TO THE INDEPENDENT COMMITTEE
The Independent Committee engaged Simmons to act as its financial advisor in
connection with the proposed Merger Agreement and the transactions contemplated
thereby (including the Offer and the Merger). On May 5, 1999, at a meeting of
the Independent Committee held to evaluate the proposed Offer and Merger,
Simmons rendered to the Independent Committee an oral opinion (subsequently
confirmed by delivery of a written opinion dated May 6, 1999) to the effect
that, as of such date and based upon and subject to certain matters stated in
such opinion, the consideration to be paid in the Offer and the Merger is fair
to the holders of Shares (other than Parent) from a financial point of view. As
indicated above, the oral opinion of Simmons as of May 5, 1999 was only one of
many factors taken into consideration by the Independent Committee in making its
determination to approve the Merger Agreement.
THE FULL TEXT OF SIMMONS' WRITTEN OPINION DATED AS OF MAY 6, 1999, WHICH SETS
FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED, AND SCOPE AND
LIMITATIONS ON THE REVIEW UNDERTAKEN (THE "OPINION"), IS ATTACHED AS ANNEX B AND
IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF SHARES ARE URGED TO, AND
SHOULD, READ THE OPINION CAREFULLY AND IN ITS ENTIRETY. THE OPINION IS DIRECTED
TO THE INDEPENDENT COMMITTEE, IS LIMITED TO THE FAIRNESS, FROM A FINANCIAL POINT
OF VIEW, OF THE CASH CONSIDERATION TO BE RECEIVED IN THE OFFER AND THE MERGER BY
THE COMPANY'S SHAREHOLDERS (OTHER THAN PARENT) AND IS NOT A RECOMMENDATION TO
SUCH SHAREHOLDERS AS REGARDS TO THE OFFER AND THE MERGER. THE OPINION DOES NOT
ADDRESS THE UNDERLYING DECISION OF THE COMPANY TO ENGAGE IN THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT. THE SUMMARY OF THE OPINION SET FORTH
HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION.
In connection with its Opinion, Simmons has, among other things, (1) reviewed
and analyzed certain publicly available business and financial information
relating to the Company that it deemed relevant, including estimates of the
future operating performance of the Company prepared by industry analysts
unaffiliated with either the Company or Parent; (2) reviewed certain business
and financial information provided to Simmons by the Company, including certain
limited financial forecasts prepared by management of the Company, relating to
its business, earnings, cash flow, assets, liabilities and prospects; (3)
reviewed certain publicly available information concerning the trading of, and
the trading market for, the Shares, including trading multiples, and compared
such information with that of certain other publicly-traded companies that it
deemed to be relevant; (4) compared the proposed financial terms of the
transactions contemplated by the Merger Agreement with the financial terms of
other transactions that it deemed to be relevant; (5) participated in certain
discussions and negotiations among representatives of the Company and Parent;
(6) reviewed the Merger Agreement; and (7) reviewed such other financial studies
and analyses and took into account such other matters as it deemed necessary,
including its assessment of general economic, market and monetary conditions.
In arriving at its Opinion, Simmons, with the consent of the Independent
Committee, assumed and relied upon the accuracy and completeness of all the
foregoing information (other than the limited financial forecasts) and did not
independently verify any of such information. With respect to such financial
forecasts, Simmons utilized certain
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information set forth therein and assumed that such information was reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of the Company as to the future financial
performance of the Company. Simmons did not conduct a physical inspection of any
of the assets, operations or facilities of the Company and did not make or
receive any independent evaluation or appraisal of any assets or liabilities
(contingent or otherwise) of the Company. Simmons noted in its Opinion that the
Company is subject to the governmental investigations and litigation described
in note (6) (the "HeereMac Litigation") to the interim financial statements of
the Company included in its Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998, and that, upon consummation of the Merger, the shareholders
of the Company (other than Parent) will be relieved of the exposure to the
potential risk that the Company will be forced to pay damages in connection with
the HeereMac Litigation in excess of any current accruals therefor. Simmons
expressed no opinion with respect to any matter relating to any of such
litigation. Simmons was not requested to approach and did not approach any
unaffiliated persons or entities with respect to the acquisition of the Company
or any of its subsidiaries or any of their assets. Simmons' Opinion is
necessarily based upon market, economic and other conditions as they existed and
could be evaluated on, and the information made available to it as of, the date
of its Opinion.
In preparing its Opinion for the Independent Committee, Simmons performed a
variety of financial and comparative analyses, including those described below.
The summary of the analyses performed by Simmons as set forth below does not
purport to be a complete description of the analyses underlying the Opinion.
The presentation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial or summary description. No company or transaction used in such analyses
as a comparison is identical to the Company or the transactions contemplated by
the Merger Agreement, nor is an evaluation of the results of such analyses
entirely mathematical; rather, it involves complex considerations and judgments
concerning financial and operational characteristics and other factors that
could affect the acquisitions, public trading or other values of the companies
or transactions being analyzed. The estimates contained in such analyses and
the ranges of valuations resulting from any particular analysis are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by such analyses. In addition, analyses relating to the value of the business
or securities do not purport to be appraisals or to reflect the prices at which
businesses, companies or securities actually may be sold. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty.
In arriving at its Opinion, Simmons made qualitative judgments as to the
significance and relevance of each analysis and factor it considered.
Accordingly, Simmons believes that its analyses must be considered as a whole
and that selecting portions of its analyses and factors, without considering all
analyses and factors, could create an incomplete view of the processes
underlying such analyses and its Opinion. In its analyses, Simmons made
numerous assumptions with respect to general business, economic, market and
financial conditions, as well as other matters, many of which are beyond the
control of the Company and involve the application of complex methodologies and
experienced and educated judgment.
The following is a summary of the material analyses performed by Simmons in
connection with its Opinion.
Premium Analyses
In order to determine the magnitude of the premium implicit in the Offer
Price, Simmons compared the Offer Price to three different per share prices of
the Shares: (i) the closing sales price of the Shares on the NYSE on May 6,
1999, the day next preceding public announcement of the Merger Agreement (the
"May 6 Closing Price"), of $30.50; (ii) the estimated Share price on May 6,
1999, estimated in the manner described below, in the absence of any
announcement regarding a proposed transaction (the "Estimated May 6 Price") of
$29.38; and (iii) the average of the closing sales prices for the Shares for the
20 trading days ending on March 9, 1999 (the "Pre-announcement Date"), the day
preceding Parent's public announcement of its offer to acquire the Company for
Parent Stock (the "Pre-announcement Price") of $22.43. Simmons found that the
Offer Price implied a premium of 16.8% over the May 6 Closing Price, 21.2% over
the Estimated May 6 Price and 58.8% over the Pre-announcement Price.
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In addition, Simmons compared the Offer Price to the May 6 Closing Price, the
Estimated May 6 Price and the Pre-announcement Price, in each case as adjusted
to eliminate any premium on the Company's excess cash. It was Simmons' judgment
that the Company's cash and cash equivalents and investments in debt securities
exceeded the Company's cash needs at May 6 by an amount equal to $12.95 per
Share. In order to gauge the premium implied by the Offer Price over the May 6
Closing Price as adjusted to eliminate any premium on excess cash, Simmons
subtracted the per share amount of the excess cash ($12.95) from each of the May
6 Closing Price (to yield an adjusted price per Share of $17.55) and the Offer
Price (to yield $22.67 per Share) and compared the adjusted Offer Price to the
adjusted May 6 Closing Price. This calculation resulted in a 29.2% premium. In
like fashion, Simmons adjusted both the Estimated May 6 Price and the Pre-
announcement Price to exclude the excess cash and determined that the premium so
implied with respect to the adjusted Estimated May 6 Price was 38.0% and the
premium so implied with respect to the adjusted Pre-announcement Price was
139.1%.
Simmons utilized the Estimated May 6 Price in order include a measure for
comparison purposes that was not influenced by the announcement of Parent's
offer to acquire the Company but did recognize the recent significant recovery
in the value of oil and gas service industry equities. In order to derive this
price, Simmons calculated the average increase during various periods ending on
May 6, 1999 for three separate indices consisting of comparable companies, i.e.,
the OSX Index (an index of 15 large oil service companies used to price options
on the Philadelphia Exchange); an index of "Offshore Construction Comparable
Companies" (as defined below); and an index of "Oil Service Comparables" (as
defined below). For each index, Simmons calculated the average increase
(derived from changes in stock prices of the companies comprising each index)
through May 6, 1999 based on (i) the closing prices on the Pre-announcement Date
(the "One Day Price"), (ii) the average closing prices for the 20 trading day
period ending on the Pre-announcement Date (the "20 Day Price") and (iii) the
average closing prices for the three months ending on the Pre-announcement Date
(the "Three Month Price"). Simmons then averaged the increase in each index and
found that the average increases were 47.3% (One Day Price), 59.1% (20 Day
Price) and 53.7% (Three Month Price). Simmons then subtracted the amount of the
excess cash ($12.95 per Share) from the One Day Price, the 20 Day Price and the
Three Month Price for the Shares yielding net prices of $11.43, $9.48 and
$11.31, respectively. Simmons then increased each such net price for the Shares
by the average industry percentage price recovery indicated above applicable to
each price determination period, added back the excess cash ($12.95), yielding
estimated Share prices, reflecting the recovery in oil service industry equities
but unaffected by Parent's public announcement, of $29.78 (One Day Price),
$28.04 (20 Day Price) and $30.33 (Three Month Price). Based on that range,
Simmons determined the Estimated May 6 Price of $29.38.
The "Offshore Construction Comparable Companies" are: Bouygues Offshore S.A.,
Cal Dive International, Inc., Coflexip S.A., Global Industries, Ltd., Horizon
Offshore, Inc., Gulf Island Fabrication, Inc., Oceaneering International, Inc.,
and Stolt Comex Seaway S.A. The "Oil Service Comparables" are BJ Services
Company, Cooper Cameron Corporation, National-Oilwell, Inc., Smith
International, Inc., and Tidewater, Inc.
Based on the foregoing, Simmons determined that the premium implied by the
Offer Price ranged from 16.8% to 58.8% in the cases of the unadjusted prices and
from 29.2% to 139.1% in the cases of the adjusted prices.
Analysis of Comparable Transactions
Simmons reviewed publicly available information with respect to various
transactions in which minority stock holdings of publicly-held corporations were
acquired for cash by a controlling stockholder. In particular, Simmons examined
thirteen such transactions that have occurred since January 1, 1994 that were in
the range of $100 million to $1 billion. The source of the data was Securities
Data Corporation and the specific transactions ranged in size from $107.6
million to $462.3 million. Simmons determined that the median transaction value
was $190.7 million, the median percentage of the outstanding common stock
acquired was 29.9% and that the median closing valuation premium relative to the
pre-announcement price of the common stock in each such transaction was 26.3%
(one day prior to announcement), 23.6% (one week prior to announcement) and
26.8% (four weeks prior to announcement) and the mean closing valuation premium
relative to the pre-announcement price of the common stock in each such
transaction was 32.6% (one day prior to announcement), 31.3% (one week prior to
announcement) and 32.3% (four weeks prior to announcement).
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Simmons compared these transaction values and premiums to the transactions
contemplated by the Merger Agreement. In their analysis, Simmons calculated the
premiums implied by the Offer Price on a basis where no premium was attributed
to the Company's excess cash, as described above. It found a transaction value
of $520.3 million, that the percentage of outstanding Shares to be acquired was
37.2% and that the implied premiums were as follows: based on one day prior to
announcement of the all cash offer of $35.62 per Share (May 6, 1999), the
premium was 29.2%; based on one week prior to announcement (April 29, 1999), the
premium was 22.2%; and based on four weeks prior to announcement (April 8,
1999), the premium was 41.8%. Simmons then calculated the premium implied in
the Offer Price relative to the prices for the Shares one day prior to the first
announcement by Parent of an offer to acquire the Shares (other than Shares
owned by Parent) on March 10, 1999 (March 9, 1999), one week prior (March 3,
1999) and four weeks prior (February 10, 1999) adjusted in the same fashion as
described above for the Estimated May 6 Price. The implied premiums so
calculated were 34.7% (March 9, 1999), 64.9% (March 3, 1999) and 27.0% (February
10, 1999).
Simmons compared the premiums implied by the Offer Price on an unadjusted
basis (ranging from 22.2% to 41.8%) and on an adjusted basis (ranging from 27.0%
to 64.9%) to the premiums implied by the median of the comparable transactions
(ranging from 23.6% to 26.8%) and the mean of the comparable transactions
(ranging from 31.3% to 32.6%).
Analysis of Selected Publicly-traded Comparable Companies
Using publicly available information, Simmons compared selected valuation
multiples for the Company calculated using the Offer Price with respective
corresponding multiples of certain similar publicly-traded companies. Simmons
selected a group of companies from the universe of possible companies based on
its views as to the comparability of the financial and operating characteristics
of offshore construction and oil field service companies to the Company. With
respect to each such analysis, Simmons made such comparisons with the following
companies (the "Comparable Companies"): Aker Maritime Corporation, Coflexip
S.A., Cooper Cameron Corporation, Dril-Quip, Inc., Det Sndenfjelds - Norske
Dampskibsselskab, IHC Caland N.V., Global Industries, Ltd., Oceaneering
International, Inc., Saipem S.p.A. and Stolt Comex Seaway, S.A.
The two primary multiples derived by Simmons were (i) an enterprise value,
calculated as the sum of the aggregate market value of the outstanding common
stock of an enterprise plus its debt and preferred stock (the "Enterprise
Value") divided by its earnings before depreciation, interest and taxes
("EBDIT") and (ii) the price per share of common stock divided by the earnings
per share of common stock. Simmons made these determinations for the Company
for the years ending March 31, 2000 and March 31, 2001 based on limited
financial forecasts prepared by the Company and provided to Simmons, and for the
Comparable Companies for similar fiscal periods using financial projections from
publicly-available sources, including First Call.
EBDIT. Simmons determined that the Enterprise Value of the Company implied
by the Offer Price represented a multiple of 16.9 times the Company's forecast
EBDIT of $82.8 million for fiscal year 2000 and a multiple of 13.1 times the
Company's forecast EBDIT of $107.3 million for fiscal year 2001. Simmons made
further determinations after adjusting to exclude the value of the Company's
excess cash, as estimated by Simmons, from the Enterprise Value implied by the
Offer Price to calculate an adjusted Enterprise Value. Simmons then calculated
that the adjusted Enterprise Value of the Company represented a multiple of
EBDIT for fiscal years 2000 and 2001 of 10.8x and 8.3x, respectively.
Simmons then derived the multiples of EBDIT for each of the Comparable
Companies by dividing the adjusted Enterprise Value for each company by its
respective projected EBDIT for the calendar years ending December 31, 1999 and
December 31, 2000. Simmons concluded that the average EBDIT multiples of the
Comparable Companies for calendar years 1999 and 2000 were 8.9x and 7.8x,
respectively.
Simmons compared the EBDIT multiples for the Company implied by the Offer
Price on an unadjusted basis for the fiscal years ending March 31, 2000 (16.9x)
and March 31, 2001 (13.1x) and on an adjusted basis for such years (10.8x and
8.3x, respectively) with the EBDIT multiples for the Comparable Companies for
the calendar years ending December 31, 1999 (8.9x) and December 31, 2000 (7.8x).
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P/E RATIO. Simmons determined that, based on nominal earnings per share of
the Company's common stock forecast by the Company for the fiscal years ending
March 31, 2000 and March 31, 2001 of $1.10 and $1.82, respectively, the Offer
Price implied price/earnings ratios for those years of 32.4x and 19.6x,
respectively. Simmons made further determinations after adjusting to exclude
from the earnings per share forecast by the Company the interest income earned
on the Company's excess cash as estimated by Simmons. To do so, Simmons
subtracted such interest income from the forecast earnings per share to obtain
an adjusted earnings per share of the Company's common stock and subtracted the
excess cash ($12.95 per Share) from the Offer Price to obtain an adjusted per
share price. Simmons thereby estimated that the price/earnings ratios
calculated using the adjusted per share price and the adjusted earnings per
share for fiscal years 2000 and 2001 were 39.7x and 17.6x, respectively.
Simmons then derived the price/earnings ratios for each of the Comparable
Companies by dividing the share price for each company by its respective
projected earnings per share for the calendar years 1999 and 2000. Simmons
determined that the average price/earnings ratios for the Comparable Companies
for calendar years 1999 and 2000 were 21.6x and 16.7x, respectively.
Simmons then compared the unadjusted price/earnings ratios for the Shares
implied by the Offer Price for fiscal years 2000 (32.4x) and 2001 (19.6x) and on
an adjusted basis for such fiscal years (39.7x and 17.6x, respectively) with the
price/earnings ratios for the Comparable Companies for the calendar years 1999
and 2000 (21.6x and 16.7x, respectively).
Other Factors and Analyses
In the course of preparing its Opinion, Simmons performed certain other
analyses and reviewed certain other matters, including, among other things, the
trading characteristics of the Shares.
Simmons is an internationally recognized investment banking firm and, as part
of its investment banking business, is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions. The
Independent Committee selected Simmons as its financial advisor because of
Simmons' experience and expertise.
Pursuant to the terms of the engagement of Simmons by the Independent
Committee, the Company has agreed to pay Simmons for its financial advisory
services in connection with the transactions contemplated by the Merger
Agreement: (i) a retainer of $250,000 payable on the date of the engagement;
(ii) a fee of $500,000 payable upon delivery of Simmons' initial study and
opinion to the Independent Committee; and (iii) a fee, contingent upon the
closing of the transactions contemplated by the Merger Agreement, equal to 2% of
any improvement in value of the minority stock calculated at the time of closing
over the 20 trading day moving average pre-announcement price. The Initial
Proposal was publicly announced by Parent on March 10, 1999. Following the
announcement of the transactions contemplated by the Merger Agreement on May 7,
1999, Simmons agreed to cap the contingent portion of its fee at $3.5 million.
In addition, the Company has agreed to reimburse Simmons for its reasonable out-
of-pocket expenses, including the fees and expenses of its legal counsel,
incurred in connection with the engagement, and to indemnify Simmons against
certain liabilities, including certain liabilities under the federal securities
laws, relating to, or arising out of its engagement, or to contribute to
payments Simmons may be required to make in respect thereof.
In 1995, Simmons was retained by Parent to perform a strategic consulting
assignment for which it received customary compensation. Simmons has also been
retained from time to time by the Company to perform investment banking services
for which it has received customary fees.
OPINION OF FINANCIAL ADVISOR TO THE FINANCE COMMITTEE
Parent retained Merrill Lynch to act as its exclusive financial advisor in
connection with the Merger Agreement and the transactions contemplated thereby.
On May 7, 1999, Merrill Lynch confirmed in writing its oral opinion previously
rendered to the Finance Committee and Parent Board (the "Merrill Lynch Opinion")
that, as of the date of the opinion and based upon and subject to the factors
and assumptions set forth therein, the price to be paid pursuant to the Offer
and the Merger was fair from a financial point of view to the Parent.
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THE FULL TEXT OF THE MERRILL LYNCH OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, MATTERS CONSIDERED, AND QUALIFICATIONS AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY MERRILL LYNCH, IS ATTACHED AS ANNEX C HERETO AND IS INCORPORATED
HEREIN BY REFERENCE. THE SUMMARY OF THE MERRILL LYNCH OPINION SET FORTH HEREIN
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
STOCKHOLDERS OF PARENT ARE URGED TO READ SUCH OPINION IN ITS ENTIRETY. THE
MERRILL LYNCH OPINION WAS PROVIDED TO THE FINANCE COMMITTEE AND PARENT BOARD FOR
ITS INFORMATION AND IS DIRECTED ONLY TO THE FAIRNESS FROM A FINANCIAL POINT OF
VIEW TO PARENT OF THE PRICE TO BE PAID PURSUANT TO THE OFFER AND THE MERGER. THE
MERRILL LYNCH OPINION DOES NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION BY
PARENT TO ENGAGE IN THE TRANSACTION CONTEMPLATED BY THE MERGER AGREEMENT. THE
MERRILL LYNCH OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO THE COMPANY'S
STOCKHOLDERS AS TO HOW SUCH STOCKHOLDERS SHOULD RESPOND TO THE OFFER OR VOTE ON
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT OR ANY MATTER RELATED THERETO.
The summary set forth below does not purport to be a complete description of
the analyses underlying the Merrill Lynch Opinion or the presentation made by
Merrill Lynch to the Finance Committee and Parent Board. The preparation of a
fairness opinion is a complex analytical process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances.
Therefore, such an opinion is not readily susceptible to partial analysis or
summary description. In arriving at its opinion, Merrill Lynch did not attribute
any particular weight to any analysis or factor considered by it, but rather
made qualitative judgments as to the significance and relevance of each analysis
and factor. Accordingly, Merrill Lynch believes that its analyses must be
considered as a whole and that selecting portions of its analyses, without
considering all of its analyses, would create an incomplete view of the process
underlying the Merrill Lynch Opinion.
In performing its analyses, numerous assumptions were made with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Merrill
Lynch, the Company and Parent. Any estimates contained in the analyses performed
by Merrill Lynch are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. Additionally, estimates of the value of businesses or securities
do not purport to be appraisals or to reflect the prices at which such
businesses or securities might actually be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. The Merrill Lynch
Opinion and Merrill Lynch's presentation to the Finance Committee and Parent
Board were among several factors taken into consideration by the Finance
Committee and Parent Board in making their determination to approve the Merger
Agreement. Consequently, the Merrill Lynch analyses described below should not
be viewed as determinative of such decisions.
In arriving at the Merrill Lynch Opinion, Merrill Lynch, among other things:
(i) reviewed certain publicly available business and financial information
relating to the Company and Parent that Merrill Lynch deemed to be relevant;
(ii) reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets, liabilities and prospects of the
Company and Parent, as well as the amount and timing of the cost-savings and
related expenses and synergies expected to result from the Merger (the "Expected
Synergies"), furnished to Merrill Lynch by the Company and Parent; (iii)
conducted discussions with members of senior management and representatives of
the Company and Parent concerning the matters described in clauses (i) and (ii)
above, as well as their respective businesses and prospects before and after
giving effect to the Offer, the Merger and the Expected Synergies; (iv) reviewed
the market prices and valuation multiples for the Shares and compared them with
those of certain publicly-traded companies that Merrill Lynch deemed to be
relevant; (v) reviewed the results of operations of the Company and compared
them with those of certain publicly-traded companies that Merrill Lynch deemed
to be relevant; (vi) compared the proposed financial terms of the Merger with
the financial terms of certain other transactions that Merrill Lynch deemed to
be relevant; (vii) participated in certain discussions and negotiations among
representatives of the Company and Parent and their financial and legal
advisors; (viii) reviewed the potential pro forma impact of the Offer and the
Merger on Parent; (ix) reviewed the Merger Agreement; and (x) reviewed such
other financial studies and analyses and took into account such other matters as
Merrill Lynch deemed necessary, including Merrill Lynch's assessment of general
economic, market and monetary conditions.
In preparing the Merrill Lynch Opinion, Merrill Lynch assumed and relied on
the accuracy and completeness of all information supplied or otherwise made
available to Merrill Lynch, discussed with or reviewed by or for Merrill Lynch,
or publicly available, and Merrill Lynch did not assume any responsibility for
independently verifying such
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information, did not undertake an independent evaluation or appraisal of any of
the assets or liabilities of the Company or Parent and was not furnished with
any such evaluation or appraisal. In addition, Merrill Lynch did not assume any
obligation to conduct, nor did Merrill Lynch conduct any physical inspection of
the properties or facilities of the Company or Parent. With respect to the
financial forecast information and the Expected Synergies, Merrill Lynch assumed
that they have been reasonably prepared and reflect the best currently available
estimates and judgments of the Company's or the Parent's management as to the
expected future financial performance of the Company or Parent, as the case may
be, and the Expected Synergies. Merrill Lynch relied upon the foregoing in
preparing the Merrill Lynch Opinion.
For purposes of rendering the Merrill Lynch Opinion, Merrill Lynch assumed, in
all respects material to its analyses, that the representations and warranties
of each party to the Merger Agreement and all related documents and instruments
contained therein were true and correct in all material respects, that each
party to such documents will perform all of the covenants and agreements
required to be performed by such party under such documents and that all
conditions to the consummation of the Offer and the Merger will be satisfied
without waiver thereof.
The Merrill Lynch Opinion is necessarily based upon market, economic and other
conditions as they existed and could be evaluated on and upon the information
made available to Merrill Lynch as of the date of such opinion. Merrill Lynch
assumed that in the course of obtaining the necessary regulatory or other
consents or approvals (contractual or otherwise) for the Offer and the Merger,
no restrictions, including any divestiture requirements or amendments or
modifications, will be imposed that will have a material adverse effect on the
contemplated benefits of the Offer and the Merger.
The following is a brief summary of the material analyses performed by Merrill
Lynch in connection with its preparation of the Merrill Lynch Opinion. The
Company provided Merrill Lynch with, among other things, projections through
2002, and Merrill Lynch mathematically extrapolated such projections through
2004.
Discounted Cash Flow Analysis. Using a discounted cash flow analysis, Merrill
Lynch calculated ranges of implied enterprise values for the Company. Merrill
Lynch utilized multiples of 2004 EBITDA ranging from 8.0x to 9.0x as the
terminal value of the enterprise and discount rates ranging from 12.0% to 14.0%.
The discount rates were based on an analysis of the weighted average cost of
capital for the Company. The discounted cash flow analysis indicated a relevant
range of per Share prices of between $34.55 and $39.31.
Merger Premium Analysis. Merrill Lynch examined the premiums paid for target
company shares in certain transactions in which minority interest holdings of
publicly-traded companies were acquired by a controlling shareholder over the
pre-announcement stock prices of such target companies. In addition, Merrill
Lynch calculated a range of per Share prices based on the price of the Shares
and a range of assumed merger premiums.
Merrill Lynch examined premiums paid over pre-announcement stock prices one
day, one week and four weeks prior to announcement in twenty-nine selected
minority interest transactions. In aggregate, such analyses indicated relevant
merger premiums between 15.0% and 25.0%. In addition, based on the closing price
per Share on May 6, 1999 of $30.50 and a range of assumed merger premiums of
between 15% and 25%, Merrill Lynch calculated a range of per Share prices of
between $35.08 and $38.13.
Comparable Company Trading Analysis. Using publicly available information,
Merrill Lynch examined the public market multiples for a group of publicly-
traded companies with financial and operating characteristics that Merrill Lynch
deemed to be comparable to the Company. This group of selected comparable
companies consisted of the following companies: Global Industries, Ltd.; Saipem
S.p.A.; IHC Caland N.V.; Aker Maritime Corporation; Dril-Quip, Inc.; Oceaneering
International, Inc.; Coflexip S.A.; Cooper Cameron Corporation; and Stolt Comex
Seaway, S.A. (collectively, the "Comparable Companies").
Merrill Lynch calculated the market value of common stock as a multiple of
estimated 1999 and 2000 after-tax cash flow for the Comparable Companies using
estimates of after-tax cash flow obtained from Merrill Lynch and First Call
Corporation, a data service which monitors and publishes a compilation of after-
tax cash flow and earnings estimates produced by selected research analysts on
companies of interest to investors. The analysis indicated market
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value as a multiple of 1999 and 2000 estimated after-tax cash flow for the
Comparable Companies ranged from 12.5x to 17.0x and from 11.0x to 14.0x,
respectively.
In addition, Merrill Lynch calculated the market value of common stock as a
multiple of estimated 1999 and 2000 earnings per share for the Comparable
Companies using estimates of earnings per share obtained from Merrill Lynch and
First Call Corporation. The analysis indicated the market value as a multiple
of 1999 and 2000 earnings per share for the Comparable Companies ranged from
25.0x to 35.0x and from 22.0x to 28.0x, respectively.
Because a significant portion of the Company's earnings and after-tax cash
flow are derived from the interest income from the existing cash balance
currently held by the Company, Merrill Lynch determined operating after-tax cash
flow and earnings per share estimates by adjusting the Company's estimates for
this interest income. Merrill Lynch calculated these operating cash flow and
earnings estimates by Merrill Lynch by subtracting the interest income as
projected by the Company from the after-tax cash flow and earnings estimates as
projected by the Company. In order to determine per share prices relevant to
these operating estimates of after-tax cash flow and earnings per share, the
relevant multiples derived in the Comparable Company Trading Analysis were then
applied to these adjusted operating estimates. The value of the cash held at the
Company was divided by the shares outstanding of the Company and added to the
value determined by the application of the Comparable Company Trading Analysis
described above. Applying this analysis to the Company's (i) fiscal year ended
March 31, 2000 and 2001 estimated after-tax cash flow, Merrill Lynch calculated
ranges of per Share prices of $31.00 to $38.00 and $32.50 to $38.25,
respectively and (ii) fiscal year ended March 31, 2000 and 2001 estimated
earnings per Share, Merrill Lynch calculated ranges of per share prices of
$23.25 to $28.00 and $35.25 to $41.75, respectively.
Merger Consequences. Merrill Lynch analyzed certain pro forma effects, which
could result from the Offer and the Merger, based on financial forecasts
provided by the Company's and the Parent's respective managements for the fiscal
years ending March 31, 2000 through 2002. Management of the Company and Parent
also provided Merrill Lynch with projections of certain synergies that are
expected to occur as a result of the Offer and the Merger. In addition, Merrill
Lynch calculated merger consequences based on the assumptions that the goodwill
associated with the Offer and the Merger was expected to be amortized over each
of 15, 20 and 30 years. Assuming a 15-year amortization of goodwill, this
analysis indicated that the Offer and the Merger would be 27.5%, 12.6% and 5.2%
dilutive to the Parent's 2000, 2001 and 2002 earnings per share, respectively.
Assuming a 20-year amortization of goodwill, this analysis indicated that the
Offer and the Merger would be 22.8%, 9.3% and 2.6% dilutive to the Parent's
2000, 2001 and 2002 earnings per share, respectively. Assuming a 30-year
amortization of goodwill, this analysis indicated that the Offer and the Merger
would be 18.2% dilutive, 6.0% dilutive and 0.0% accretive to the Parent's 2000,
2001 and 2002 earnings per share, respectively. In addition this analysis
indicated that the Offer and the Merger would be 5.0% dilutive, 0.4% accretive
and 3.8% accretive to the Parent's 2000, 2001 and 2002 after-tax cash flow per
share, respectively. The actual results achieved by the combined company may
vary from projected results, and the variation may be material.
Merrill Lynch Financial Advisor Fee. Pursuant to a letter agreement between
Parent and Merrill Lynch (the "Merrill Lynch Letter Agreement"), Parent has
agreed to pay Merrill Lynch a fee of $2.5 million, if during the period Merrill
Lynch is retained by the Parent or within one year thereafter a Recombination
Transaction (as defined in the Merrill Lynch Letter Agreement) is consummated
with the Company. Such fee is payable in cash upon the closing of such
Recombination Transaction, or in the case of a tender offer or exchange offer,
at such earlier date as may be specified in the dealer manager agreement entered
into in connection with such offer. The Parent also has agreed to reimburse
Merrill Lynch for its reasonable out-of-pocket expenses, including reasonable
fees and disbursements of its legal counsel. Additionally, the Parent agreed to
indemnify Merrill Lynch and certain related persons for certain liabilities
related to or arising out of its engagement, including liabilities under federal
securities laws.
Parent retained Merrill Lynch based upon Merrill Lynch's experience and
expertise. Merrill Lynch is an internationally recognized investment banking and
advisory firm. Merrill Lynch, as part of its investment banking business, is
continuously engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. Merrill Lynch has in the past
provided financial advisory and financing services to Parent and the Company and
may continue to do so and has received, and may
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receive, fees for the rendering of such services. In the ordinary course of its
business, Merrill Lynch and its affiliates may actively trade the debt and
equity securities of the Company and Parent (and anticipate trading after the
Merger in the securities of Parent) for their own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position in
such securities.
POSITION OF PARENT AND PURCHASER REGARDING FAIRNESS OF THE OFFER AND THE MERGER
Parent and Purchaser believe that the consideration to be received by the
Company's shareholders pursuant to the Offer and the Merger is fair to such
shareholders. Parent and Purchaser base their belief on the following facts:
(i) the fact that the Independent Committee and Company Board concluded that
the Offer and the Merger are fair to, and in the best interests of, the
Company's shareholders (other than Parent);
(ii) notwithstanding the fact that Simmons' opinion was addressed to the
Independent Committee and that neither Parent nor Purchaser is entitled to rely
on such opinion, the fact that the Independent Committee received an opinion
from Simmons that, as of the date of such opinion and based on and subject to
certain matters stated in such opinion, the consideration to be paid in the
Offer and the Merger is fair to the holders of Shares (other than Parent) from a
financial point of view;
(iii) the fact that the same consideration will be paid in both the Offer
and the Merger;
(iv) the fact that the Offer and the Merger will each provide consideration
to the Company's shareholders entirely in cash;
(v) the fact that the per Share price to be paid in both the Offer and Merger
constitutes a 16.79% premium over the closing market price of the Company's
Shares on May 6, 1999, the business day immediately prior to the date on which
the Merger Agreement was announced;
(vi) the fact that the Minimum Condition requires that the Offer not be
consummated unless at least a majority of the publicly-held Shares are validly
tendered pursuant to the Offer and not withdrawn;
(vii) the other factors enumerated by the Independent Committee as
supporting their recommendation of the Offer and the Merger; and
(viii) the terms and conditions of the Offer, the Merger and the Merger
Agreement, including the fact that the Merger Agreement does not preclude the
Independent Committee from withdrawing or modifying its recommendation to
shareholders if failure to do so would be inconsistent with its fiduciary
duties.
Parent and Purchaser did not find it practicable to assign, nor did they
assign, relative weights to the individual factors considered in reaching their
conclusion as to fairness. In light of the nature of the Company's business,
Parent and Purchaser did not deem net book value or liquidation value to be
relevant indicators of the value of the Shares. Parent's executive officers
have not been asked to make a recommendation as to the Offer or the Merger.
PURPOSE AND STRUCTURE OF THE OFFER AND THE MERGER; REASONS OF PARENT FOR THE
OFFER AND THE MERGER
The purpose of the Offer and the Merger is for Parent to increase Parent's
ownership of the Company from approximately 63% to 100%. Upon consummation of
the Merger, the Company will become a direct, wholly-owned subsidiary of Parent.
The acquisition of the Shares not owned by Parent has been structured as a cash
tender offer followed by a cash merger so as to effect a prompt and orderly
transfer of ownership of Shares from the Company's public shareholders to Parent
and Purchaser, and so as to provide such shareholders with cash for all of their
Shares.
Under Panama Law and the Company's Articles of Incorporation, the approval of
the Company Board and the affirmative vote of (i) the holders of two-thirds of
the outstanding Shares, voting separately as a class and (ii) the holders of
two-thirds of the outstanding shares of Preferred Stock, voting separately as a
class, are required to approve
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and adopt the Merger Agreement and the transactions contemplated thereby,
including the Merger. The Company Board has approved the Merger Agreement and
the transactions contemplated thereby. As the holder of all of the outstanding
shares of Preferred Stock and approximately 63% of the outstanding Shares,
Parent has agreed to vote all such shares (and all Shares purchased pursuant to
the Offer) in favor of the Merger and the Merger Agreement.
In the Merger Agreement, the Company has agreed to cause a meeting of its
shareholders to be held as soon as reasonably practicable after consummation of
the Offer for the purpose of voting on the approval and adoption of the Merger
and the Merger Agreement. The Company has agreed to use commercially reasonable
efforts to obtain such approval and adoption. If Parent and Purchaser own more
than two-thirds of the outstanding Shares as a result of the Offer or otherwise,
Parent and Purchaser would have sufficient voting power to and could approve the
Merger without the affirmative vote of any other stockholder of the Company.
Parent decided to pursue the transaction for several reasons. First, a merger
of Parent and the Company creates a more simplified organizational structure.
After the Merger, Parent and the Company will be able to eliminate approximately
$3 million a year in after-tax expenses, previously associated with the separate
management and administration of two separate, publicly-traded companies. This
simplified corporate structure will also make it more cost efficient for Parent
to access capital markets as the need to support Parent's operating groups
arises.
Second, the combination of Parent and the Company provides those investors who
wish to invest in the oil service industry with the opportunity to benefit from
the more stable earnings of Parent's non-oilfield service businesses. These
businesses counteract the cyclical oil service industry. Parent believes that
the business combination will also provide it with greater flexibility with
respect to the use of cash to support and grow all of its business units.
Finally, a combination of Parent and the Company presents a simpler, more
attractive investment for Parent's shareholders, which will be less confusing to
investors and will make the combined entity's financial performance easier to
analyze, which should increase liquidity in the common stock of Parent and make
Parent's common stock more attractive to potential investors.
PLANS FOR THE COMPANY AFTER THE OFFER AND THE MERGER
As promptly as practicable after consummation of the Offer, Parent and
Purchaser intend to effect the Merger in accordance with the terms of the Merger
Agreement. See "The Merger Agreement."
Upon the consummation of the Offer, Parent will be entitled to designate a
number of directors (rounded to the nearest whole number) to the Company Board
that equals the product of (i) the total number of directors on the Company
Board and (ii) the percentage that the number of Shares beneficially owned by
Parent bears to the total number of outstanding Shares, and the Company shall
take all action necessary to cause Parent's designees to be elected or appointed
to the Company Board, including, without limitation, increasing the number of
directors, and seeking and accepting resignations of incumbent directors.
Parent has indicated to the Company that it has no present intention to replace
or elect any new director to the Company Board during the period between the
consummation of the Offer and the consummation of the Merger, although Parent
could change its intention at any time, subject to compliance with applicable
legal requirements including Rule 14(f) of the Securities Exchange Act of 1934
(the "1934 Act") and the rules and regulations promulgated thereunder.
Until the Merger is consummated or abandoned, Parent has agreed to take all
actions necessary to permit the Independent Committee to continue in existence
without diminution of its powers or duties and its members to consist solely of
the members on May 7, 1999, or any successors selected (with the written consent
of a majority of the members of the Independent Committee) by the Company Board
who are not otherwise employed by Parent or its affiliates.
Upon consummation of the Merger, the officers of the Company will continue as
the officers of the Surviving Company, and the directors of Purchaser shall
become directors of the Surviving Company.
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Except as otherwise described in this Offer to Purchase and except for the
transactions contemplated by the Merger Agreement, Parent has no current plans
or proposals which relate to or would result in: (a) an extraordinary corporate
transaction, such as a merger, reorganization or liquidation involving the
Company; (b) a sale or transfer of a material amount of assets of the Company;
(c) any change in the management of the Company or any change in any material
term of the employment contract of any executive officer; or (d) any other
material change in the Company's corporate structure or business.
Nevertheless, Parent may initiate a review of the Company and its assets,
corporate structure, capitalization, operations, properties, policies,
management and personnel to determine what changes, if any, would be desirable
following the Merger in order best to organize and coordinate the activities of
the Company and Parent. In particular, Parent expressly reserves the right to
make any changes that it deems necessary or appropriate in light of its review
or in light of future developments.
RIGHTS OF SHAREHOLDERS IN THE OFFER AND THE MERGER
Under Panama Law, shareholders do not have appraisal rights as a result of the
Offer or Merger. If the Merger is consummated, each outstanding Share (other
than Shares beneficially owned by Parent) will be converted into $35.62 in cash
or any higher price paid for each Share pursuant to the Offer.
THE MERGER AGREEMENT
The following is a summary of the material provisions of the Merger Agreement,
a copy of which is attached as Annex A to this Offer to Purchase. The summary
is qualified in its entirety by reference to the Merger Agreement. Shareholders
are urged to read the Merger Agreement in its entirety.
The Offer
The Merger Agreement provides for the making of the Offer. The obligation of
Purchaser to accept for payment and pay for Shares tendered pursuant to the
Offer is subject to the satisfaction or waiver of the Minimum Condition and
certain other conditions that are described in "Certain Conditions of the
Offer." Pursuant to the Merger Agreement, Purchaser may waive any condition to
the Offer or change any of the terms or conditions of the Offer, except that,
without the prior written consent of the Company, Purchaser may not waive the
Minimum Condition or make any change in the Offer which changes the form of
consideration to be paid or decreases the price per Share or the number of
Shares sought in the Offer or which imposes conditions to the Offer in addition
to those set forth in "Certain Conditions of the Offer."
For information concerning directors of the Company prior to consummation of
the Merger, see "Plans for the Company after the Offer and the Merger."
The Merger
The Merger Agreement provides that as promptly as practicable after all
conditions to the Merger set forth therein have been satisfied or, to the extent
permitted thereunder, waived, Purchaser will be merged into the Company in
accordance with Panama Law. As a result of the Merger, the separate existence
of Purchaser will cease, and the Company will continue as the Surviving
Corporation. Pursuant to the Merger, each Share outstanding immediately prior
to the Effective Time (other than Shares beneficially owned by Parent) will be
converted into the right to receive the Merger Consideration.
Each of Purchaser and Parent will be entitled to deduct and withhold from the
consideration otherwise payable to any person pursuant to the Merger Agreement
such amounts as it is required to deduct and withhold with respect to the making
of such payment under any provision of federal, state, local or foreign tax law.
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Stock Options
The Company has outstanding options to purchase Shares ("Company Stock
Options") under certain employee and director stock compensation plans,
including a Restated 1994 Executive Long-Term Incentive Compensation Plan (the
"1994 Plan") and a Non-Employee Director Stock Plan (the "Directors Plan").
Under the Merger Agreement, Company Stock Options, whether or not exercisable
or vested, will be adjusted as necessary so that, at the Effective Time, each
Company Stock Option outstanding immediately prior to the Effective Time shall
be deemed to constitute an option to purchase shares of Parent Stock, on the
same terms and conditions as were applicable under such Company Stock Option,
except as set forth below (each, as so adjusted, an "Adjusted Option"). Each
Adjusted Option shall be fully vested and will entitle the holder to purchase a
number of shares of Parent Stock having an aggregate market value, as of the
Effective Time, equal to the product of the number of Shares purchasable
pursuant to the applicable Company Stock Option and the Merger Consideration.
The exercise price per share of Parent Stock under each Adjusted Option shall be
equal to (A) the aggregate exercise price for the Shares purchasable pursuant to
the applicable Company Stock Option divided by (B) the aggregate number of
shares of Parent Stock deemed purchasable pursuant to such Adjusted Stock
Option. Any fractional share of Parent Stock resulting from the foregoing
adjustment of a Company Stock Option shall be rounded down to the nearest whole
share.
Restricted Shares
Under the 1994 Plan and Directors Plan, the Company granted to its officers
and directors Shares subject to transfer restrictions and forfeiture provisions
("Restricted Shares"). Restricted Shares granted to officers generally vest 50%
at the end of five years with the remaining 50% vesting between the third and
tenth anniversary of the date of grant based upon the Company's financial
performance. Restricted Shares granted to directors vest at the end of the
director's term. Officers and directors pay $1.00 for each Restricted Share and
receive dividends paid on and are entitled to vote such shares prior to vesting.
Under the Merger Agreement, the Company will provide, as soon as practicable,
each person who holds Restricted Shares the opportunity to make an irrevocable
election either to (i) receive a cash payment, as of the Effective Time, in
respect of such Restricted Shares (whether or not vested) or (ii) receive a
replacement award (a "Replacement Restricted Award"), as of the Effective Time,
of Parent Stock having an aggregate fair market value (as of the Effective Time)
equal to the product of (A) the number of Restricted Shares to which such
Replacement Restricted Award relates and (B) the Merger Consideration. Each
Replacement Restricted Award will be issued on the same terms, and subject to
identical restrictions, as applied to the Restricted Shares to which such
Replacement Restricted Award relates (without taking into account any
accelerated vesting as a result of the Merger).
Performance Shares
Under the 1994 Plan, the Company made notional grants of Restricted Shares,
which are subject to adjustment based upon future stock performance
("Performance Shares"), to its officers. No Restricted Shares are issued by the
Company at the time of the grant. The number of Restricted Shares actually
received by an officer, if any, is determined on the second anniversary of the
grant date by calculating the difference between the fair market value of a
Share (based upon the preceding 30 trading day average) and the fair market
value of the Shares on the grant date. The difference is multiplied by that
number of Restricted Shares in an officer's notional grant and the resulting
product is divided by the fair market value of a Share as of the second
anniversary of the grant date, calculated as described above. The resulting
number is added to (in the case of an increase in share price) or subtracted
from (in the case of a decrease in share price) the number of Restricted Shares
in an officer's notional grant. The notional grant, as adjusted (to the extent
not reduced to zero), is then issued to the officer as Restricted Shares on the
second anniversary of the grant date, for which the officer is required to pay
$1.00 per share. The Restricted Shares vest two years thereafter, during which
they are nontransferable and are subject to forfeiture prior to vesting.
Under the Merger Agreement, the Company will provide, as soon as practicable,
each person who holds Performance Shares the opportunity to make an irrevocable
election either to (i) receive a cash payment, as of the Effective Time, in
respect of such Performance Shares or (ii) receive a replacement award (a
"Replacement
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Performance Award"), as of the Effective Time, of Restricted Shares of Parent
Stock and having the following terms. Each Replacement Performance Award will
represent that number of shares of Parent Stock having an aggregate fair market
value, as of the Effective Time, equal to the product of (A) the number of
notional Performance Shares originally granted and (B) the Merger Consideration.
Each Replacement Performance Award will be subject to a two-year vesting period
upon terms identical to those that apply, under the 1994 Plan, to Performance
Shares as of the end of the initial two-year measurement period.
The Parent Board or the Compensation Committee of the Parent Board will at or
prior to the Effective Time adopt resolutions specifically approving, for
purposes of Rule 16b-3 under the 1934 Act, the receipt pursuant to this section
of Parent Stock and Adjusted Options by officers and directors of the Company
who will become officers or directors of the Parent subject to Rule 16b-3.
For purposes of the immediately preceding three sections ("The Merger
Agreement--Stock Options", "--Restricted Shares" and "--Performance Shares"),
the market value of a share of Parent Stock as of the Effective Time will be
deemed to be the closing sale price of such share on the NYSE on the trading day
immediately preceding the Effective Time.
Representations and Warranties
The Merger Agreement contains various customary representations and warranties
of the parties thereto, including, without limitation, representations (i) by
the Company and Parent as to corporate status, the authorization and the
enforceability of the Merger Agreement against each such party, and absence of
contravention due to execution and performance under the Merger Agreement, (ii)
by the Company as to its governmental authorization, capitalization, compliance
with law, the accuracy of financial statements and filings with the Commission,
absence of undisclosed material liabilities or litigation and the absence of
certain changes or events concerning the Company's business from December 31,
1998 and (iii) by Parent as to its governmental authorization, the accuracy of
this Offer to Purchase, and the availability at the expiration of the Offer of
cash sufficient to consummate the Offer and the Merger and to pay all expenses
in connection with the Offer and Merger. The representations and warranties
contained in the Merger Agreement will not survive the Effective Time.
Covenants
The Merger Agreement contains various customary covenants of the parties
thereto. A description of certain of these covenants follows:
Conduct of Business. From the date of the Merger Agreement until the
Effective Time, the Company and its subsidiaries will conduct their business
in the ordinary course consistent with past practice and will use their
commercially reasonable efforts to preserve intact their business
organizations and relationships with third parties and to keep available the
services of their present officers and employees. Without limiting the
generality of the foregoing, from the date of the Merger Agreement until the
Effective Time, except as consented to in writing by Parent, the Company has
agreed that:
(a) the Company will not adopt or propose any change to its certificate of
incorporation or bylaws;
(b) the Company will not, and will not permit any of its subsidiaries to,
merge or consolidate with any other person or acquire a material amount of
stock or assets of any other person;
(c) the Company will not, and will not permit any of its subsidiaries to,
sell, lease, license or otherwise dispose of any significant subsidiary or any
material amount of assets or property except pursuant to existing contracts or
commitments and in the ordinary course consistent with past practice;
(d) the Company will not, and will not permit any of its subsidiaries to,
take any action that would make any representation and warranty of the Company
under the Merger Agreement inaccurate in any respect at, or as of any time
prior to, the Effective Time; and
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(e) the Company will not, and will not permit any of its subsidiaries to,
agree or commit to do any of the foregoing.
Shareholder Meeting. The Company will cause a meeting of its shareholders
(the "Company Shareholder Meeting") to be duly called and held as soon as
reasonably practicable after consummation of the Offer for the purpose of voting
on the approval and adoption of the Merger Agreement and the Merger. In
connection with such meeting, the Company will use its commercially reasonable
efforts to obtain the necessary approvals by its shareholders of the Merger
Agreement and the transactions contemplated thereby and otherwise comply with
all legal requirements applicable to such meeting.
Except as provided in the next sentence, the Company Board will recommend the
Offer and the approval and adoption of the Merger Agreement and the Merger by
the Company's shareholders. The Independent Committee shall be permitted to
withdraw, or modify in a manner adverse to Parent, its recommendation to its
shareholders, if (i) the Company has complied with the terms of the "No
Solicitation" covenant below, (ii) the Independent Committee determines in good
faith (after consultation with independent legal counsel) that failure to take
such action would be reasonably likely to be inconsistent with its fiduciary
duties under applicable law and (iii) the Independent Committee shall have
delivered to Parent a prior written notice advising Parent that it intends to
take such action.
No Solicitation. From the date of the Merger Agreement until the termination
thereof, the Company will not, and will cause its subsidiaries and the officers,
directors, employees and other agents and advisors of the Company and its
subsidiaries not to, directly or indirectly, (i) take any action to solicit,
initiate or encourage the submission of any Acquisition Proposal or (ii)
disclose any nonpublic information relating to, or afford access to the
properties, books or records of, the Company or any of its subsidiaries to, or
engage in any discussions or negotiations with, any person who is considering
making or has made an Acquisition Proposal; provided that the Company may
furnish nonpublic information or afford access to properties, books and records
to any person who is considering making or has made an Acquisition Proposal and
may negotiate or otherwise engage in substantive discussions with any person who
has made an Acquisition Proposal if (w) the Company has complied with the
foregoing terms of this covenant, (x) the Independent Committee determines in
good faith (after consultation with independent legal counsel) that failure to
take such action would be reasonably likely to be inconsistent with its
fiduciary duties under applicable law, (y) such person executes a
confidentiality agreement on terms no less favorable to the Company than those
contained in the Merger Agreement and (z) the Company shall have delivered to
Parent a prior written notice advising Parent that it intends to take such
action. Nothing contained in the Merger Agreement shall prevent the Company
Board from complying with Rule 14e-2 under the 1934 Act with respect to any
Acquisition Proposal. "Acquisition Proposal" means any offer or proposal for a
merger, consolidation, share exchange, business combination or other similar
transaction involving the Company or any of its subsidiaries or the acquisition
of any substantial equity interest in or substantial portion of the assets of
the Company or any of its subsidiaries, other than the transactions contemplated
by the Merger Agreement.
The Company will notify Parent promptly (but in no event later than 24 hours)
after receipt by the Company, or any of its advisors, of any Acquisition
Proposal or any request for nonpublic information relating to, or access to the
properties, books or records of, the Company or any of its subsidiaries by any
person who is considering making or has made an Acquisition Proposal. The
Company shall identify the person making, and the terms and conditions of, any
such Acquisition Proposal or request. The Company shall keep Parent fully
informed, on a current basis, of the status and details of any such Acquisition
Proposal or request.
Director and Officer Liability. After the Effective Time, the Surviving
Corporation will indemnify and hold harmless the present and former officers and
directors of the Company (each an "Indemnified Person") in respect of acts or
omissions occurring at or prior to the Effective Time to the extent required
under Panama Law or provided under the Company's certificate of incorporation
and bylaws or any agreement any Indemnified Person may have with the Company, in
each case, as in effect on the date of the Merger Agreement; provided that such
indemnification will be subject to any limitation imposed from time to time
under applicable law.
For six years after the Effective Time, the Surviving Corporation will provide
officers' and directors' liability insurance in respect of acts or omissions
occurring prior to the Effective Time covering each such Indemnified Person
currently covered by the Company's officers' and directors' liability insurance
policy on terms with respect to coverage
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and amount no less favorable than those of such policy in effect on the date of
the Merger Agreement; provided that, in satisfying its obligation under this
covenant, the Surviving Corporation will not be obligated to pay premiums in
excess of 200% of the amount per annum the Company paid in its last full fiscal
year.
The rights of each Indemnified Person under this covenant shall be in addition
to any rights such person may have under the certificate of incorporation or
bylaws of the Company or any of its subsidiaries, under Panama Law or under any
agreement any Indemnified Person may have with the Company. These rights shall
survive consummation of the Merger and are intended to benefit, and shall be
enforceable by, each Indemnified Person.
Best Efforts. Pursuant to the terms and conditions of the Merger Agreement,
the Company and Parent shall use their best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate the
transactions contemplated by the Merger Agreement.
Public Announcements. The Merger Agreement provides that Parent and the
Company will consult with each other before issuing any press release or making
any public statement with respect to the Merger Agreement and the transactions
contemplated thereby and, except as may be required by applicable law or any
listing agreement with any national securities exchange, will not issue any such
press release or make any such public statement prior to such consultation.
Other
Parent will not, and will cause its subsidiaries not to, directly or
indirectly, take any action to knowingly cause the Company to violate its
representations, warranties or covenants under the Merger Agreement.
Conditions of the Offer
See "Certain Conditions of the Offer."
Conditions to the Merger
The Merger Agreement provides that the obligations of the Company, Parent and
Purchaser to consummate the Merger are subject to the satisfaction of the
following conditions:
(a) the Merger Agreement shall have been approved and adopted by the
shareholders of the Company in accordance with Panama Law and applicable listing
requirements;
(b) Purchaser shall have purchased Shares pursuant to the Offer;
(c) no preliminary or permanent injunction or other order, decree or ruling
by any court or governmental body or regulatory authority in the United States
or the Republic of Panama, which prevents consummation of the Merger or the
payment of the Merger Consideration, will have been issued and remain in effect
(each party agreeing to use its reasonable efforts to have any such injunction,
order, decree or ruling lifted); and
(d) no statute, rule or regulation of any government or governmental agency
in the United States or the Republic of Panama will prevent the consummation of
the Merger or the payment of the Merger Consideration or make the consummation
of the Merger or the payment of the Merger Consideration illegal.
Termination
The Merger Agreement provides that it may be terminated and the Merger may be
abandoned at any time prior to the Effective Time (notwithstanding any approval
of the Merger Agreement by the shareholders of the Company):
(a) by mutual written agreement of the Company and Parent;
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(b) by either the Company or Parent, if:
(i) the Offer has not been consummated on or before July 31, 1999,
provided that the right to terminate the Merger Agreement under this
subparagraph will not be available to any party whose breach of any
provision of the Merger Agreement results in the failure of the Offer to be
consummated by such time; or
(ii) there shall be any law or regulation that makes acceptance for
payment of, and payment for, the Shares pursuant to the Offer or
consummation of the Merger illegal or otherwise prohibited or any judgment,
injunction, order or decree of any court or governmental body having
competent jurisdiction enjoining Purchaser from accepting for payment of,
and paying for, the Shares pursuant to the Offer or Company or Parent from
consummating the Merger and such judgment, injunction, order or decree shall
have become final and nonappealable; provided, however, that the party
seeking to terminate the Merger Agreement under this subparagraph will have
used commercially reasonable best efforts to remove any such judgment,
injunction, order or decree; or
(c) by Parent, if prior to the acceptance for payment of Shares under the
Offer, (i) the Company Board will have failed to recommend, or will have
withdrawn or modified in a manner adverse to Parent its approval or
recommendation of the Offer or the Merger or (ii) the Company will have failed
to perform in all material respects its obligations hereunder.
The Merger Agreement provides that if it is terminated, it will become void
and of no effect with no liability on the part of any party (or any shareholder,
director, officer, employee or other agent or advisor of such party) to the
other party thereto, except that, if such termination is the result from the
willful failure of either party to fulfill a condition to the performance of the
obligations of the other party or the failure of either party to perform a
covenant under the Merger Agreement, such party shall be fully liable for any
and all liabilities and damages incurred or suffered by the other party as a
result of such failure.
Fees and Expenses
Except as provided in the following sentence, all costs and expenses incurred
in connection with the Merger Agreement shall be paid by the party incurring
such cost or expense.
The Merger Agreement provides that the Company will pay Parent a fee in
immediately available funds equal to $10 million promptly, but in no event later
than two business days, after a termination of the Merger Agreement by Parent
pursuant to subparagraph (c) above under "Termination".
Amendments and Waivers
Any provision of the Merger Agreement may be amended or waived prior to the
Effective Time if, but only if, such amendment or waiver is in writing and is
signed, in the case of an amendment, by each party to the Merger Agreement or,
in the case of a waiver, by each party against whom the waiver is to be
effective; provided that, after the adoption of the Merger Agreement by the
Company's shareholders and without their further approval, no such amendment or
waiver shall reduce the amount or change the kind of consideration to be
received in exchange for any Shares.
No failure or delay by any party in exercising any right, power or privilege
under the Merger Agreement will operate as a waiver thereof nor will any single
or partial exercise thereof preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The rights and remedies
provided in the Merger Agreement shall be cumulative and not exclusive of any
rights or remedies provided by law.
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INTERESTS OF CERTAIN PERSONS IN THE OFFER AND THE MERGER
In considering the recommendation of the Company Board, shareholders of the
Company should be aware that certain officers of the Company and members of the
Company Board have certain interests that present actual or potential conflicts
of interest in connection with the Offer and the Merger. The Independent
Committee and the Company Board were aware of these actual or potential
conflicts of interest and considered them in connection with such
recommendation.
Independent Committee Fees
At a meeting of the Company Board held on March 11, 1999, the Company Board
considered a proposal to pay the Chairman of the Independent Committee a fee of
$20,000 and the other members of the Independent Committee a fee of $10,000 for
their services as members on the Independent Committee in evaluating any
proposed business combination between Parent and the Company, in addition to any
other fees payable to them as directors of the Company or as members of the
Independent Committee. The Company Board determined to postpone its action on
this proposal, pending confirmation from the Company's General Counsel that the
proposed fees were within the range of fees paid to members of independent or
special committees involved in similar transactions. The General Counsel of the
Company subsequently confirmed that the fee proposal was within such range. The
Company Board expects to act on the fee proposal at its meeting scheduled for
June 4, 1999.
Finance Committee Fees
At a meeting of the Parent Board held on March 9, 1999, the Parent Board
considered a proposal to pay Mr. Johnstone, the Chairman of the Finance
Committee, a fee of $20,000 and Mr. Burguieres a fee of $17,500 and each of the
other members of the Finance Committee a fee of $10,000 for their services as
members on the Finance Committee in evaluating any proposed business combination
between Parent and the Company, in addition to any other fees payable to them as
directors of the Parent or as members of the Finance Committee. The Parent
Board determined to postpone its action on this proposal, pending confirmation
from the Parent's General Counsel that the proposed fees were within the range
of fees paid to members of independent or special committees involved in similar
transactions. The General Counsel of Parent subsequently confirmed that the fee
proposal was within such range. The Parent Board expects to act on the fee
proposal at its meeting scheduled for June 2, 1999.
Indemnification Agreements
On March 11, 1999, the Company entered into indemnification agreements with
each of its directors (the "Indemnification Agreements"). The Indemnification
Agreements provide that the Company will indemnify and hold harmless any
director of the Company to the fullest extent permitted by the Company's
Certificate of Incorporation or Bylaws, Panama Law or other applicable law, as
in effect as of the date of the agreement or to such greater extent as the
Company's Certificate of Incorporation or Bylaws, Panama Law or applicable law
may thereafter permit, from and against all losses, liabilities, claims,
damages, judgments, penalties, fines, amounts paid in settlement and expenses
(including attorneys' fees) arising out of a business combination transaction
between Parent and the Company. The Indemnification Agreements further provide
that, in the event of any threatened, or pending action, suit or proceeding
arising out of a business combination between Parent and the Company in which a
director is a party and that may give rise to a right of indemnification under
the Indemnification Agreements or in which a director is involved as a witness,
following written request by such person, the Company will promptly pay to such
person amounts to cover expenses reasonably incurred by such person in such
proceeding in advance of its final disposition upon the receipt by the Company
of (i) a written undertaking executed by or on behalf of such person providing
that such person will repay the advance if it is ultimately determined that such
person is not entitled to be indemnified by the Company as provided in the
Indemnification Agreements and (ii) satisfactory evidence as to the amount of
such expenses. The Indemnification Agreements also include provisions meant to
facilitate the indemnitee's receipt of benefits. These provisions cover, among
other things: (i) specification of the method of determining entitlement to
indemnification and the selection of independent counsel that will in some cases
make such determination, (ii) specification of certain time periods by which
certain payments or determinations must be made and actions must be taken and
(iii) the establishment of certain presumptions in favor of an indemnitee. The
benefits of certain of these provisions are available to an
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indemnitee only if there has been a change in control of the Company (as defined
in the Indemnification Agreements). On May 6, 1999, the Company entered into
indemnification agreements with Messrs. Johnson, Burdick, O'Keefe and Ritchie
substantially the same as the agreements entered into on March 11, 1999, except
that rights to indemnification and advancement of expenses thereunder cover
losses, liabilities, claims, damages, judgments, penalties, fines, amounts paid
in settlement and expenses incurred by reason of their status as a director of
the Company and are not limited to those arising out of a business combination
between Parent and the Company.
Stock Options, Restricted Stock and Performance Shares
Certain Executive Officers and Directors hold awards of Stock Options,
Restricted Stock and Performance Shares. The treatment of those awards is
described above under "The Merger Agreement--Stock Options", "--Restricted
Shares" and "--Performance Shares", respectively.
Consummation of Offer and Change of Control. The Company previously granted
to its directors (including members of the Independent Committee) and executive
officers (including Roger E. Tetrault, Daniel R. Gaubert and S. Wayne Murphy,
who are also executive officers of Parent) Company Stock Options, Restricted
Shares and Performance Shares under the 1994 Plan and Directors Plan. Under
these plans, a "change in control" of the Company results in all Company Stock
Options becoming fully exercisable, all transfer restrictions and forfeiture
provisions on the Restricted Shares lapsing and the conversion of all
Performance Shares into a pro-rata cash payout based upon the assumed
achievement of performance objectives at target levels (if not otherwise
exceeded) and the length of time elapsed during their two-year measurement
period through the Effective Time. The consummation of the Offer and Merger
will constitute an effective change in control of the Company. Under the Merger
Agreement, each Company Stock Option outstanding as of the Effective Time will
become an Adjusted Option, and each person who holds Restricted Shares or
Performance Shares will be given the opportunity to receive replacement stock
awards in Parent Stock, in lieu of the cash payment that such person would
otherwise be entitled to receive at the Effective Time. See "The Merger
Agreement--Stock Options", "--Restricted Shares" and "--Performance Shares,"
respectively.
Beneficial Ownership of the Shares
Schedules I and II of this Offer to Purchase set forth information concerning
beneficial ownership of the Shares as of March 31, 1999 by each of the directors
and executive officers of the Company and Parent and Purchaser, respectively.
No director or executive officer of Parent (other than Messrs. Tetrault,
Gaubert, Murphy, Rawle, Howard and Woolbert, who are also officers or directors
of the Company) owns any Shares. The Company has been informed that all of its
directors and executive officers intend to tender all Shares beneficially owned
by each of them pursuant to the Offer, other than Shares that may be acquired
upon the exercise of Company Stock Options, Restricted Shares and Performance
Shares, which are subject to certain arrangements under the Merger Agreement.
See "The Merger Agreement."
Parent owns approximately 63% of the outstanding Shares and all of the
Preferred Stock, which collectively represents approximately 66% of the voting
stock of the Company.
Related Party Transactions
Parent, either directly or through its subsidiaries and affiliates (other than
the Company and its subsidiaries), has provided and, subject to the continuing
approval of the Independent Committee, will continue to provide various services
to the Company and its subsidiaries in an effort to reduce duplicative costs,
overhead and resources.
Services Agreement and Other Administrative Charges. Under the terms of a
services agreement between Parent and the Company, Parent provides certain
services to the Company, based primarily upon a predetermined annual fee for
each such service. Such services include accounting and financial reporting,
treasury and financing, tax administration and research, human resources, risk
management, public and investor relations, executive officer, legal and
corporate secretary, business planning and analysis, purchasing and procurement,
and project management services.
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For fiscal years 1996, 1997 and 1998, the Company paid to Parent approximately
$11.9 million, $11.9 million and $13.1 million, respectively, under the Services
Agreement.
For fiscal years 1996, 1997 and 1998, Parent and other affiliated entities
also provided other administrative services, including investment portfolio
management, data processing development, telecommunication and lobbying
services, and shared office space to the Company for which the Company paid to
Parent approximately $6.6 million, $6.6 million and $5.2 million, respectively.
The Independent Committee reviews the services provided by Parent to the
Company and its subsidiaries on an annual basis. After consultation with Parent
and giving due consideration to the legal obligations of Parent, the Company may
seek the provision of any of the above described services from third parties if
the Company Board, after receiving the recommendation of the Independent
Committee, determines that obtaining such services from third parties would be
in the best interests of the Company.
Other Arrangements and Transactions. For fiscal years 1996, 1997 and 1998,
the Company and its subsidiaries purchased from Parent and other affiliated
entities approximately $24.3 million, $16.2 million and $8.9 million of other
services on an as requested basis, the costs of which were based on charges to
unrelated parties for similar work. Such services relate primarily to
technology development and research, and engineering, procurement and
construction services on a power plant project. For fiscal years 1996, 1997 and
1998, the Company and its subsidiaries provided marine construction and
engineering services to Parent and other affiliated entities, on the same basis,
for which the Company recognized revenue in the amount of approximately $45.2
million, $32 million and $22 million, respectively.
Parent, through wholly-owned insurance subsidiaries, reinsures substantially
all of the Company's employee liability exposure and insures significant
deductibles under the Company's other insurance programs. The insurance
premiums charged by such insurance subsidiaries of Parent are primarily based on
claims experience and forecasted future activities of the Company and its
subsidiaries. Management believes that this approach is more cost-effective
than other alternatives as there is generally no commercial market for insurance
on the same economic terms for these types of exposures.
The Company has acquired several businesses from Parent, including in fiscal
year 1998, the Parent's 60% interest in Tallares Navales del Golfo S.A. de C.V.,
a shipbuilding and repair business in Vera Cruz, Mexico, for approximately $19.7
million.
During fiscal year 1997, the Company paid a $231 million note payable to
Parent.
All of these transactions were negotiated at arm's-length by the parties and,
to the extent required, approved by the Independent Committee.
Series A Preferred Stock
During each of fiscal years 1996, 1997 and 1998, Parent as the sole holder of
all of the Preferred Stock received quarterly dividend payments totaling $7.2
million from the Company.
Management of Company After the Merger
See "Plans for the Company after the Offer and the Merger."
CONFIDENTIALITY AGREEMENT
On February 17, 1999, Parent and the Company entered into a confidentiality
agreement (the "Confidentiality Agreement"), under which Parent agreed to
provide to the Company certain confidential information. Pursuant to the
Confidentiality Agreement, the Company agreed that it and its representatives
would treat all nonpublic information received from Parent under the
Confidentiality Agreement in confidence, except to the extent that disclosure
would be required in connection with a transaction under applicable securities
laws and as would be consistent with applicable
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fiduciary duties. A copy of the Confidentiality Agreement is filed as an exhibit
to the Schedule 14D-1 and incorporated herein by reference, and the foregoing
summary of the Confidentiality Agreement is qualified in its entirety by
reference thereto.
THE TENDER OFFER
TERMS OF THE OFFER
Upon the terms and subject to the conditions of the Offer (including, if the
Offer is extended or amended, the terms and conditions of such extension or
amendment), Purchaser will accept for payment and pay for all Shares validly
tendered prior to the Expiration Date and not theretofore withdrawn as permitted
by "Withdrawal Rights." The term "Expiration Date" means 12:00 midnight, New
York City time, on Thursday, June 10, 1999, unless Purchaser, in its sole
discretion (but subject to the terms and conditions of the Merger Agreement),
shall have extended the period during which the Offer is open, in which event
the term "Expiration Date" shall mean the latest time and date at which the
Offer, as so extended by Purchaser, shall expire.
Purchaser expressly reserves the right, in its sole discretion (but subject to
the terms and conditions of the Merger Agreement), at any time and from time to
time, to extend the period of time during which the Offer is open, including the
occurrence of any of the conditions specified in "Certain Conditions of the
Offer," by giving oral or written notice of such extension to the Depositary.
During any such extension, all Shares previously tendered and not withdrawn will
remain subject to the Offer, subject to the rights of a tendering shareholder to
withdraw such shareholder's Shares. See "Withdrawal Rights."
Subject to the applicable rules and regulations of the Commission, Purchaser
also expressly reserves the right, in its sole discretion (but subject to the
terms and conditions of the Merger Agreement), at any time and from time to
time, (i) to terminate the Offer and not accept for payment any Shares upon the
occurrence of any of the conditions specified in "Certain Conditions of the
Offer", (ii) to waive any condition, except as described in the following
paragraph or (iii) amend the Offer in any respect, except as described in the
following paragraph. Purchaser acknowledges that (i) Rule 14e-1(c) under the
1934 Act requires Purchaser to pay the consideration offered or return the
Shares tendered promptly after the termination or withdrawal of the Offer and
(ii) Purchaser may not delay acceptance for payment of, or payment for, any
Shares upon the occurrence of any of the conditions specified in "Certain
Conditions of the Offer" without extending the period of time during which the
Offer is open.
In addition, Purchaser has agreed in the Merger Agreement that, without the
prior written consent of the Company, Purchaser will not waive the Minimum
Condition and will not make any change in the Offer which changes the form of
consideration to be paid or decreases the price per Share or the number of
Shares sought in the Offer or which imposes conditions to the Offer in addition
to those set forth in "Certain Conditions of the Offer."
Any such extension, delay, termination, waiver or amendment will be followed
as promptly as practicable by public announcement thereof, such announcement in
the case of an extension to be made no later than 9:00 a.m., New York City time,
on the next business day after the previously scheduled Expiration Date.
Subject to applicable law (including Rules 14d-4(c), 14d-6(d) and 14e-1 under
the 1934 Act, which require that material changes be promptly disseminated to
shareholders in a manner reasonably designed to inform them of such changes) and
without limiting the manner in which Purchaser may choose to make any public
announcement, Purchaser shall have no obligation to publish, advertise or
otherwise communicate any such public announcement other than by issuing a press
release to the Dow Jones News Service.
If Purchaser makes a material change in the terms of the Offer or the
information concerning the Offer, or if it waives a material condition of the
Offer, Purchaser will extend the Offer to the extent required by Rules 14d-4(c),
14d-6(d) and 14e-1 under the 1934 Act.
Subject to the terms of the Merger Agreement, if, prior to the Expiration
Date, Purchaser should decide to decrease the number of Shares being sought or
to increase or decrease the consideration being offered in the Offer, such
decrease
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in the number of Shares being sought or such increase or decrease in the
consideration being offered will be applicable to all shareholders whose Shares
are accepted for payment pursuant to the Offer and, if at the time notice of any
such decrease in the number of Shares being sought or such increase or decrease
in the consideration being offered is first published, sent or given to holders
of such Shares, the Offer is scheduled to expire at any time earlier than the
period ending on the tenth business day from and including the date that such
notice is first so published, sent or given, the Offer will be extended at least
until the expiration of such ten business day period. For purposes of the Offer,
a "business day" means any day other than a Saturday, Sunday or United States
federal holiday and consists of the time period from 12:01 a.m. through 12:00
midnight, New York City time.
Consummation of the Offer is conditioned upon satisfaction of the Minimum
Condition and the other conditions specified in "Certain Conditions of the
Offer."
The Company has provided Purchaser with the Company's shareholder list and
security position listings for the purpose of disseminating the Offer to holders
of Shares. This Offer to Purchase and the related Letter of Transmittal will be
mailed to record holders of Shares whose names appear on the Company's
shareholder list and will be furnished, for subsequent transmittal to beneficial
owners of Shares, to brokers, dealers, commercial banks, trust companies and
similar persons whose names, or the names of whose nominees, appear on the
shareholder list or, if applicable, who are listed as participants in a clearing
agency's security position listing.
ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES
Upon the terms and subject to the conditions of the Offer (including, if the
Offer is extended or amended, the terms and conditions of any such extension or
amendment), Purchaser will accept for payment and will pay for all Shares
validly tendered prior to the Expiration Date and not properly withdrawn,
promptly after the Expiration Date.
For purposes of the Offer, Purchaser will be deemed to have accepted for
payment (and thereby purchased) Shares validly tendered and not properly
withdrawn as, if and when Purchaser gives oral or written notice to the
Depositary of Purchaser's acceptance for payment of such Shares pursuant to the
Offer. Upon the terms and subject to the conditions of the Offer, payment for
Shares accepted for payment pursuant to the Offer will be made by deposit of the
purchase price therefor with the Depositary, which will act as agent for
tendering shareholders for the purpose of receiving payments from Purchaser and
transmitting such payments to tendering shareholders whose Shares have been
accepted for payment. UNDER NO CIRCUMSTANCES WILL INTEREST ON THE PURCHASE
PRICE FOR SHARES BE PAID, REGARDLESS OF ANY DELAY IN MAKING SUCH PAYMENT.
In all cases, payment for Shares accepted for payment pursuant to the Offer
will be made only after timely receipt by the Depositary of (A) the certificates
evidencing such Shares (the "Share Certificates") or confirmation (a "Book-
Entry Confirmation") of a book-entry transfer of such Shares into the
Depositary's account at The Depository Trust Company (the "Book-Entry Transfer
Facility") pursuant to the procedures set forth in "Procedures for Accepting the
Offer and Tendering Shares," (B) the Letter of Transmittal (or a facsimile
thereof), properly completed and duly executed, with any required signature
guarantees or, in the case of a book-entry transfer, an Agent's Message (as
defined below) in lieu of the Letter of Transmittal and (C) any other documents
required under the Letter of Transmittal.
If any tendered Shares are not accepted for payment for any reason pursuant to
the terms and conditions of the Offer, or if Share Certificates are submitted
evidencing more Shares than are tendered, Share Certificates evidencing
unpurchased Shares will be returned, without expense to the tendering
shareholder (or, in the case of Shares tendered by book-entry transfer into the
Depositary's account at the Book-Entry Transfer Facility pursuant to the
procedure set forth in "Procedures for Accepting the Offer and Tendering
Shares," such Shares will be credited to an account maintained at such Book-
Entry Transfer Facility), as promptly as practicable following the expiration or
termination of the Offer.
If, prior to the Expiration Date, Purchaser shall increase the consideration
offered to any holders of Shares pursuant to the Offer, such increased
consideration shall be paid to all holders of Shares that are purchased pursuant
to the Offer, whether or not such Shares were tendered prior to such increase in
consideration.
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Purchaser reserves the right to transfer or assign, in whole or from time to
time in part, to one or more of its affiliates, the right to purchase all or any
portion of the Shares tendered pursuant to the Offer, but any such transaction
or assignment will not relieve Purchaser of its obligations under the Offer and
will in no way prejudice the rights of tendering shareholders to receive payment
for Shares validly tendered and accepted for payment pursuant to the Offer.
PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES
In order for a holder of Shares to validly tender Shares pursuant to the
Offer, the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed, together with any required signature guarantees (or, in the
case of a book-entry transfer, an Agent's Message in lieu of the Letter of
Transmittal) and any other documents required by the Letter of Transmittal must
be received by the Depositary at one of its addresses set forth on the back
cover of this Offer to Purchase and either (i) the Share Certificates evidencing
tendered Shares must be received by the Depositary at such address or such
Shares must be tendered pursuant to the procedure for book-entry transfer
described below and a Book-Entry Confirmation must be received by the Depositary
(including an Agent's Message if the tendering shareholder has not delivered a
Letter of Transmittal), in each case prior to the Expiration Date, or (ii) the
tendering shareholder must comply with the guaranteed delivery procedures
described below. The term "Agent's Message" means a message transmitted by the
Book-Entry Transfer Facility to and received by the Depositary and forming a
part of a Book-Entry Confirmation which states that the Book-Entry Transfer
Facility has received an express acknowledgment from the participant in the
Book-Entry Transfer Facility tendering the Shares, which are the subject of such
book-entry confirmation, that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal and that Purchaser may enforce
such agreement against such participant.
THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS,
INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION
AND RISK OF THE TENDERING SHAREHOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY
WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED
MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Book-Entry Transfer
The Depositary will establish an account with respect to the Shares at the
Book-Entry Transfer Facility for purposes of the Offer within two business days
after the date of this Offer to Purchase. Any financial institution that is a
participant in the system of the Book-Entry Transfer Facility may make a book-
entry delivery of Shares by causing the Book-Entry Transfer Facility to transfer
such Shares into the Depositary's account at the Book-Entry Transfer Facility in
accordance with the Book-Entry Transfer Facility's procedures for such transfer.
However, although delivery of Shares may be effected through book-entry transfer
at the Book-Entry Transfer Facility, either the Letter of Transmittal (or a
facsimile thereof), properly completed and duly executed, together with any
required signature guarantees, or an Agent's Message in lieu of the Letter of
Transmittal, and any other required documents, must, in any case, be received by
the Depositary at one of its addresses set forth on the back cover of this Offer
to Purchase prior to the Expiration Date, or the tendering shareholder must
comply with the guaranteed delivery procedure described below. DELIVERY OF
DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO
THE DEPOSITARY.
Signature Guarantees
Signatures on all Letters of Transmittal must be guaranteed by a firm which is
a member of a recognized Medallion Program approved by The Securities Transfer
Associations, Inc. (an "Eligible Institution"), except in cases where Shares are
tendered (i) by a registered holder of Shares who has not completed the box
entitled "Special Payment Instructions" on the Letter of Transmittal or (ii) for
the account of an Eligible Institution. If a Share Certificate is registered in
the name of a person other than the signer of the Letter of Transmittal, or if
payment is to be made, or a Share Certificate not accepted for payment or not
tendered is to be issued, in the name of a person other than the registered
holder(s), then the Share Certificate must be endorsed or accompanied by
appropriate stock powers, in either case signed exactly as the name(s) of the
registered holder(s) appear on the Share Certificate, with the signature(s) on
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such Share Certificate or stock powers guaranteed by an Eligible Institution.
See Instructions 1 and 5 of the Letter of Transmittal.
Guaranteed Delivery
If a shareholder desires to tender Shares pursuant to the Offer and the Share
Certificates evidencing such shareholder's Shares are not immediately available
or such shareholder cannot deliver the Share Certificates and all other required
documents to the Depositary prior to the Expiration Date, or such shareholder
cannot complete the procedure for delivery by book-entry transfer on a timely
basis, such Shares may nevertheless be tendered; provided that all the following
conditions are satisfied:
(i) such tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form made available by Purchaser, is received prior to the
Expiration Date by the Depositary as provided below; and
(iii) the Share Certificates (or a Book-Entry Confirmation) evidencing all
tendered Shares, in proper form for transfer, in each case together with the
Letter of Transmittal (or a facsimile thereof), properly completed and duly
executed, with any required signature guarantees (or, in the case of a book-
entry transfer, an Agent's Message), and any other documents required by the
Letter of Transmittal are received by the Depositary within three trading days
after the date of execution of such Notice of Guaranteed Delivery. A "trading
day" is any day on which the NYSE is open for business.
The Notice of Guaranteed Delivery may be delivered by hand or mail or
transmitted by telegram or facsimile transmission to the Depositary and must
include a guarantee by an Eligible Institution in the form set forth in the form
of Notice of Guaranteed Delivery made available by Purchaser.
In all cases, payment for Shares tendered and accepted for payment pursuant to
the Offer will be made only after timely receipt by the Depositary of the Share
Certificates evidencing such Shares, or a Book-Entry Confirmation of the
delivery of such Shares, and the Letter of Transmittal (or a facsimile thereof),
properly completed and duly executed, with any required signature guarantees
(or, in the case of a book-entry transfer, an Agent's Message), and any other
documents required by the Letter of Transmittal.
Determination of Validity
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for payment of any tender of Shares will be determined
by Purchaser in its sole discretion, which determination shall be final and
binding on all parties. Purchaser reserves the absolute right to reject any and
all tenders determined by it not to be in proper form or the acceptance for
payment of which may, in the opinion of its counsel, be unlawful. Subject to
the terms of the Merger Agreement, Purchaser also reserves the absolute right to
waive any condition of the Offer or any defect or irregularity in the tender of
any Shares of any particular shareholder, whether or not similar defects or
irregularities are waived in the case of other shareholders. No tender of
Shares will be deemed to have been validly made until all defects and
irregularities have been cured or waived. None of Purchaser, the Dealer
Manager, the Depositary, the Information Agent or any other person will be under
any duty to give notification of any defects or irregularities in tenders or
incur any liability for failure to give any such notification. Purchaser's
interpretation of the terms and conditions of the Offer (including the Letter of
Transmittal and the instructions thereto) will be final and binding.
Other Requirements
By executing the Letter of Transmittal as set forth above, a tendering
shareholder irrevocably appoints designees of Purchaser as such shareholder's
proxies, each with full power of substitution, in the manner set forth in the
Letter of Transmittal, to the full extent of such shareholder's rights with
respect to the Shares tendered by such shareholder and accepted for payment by
Purchaser (and with respect to any and all other Shares or other securities
issued or issuable in respect of such Shares on or after May 7, 1999). All such
proxies shall be considered coupled with an
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interest in the tendered Shares. Such appointment will be effective when, and
only to the extent that, Purchaser accepts such Shares for payment. Upon such
acceptance for payment, all prior proxies given by such shareholder with respect
to such Shares (and such other Shares and securities) will be revoked without
further action, and no subsequent proxies may be given nor any subsequent
written consent executed by such shareholder (and, if given or executed, will
not be deemed to be effective) with respect thereto. The designees of Purchaser
will, with respect to the Shares for which the appointment is effective, be
empowered to exercise all voting and other rights of such shareholder as they in
their sole discretion may deem proper at any annual or special meeting of the
Company's shareholders or any adjournment or postponement thereof, by written
consent in lieu of any such meeting or otherwise. Purchaser reserves the right
to require that, in order for Shares to be deemed validly tendered, immediately
upon Purchaser's payment for such Shares, Purchaser must be able to exercise
full voting rights with respect to such Shares.
The tender of Shares pursuant to any one of the procedures described above
will constitute the tendering shareholder's acceptance of the Offer, as well as
the tendering shareholder's representation and warranty that (a) such
shareholder owns the Shares being tendered within the meaning of Rule 14e-4
promulgated under the 1934 Act, (b) the tender of such Shares complies with Rule
14e-4 and (c) such shareholder has the full power and authority to tender and
assign the Shares tendered, as specified in the Letter of Transmittal.
Purchaser's acceptance for payment of Shares tendered pursuant to the Offer will
constitute a binding agreement between the tendering shareholder and Purchaser
upon the terms and subject to the conditions of the Offer.
TO PREVENT BACKUP FEDERAL INCOME TAX WITHHOLDING WITH RESPECT TO PAYMENT TO
SHAREHOLDERS OF THE PURCHASE PRICE OF SHARES PURCHASED PURSUANT TO THE OFFER,
EACH UNITED STATES SHAREHOLDER MUST PROVIDE THE DEPOSITARY WITH SUCH
SHAREHOLDER'S CORRECT TAXPAYER IDENTIFICATION NUMBER OR SOCIAL SECURITY NUMBER
OR CERTIFY THAT SUCH SHAREHOLDER IS NOT SUBJECT TO BACKUP WITHHOLDING BY
COMPLETING THE SUBSTITUTE FORM W-9 IN THE LETTER OF TRANSMITTAL. IF BACKUP
WITHHOLDING APPLIES TO A SHARE HOLDER, THE DEPOSITARY IS REQUIRED TO WITHHOLD
31% OF ANY PAYMENTS MADE TO SUCH SHAREHOLDER. SEE INSTRUCTION 8 OF THE LETTER
OF TRANSMITTAL. IF A SHAREHOLDER IS A NONRESIDENT ALIEN OR FOREIGN ENTITY NOT
SUBJECT TO BACKUP WITHHOLDING, THE SHARE HOLDER IS URGED TO GIVE THE DEPOSITARY
A COMPLETED W-8BEN (CERTIFICATE OF FOREIGN STATUS) PRIOR TO RECEIPT OF PAYMENT.
WITHDRAWAL RIGHTS
Tenders of the Shares made pursuant to the Offer are irrevocable except that
such Shares may be withdrawn at any time prior to the Expiration Date and,
unless theretofore accepted for payment by Purchaser pursuant to the Offer, may
also be withdrawn at any time after July 11, 1999. If Purchaser extends the
Offer, is delayed in its acceptance for payment of Shares or is unable to accept
Shares for payment pursuant to the Offer for any reason, then, without prejudice
to Purchaser's rights under the Offer, the Depositary may, nevertheless, on
behalf of Purchaser, retain tendered Shares, and such Shares may not be
withdrawn except to the extent that tendering shareholders are entitled to
withdrawal rights as described herein.
For a withdrawal to be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must be timely received by the Depositary at
one of its addresses set forth on the back cover page of this Offer to Purchase.
Any such notice of withdrawal must specify the name, address and tax
identification number of the person who tendered the Shares to be withdrawn, the
number of Shares to be withdrawn and the name of the registered holder of such
Shares, if different from that of the person who tendered such Shares. If Share
Certificates evidencing Shares to be withdrawn have been delivered or otherwise
identified to the Depositary, then, prior to the physical release of such Share
Certificates, the serial numbers shown on such Share Certificates must be
submitted to the Depositary and the signature(s) on the notice of withdrawal
must be guaranteed by an Eligible Institution, unless such Shares have been
tendered for the account of an Eligible Institution. If Shares have been
tendered pursuant to the procedure for book-entry transfer as set forth in
"Procedures for Accepting the Offer and Tendering Shares," any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Shares.
33
<PAGE>
All questions as to the form and validity (including time of receipt) of any
notice of withdrawal will be determined by Purchaser, in its sole discretion,
whose determination will be final and binding. None of Purchaser, the Dealer
Manager, the Depositary, the Information Agent or any other person will be under
duty to give notification of any defects or irregularities in any notice of
withdrawal or incur any liability for failure to give any such notification.
Any Shares properly withdrawn will thereafter be deemed not to have been
validly tendered for purposes of the Offer. However, withdrawn Shares may be
re-tendered at any time prior to the Expiration Date by following one of the
procedures described in "Procedures for Accepting the Offer and Tendering
Shares."
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
This summary of the material United States federal income tax consequences of
the Offer and the Merger is for general information only and is based on the law
as currently in effect. This summary does not discuss all of the tax
consequences that may be relevant to a shareholder in light of its particular
circumstances or to shareholders subject to special rules, such as financial
institutions, broker-dealers, tax-exempt organizations, shareholders that hold
their Shares as part of a straddle or a hedging or conversion transaction and
shareholders who acquired their Shares through the exercise of an employee stock
option or otherwise as compensation.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR
TAX CONSEQUENCES TO THEM OF THE OFFER AND THE MERGER, INCLUDING THE EFFECT OF
UNITED STATES STATE AND LOCAL TAX LAWS OR FOREIGN TAX LAWS.
A United States holder refers to:
. a citizen or resident of the United States,
. a corporation or other entity created or organized in the United States or
under the laws of the United States or of any political subdivision of the
United States, or
. an estate or trust, the income of which is includible in gross income for
federal income tax purposes regardless of its source.
A Non-United States holder refers to a shareholder that is not a United States
holder.
Tender Offer -- United States Holders
The receipt by a United States holder of cash for Shares pursuant to the Offer
will be a taxable transaction under the United States Internal Revenue Code of
1986, as amended (the "Code"). A tendering United States holder will generally
recognize gain or loss in an amount equal to the difference between the cash
received by the shareholder pursuant to the Offer and the shareholder's adjusted
tax basis in the Shares tendered pursuant to the Offer. That gain or loss will
be a capital gain or loss if the Shares are a capital asset in the hands of the
shareholder. Shareholders are urged to consult their own tax advisors as to the
federal income tax treatment of a capital gain or loss (including limitations on
the deductibility of a capital loss).
A shareholder that tenders Shares may be subject to backup withholding at a
rate of 31% unless it provides its taxpayer identification number and certifies
that the number is correct or properly certifies that it is awaiting a taxpayer
identification number, or unless an exemption is demonstrated to apply. See
"Procedures for Accepting the Offer and Tendering Shares--Other Requirements."
Backup withholding is not an additional tax. Amounts so withheld can be
refunded or credited against the federal income tax liability of the
shareholder, provided appropriate information is forwarded to the IRS. A
TENDERING UNITED STATES HOLDER SHOULD COMPLETE THE SUBSTITUTE FORM W-9 THAT IS
INCLUDED IN THE LETTER OF TRANSMITTAL.
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<PAGE>
Tender Offer -- Non-United States Holders
A tendering Non-United States holder will generally not be subject to United
States federal income tax on a gain realized on a disposition of Shares unless:
. the gain is effectively connected with a trade or business in the United
States of that Non-United States holder,
. that Non-United States holder is a non-resident alien individual who holds
the Shares as a capital asset and who is present in the United States for
183 or more days in 1999, or
. that Non-United States holder is subject to tax under the provisions of the
Code on the taxation of United States expatriates.
Non-United States holders are urged to consult their own tax advisors.
Information reporting and backup withholding imposed at a rate of 31% will
apply to cash payments received by a tendering Non-United States holder pursuant
to the Offer if the disposition of Shares is effected by or through a United
States office of a broker, unless the Non-United States holder certifies as to
its foreign status or otherwise establishes an exemption. See "Procedures for
Accepting the Offer and Tendering Shares--Other Requirements." Generally,
information reporting and backup withholding would not apply to the payment
received upon a disposition of Shares where that disposition is effected outside
the United States through a non-United States office of a non-United States
broker. However, information reporting requirements would apply to a payment
where a disposition is effected outside the United States by or through an
office outside the United States of a broker that is:
. a United States person,
. a non-United States person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United
States, or
. a "controlled foreign corporation" for federal income tax purposes,
and, in each case, the broker fails to maintain documentary evidence that the
shareholder is a Non-United States holder and that certain conditions are met,
or that the shareholder otherwise is entitled to an exemption. Backup
withholding is not an additional tax. Amounts so withheld can be refunded or
credited against the federal income tax liability of a Non-United States holder,
provided appropriate information is forwarded to the IRS. TO AVOID BACKUP
WITHHOLDING, A TENDERING NON-UNITED STATES HOLDER SHOULD COMPLETE A FORM W-8BEN,
WHICH MAY BE OBTAINED FROM THE DEPOSITARY.
Shareholders that Receive Cash in the Merger
The receipt by a United States holder or Non-United States holder of cash
pursuant to the Merger would generally result in federal income tax consequences
similar to those described in the relevant portion of the above summary.
Shareholders that receive cash pursuant to the Merger are urged to consult their
own tax advisors.
PRICE RANGE OF SHARES; DIVIDENDS
The Shares are traded on the NYSE under the symbol "JRM". The following table
indicates the high and low sale prices for Shares as reported on the NYSE
Composite Tape for the calendar periods indicated below. Since its organization
in 1995, the Company has not declared or paid any dividends with respect to the
Shares and does not anticipate doing so in the future.
35
<PAGE>
<TABLE>
<CAPTION>
MARKET PRICE
------------------------------
HIGH LOW
------------- -------------
<S> <C> <C>
1997
First Quarter.............................. $26 1/8 $21 3/4
Second Quarter............................. 27 7/8 16 1/4
Third Quarter.............................. 49 27
Fourth Quarter............................. 52 1/4 34 3/16
1998
First Quarter.............................. $45 5/16 $31 7/8
Second Quarter............................. 47 3/8 37 1/8
Third Quarter.............................. 43 7/8 25 1/2
Fourth Quarter............................. 35 5/8 22 1/4
1999
First Quarter.............................. $31 1/2 $20 3/16
Second Quarter (through May 12, 1999)...... 35 3/8 30 1/4
</TABLE>
On May 6, 1999 there were 539 holders of record of Shares and 39,077,385
outstanding Shares.
On March 9, the last full day of trading before the Parent announced its
proposal to acquire all of the publicly-held Shares, the closing price of the
Shares on the NYSE Composite Tape was $24 3/8 per Share. On May 6, 1999, the
last full day of trading before the public announcement of the execution of the
Merger Agreement, the closing price of the Shares on the NYSE Composite Tape was
$30 1/2 per Share. On May 12, 1999, the last full day of trading before the
commencement of the Offer, the closing price of the Shares on the NYSE Composite
Tape was $35 5/16 per Share. SHAREHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET
QUOTATION FOR THE SHARES.
CERTAIN INFORMATION CONCERNING THE COMPANY
Except as otherwise set forth herein, the information concerning the Company
contained in this Offer to Purchase, including financial information, has been
furnished by the Company or has been taken from or based upon publicly available
documents and records on file with the Commission and other public sources.
Although neither Purchaser nor Parent has any knowledge that would indicate that
any statements contained herein based upon such reports and documents are
untrue, neither Purchaser nor Parent takes any responsibility for the accuracy
or completeness of the information contained in such reports and other documents
or for any failure by the Company to disclose events that may have occurred and
may affect the significance or accuracy of any such information but that are
unknown to Purchaser or Parent.
General
The Company is a corporation organized under the laws of the Republic of
Panama with its principal offices located at 1450 Poydras Street, New Orleans,
Louisiana 70112. The Company 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.
The name, citizenship, business address, principal occupation or employment
and five-year employment history for each of the directors and executive
officers of the Company and certain other information are set forth in Schedule
I hereto.
The Company is subject to the informational filing requirements of the 1934
Act and, in accordance therewith, is required to file periodic reports, proxy
statements and other information with the Commission relating to its business,
financial condition and other matters. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
36
<PAGE>
D.C. 20549, and at the Commission's regional offices located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Information regarding the
public reference facilities may be obtained from the Commission by telephoning
1-800-SEC-0330. The Company's filings are also available to the public on the
Commission's internet site (http://www.sec.gov). Copies of such materials may
also be obtained by mail from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Certain
reports and other information concerning the Company may also be inspected at
the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
37
<PAGE>
Selected Financial Information
Selected Consolidated Financial Data. Set forth below is certain selected
financial information relating to the Company which has been excerpted or
derived from the audited financial statements contained in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1998 (the "Company
10-K") and the unaudited financial statements contained in the Company's
quarterly report on Form 10-Q for the quarter ended December 31, 1998. The
financial information that follows is qualified in its entirety by reference to
such reports and other documents may be examined and copies may be obtained from
the offices of the Commission in the manner set forth above.
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
(UNAUDITED) YEAR ENDED MARCH 31,
---------------------------- -------------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues................................ $1,032,999 $1,442,363 $1,855,486 $1,408,469
Operating Income........................ 150,808 109,372 124,175 15,397
Income before Income Taxes.............. 175,688 109,497 123,811 (1,168)
Net Income.............................. 163,323 78,118 88,960 (12,900)
Earnings per Share:
Basic................................ 3.97 1.78 2.00 (0.50)
Diluted.............................. 3.57 1.66 1.89 (0.50)
At end of period:
Working capital...................... (23,580) 249,048 7,173 119,438
Total assets......................... 1,515,589 1,624,294 1,548,720 1,506,792
Long-term debt....................... 245,756 270,798 245,822 275,487
Shareholders' equity................. 733,104 620,126 616,562 550,979
Additional data:
Book value per Share................. 17.78 15.09 14.99 13.56
Ratio of earnings to fixed charges... 5.84 3.45 2.94 1.02
</TABLE>
Certain Projections
The Company does not, as a matter of course, make public any forecasts as to
its future financial performance. However, in connection with Parent's review of
the transactions contemplated by the Offer and the Merger, the Company has
provided Parent with certain nonpublic information concerning the Company and
its subsidiaries. Such information included, among other things, the Company's
projections of consolidated net revenues, net earnings before interest and taxes
("EBIT") and net income for the Company for the fiscal years 1999 through 2002.
The information provided to Parent by the Company (the "Projections")
discloses, among other things, the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------
1999 2000 2001 2002
---------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Revenue............... $1,279,750 $789,274 $1,094,787 $1,274,387
EBIT...................... 168,765 37,062 68,900 102,526
Net Income................ 136,028 50,422 78,553 103,840
</TABLE>
The Projections reflect the Company's forecast of its consolidated net
revenue, EBIT and net income on a stand-alone basis and without reflecting any
potential synergies from the consummation of the Offer and Merger.
THE PROJECTIONS WERE PREPARED SOLELY FOR INTERNAL USE AND NOT WITH A VIEW TO
PUBLIC DISCLOSURE OR COMPLIANCE WITH THE PUBLISHED GUIDELINES OF THE COMMISSION
OR THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS REGARDING PROJECTIONS
AND WERE NOT PREPARED WITH THE ASSISTANCE OF, OR REVIEWED BY, INDEPENDENT
ACCOUNTANTS.
38
<PAGE>
SUCH PROJECTIONS ARE INCLUDED BY PURCHASER IN THIS OFFER TO PURCHASE SOLELY
BECAUSE SUCH INFORMATION WAS FURNISHED TO PARENT AND PURCHASER BY THE COMPANY.
NONE OF PARENT, PURCHASER, THE COMPANY, SIMMONS, MERRILL LYNCH OR ANY OTHER
PERSON PROVIDES ANY ASSURANCE AS TO THE VALIDITY OR ACCURACY OF THE PROJECTED
OUTCOMES OR COMPLETENESS OF THE PROJECTIONS AND THE INCLUSION OF SUCH PROJECTED
INFORMATION IN THIS OFFER TO PURCHASE SHOULD NOT BE REGARDED AS AN INDICATION
THAT ANY SUCH PERSONS CONSIDER SUCH PROJECTED OUTCOMES TO BE ACCURATE OR
RELIABLE. THE PROJECTIONS WERE NOT PREPARED IN ACCORDANCE WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES AND WERE NOT AUDITED OR REVIEWED BY ANY
INDEPENDENT ACCOUNTING FIRM, NOR DID ANY SUCH FIRM PERFORM ANY OTHER SERVICES
WITH RESPECT THERETO. WHILE PRESENTED WITH NUMERICAL SPECIFICITY, THE
PROJECTIONS ARE BASED ON A VARIETY OF ASSUMPTIONS RELATING TO THE BUSINESSES OF
THE COMPANY, INDUSTRY PERFORMANCE, GENERAL BUSINESS AND ECONOMIC CONDITIONS AND
OTHER MATTERS, WHICH ARE INHERENTLY SUBJECT TO SIGNIFICANT UNCERTAINTIES AND
CONTINGENCIES, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. THESE ASSUMPTIONS
INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE ECONOMIC AND
COMPETITIVE CONDITIONS, INFLATION RATES AND FUTURE BUSINESS CONDITIONS.
THEREFORE, SUCH PROJECTIONS ARE INHERENTLY IMPRECISE AND THERE CAN BE NO
ASSURANCE THAT THEY WILL PROVE TO BE RELIABLE. ALSO, ACTUAL FUTURE RESULTS MAY
VARY MATERIALLY FROM THOSE SHOWN IN THE PROJECTIONS. NONE OF PARENT, PURCHASER,
THE COMPANY, SIMMONS OR MERRILL LYNCH IS UNDER ANY OBLIGATION TO OR HAS ANY
INTENTION TO UPDATE THE PROJECTIONS AT ANY FUTURE TIME.
Repurchases of Shares by the Company
The Company has made the following repurchases of Shares since April 1, 1997:
<TABLE>
<CAPTION>
AMOUNT OF RANGE OF AVERAGE
FISCAL YEAR ENDED MARCH 31, SHARES PURCHASED PRICES PAID PURCHASE PRICE
---------------- ------------- ----------------
<S> <C> <C> <C>
1998
First Quarter.......................... 0 -- --
Second Quarter......................... 0 -- --
Third Quarter.......................... 0 -- --
Fourth Quarter......................... 362,500 $37.12-$38.00 $37.31
1999
First Quarter.......................... 275,200 $38.00-$38.75 $38.38
Second Quarter......................... 1,462,500 $26.10-$37.00 $30.73
Third Quarter.......................... 100,000 * $27.08
Fourth Quarter......................... 0 -- --
2000
First Quarter (through May 6, 1999).... 0 -- --
</TABLE>
- -------------
* All Shares purchased at same price.
CERTAIN INFORMATION CONCERNING PARENT AND PURCHASER
Parent is a Panama corporation with its principal offices located at 1450
Poydras Street, New Orleans, Louisiana 70112. Parent is a leading worldwide
energy services company. Parent and its subsidiaries manufacture steam-
generating equipment, environmental equipment, and products for the U.S.
government. They also provide engineering and construction services for
industrial, utility, and hydrocarbon processing facilities and to the offshore
oil and natural gas industry.
Purchaser is a Panama corporation with its principal offices located at 1450
Poydras Street, New Orleans, Louisiana 70112. Purchaser is a wholly-owned
subsidiary of Parent. Purchaser was organized on May 10, 1999 and has not
carried on any activities other than in connection with the Merger Agreement.
The name, citizenship, business address, principal occupation or employment
and five-year employment history for each of the directors and executive
officers of Parent and Purchaser and certain other information are set forth in
Schedule II hereto.
39
<PAGE>
As of May 6, 1999, Parent beneficially owned 24,668,297 Shares or
approximately 63% of the outstanding Shares.
Except as described in this Offer to Purchase, (i) none of Parent, Purchaser
nor, to the best knowledge of Parent and Purchaser, any of the persons listed in
Schedule II to this Offer to Purchase or any associate or majority-owned
subsidiary of Parent or Purchaser or any of the persons so listed beneficially
owns or has any right to acquire, directly or indirectly, any Shares and (ii)
none of Parent, Purchaser nor, to the best knowledge of Parent and Purchaser,
any of the persons or entities referred to above nor any director, executive
officer or subsidiary of any of the foregoing has effected any transaction in
the Shares during the past 60 days.
Except as provided in the Merger Agreement or as otherwise described in this
Offer to Purchase, none of Parent, Purchaser nor, to the best knowledge of
Parent and Purchaser, any of the persons listed in Schedule II to this Offer to
Purchase, has any contract, arrangement, understanding or relationship with any
other person with respect to any securities of the Company, including, but not
limited to, any contract, arrangement, understanding or relationship concerning
the transfer or voting of such securities, finder's fees, joint ventures, loan
or option arrangements, puts or call, guarantees of loans, guaranties against
loss, guaranties of profits, division of profits or loss or the giving or
withholding of proxies.
Except as set forth in this Offer to Purchase, since April 1, 1996, none of
Parent, Purchaser nor, to the best knowledge of Parent and Purchaser, any of the
persons listed on Schedule II hereto, has had any business relationship or
transaction with the Company or any of its executive officers, directors or
affiliates that is required to be reported under the rules and regulations of
the Commission applicable to the Offer. Except as set forth in this Offer to
Purchase, since April 1, 1996, there have been no contacts, negotiations or
transactions between Parent or any of its subsidiaries or, to the best knowledge
of Parent, any of the persons listed in Schedule II to this Offer to Purchase,
on the one hand, and the Company or its affiliates, on the other hand,
concerning a merger, consolidation or acquisition, tender offer or other
acquisition of securities, an election of directors or a sale or other transfer
of a material amount of assets.
Parent is subject to the informational filing requirements of the 1934 Act
and, in accordance therewith, is required to file periodic reports, proxy
statements and other information with the Commission relating to its business,
financial condition and other matters. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the Commission's regional offices located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Information regarding the
public reference facilities may be obtained from the Commission by telephoning
1-800-SEC-0330. Parent's filings are also available to the public on the
Commission's internet site (http://www.sec.gov). Copies of such materials may
also be obtained by mail from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Certain
reports and other information concerning Parent may also be inspected at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
FINANCING OF THE OFFER AND THE MERGER
The total amount of funds required by Parent and Purchaser to consummate the
Offer and the Merger and to pay related fees and expenses is estimated to be
approximately $560 million. The Offer and the Merger are not conditioned on
obtaining financing. Parent expects that it will obtain such funds from cash on
hand and from financing arrangements which Parent expects to enter into prior to
the consummation of the Offer, which may include a new senior secured term loan
facility in the amount of $525 million (the "Facility"). Parent has received a
letter (together with the related term sheet, the "Commitment Letter"), dated
May 7, 1999, from Citibank, N.A. ("Citibank") pursuant to which Citibank has
committed to provide Parent with the Facility. A copy of the Commitment Letter
is filed as an exhibit to the Schedule 14D-1 and incorporated herein by
reference, and the following summary of the Commitment Letter (including the
related term sheet) is qualified in its entirety by reference thereto.
The proceeds of the Facility will be used to finance the Offer and the Merger.
All borrowings under the Facility will mature no later than September 30, 1999.
Upon consummation of the Merger, the commitments will terminate and Parent will
cause the Company to declare and distribute a dividend and/or provide a loan to
Parent in an aggregate amount that, together with available cash of Parent, is
sufficient to repay all outstanding loans under the Facility, and
40
<PAGE>
Parent will apply all such proceeds to such repayment. Under the Facility,
Citibank may act either as sole lender or syndicate all or a portion of the
Facility to a group of financial institutions. If the Facility is syndicated,
Citibank will serve as administrative agent for a syndicate of lenders (the
"Lenders") to be arranged by Salomon Smith Barney, Inc., who will serve as the
sole syndication agent.
The Facility will permit Parent to borrow, at Parent's option, at the London
interbank offered rate for deposits in U.S. dollars adjusted for statutory
reserves ("Adjusted LIBOR") or the higher of (x) Citibank's prime rate and (y)
the federal funds rate plus 1/2 of 1% (the "Alternate Base Rate"), plus a
margin, if any, applicable to such rate. The applicable margin will vary
depending on Parent's senior unsecured long-term debt ratings as determined by
Standard & Poor's, in the case of Adjusted LIBOR, between 1% and 3%, and in the
case of the Alternate Base Rate, between 0% and 2%. In addition, Parent will
pay a commitment fee on the unused portion of the Facility that will vary
between 0.25% and 0.75% depending on Parent's senior unsecured long-term debt
ratings as determined by Standard & Poor's. The credit agreement relating to
the Facility will contain customary representations, warranties, covenants and
events of default. In addition, the Facility will include financial covenants
requiring Parent to maintain a minimum consolidated tangible net worth of not
less than $250 million, limiting the ability of Parent to pay dividends and
requiring that cash, cash equivalents and investments in debt securities in an
amount equal to at least $525 million be held by the Company at all times.
The commitment is contingent upon certain conditions, including, without
limitation, (a) the preparation, execution and delivery of mutually acceptable
documentation, including a credit agreement and other loan documents that
incorporate substantially the terms and conditions of the Commitment Letter, (b)
the absence of a material adverse change in the business, condition (financial
or otherwise), operations, properties or prospects of the Parent, as reflected
in the Parent's audited consolidated financial statements for the fiscal year
ended March 31, 1999 and (c) the closing of and initial funding under the
Facility occurring on or prior to July 31, 1999. Borrowings under the Facility
to finance the Offer and Merger are contingent on satisfaction or waiver of
certain additional conditions, including, without limitation, the following: (a)
the amendment or repayment of the Company's existing $200 million revolving
credit facility with Citibank and certain other lenders, (b) the absence of any
legal or contractual or other impediment that could reasonably be expected to
prevent the completion of the Merger promptly following the purchase of the
Shares pursuant to the Offer, (c) satisfaction that the Company holds cash, cash
equivalents and investments in debt securities in an amount equal to at least
$525 million and the absence of any legal, contractual or other impediment that
could reasonably be expected to prevent the Company from distributing a dividend
or providing a loan to Parent in an amount at least equal to $525 million,
promptly following the Merger, (d) satisfaction of the conditions to the
purchase of the Shares pursuant to the Offer and the purchase pursuant to the
Offer of at least a majority of the outstanding Shares (other than shares
beneficially owned by Parent), (e) the absence of any defaults, prepayment
events or creation of liens under debt instruments or other agreements as a
result of the transactions contemplated hereby (subject to certain de minimus
exceptions) and (f) the absence of material litigation.
The Facility and any related hedging facilities will be secured by a first
priority pledge of all capital stock of the Company and securities convertible
into capital stock of the Company held or acquired by Parent or any of its
subsidiaries.
DIVIDENDS AND DISTRIBUTIONS
Since its organization in 1995, the Company has not declared or paid any
dividends with respect to the Shares. Under various bank credit agreements, the
Company is limited in the amount of dividends and distributions that it can pay.
Under the most restrictive agreement, the Company currently has the capacity to
make dividends and distributions in an aggregate amount not exceeding
approximately $147 million.
If, subsequent to the date of the Merger Agreement but prior to the Effective
Time, the Company changes the number of Shares outstanding as a result of any
stock split, stock dividend, recapitalization or similar transaction, then
appropriate adjustments shall be made in all amounts payable pursuant to the
Merger Agreement, including, without limitation, the price to be paid in the
Offer and/or the Merger.
41
<PAGE>
CERTAIN EFFECTS OF THE OFFER
Market for the Shares
The purchase of Shares pursuant to the Offer will reduce the number of holders
of Shares and the number of Shares that might otherwise trade publicly and could
adversely affect the liquidity and market value of the remaining Shares held by
the public.
Stock Quotation
Depending upon the number of Shares purchased pursuant to the Offer, the
Shares may no longer meet the standards for continued listing on the NYSE.
According to the NYSE's published guidelines, the Shares would not be eligible
for continued listing if, among other things, the number of Shares publicly held
falls below 600,000, the number of beneficial holders of Shares falls below
1,200 (holding at least 100 Shares) or the aggregate market value of such
publicly-held Shares does not exceed $5 million. If, as a result of the
purchase of Shares pursuant to the Offer, the Merger or otherwise, the Shares no
longer meet the requirements of the NYSE for continued listing, the listing of
the Shares might be discontinued and, in such event, the market for the Shares
could be adversely affected. In the event the Shares were no longer eligible
for listing on the NYSE, quotations might still be available from other sources.
The extent of the public market for the Shares and the availability of such
quotations would, however, depend upon the number of holders of such Shares
remaining at such time, the interest in maintaining a market in such Shares on
the part of securities firms, the possible termination of registration of such
Shares under the 1934 Act as described below and other factors.
Exchange Act Registration
The Shares are currently registered under Section 12(b) of the 1934 Act.
Registration of the Shares under the 1934 Act may be terminated upon application
of the Company to the Commission if the Shares are not listed on a national
securities exchange and not held by 300 or more holders of record. Termination
of registration of the Shares under the 1934 Act would substantially reduce the
information required to be furnished by the Company to its shareholders and to
the Commission and would make certain provisions of the 1934 Act no longer
applicable to the Company, such as the short-swing profit recovery provisions of
Section 16(b) of the 1934 Act, the requirement of furnishing a proxy statement
pursuant to Section 14(a) of the 1934 Act in connection with shareholders'
meetings and the related requirement of furnishing an annual report to
shareholders and the requirements of Rule 13e-3 under the 1934 Act with respect
to "going private" transactions. Furthermore, the ability of "affiliates" of
the Company and persons holding "restricted securities" of the Company to
dispose of such securities pursuant to Rule 144 or 144A promulgated under the
Securities Act of 1933, may be impaired or eliminated. If registration of the
Shares under the 1934 Act were terminated, the Shares would no longer be "margin
securities" or be eligible for listing on the NYSE. Parent and Purchaser
currently intend to seek to cause the Company to terminate the registration of
the Shares under the 1934 Act as soon after consummation of the Offer as the
requirements for termination of registration are met.
Margin Regulations
The Shares are currently "margin securities" under the regulations of the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board"),
which has the effect, among other things, of allowing brokers to extend credit
on the collateral of the Shares. Depending upon factors similar to those
described above regarding listing and market quotations, it is possible that,
following the Offer, the Shares would no longer constitute "margin securities"
for the purposes of the margin regulations of the Federal Reserve Board and
therefore could no longer be used as collateral for loans made by brokers. In
any event, the Shares will cease to be "margin securities" if registration of
the Shares under the 1934 Act is terminated.
42
<PAGE>
Increased Interest in Net Book Value and Net Earnings of the Company
If the Offer is consummated, the direct and indirect interest of Parent in the
Company's net book value and net earnings will increase in proportion to the
number of Shares acquired in the Offer. Following consummation of the Merger,
Parent's direct and indirect interest in such items will increase to 100%, and
the Company will be a wholly-owned subsidiary of Parent. Accordingly, Parent
and its subsidiaries will be entitled to all benefits resulting from that
interest, including all income generated by the Company's operations, any future
increase in the Company's value and the right to elect all members of the
Company Board. Similarly, Parent will also bear the risk of losses generated by
the Company's operations and any decrease in the value of the Company after the
Merger. Furthermore, after the Merger, pre-Merger shareholders (other than
Parent) will not have the opportunity to participate directly in the earnings
and growth of the Company and will not face the risk of losses generated by the
Company's operations or decline in the value of the Company.
If all of the outstanding Shares are purchased pursuant to the Offer, Parent's
beneficial interest in the net book value (shareholders' equity) at December 31,
1998 and net income of the Company for the nine months ended December 31, 1998,
as reflected in the Company's December 31, 1998 Form 10-Q, would increase to
100% or $733,104, and $163,323, respectively.
CERTAIN CONDITIONS OF THE OFFER
Notwithstanding any other provision of the Offer, Purchaser shall not be
required to accept for payment or, subject to any applicable rules and
regulations of the Commission, including Rule 14e-1(c) promulgated under the
1934 Act (relating to Purchaser's obligation to pay for or return tendered
Shares promptly after expiration or termination of the Offer), pay for any
Shares, and may, subject to the terms of the Merger Agreement, terminate the
Offer, if (i) at the Expiration Date, the Minimum Condition has not been
satisfied or (ii) at any time on or after May 7, 1999 and prior to the
Expiration Date, any of the following conditions exist:
(a) any injunction, judgment, order or decree of a court of competent
jurisdiction shall have been entered and not withdrawn or any law or regulation
shall exist that prohibits the consummation of the Offer or the Merger; or
(b) the Company shall have breached its representations and warranties set
forth in the Merger Agreement or failed to perform any of its obligations,
covenants or agreements under the Merger Agreement (other than any breaches or
failures to perform that, in the aggregate, do not have a material adverse
effect on the Company); or
(c) the Merger Agreement shall have been terminated in accordance with its
terms.
Except for the Minimum Condition (which may be waived only with the consent of
the Company, Parent and Purchaser), the foregoing conditions are for the sole
benefit of Parent and Purchaser and may, subject to the terms of the Merger
Agreement, be waived by Parent and Purchaser in whole or in part at any time and
from time to time in their discretion.
CERTAIN LEGAL MATTERS; REGULATORY APPROVALS
General
Except as described in this Section, based on its review of publicly available
filings of the Company with the Commission and other publicly available
information regarding the Company, neither Parent nor Purchaser is aware of any
license or regulatory permit that appears to be material to the business of the
Company and its subsidiaries, taken as a whole, that might be adversely affected
by Purchaser's acquisitions of Shares (and/or the indirect acquisition of the
stock of the Company's subsidiaries) as contemplated herein or of any approval
or other action by or with any domestic, or foreign, government authority or
administrative or regulatory agency that would be required for the acquisition
of ownership of the Shares (and/or the indirect acquisition of the stock of the
Company's subsidiaries) by Purchaser. Should any such approval or other action
be required, Parent and Purchaser currently contemplate that such
43
<PAGE>
approval or other action will be sought. While, except as otherwise expressly
described in this Section, Purchaser does not presently intend to delay the
acceptance for payment of or payment for Shares tendered pursuant to the Offer
pending the outcome of any such matter, there can be no assurance that any such
approval or other action, if needed, would be obtained without substantial
conditions or that failure to obtain any such approval or other action might not
result in consequences adverse to the Company's business or that certain parts
of the Company's business might not have to be divested if such approvals were
not obtained or such other actions were not taken, any of which could cause
Purchaser to decline to accept for payment or pay for any Shares tendered.
Purchaser's obligations to accept for payment or pay for the Shares tendered
pursuant to the Offer is subject to the conditions set forth in this Offer to
Purchase, including the conditions referred to above. See "Certain Conditions of
the Offer."
Antitrust
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act"), certain acquisitions may not be consummated unless certain information
has been furnished to the Federal Trade Commission and the Antitrust Division of
the Department of Justice and certain waiting period requirements have been
satisfied. Because Parent already owns more than 50% of the equity of the
Company, Parent believes that the HSR Act is not applicable to the purchase of
Shares pursuant to the Offer.
Based upon Purchaser's and Parent's examination of publicly available
information concerning the Company, it appears that the Company and its
subsidiaries own property and conduct business in a number of foreign countries.
In connection with the acquisition of Shares pursuant to the Offer, the laws of
certain of these foreign countries may require the filing of information with,
or the obtaining of the approval of, governmental authorities therein. After
commencement of the Offer, Purchaser will seek further information regarding the
applicability of any such laws and currently intends to take such action as they
may require, but no assurance can be given that such approvals will be obtained.
If any action is taken prior to completion of the Offer by any such government
or governmental authority, Purchaser may not be obligated to accept for payment
or pay for any tendered Shares. See "Certain Conditions of the Offer".
CERTAIN LITIGATION
Shareholders Litigation. 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 the Company, which challenge negotiations between the
Company and Parent concerning a potential transaction.
On or around March 17, 1999, an action styled Pasternac, et al. v. William J.
Johnson, Robert H. Rawle, Roger E. Tetrault, Rick L. Burdick, Richard E.
Woolbert, Robert L. Howard, Sean C. O'Keefe, Cedric Ritchie, McDermott
International, Inc. and J. Ray McDermott, S.A., No. 99-4195, was filed in the
Parish of Orleans Civil District Court by certain alleged shareholders of the
Company. The complaint in the Pasternac action challenges Parent's Initial
Proposal in which each share of the Company not already owned by Parent would
have been exchanged for 1.15 shares of common stock of Parent. The Pasternac
complaint alleges that, as an approximately 63% shareholder of the Company,
Parent owed fiduciary duties to the public shareholders of the Company and that
the proposal breached those duties, allegedly because the proposal placed undue
pressure on the Company board of directors, Parent used confidential information
of the Company in formulating the proposal and the consideration offered by
Parent in the proposal was unfair and inadequate. The complaint also alleges
that the members of the Company board of directors are not independent of Parent
and are therefore incapable of representing the Company's public shareholders in
any negotiations with Parent. The complaint seeks to proceed as a class action,
seeks preliminary and permanent injunctive relief against the transaction
proposed by Parent, seeks compensatory and rescissory damages in an unspecified
amount and seeks plaintiffs' costs in bringing the action. By agreement with
plaintiffs' counsel, the time for a response to the complaint in the Pasternac
action has been adjourned, subject to reinstatement by plaintiffs on twenty-
days' notice.
On or around April 7, 1999, a second action styled Hill v. J. Ray McDermott,
S.A., McDermott International, Inc., Roger E. Tetrault, Rick L. Burdick, Robert
L. Howard, William J. Johnson, Sean Charles O'Keefe, Robert H. Rawle, Cedric E.
Ritchie, Richard E. Woolbert and John Doe, No. 99-5595, was filed in the Parish
of Orleans Civil District Court. The complaint in the Hill action makes
allegations similar to those of the Pasternac complaint, and also alleges
44
<PAGE>
that certain members of the Company board of directors have conflicts of
interest in considering any transaction with Parent because of their alleged
shareholdings in Parent. As in the Pasternac action, the Hill complaint seeks to
proceed as a class action, seeks preliminary and permanent injunctive relief
against the transaction proposed by Parent, seeks compensatory and rescissory
damages in an unspecified amount and seeks plaintiffs' costs in bringing the
action. By agreement with plaintiffs' counsel, the time for a response to the
complaint in the Hill action has been adjourned, subject to reinstatement by
plaintiffs on twenty-one days' notice.
On or around May 5, 1999, plaintiffs' counsel in the Hill action served a
request for production of documents on JRM and McDermott.
On May 7, 1999, 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. Parent and the Company
believe that the actions are without merit and intend to contest these suits
vigorously.
FEES AND EXPENSES
Except as set forth below, Parent and Purchaser will not pay any fees or
commissions to any broker, dealer or other person for soliciting tenders of
Shares pursuant to the Offer.
Pursuant to the terms of Merrill Lynch's engagement, Parent has agreed to pay
Merrill Lynch for its services as financial advisor and Dealer Manager in
connection with the Offer and the Merger an aggregate fee of $2,500,000. Parent
has also agreed to reimburse Merrill Lynch for its reasonable travel and other
out-of-pocket expenses, including those incurred in connection with Merrill
Lynch's activities as Dealer Manager and the fees and expenses of its legal
counsel, and to indemnify Merrill Lynch and certain related parties against
certain liabilities, including liabilities under the federal securities laws,
arising out of Merrill Lynch's engagement.
Parent and Purchaser have retained Morrow & Co., Inc. to be the Information
Agent and First Chicago Trust Company of New York to be the Depositary in
connection with the Offer. The Information Agent may contact holders of Shares
by mail, telephone, telecopy, telegraph and personal interview and may request
banks, brokers, dealers and other nominees to forward materials relating to the
Offer to beneficial owners of Shares.
As compensation for acting as Information Agent in connection with the Offer,
Morrow & Co., Inc. will be paid a fee of $7,500 and will also be reimbursed for
certain reasonable out-of-pocket expenses and may be indemnified against certain
liabilities and expenses in connection with the Offer, including certain
liabilities under the federal securities laws. Purchaser will pay the
Depositary reasonable and customary compensation for its services in connection
with the Offer, plus reimbursement for reasonable out-of-pocket expenses, and
will indemnify the Depositary against certain liabilities and expenses in
connection therewith, including certain liabilities under federal securities
laws. Brokers, dealers, commercial banks and trust companies will be reimbursed
by Purchaser for customary handling and mailing expenses incurred by them in
forwarding material to their customers.
The following is an estimate of fees and expenses to be incurred in connection
with the Offer:
<TABLE>
<CAPTION>
<S> <C>
Fees and Expenses to Be Paid by Parent:
Financial Advisor/Dealer Manager $2,500,000
Legal 850,000
Printing 150,000
Advertising 77,000
Filing 105,084
Depositary 10,000
Information Agent (including mailing) 17,500
Financing 3,481,250
Miscellaneous 25,000
----------
Total $7,215,834
==========
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Fees and Expenses to Be Paid by the Company:
Financial Advisor $4,250,000
Legal 300,000
Miscellaneous 25,000
----------
Total $4,575,000
==========
</TABLE>
MISCELLANEOUS
The Offer is not being made to (nor will tenders be accepted from or on behalf
of) holders of Shares in any jurisdiction in which the making of the Offer or
the acceptance thereof would not be in compliance with the laws of such
jurisdiction. However, Purchaser may, in its discretion, take such action as it
may deem necessary to make the Offer in any such jurisdiction and extend the
Offer to holders of Shares in such jurisdiction.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION ON BEHALF OF PARENT OR PURCHASER NOT CONTAINED HEREIN OR IN THE
LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
Purchaser has filed with the Commission a Tender Offer Statement on Schedule
14D-1 and a Transaction Statement on Schedule 13E-3 pursuant to Rules 14d-1 and
13e-3, respectively, under the 1934 Act, together with exhibits furnishing
certain additional information with respect to the Offer, and may file
amendments thereto. In addition, the Company has filed with the Commission a
Schedule 14D-9, together with exhibits, pursuant to Rule 14d-9 under the 1934
Act, setting forth the recommendations of the Company Board with respect to the
Offer and the reasons for such recommendations and furnishing certain additional
related information. A copy of such documents, and any amendments thereto, may
be examined at, and copies may be obtained from the Commission (but not the
regional offices of the Commission) in the manner set forth under "--Certain
Information Concerning Parent and Purchaser" above.
MCDERMOTT ACQUISITION COMPANY, INC.
May 13, 1999
46
<PAGE>
SCHEDULE I
DIRECTORS AND EXECUTIVE OFFICERS OF
THE COMPANY
The following table sets forth (i) the name, current business or residence
address and present principal occupation or employment, (ii) material
occupations, positions, offices or employments and business addresses thereof
for the past five years and (iii) information as to beneficial ownership of
Shares of each director and executive officer of the Company as of March 31,
1999. Each of the Company's directors and officers is a citizen of the United
States. Except as otherwise indicated, the business address of each director
and executive officer of the Company is 1450 Poydras Street, New Orleans,
Louisiana 70112. Except as otherwise indicated, each occupation set forth
opposite a person's name refers to employment with the Company. No director or
executive officer of the Company beneficially owns more than 1% of the
outstanding Shares. Directors of the Company are indicated with an asterisk.
<TABLE>
<CAPTION>
BENEFICIAL
NAME, CITIZENSHIP PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS OWNERSHIP OF
AND CURRENT BUSINESS ADDRESS HELD DURING THE PAST FIVE YEARS AND BUSINESS ADDRESSES THEREOF SHARES(1)
- ---------------------------- --------------------------------------------------------------- -------------
<S> <C> <C>
*Rick L. Burdick............... A partner in the law firm of Akin, Gump, Hauer & Feld, 4,545(2)
L.L.P., since 1988. He is also a director of AutoNation, Inc.
and Century Business Services, Inc.
Gary W. Drinkwater............. Senior Vice President and Group Executive, Western 10,440(3)
Hemisphere, since February 1999, and Compliance Director
since April 1997. Before assuming his present positions, he
was Senior Vice President and Group Executive, Eastern
Hemisphere, from March 1998; Senior Vice President and
General Manager, Project Services, from January 1997; and
Vice President and General Manager, Project Services, from
September 1996. Previously, Mr. Drinkwater was Vice
President and General Manager, Project Management, of
Parent, from April 1995 and Vice President and General
Manager, Washington Operations, of Parent from March
1993.
Daniel R. Gaubert.............. Senior Vice President and Chief Financial Officer since 8,731(4)
August 1997, prior to which, he was Vice President, Finance
from August 1995 and Acting Controller from February 1995
to August 1995. Mr. Gaubert has also been Senior Vice
President and Chief Financial Officer of Parent since
February 1997, prior to which, he was Vice President and
Chief Financial Officer of Parent from September 1996; Vice
President, Finance and Controller of Parent from February
1995; and Vice President and Controller of Parent from
February 1992.
*Robert L. Howard.............. Until his retirement in March 1995, he was Vice President, 2,445(5)
Domestic Operations, Exploration and Production, of Shell
Oil Company and President of Shell Western Exploration and
Production Inc. from 1992, and President of Shell Offshore,
Inc. from 1985. He is also a director of Parent, Southwestern
Energy Company and Ocean Energy, Inc.
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL
NAME, CITIZENSHIP PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS OWNERSHIP OF
AND CURRENT BUSINESS ADDRESS HELD DURING THE PAST FIVE YEARS AND BUSINESS ADDRESSES THEREOF SHARES(1)
- ---------------------------- --------------------------------------------------------------- -------------
<S> <C> <C>
*William J. Johnson............. President and a director of JonLoc Inc., an oil and gas 2,475(6)
company of which he and his family are the sole
shareholders, and an independent consultant to the oil and gas
industry. From 1991 to 1994, Mr. Johnson was President and
Chief Operating Officer of Apache Corporation. Previously,
Mr. Johnson held various positions in the oil and gas
industry, including President and Chief Executive Officer of
Tex/Con Oil and Gas Company, President USA of BP
Exploration Company and President of Standard Oil
Production Company. Mr. Johnson is also a director of
Snyder Oil Corporation and Tesoro Petroleum Corporation.
S. Wayne Murphy................. Senior Vice President, General Counsel and Corporate 4,177(7)
Secretary since August 1997, prior to which, he was Acting
General Counsel and Acting Corporate Secretary from
February 1996. He also has been Senior Vice President,
General Counsel and Corporate Secretary of Parent since
February 1997, prior to which, he was Vice President,
General Counsel and Corporate Secretary of Parent from June
1996; Acting General Counsel and Acting Corporate
Secretary of Parent from February 1996; and Associate
General Counsel of Parent from August 1993.
Kurt S. Nelson.................. Vice President and Group Executive, Eastern Hemisphere, 21,553(8)
since February 1999. Previously, he was Vice President and
Area Executive, Middle East Operations, from March 1998;
Vice President and Group Executive, Middle East Operations,
from February 1997; Vice President and Group Executive,
Subsea Development, from September 1996; and Vice
President and General Manager, Sub-Ocean, from February
1995. From March 1993 until February 1995, he was Vice
President, Marine Operations, of Parent's Marine
Construction Services Division.
Fred R. Oehrlein................ Vice President and Group Executive, Project Services, since 32,509(9)
February 1999. Before assuming his present position, Mr.
Oehrlein was Vice President and Group Executive, Western
Hemisphere, from March 1998; Vice President and Group
Executive, European Operations, from September 1996; Vice
President and Group Executive, Project Services, from July
1996; Vice President and Group Executive of Southeast Asia
Operations from February 1995; and Vice President and
General Manager, Southeast Asia Operations, of Parent's
Marine Construction Services Division from 1991.
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL
NAME, CITIZENSHIP PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS OWNERSHIP OF
AND CURRENT BUSINESS ADDRESS HELD DURING THE PAST FIVE YEARS AND BUSINESS ADDRESSES THEREOF SHARES(1)
- ---------------------------- --------------------------------------------------------------- -------------
<S> <C> <C>
*Sean C. O'Keefe................ Formerly Secretary of the Navy, Mr. O'Keefe currently holds 1,235(10)
the Louis A. Bantle Chair in Business and Government Policy
in the Maxwell School of Citizenship and Public Affairs at
Syracuse University. He is also Director of National
Securities Study at Syracuse University and has been on the
faculty of the Maxwell School since 1996. Previously, Mr.
O'Keefe was a professor of business administration and
assistant to the senior vice president for research and graduate
education at Pennsylvania State University from 1993.
*Robert H. Rawle................ President and Chief Operating Officer since January 1997. 33,234(11)
Previously, Mr. Rawle was Vice President and Group
Executive of the North, Central and South America
Operations from January 1996, prior to which, he was Vice
President, Domestic Operations from January 1995. From
March 1993 to January 1995, he was Vice President of the
Domestic Operations of Parent's Marine Construction
Services Division.
*Cedric E. Ritchie.............. Chairman of the Board and Chairman of the Executive 5,240(12)
Committee of the Board of The Bank of Nova Scotia from
January 1993 until January 1995, prior to which, he served in
various executive and managerial capacities with the bank for
over 40 years, including President and Chief Executive
Officer. He is also a director of MacMillan Bloedel Limited,
Minorco, Canadian National Railways, Concord Pacific
Group Inc. and TransCanada Pipelines Limited.
*Roger E. Tetrault.............. Chairman of the Board since June 1997 and Chief Executive 77,317(13)
Officer since March 1997 of the Company and Parent.
Before assuming his present positions, Mr. Tetrault was a
Senior Vice President of General Dynamics Corporation (a
supplier of weapons systems and services to the U.S.
government and its allies) and President of its Land Systems
Division from April 1993; Vice President of General
Dynamics Corporation and President of its Electric Boat
Division from August 1992 until April 1993; Vice President
and General Manager of General Dynamics Corporation's
Electric Boat Division from August 1991 until August 1992;
and prior to that, he served as a Vice President and Group
Executive of Parent's Babcock & Wilcox subsidiary from
1990. He is also a director of Parent.
*Richard E. Woolbert............ Until his retirement in January 1999, he was Executive Vice 35,000(14)
President and Chief Administrative Officer of the Company
and Parent from February 1995. Previously, Mr. Woolbert
was Senior Vice President and Chief Administrative Officer
of Parent from August 1991. He is also a director of Parent.
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL
NAME, CITIZENSHIP PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS OWNERSHIP OF
AND CURRENT BUSINESS ADDRESS HELD DURING THE PAST FIVE YEARS AND BUSINESS ADDRESSES THEREOF SHARES(1)
- ---------------------------- --------------------------------------------------------------- -------------
<S> <C> <C>
J. R. Woolsey................... Senior Vice President and Chief Administrative Officer of the --
Company and Parent since January 1999 and Parent's
Compliance Director since November 1997. Previously, he
was Vice President, Business Venture Relations, of Parent
from October 1997; and Vice President and General Manager
of the Nuclear Equipment Division of Parent's Government
Group from 1990.
</TABLE>
- ------------------
(1) Shares beneficially owned as a result of stock options refer to options
exercisable within 60 days of March 31, 1999.
(2) Shares owned by Mr. Burdick include 1,200 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 500
restricted Shares as to which he has sole voting power but no dispositive
power.
(3) Shares owned by Mr. Drinkwater include 10,065 Shares that may be acquired
upon the exercise of stock options as described in footnote (1) above, and
375 Shares held in The Thrift Plan for Employees of McDermott Incorporated
and Participating Subsidiary and Affiliated Companies (the "McDermott Thrift
Plan") as of March 31, 1999.
(4) Shares owned by Mr. Gaubert include 6,691 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 2,040
restricted shares of Common Stock as to which he has sole voting power but
no dispositive power.
(5) Shares owned by Mr. Howard include 800 Shares that may be acquired upon the
exercise of stock options as described in footnote (1) above, and 400
restricted Shares as to which he has sole voting power but no dispositive
power.
(6) Shares owned by Mr. Johnson include 800 Shares that may be acquired upon the
exercise of stock options as described in footnote (1) above, and 300
restricted Shares as to which he has sole voting power but no dispositive
power.
(7) Shares owned by Mr. Murphy include 3,427 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 750
restricted shares of Common Stock as to which he has sole voting power but
no dispositive power.
(8) Shares owned by Mr. Nelson include 16,652 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 4,200
restricted Shares as to which he has sole voting power but no dispositive
power. Also includes 701 Shares held in the McDermott Thrift Plan as of
March 31, 1999.
(9) Shares owned by Mr. Oehrlein include 25,308 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 6,510
restricted Shares as to which he has sole voting power but no dispositive
power. Also includes 691 Shares held in the McDermott Thrift Plan as of
March 31, 1999.
(10) Shares owned by Mr. O'Keefe include 200 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 100
restricted Shares as to which he has sole voting power but no dispositive
power.
I-4
<PAGE>
(11) Shares owned by Mr. Rawle include 25,437 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 5,300
restricted Shares as to which he has sole voting power but no dispositive
power. Also includes 697 Shares in the McDermott Thrift Plan as of March
31, 1999.
(12) Shares owned by Mr. Ritchie include 1,200 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 400
restricted Shares as to which he has sole voting power but no dispositive
power.
(13) Shares owned by Mr. Tetrault include 40,783 Shares that may be acquired
upon the exercise of stock options as described in footnote (1) above, and
8,100 Restricted Shares as to which he has sole voting power but no
dispositive power. Also includes 701 Shares held in the McDermott Thrift
Plan as of March 31, 1999.
(14) Shares owned by Mr. Woolbert include 30,550 Shares that may be acquired
upon the exercise of stock options as described in footnote (1) above.
I-5
<PAGE>
SCHEDULE II
DIRECTORS AND EXECUTIVE OFFICERS OF
PARENT AND PURCHASER
The following table sets forth (i) the name, current business or residence
address and present principal occupation or employment and (ii) material
occupations, positions, offices or employments and business addresses thereof
for the past five years, in each case of each director and executive officer of
Parent and Purchaser, and persons who may be designated by Parent to serve as
directors on the Company's Board following the Offer and Merger. Each of
Parent's and Purchaser's directors and officers, and each of the proposed
directors and officers of the Company after consummation of the Offer and the
Merger, is a citizen of the United States.
Except as otherwise indicated, the business address of each director and
executive officer of Parent and Purchaser is 1450 Poydras Street, New Orleans,
Louisiana 70112. Except as otherwise indicated, each occupation set forth
opposite a person's name refers to employment with Parent or Purchaser,
respectively. No director or executive officer of Parent or Purchaser
beneficially owns more than 1% of the outstanding Shares. Directors of each of
Parent and Purchaser are indicated with an asterisk.
A. DIRECTORS AND EXECUTIVE OFFICERS OF PARENT.
<TABLE>
<CAPTION>
BENEFICIAL
NAME, CITIZENSHIP PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS OWNERSHIP OF
AND CURRENT BUSINESS ADDRESS HELD DURING THE PAST FIVE YEARS AND BUSINESS ADDRESSES THEREOF SHARES(1)
- ---------------------------- --------------------------------------------------------------- -------------
<S> <C> <C>
*Theodore H. Black............ Chairman of the Board and Chief Executive Officer of Ingersoll- --
Rand Company (a manufacturer of heavy equipment) from 1988
until his retirement in October 1993. He is also a director of
Bestfoods and General Public Utilities Corporation.
*Philip J. Burguieres......... Chief Executive Officer of EMC Holdings, LLC, and Vice --
Chairman, The McNair Group. Formerly, he served as Chairman of
the Board of Weatherford International, Inc. (a diversified
international energy services and manufacturing company) from
December 1992 to May 1998 and as its President and Chief
Executive Officer from April 1991 to October 1996. He is also a
director of Weatherford International, Inc., Chase Bank of Texas,
N.A., Denali Incorporated and Newfield Exploration Company.
*Bruce DeMars................. Partner in the Trident Merchant Group. Admiral, United States Navy --
(retired). From 1988 until his retirement in October 1996, he was
Director, Naval Nuclear Propulsion, a joint Department of the
Navy/Department of Energy program responsible for the design,
construction, maintenance, operation and final disposal of reactor
plants for the United States Navy. He is also a director of Unicom
Corporation, Commonwealth Edison Corporation and Draper
Laboratories.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL
NAME, CITIZENSHIP PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS OWNERSHIP OF
AND CURRENT BUSINESS ADDRESS HELD DURING THE PAST FIVE YEARS AND BUSINESS ADDRESSES THEREOF SHARES(1)
- ---------------------------- --------------------------------------------------------------- -------------
<S> <C> <C>
Daniel R. Gaubert............. Senior Vice President and Chief Financial Officer since February 8,731(2)
1997. Prior thereto, he was Vice President and Chief Financial
Officer from September 1996; Vice President, Finance and
Controller from February 1995; and Vice President and Controller
from February 1992. Mr. Gaubert has also been Senior Vice
President and Chief Financial Officer of the Company since August
1997, prior to which he was Vice President, Finance of the Company
from August 1995 and Acting Controller of the Company from
February 1995.
*Robert L. Howard............. Until his retirement in March 1995, he was Vice President Domestic 2,445(3)
Operations, Exploration and Production, of Shell Oil Company and
President of Shell Western Exploration and Production Inc. from
1992, and President of Shell Offshore, Inc. from 1985. He is also a
director of J. Ray McDermott, Southwestern Energy Company and
Ocean Energy, Inc.
*John W. Johnstone, Jr. ...... Until his retirement in May 1996, he was Chairman of the Board --
from 1988 and Chief Executive Officer from 1987 of Olin
Corporation (a manufacturer and supplier of chemicals, metals,
defense related products and services, and ammunition). He is also a
director of Fortune Brands, Inc., Phoenix Home Mutual Life
Insurance Company and Arch Chemicals, Inc.
William McCollam, Jr. ........ Energy management consultant, and President Emeritus of Edison --
Electric Institute (an electric utility company association) since May
1990. From April 1978 to 1990, he was President of Edison Electric
Institute.
S. Wayne Murphy............... Senior Vice President, General Counsel and Corporate Secretary 4,177(4)
since February 1997. Prior thereto, he was Vice President, General
Counsel and Corporate Secretary from June 1996; Acting General
Counsel and Acting Corporate Secretary from February 1996; and
Associate General Counsel from August 1993. Mr. Murphy has also
been Senior Vice President, General Counsel and Corporate
Secretary of the Company since August 1997, prior to which he was
Acting General Counsel and Acting Corporate Secretary of the
Company from February 1996.
Robert H. Rawle............... President and Chief Operating Officer of the Company since January 2,445(5)
1997. Previously, Mr. Rawle was Vice President and Group
Executive of the Company's North, Central and South America
Operations from January 1996, prior to which, he was Vice
President, Domestic Operations, of the Company from January 1995.
From March 1993 to January 1995, he was Vice President of the
Domestic Operations of Parent's Marine Construction Services
Division from 1993. Mr. Rawle is also a director of the Company.
*Kathryn D. Sullivan.......... President and Chief Executive Officer of the Ohio Center for Science --
and Industry since 1996. Prior thereto, she was Chief Scientist for
the National Oceanic & Atmospheric Administration from 1992 to
1996 and a NASA space shuttle astronaut from 1978 to 1992. Ms.
Sullivan is also a director of American Electric Power Company, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL
NAME, CITIZENSHIP PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS OWNERSHIP OF
AND CURRENT BUSINESS ADDRESS HELD DURING THE PAST FIVE YEARS AND BUSINESS ADDRESSES THEREOF SHARES(1)
- ---------------------------- --------------------------------------------------------------- -------------
<S> <C> <C>
*Roger E. Tetrault............ Chairman of the Board since June 1997 and Chief Executive Officer 77,317(6)
since March 1997 of Parent and the Company. Formerly, Mr.
Tetrault was a Senior Vice President of General Dynamics
Corporation (a supplier of weapons systems and services to the U.S.
government and its allies) and President of its Land Systems
Division from April 1993; Vice President of General Dynamics
Corporation and President of its Electric Boat Division from August
1992 until April 1993; Vice President and General Manager of
General Dynamics Corporation's Electric Boat Division from August
1991 until August 1992; and prior to that, he served as a Vice
President and Group Executive of Parent's Babcock & Wilcox
subsidiary from 1990.
*John N. Turner............... Partner at Miller Thomson (barristers & solicitors), Toronto, Canada --
since 1990. Prior thereto, he was Leader of Opposition of the
Parliament of Canada from 1984. He is also a director of E-L
Financial Corporation, The Loewen Group Inc., Noranda Forest Inc.
and Triple Crown Electronics, Inc.
E. Allen Womack, Jr. ......... Executive Vice President and President, BWX Technologies, --
Industrial and Technical Group since April 1998. Previously, he was
Senior Vice President and Group Executive, Industrial Group, from
September 1996; Senior Vice President and Group Executive,
Shipbuilding and Industrial Group, from August 1995; and Senior
Vice President, Research and Development and Contract Research
Divisions, of Parent's Babcock & Wilcox unit from August 1991.
He has also been Chief Technical Officer since February 1993.
James F. Wood................. Executive Vice President and President of Parent's Babcock & --
Wilcox Power Generation Group since October 1996, prior to which,
he was Vice President and General Manager, Global Ventures and
Power, of the Babcock & Wilcox Power Generation Group from
June 1996. From January 1989 until January 1996, he was an officer
of Wheelabrator Technologies, Inc. and certain of its subsidiaries.
*Richard E. Woolbert.......... Until his retirement in January 1999, he was Executive Vice 35,000 (7)
President and Chief Administrative Officer of Parent and J. Ray
McDermott from February 1995. Previously, Mr. Woolbert was
Senior Vice President and Chief Administrative Officer of Parent
from August 1991. He is also a director of J. Ray McDermott.
J. R. Woolsey................. Senior Vice President and Chief Administrative Officer since --
January 1999. Previously, he was Vice President, Business Venture
Relations from October 1997; and Vice President and General
Manager, Nuclear Equipment Division, of Parent's Government
Group from 1990. He has also been Parent's Compliance Director
since November 1997 and Senior Vice President and Chief
Administrative Officer of the Company since January 1999.
</TABLE>
- ---------------
(1) Shares beneficially owned as a result of stock options refer to options
exercisable within 60 days of March 31, 1999.
II-3
<PAGE>
(2) Shares owned by Mr. Gaubert include 6,691 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 2,040
restricted shares of Common Stock as to which he has sole voting power but
no dispositive power.
(3) Shares owned by Mr. Howard include 800 Shares that may be acquired upon the
exercise of stock options as described in footnote (1) above, and 400
restricted Shares as to which he has sole voting power but no dispositive
power.
(4) Shares owned by Mr. Murphy include 3,427 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 750
restricted shares of Common Stock as to which he has sole voting power but
no dispositive power.
(5) Shares owned by Mr. Rawle include 25,437 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 5,300
restricted Shares as to which he has sole voting power but no dispositive
power. Also includes 697 Shares in The Thrift Plan for Employees of
McDermott Incorporated and Participating Subsidiary and Affiliated Companies
(the "McDermott Thrift Plan") as of March 31, 1999
(6) Shares owned by Mr. Tetrault include 40,783 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 8,100
restricted Shares as to which he has sole voting power but no dispositive
power.
(7) Shares owned by Mr. Woolbert include 30,550 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above.
II-4
<PAGE>
B. DIRECTORS AND EXECUTIVE OFFICERS OF PURCHASER.
<TABLE>
<CAPTION>
BENEFICIAL
NAME, CITIZENSHIP PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; MATERIAL POSITIONS OWNERSHIP OF
AND CURRENT BUSINESS ADDRESS HELD DURING THE PAST FIVE YEARS AND BUSINESS ADDRESSES THEREOF SHARES(1)
- ---------------------------- --------------------------------------------------------------- -------------
<S> <C> <C>
*Daniel R. Gaubert............ Treasurer and Director of Purchaser since the Company was 8,731(2)
founded. Mr. Gaubert is also Senior Vice President and Chief
Financial Officer of Parent since February 1997. Prior thereto, he
was Vice President and Chief Financial Officer from September
1996; Vice President, Finance and Controller from February 1995;
and Vice President and Controller from February 1992. Mr.
Gaubert has also been Senior Vice President and Chief Financial
Officer of the Company since August 1997, prior to which he was
Vice President, Finance of the Company from August 1995 and
Acting Controller of the Company from February 1995.
*S. Wayne Murphy.............. Secretary and Director of Purchaser since the Company was 4,177(3)
founded. Mr. Murphy is also Senior Vice President, General
Counsel and Corporate Secretary of Parent since February 1997.
Prior thereto, he was Vice President, General Counsel and
Corporate Secretary from June 1996; Acting General Counsel and
Acting Corporate Secretary from February 1996; and Associate
General Counsel from August 1993. Mr. Murphy has also been
Senior Vice President, General Counsel and Corporate Secretary of
the Company since August 1997, prior to which he was Acting
General Counsel and Acting Corporate Secretary of the Company
from February 1996.
*Roger E. Tetrault............ President and Director of Purchaser since the company was 77,317(4)
founded. Mr. Tetrault is also the Chairman of the Board since June
1997 and Chief Executive Officer since March 1997 of Parent and
the Company. Formerly, Mr. Tetrault was a Senior Vice President
of General Dynamics Corporation (a supplier of weapons systems
and services to the U.S. government and its allies) and President of
its Land Systems Division from April 1993; Vice President of
General Dynamics Corporation and President of its Electric Boat
Division from August 1992 until April 1993; Vice President and
General Manager of General Dynamics Corporation's Electric Boat
Division from August 1991 until August 1992; and prior to that, he
served as a Vice President and Group Executive of Parent's
Babcock & Wilcox subsidiary from 1990.
</TABLE>
- --------------
(1) Shares beneficially owned as a result of stock options refer to options
exercisable within 60 days of March 31, 1999.
(2) Shares owned by Mr. Gaubert include 6,691 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 2,040
restricted shares of Common Stock as to which he has sole voting power but
no dispositive power.
(3) Shares owned by Mr. Murphy include 3,427 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 750
restricted shares of Common Stock as to which he has sole voting power but
no dispositive power.
(4) Shares owned by Mr. Tetrault include 40,783 Shares that may be acquired upon
the exercise of stock options as described in footnote (1) above, and 8,100
restricted Shares as to which he has sole voting power but no dispositive
power.
II-5
<PAGE>
ANNEX A
CONFORMED COPY
AGREEMENT AND PLAN OF MERGER
dated as of
May 7, 1999
between
J. RAY MCDERMOTT, S.A.
and
MCDERMOTT INTERNATIONAL, INC.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 THE OFFER
Section 1.01. The Offer............................................ 1
Section 1.02. Company Action....................................... 2
Section 1.03. Directors............................................ 3
ARTICLE 2 THE MERGER
Section 2.01. The Merger........................................... 4
Section 2.02. Conversion of Shares................................. 5
Section 2.03. Surrender and Payment................................ 5
Section 2.04. Stock Options........................................ 6
Section 2.05. Restricted Shares and Performance Shares............. 7
Section 2.06. Board Approval....................................... 8
Section 2.07. Withholding Rights................................... 9
ARTICLE 3 THE SURVIVING CORPORATION
Section 3.01. Certificate of Incorporation......................... 9
Section 3.02. Bylaws............................................... 9
Section 3.03. Directors and Officers............................... 9
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 4.01. Corporate Existence and Power....................... 10
Section 4.02. Corporate Authorization............................. 10
Section 4.03. Governmental Authorization.......................... 10
Section 4.04. Non-Contravention................................... 11
Section 4.05. Capitalization...................................... 11
Section 4.06. Subsidiaries........................................ 12
Section 4.07. SEC Filings......................................... 12
Section 4.08. Financial Statements................................ 13
Section 4.09. Disclosure Documents................................ 13
Section 4.10. Absence of Certain Changes.......................... 14
i
<PAGE>
Section 4.11. No Undisclosed Material Liabilities................. 16
Section 4.12. Compliance with Laws and Court Orders............... 16
Section 4.13. Litigation.......................................... 17
Section 4.14. Finders' Fees....................................... 17
Section 4.15. Opinion of Financial Advisor........................ 17
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PARENT
Section 5.01. Corporate Existence and Power....................... 17
Section 5.02. Corporate Authorization............................. 18
Section 5.03. Governmental Authorization.......................... 18
Section 5.04. Non-Contravention................................... 18
Section 5.05. Disclosure Documents................................ 19
Section 5.06. Finders' Fees....................................... 19
Section 5.07. Financing........................................... 19
ARTICLE 6 COVENANTS OF THE COMPANY
Section 6.01. Conduct of the Company.............................. 20
Section 6.02. Stockholder Meeting; Proxy Material................. 20
Section 6.03. No Solicitation..................................... 21
ARTICLE 7 COVENANTS OF PARENT
Section 7.01. Certain Obligations of Parent....................... 22
Section 7.02. Voting of Shares.................................... 22
Section 7.03. Director and Officer Liability...................... 22
ARTICLE 8 COVENANTS OF PARENT AND THE COMPANY
Section 8.01. Best Efforts........................................ 24
Section 8.02. Certain Filings..................................... 24
Section 8.03. Public Announcements................................ 24
Section 8.04. Further Assurances.................................. 25
Section 8.05. Access to Information............................... 25
Section 8.06. Notices of Certain Events........................... 25
Section 8.07. Confidentiality..................................... 25
ii
<PAGE>
ARTICLE 9 CONDITIONS TO THE MERGER
Section 9.01. Conditions to Obligations of Each Party............. 26
ARTICLE 10 TERMINATION
Section 10.01. Termination........................................ 27
Section 10.02. Effect of Termination.............................. 28
ARTICLE 11 MISCELLANEOUS
Section 11.01. Notices............................................ 28
Section 11.02. Survival of Representations and Warranties......... 29
Section 11.03. Amendments; No Waivers............................. 29
Section 11.04. Expenses........................................... 30
Section 11.05. Successors and Assigns............................. 30
Section 11.06. Governing Law...................................... 30
Section 11.07. Jurisdiction....................................... 30
Section 11.08. WAIVER OF JURY TRIAL............................... 31
Section 11.09. Counterparts; Effectiveness........................ 31
Section 11.10. Entire Agreement................................... 31
Section 11.11. Captions........................................... 31
Section 11.12. Severability....................................... 31
Section 11.13. Specific Performance............................... 32
Section 11.14. Definitions and Usage.............................. 32
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of May 7, 1999 between J. Ray
McDermott, S.A., a corporation organized under the laws of the Republic of
Panama (the "COMPANY"), and McDermott International, Inc., a corporation
organized under the laws of the Republic of Panama ("PARENT").
The parties hereto agree as follows:
ARTICLE 1
The Offer
Section 1.1. The Offer. (a) Provided that nothing shall have occurred
that would result in a failure to satisfy any of the conditions set forth in
Annex I hereto, as promptly as practicable after the date hereof, but in no
event later than five business days following the public announcement of the
terms of this Agreement, a wholly-owned subsidiary of Parent to be organized
under the laws of the Republic of Panama ("MERGER SUBSIDIARY") shall commence an
offer (the "OFFER") to purchase all of the outstanding shares of Common Stock
(other than shares beneficially owned by Parent) at a price of $35.62 per share
of Common Stock ("COMMON SHARE PRICE"), net to the seller in cash. The Offer
shall be subject to the condition that there shall be validly tendered in
accordance with the terms of the Offer, prior to the expiration date of the
Offer and not withdrawn, a number of shares of Common Stock that represents at
least a majority of the outstanding shares of Common Stock (other than shares
beneficially owned by Parent) (the "MINIMUM CONDITION") and to the other
conditions set forth in Annex I hereto. Merger Subsidiary expressly reserves
the right to waive any of the conditions to the Offer and to make any change in
the terms or conditions of the Offer, provided that no change may be made that,
without the prior written consent of the Company, waives the Minimum Condition,
changes the form of consideration to be paid, decreases the price per share of
Common Stock or the number of shares of Common Stock sought in the Offer or
imposes conditions to the Offer in addition to those set forth in Annex I.
"COMMON STOCK" means the common stock, par value $0.01 per share, of the
Company.
(b) As soon as practicable on the date of commencement of the Offer,
Merger Subsidiary shall file with the Securities and Exchange Commission ("SEC")
a Tender Offer Statement on Schedule 14D-1 (the "SCHEDULE 14D-1") with respect
to the Offer, which will contain the offer to purchase and form of the related
letter of transmittal and summary advertisement (such Schedule 14D-1 and the
documents included therein pursuant to which the Offer will be made, together
<PAGE>
with any supplements or amendments thereto, the "OFFER DOCUMENTS") and shall, as
and to the extent required by applicable federal securities laws, disseminate
the Offer Documents to the holders of Common Stock. Parent and the Company each
agrees promptly to correct any information provided by it for use in the Offer
Documents if and to the extent that such information shall have become false or
misleading in any material respect. Merger Subsidiary agrees to take all steps
necessary to cause the Schedule 14D-1 as so corrected to be filed with the SEC
and the Offer Documents as so corrected to be disseminated to holders of Common
Stock, in each case as and to the extent required by applicable federal
securities laws.
Section 1.2. Company Action. (a) The Company hereby consents to the Offer
and represents that its Board of Directors, at a meeting duly called and held
has (i) determined that this Agreement and the transactions contemplated hereby,
including the Offer and the Merger, are fair to and in the best interests of the
Company's stockholders (other than Parent), (ii) approved and adopted this
Agreement and the transactions contemplated hereby, including the Offer and the
Merger, in accordance with the laws of the Republic of Panama ("PANAMA LAW") and
(iii) resolved (subject to Section 6.02(b)) to recommend acceptance of the Offer
and approval and adoption of this Agreement and the Merger by its stockholders.
The Company further represents that Simmons & Company International has
delivered to the Company's Board of Directors its opinion that the consideration
to be paid in the Offer and the Merger is fair to the holders of Common Stock
(other than Parent) from a financial point of view. The Company will promptly
furnish Parent with a list of its stockholders, mailing labels and any available
listing or computer file containing the names and addresses of all record
holders of Common Stock and lists of securities positions of Common Stock held
in stock depositories, in each case true and correct as of the most recent
practicable date, and will provide to Parent such additional information
(including, without limitation, updated lists of stockholders, mailing labels
and lists of securities positions) and such other assistance as Parent may
reasonably request in connection with the Offer. Subject to the requirements of
applicable law, and except for such steps as are necessary to disseminate the
Offer Documents and any other documents necessary to consummate the Merger,
Parent and Merger Subsidiary and each of their affiliates, associates,
employees, agents and advisors shall hold in confidence the information
contained in any such lists, labels, listings or files, shall use such
information only in connection with the Offer and the Merger and, if this
Agreement shall be terminated and if the Company so requests, shall deliver, and
shall use their reasonable efforts to cause their affiliates, associates,
employees, agents and advisors to deliver, to the Company all copies and any
extracts or summaries from such information then in their possession or control.
2
<PAGE>
(b) As soon as practicable after the time that the Offer is commenced,
the Company shall file with the SEC and disseminate to holders of shares of
Common Stock, in each case as and to the extent required by applicable federal
securities laws, a Solicitation/Recommendation Statement on Schedule 14D-9
(together with any amendments or supplements thereto, the "SCHEDULE 14D-9") that
shall reflect the recommendations of the Company's Board of Directors referred
to above. The Company and Parent each agree promptly to correct any information
provided by it for use in the Schedule 14D-9 if and to the extent that it shall
have become false or misleading in any material respect. The Company agrees to
take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed
with the SEC and to be disseminated to holders of shares of Common Stock, in
each case as and to the extent required by applicable federal securities laws.
Section 1.3. Directors. (a) Effective upon the acceptance for payment of
shares of Common Stock pursuant to the Offer, Parent shall be entitled to
designate the number of directors, rounded to the nearest whole number, on the
Company's Board of Directors that equals the product of (i) the total number of
directors on the Company's Board of Directors and (ii) the percentage that the
number of shares of Common Stock beneficially owned by Parent bears to the total
number of outstanding shares of Common Stock and the Company shall take all
action necessary to cause Parent's designees to be elected or appointed to the
Company's Board of Directors, including, without limitation, increasing the
number of directors, and seeking and accepting resignations of incumbent
directors. At such time, the Company will also use its best efforts to cause
individuals designated by Parent to constitute the number of members, rounded to
the nearest whole number, on (i) each committee of the Board of Directors of the
Company (other than the Independent Committee) and (ii) each board of directors
of each subsidiary of the Company (and each committee thereof) that represents
the same percentage as such individuals represent on the Board of Directors of
the Company.
(b) The Company's obligations to appoint Parent's designees to the
Company's Board of Directors shall be subject to Section 14(f) of the 1934 Act
and Rule 14f-1 promulgated thereunder. The Company shall promptly take all
actions, and shall include in the Schedule 14D-9 such information with respect
to the Company and its officers and directors, as Section 14(f) and Rule 14f-1
require in order to fulfill its obligations under this Section. Parent shall
supply to the Company in writing and be solely responsible for any information
with respect to itself and its nominees, officers, directors and affiliates
required by Section 14(f) and Rule 14f-1.
3
<PAGE>
(c) During the term of this Agreement, Parent will, and will cause all
of its subsidiaries to, take all actions necessary to permit the Independent
Committee to continue in existence without diminution of its powers or duties
and its members to consist solely of the members thereof on the date hereof, or
any successors selected (with the written consent of a majority of the members
of the Independent Committee) by the Board of Directors of the Company who are
not otherwise employed by Parent or its affiliates. Any amendment, waiver or
extension of time by the Company hereunder, and any action taken by the Company
or its Board of Directors in connection therewith, shall require the concurrence
or consent of a majority of the members of the Independent Committee.
ARTICLE 2
The Merger
Section 2.1. The Merger. (a) Upon the terms and subject to the conditions
set forth in this Agreement, at the Effective Time, Merger Subsidiary shall be
merged (the "MERGER") with and into the Company in accordance with Panama Law,
whereupon the separate existence of Merger Subsidiary shall cease, and the
Company shall continue as the surviving corporation (the "SURVIVING
CORPORATION").
(b) As soon as practicable after satisfaction or, to the extent
permitted hereunder, waiver of all conditions to the Merger set forth herein,
the Company and Merger Subsidiary will file a certificate of merger, in a form
mutually acceptable to the Company and Parent and prepared and executed in
accordance with the relevant provisions of Panama Law (the "CERTIFICATE OF
MERGER"), with the Public Registry Office of the Republic of Panama and make all
other filings or recordings required in connection with the Merger. The Merger
shall become effective at such time (the "EFFECTIVE TIME") as the Company's
Certificate of Merger is recorded by the Public Registry Office of the Republic
of Panama.
(c) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, powers, privileges and franchises and be subject to all
of the obligations, liabilities, restrictions and disabilities of the Company
and Merger Subsidiary, all as provided under Panama Law.
Section 2.2. Conversion of Shares. At the Effective Time:
(a) except as otherwise provided in Section 2.02(b), each share of
Common Stock outstanding immediately prior to the Effective Time shall be
converted into the right to receive $35.62 in cash or any higher price paid for
each
4
<PAGE>
share of Common Stock pursuant to the Offer, without interest (the "MERGER
CONSIDERATION");
(b) each share of Common Stock and each share of Series A $2.25
Cumulative Convertible Preferred Stock, $.01 par value, of the Company held by
the Company as treasury stock or owned by Parent or any of its subsidiaries
immediately prior to the Effective Time shall be canceled and retired, and no
payment shall be made with respect thereto; and
(c) each share of common stock of Merger Subsidiary outstanding
immediately prior to the Effective Time shall be converted into and become one
share of common stock of the Surviving Corporation with the same rights, powers
and privileges as the shares so converted (all such shares so converted shall
constitute the only outstanding shares of capital stock of the Surviving
Corporation).
Section 2.3. Surrender and Payment. (a) Prior to the Effective Time,
Parent shall appoint an agent reasonably acceptable to the Company (the
"EXCHANGE AGENT") for the purpose of exchanging certificates representing shares
of Common Stock (the "CERTIFICATES") for the Merger Consideration. Parent will
make available to the Exchange Agent, as needed, the Merger Consideration to be
paid in respect of the shares of Common Stock. Promptly after the Effective
Time, Parent will send, or will cause the Exchange Agent to send, to each holder
of shares of Common Stock at the Effective Time a letter of transmittal and
related instructions (which shall specify that the delivery shall be effected,
and risk of loss and title shall pass, only upon proper delivery of the
Certificates to the Exchange Agent) for use in such exchange.
(b) Each holder of shares of Common Stock that have been converted into
the right to receive the Merger Consideration will be entitled to receive, upon
surrender to the Exchange Agent of a Certificate, together with a properly
completed letter of transmittal if applicable, the Merger Consideration payable
for each share of Common Stock represented by such Certificate. Until so
surrendered, each such Certificate shall represent after the Effective Time for
all purposes only the right to receive such Merger Consideration, without
interest thereon.
(c) If any portion of the Merger Consideration is to be paid to a person
other than the person in whose name the surrendered Certificate is registered,
it shall be a condition to such payment that the Certificate so surrendered
shall be properly endorsed or otherwise be in proper form for transfer and that
the person requesting such payment shall pay to the Exchange Agent any transfer
or other taxes required as a result of such payment to a person other than the
registered
5
<PAGE>
holder of such Certificate or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable.
(d) After the Effective Time, there shall be no further registration of
transfers of shares of Common Stock. If, after the Effective Time, Certificates
are presented to the Surviving Corporation, they shall be canceled and exchanged
for the Merger Consideration provided for, and in accordance with the procedures
set forth, in this Article.
(e) Any portion of the Merger Consideration made available to the
Exchange Agent pursuant to Section 2.03(a) that remains unclaimed by the holders
of shares of Common Stock six months after the Effective Time shall be returned
to Parent, upon demand, and any such holder who has not exchanged them for the
Merger Consideration in accordance with this Section prior to that time shall
thereafter look only to Parent for payment of the Merger Consideration in
respect of such shares of Common Stock. Notwithstanding the foregoing, Parent
shall not be liable to any holder of shares of Common Stock for any amounts paid
to a public official pursuant to applicable abandoned property, escheat or
similar laws.
(f) If any Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such Certificate
to be lost, stolen or destroyed and, if required by the Surviving Corporation,
the posting by such person of a bond, in such reasonable amount as the Surviving
Corporation may direct, as indemnity against any claim that may be made against
it with respect to such Certificate, the Exchange Agent will issue, in exchange
for such lost, stolen or destroyed Certificate, the Merger Consideration to be
paid in respect of the shares of Common Stock represented by such Certificate,
as contemplated by this Article.
Section 2.4. Stock Options. (a) The terms of each outstanding option to
purchase shares of Common Stock under any employee or director stock option or
compensation plan or arrangement of the Company (a "COMPANY STOCK OPTION"),
whether or not exercisable or vested, shall be adjusted as necessary so that, at
the Effective Time, each Company Stock Option outstanding immediately prior to
the Effective Time shall be deemed to constitute an option to purchase shares of
common stock, $1.00 par value, of Parent ("PARENT STOCK"), on the same terms and
conditions as were applicable under such Company Stock Option, except as set
forth below (each, as so adjusted, an "ADJUSTED OPTION"). Each Adjusted Option
shall be fully vested and shall entitle the holder to purchase a number of
shares of Parent Stock having an aggregate market value, as of the Effective
Time, equal to the aggregate market value of the shares of Common Stock
purchasable pursuant to the applicable Company Stock Option. The
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exercise price per share of Parent Stock under each Adjusted Option shall be
equal to (A) the aggregate exercise price for the shares of Common Stock
purchasable pursuant to the applicable Company Stock Option divided by (B)
the aggregate number of shares of Parent Stock deemed purchasable pursuant to
such Adjusted Stock Option. Notwithstanding the foregoing, any fractional
share of Parent Stock resulting from the foregoing adjustment of a Company Stock
Option shall be rounded down to the nearest whole share. For purposes of this
Section 2.04, the market value of a share of Parent Stock as of the Effective
Time shall be deemed to be the closing sale price of such share on the New York
Stock Exchange on the trading day immediately preceding the Effective Time.
The market value of a share of Common Stock as of the Effective Time shall be
deemed the Merger Consideration.
(b) Prior to the Effective Time, the Company shall (i) make any
amendments to the terms of such stock option or compensation plans or
arrangements that are necessary to give effect to the transactions contemplated
by this Section 2.04 and (ii) to the extent required, use its best efforts to
obtain any consents from holders of Company Stock Options. At the Effective
Time, except to the extent otherwise required by the existing stock option
agreements, all references to the Company in the stock option agreements
covering outstanding options to purchase Common Stock will be deemed to refer to
Parent. Parent will assume all the Company's obligations with respect to those
options as so amended and will, from and after the Effective Time, make
available for issuance on exercise of those options all shares of Parent Stock
covered thereby and maintain an effective registration statement under the
Securities Act of 1933 (the "1933 ACT") which covers those shares.
Section 2.5. Restricted Shares and Performance Shares. (a) As soon as
practicable after the date hereof, the Company shall provide each person who
holds restricted shares of Common Stock ("RESTRICTED SHARES") under the J. Ray
McDermott, S.A. Restated 1994 Executive Long-Term Incentive Compensation Plan
(the "1994 PLAN") or the J. Ray McDermott, S.A. Non-Employee Director Stock Plan
the opportunity to make an irrevocable election either to: (i) receive a cash
payment, as of the Effective Time, in respect of such Restricted Shares (whether
or not then vested); or (ii) receive a replacement award (a "REPLACEMENT
RESTRICTED AWARD"), as of the Effective Time, of Parent Stock having an
aggregate fair market value (as of the Effective Time) equal to the product of
(A) the number of Restricted Shares to which such Replacement Restricted Award
relates and (B) the Merger Consideration. Each Replacement Restricted Award
shall be issued on the same terms, and subject to identical restrictions, as
applied to the Restricted Shares to which such Replacement Restricted Award
relates (without taking into account any accelerated vesting as a result of the
Merger).
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(b) As soon as practicable after the date hereof, the Company shall
provide each person who holds performance restricted shares ("PERFORMANCE
SHARES") under the 1994 Plan the opportunity to make an irrevocable election
either to: (i) receive a cash payment, as of the Effective Time, in respect of
such Performance Shares in accordance with the terms of Section 12.1 of the 1994
Plan; or (ii) receive a replacement award (a "REPLACEMENT PERFORMANCE AWARD"),
as of the Effective Time, of performance shares denominated in shares of Parent
Stock and having the following terms. Each Replacement Performance Award shall
represent the notional grant of a number of shares of Parent Stock having an
aggregate fair market value, as of the Effective Time, equal to the product of
(A) the number of notional shares of Common Stock originally granted pursuant to
the Performance Shares to which such Replacement Restricted Award relates and
(B) the Merger Consideration. Each Replacement Restricted Award shall be
subject to a two-year vesting period upon terms identical to those that apply,
under the 1994 Plan, to Performance Shares as of the end of the initial two-year
measurement period.
(c) Prior to the Effective Time, the Company shall make any amendments
to the terms of such compensation plans or arrangements that are necessary to
give effect to the transactions contemplated by this Section 2.05. At the
Effective Time, except to the extent otherwise required by the existing
restricted stock and performance share agreements, all references to the Company
in the agreements covering Restricted Shares and Performance Shares will be
deemed to refer to Parent. Parent will assume all the Company's obligations
with respect to Restricted Shares and Performance Shares and will, from and
after the Effective Time, make available for issuance as necessary all shares of
Parent Stock covered by the Replacement Restricted Awards and Replacement
Performance Awards and maintain an effective registration statement under the
1933 Act which covers those shares.
(d) For purposes of this Section 2.05, the market value of a share of
Parent Stock as of the Effective Time shall be deemed to be the closing sale
price of such share on the New York Stock Exchange on the trading day
immediately preceding the Effective Time.
Section 2.6. Board Approval. Parent agrees that the Parent Board of
Directors or the Compensation Committee of the Parent Board of Directors shall
at or prior to the Effective Time adopt resolutions specifically approving, for
purposes of Rule 16b-3 under the Exchange Act of 1934 (the "1934 ACT"), the
receipt pursuant to Sections 2.04 and 2.05 of Adjusted Options and Parent Stock
by officers and directors of the Company who will become officers or directors
of the Parent subject to Rule 16b-3.
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Section 2.7. Withholding Rights. Each of the Surviving Corporation and
Parent shall be entitled to deduct and withhold from the consideration otherwise
payable to any person pursuant to this Article such amounts as it is required to
deduct and withhold with respect to the making of such payment under any
provision of federal, state, local or foreign tax law. If the Surviving
Corporation or Parent, as the case may be, so withholds amounts, such amounts
shall be treated for all purposes of this Agreement as having been paid to the
holder of the shares of Common Stock or options or other rights in respect of
which the Surviving Corporation or Parent, as the case may be, made such
deduction and withholding.
ARTICLE 3
The Surviving Corporation
Section 3.1. Certificate of Incorporation. The certificate of
incorporation of Merger Subsidiary in effect at the Effective Time shall be the
certificate of incorporation of the Surviving Corporation until amended in
accordance with its terms and applicable law, provided that, at the Effective
Time, such certificate of incorporation shall be amended to provide that the
name of the corporation shall be J. Ray McDermott, S.A.
Section 3.2. Bylaws. The bylaws of Merger Subsidiary in effect at the
Effective Time shall be the bylaws of the Surviving Corporation until amended in
accordance with its terms, the certificate of incorporation of the Surviving
Corporation and applicable law.
Section 3.3. Directors and Officers. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance with
applicable law, (i) the directors of Merger Subsidiary at the Effective Time
shall be the directors of the Surviving Corporation and (ii) the officers of the
Company at the Effective Time shall be the officers of the Surviving
Corporation.
ARTICLE 4
Representations and Warranties of the Company
Except as disclosed to Parent in writing prior to the date hereof, the
Company represents and warrants to Parent that:
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Section 4.1. Corporate Existence and Power. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
Republic of Panama and has all corporate powers and all governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted, except for such matters as would not have,
individually or in the aggregate, a material adverse effect on the Company. The
Company is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where such qualification is necessary, except for
those jurisdictions where the failure to be so qualified would not have,
individually or in the aggregate, a material adverse effect on the Company. The
Company has heretofore delivered to Parent true and complete copies of the
certificate of incorporation and bylaws of the Company as currently in effect.
Section 4.2. Corporate Authorization. (a) The execution, delivery and
performance by the Company of this Agreement and the consummation by the Company
of the transactions contemplated hereby are within the Company's corporate
powers and, except for the required approval of the Company's stockholders in
connection with the Merger, have been duly authorized by all necessary corporate
action on the part of the Company. The affirmative vote of (i) the holders of
two-thirds of the outstanding shares of the Series A $2.25 Cumulative
Convertible Preferred Stock, $.01 par value, of the Company ("PREFERRED STOCK"),
voting separately as a class and (ii) the holders of two-thirds of the
outstanding shares of Common Stock, voting separately as a class, are the only
votes of the holders of any of the Company's capital stock necessary in
connection with the consummation of the Merger. This Agreement constitutes a
valid and binding agreement of the Company.
Section 4.3. Governmental Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation by the Company
of the transactions contemplated hereby require no action by or in respect of,
or filing with, any governmental body, agency, official or authority, domestic
or foreign, other than (i) the filing and recordation in the Public Registry
Office of the Republic of Panama of the Certificate of Merger, (ii) compliance
with any applicable requirements of the 1934 Act or any other securities laws
(whether state or foreign) or any applicable provisions of Panama Law (including
Executive Decree No. 18 of March 14, 1994 of the Republic of Panama), and (iii)
any actions or filings the absence of which would not reasonably be expected to
have, individually or in the aggregate, a material adverse effect on the Company
or materially to impair the ability of the Company to consummate the
transactions contemplated by this Agreement.
Section 4.4. Non-Contravention. The execution, delivery and performance
by the Company of this Agreement and the consummation of the
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transactions contemplated hereby do not and will not (i) contravene, conflict
with, or result in any violation or breach of any provision of the certificate
of incorporation or bylaws of the Company, (ii) assuming compliance with the
matters referred to in Section 4.03, contravene, conflict with or result in a
violation or breach of any provision of any applicable law, rule, regulation,
judgment, injunction, order or decree, (iii) require any consent or other action
by any person under, constitute a default under, or cause or permit the
termination, cancellation, acceleration or other change of any right or
obligation or the loss of any benefit to which the Company or any of its
subsidiaries is entitled under any provision of any agreement or other
instrument binding upon the Company or any of its subsidiaries or any license,
franchise, permit, certificate, approval or other similar authorization
affecting, or relating in any way to, the assets or business of the Company
and its subsidiaries or (iv) result in the creation or imposition of any Lien
on any asset of the Company or any of its subsidiaries except, in the case of
clauses (ii), (iii) and (iv), for such matters as would not reasonably be
expected to have, individually or in the aggregate, a material adverse effect
on the Company or materially to impair the ability of the Company to
consummate the transactions contemplated by this Agreement. "LIEN" means,
with respect to any property or asset, any mortgage, lien, pledge, charge,
security interest, encumbrance or other adverse claim of any kind in respect of
such property or asset.
Section 4.5. Capitalization. (a) The authorized capital stock of the
Company consists of 60,000,000 shares of common stock, $.01 par value, and
10,000,000 shares of preferred stock, $.01 par value, of which 3,200,000 shares
are designated as Series A $2.25 Cumulative Convertible Preferred Stock. As of
March 31, 1999, there were outstanding (i) 39,060,814 shares of Common Stock and
employee and director options to purchase an aggregate of 839,471 shares of
Common Stock (of which options to purchase an aggregate of 405,934 shares of
Common Stock were exercisable) and (ii) 3,200,000 shares of Preferred Stock.
All outstanding shares of capital stock of the Company have been duly authorized
and validly issued and are fully paid and nonassessable.
(b) Except as set forth in this Section 4.05 and for changes since March
31, 1999 resulting from the exercise of employee or director stock options or
the conversion of Preferred Stock outstanding on such date, there are no
outstanding (i) shares of capital stock or voting securities of the Company,
(ii) securities of the Company convertible into or exchangeable for shares of
capital stock or voting securities of the Company or (iii) options or other
rights to acquire from the Company or other obligation of the Company to issue
any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of the Company. There are
no outstanding obligations of the Company or any of its subsidiaries to
repurchase, redeem or otherwise acquire any of the securities referred to in
clauses (i), (ii) or (iii) above.
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Section 4.6. Subsidiaries. (a) Each significant subsidiary of the Company
is a corporation duly incorporated, validly existing and in good standing under
the laws of its jurisdiction of incorporation, has all corporate powers and all
governmental licenses, authorizations, permits, consents and approvals required
to carry on its business as now conducted, except for such matters as would not
have, individually or in the aggregate, a material adverse effect on the
Company. Each such significant subsidiary is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction where such
qualification is necessary, except for such matters as would not have,
individually or in the aggregate, a material adverse effect on the Company. All
significant subsidiaries of the Company and their respective jurisdictions of
incorporation are identified in the Company's annual report on Form 10-K for the
fiscal year ended March 31, 1998 (the "COMPANY 10-K").
(b) Except as set forth in the Company SEC Documents filed prior to the
date hereof, all of the outstanding capital stock of, or other voting securities
or ownership interests in, each subsidiary of the Company, is owned by the
Company, directly or indirectly, free and clear of any Lien and free of any
other limitation or restriction (including any restriction on the right to vote,
sell or otherwise dispose of such capital stock or other voting securities or
ownership interests). There are no outstanding (i) securities of the Company or
any of its subsidiaries convertible into or exchangeable for shares of capital
stock or other voting securities or ownership interests in any subsidiary of the
Company or (ii) options or other rights to acquire from the Company or any of
its subsidiaries, or other obligation of the Company or any of its subsidiaries
to issue, any capital stock or other voting securities or ownership interests
in, or any securities convertible into or exchangeable for any capital stock or
other voting securities or ownership interests in, any subsidiary of the
Company. There are no outstanding obligations of the Company or any of its
subsidiaries to repurchase, redeem or otherwise acquire any of the securities
referred to in clauses (i) or (ii) above.
Section 4.7. SEC Filings. (a) The Company has delivered to Parent (i) the
Company's annual report on Form 10-K for its fiscal year ended March 31, 1998,
(ii) its quarterly reports on Form 10-Q for its fiscal quarters ended June 30,
1998, September 30, 1998 and December 31, 1998, (iii) its proxy or information
statements relating to meetings of, or actions taken without a meeting by, the
stockholders of the Company held since March 31, 1998 and (iv) all of its other
reports, statements, schedules and registration statements filed with the SEC
pursuant to the 1933 Act or the 1934 Act, as the case may be, since March 31,
1998 (the documents referred to in this Section 4.07(a), collectively, the
"COMPANY SEC DOCUMENTS"). The Company's quarterly report on Form 10-Q
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for its fiscal quarter ended December 31, 1998 is referred to herein as the
"COMPANY 10-Q".
(b) As of its filing date, each Company SEC Document complied as to form
in all material respects with the applicable requirements of the 1933 Act or the
1934 Act, as the case may be. Each Company SEC Document filed pursuant to the
1934 Act did not, as of its filing date, and each Company SEC Document filed
pursuant to the 1933 Act did not, as of the date it became effective, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
Section 4.8. Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of the
Company included in the Company SEC Documents fairly present in all material
respects, in conformity with generally accepted accounting principles ("GAAP")
applied on a consistent basis (except as may be indicated in the notes thereto),
the consolidated financial position of the Company and its consolidated
subsidiaries as of the dates thereof and their consolidated results of
operations and cash flows for the periods then ended (subject to normal year-end
adjustments in the case of any unaudited interim financial statements). For
purposes of this Agreement, "COMPANY BALANCE SHEET" means the consolidated
balance sheet of the Company and its consolidated subsidiaries as of December
31, 1998 as set forth in the Company 10-Q and "COMPANY BALANCE SHEET DATE" means
December 31, 1998.
Section 4.9. Disclosure Documents. (a) Each document required to be filed
by the Company with the SEC or required to be distributed or otherwise
disseminated by the Company to the Company's stockholders in connection with the
transactions contemplated by this Agreement (the "COMPANY DISCLOSURE
DOCUMENTS"), including, without limitation, the Schedule 14D-9, the proxy or
information statement of the Company (the "COMPANY PROXY STATEMENT"), if any, to
be filed with the SEC in connection with the Merger, and any amendments or
supplements thereto, when filed, distributed or disseminated, as applicable,
will comply as to form in all material respects with the applicable requirements
of the 1934 Act.
(b) (i) The Company Proxy Statement, as supplemented or amended, if
applicable, at the time such Company Proxy Statement or any amendment or
supplement thereto is first mailed to stockholders of the Company and at the
time such stockholders vote on adoption of this Agreement and at the Effective
Time, and (ii) any Company Disclosure Document (other than the Company Proxy
Statement), at the time of the filing of such Company Disclosure Document or
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any supplement or amendment thereto and at the time of any distribution or
dissemination thereof, will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
made therein, in the light of the circumstances under which they were made, not
misleading. The representations and warranties contained in this Section will
not apply to statements or omissions included in the Company Disclosure
Documents based upon information furnished to the Company in writing by Parent
specifically for use therein.
(c) The information with respect to the Company or any of its
subsidiaries that the Company furnishes to Parent in writing specifically for
use in the Offer Documents, at the time of the filing thereof, at the time of
any distribution or dissemination thereof and at the time of the consummation of
the Offer, will not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
Section 4.10. Absence of Certain Changes. Since the Company Balance Sheet
Date, (i) the business of the Company and its subsidiaries has been conducted
in the ordinary course consistent with past practices and (ii) except as
disclosed in the Company SEC Documents filed prior to the date hereof and except
for developments relating to matters described under Part 1, Item 3 (Legal
Proceedings) (other than the last paragraph thereof) of the Company 10-K, there
has not been:
(a) any event, occurrence, development or state of circumstances or
facts that has had or would reasonably be expected to have, individually or in
the aggregate, a material adverse effect on the Company;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of the Company, or any
repurchase, redemption or other acquisition by the Company or any of its
subsidiaries of any outstanding shares of capital stock or other securities of,
or other ownership interests in, the Company or any of its subsidiaries, except
in the administration of its stock option plans consistent with past practice;
(c) any material amendment of any outstanding security of the Company or
any of its subsidiaries;
(d) any incurrence, assumption or guarantee by the Company or any of its
subsidiaries of any material indebtedness for borrowed money other than in the
ordinary course of business and in amounts and on terms consistent with past
practices;
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(e) any creation or other incurrence by the Company or any of its
subsidiaries of any Lien on any material asset other than in the ordinary course
of business consistent with past practices;
(f) any making of any material loan, advance or capital contributions
to or investment in any person other than loans, advances or capital
contributions to or investments in its wholly-owned subsidiaries in the ordinary
course of business consistent with past practices;
(g) any damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business or assets of the Company or any of
its subsidiaries that would have, individually or in the aggregate, a material
adverse effect on the Company;
(h) any transaction or commitment made, or any contract or agreement
entered into, by the Company or any of its subsidiaries relating to its assets
or business (including the acquisition or disposition of any assets) or any
relinquishment by the Company or any of its subsidiaries of any contract or
other right, in either case, material to the Company and its subsidiaries, taken
as a whole, other than transactions and commitments in the ordinary course of
business consistent with past practices and those contemplated by this
Agreement;
(i) any material change in any method of accounting or accounting
principles or practice by the Company or any of its subsidiaries, except for any
such change required by reason of a concurrent change in GAAP or Regulation S-X
under the 1934 Act;
(j) any (i) grant of any severance or termination pay to (or amendment
to any existing arrangement with) any director or officer of the Company or any
of its significant subsidiaries, (ii) increase in benefits payable under any
existing severance or termination pay policies or employment agreements, (iii)
entering into any employment, deferred compensation or other similar agreement
(or any amendment to any such existing agreement) with any director or officer
of the Company or any of its significant subsidiaries, (iv) establishment,
adoption or amendment (except as required by applicable law) of any collective
bargaining, bonus, profit-sharing, thrift, pension, retirement, deferred
compensation, compensation, stock option, restricted stock or other benefit plan
or arrangement covering any director or officer of the Company or any of its
significant subsidiaries or (v) increase in compensation, bonus or other
benefits payable to any director or officer of the Company or any of its
significant subsidiaries, other than in the ordinary course of business
consistent with past practice; or
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(k) any material labor dispute, other than routine individual
grievances, or any activity or proceeding by a labor union or representative
thereof to organize any employees of the Company or any of its subsidiaries,
which employees were not subject to a collective bargaining agreement at the
Company Balance Sheet Date, or any material lockouts, strikes, slowdowns, work
stoppages or threats thereof by or with respect to such employees.
Section 4.11. No Undisclosed Material Liabilities. There are no
liabilities or obligations of the Company or any of its subsidiaries required to
be disclosed on a consolidated balance sheet of the Company and its consolidated
subsidiaries prepared in accordance with GAAP, other than:
(a) liabilities or obligations disclosed or provided for in the Company
Balance Sheet or in the notes thereto or in the Company SEC Documents filed
prior to the date hereof or in connection with developments relating to matters
described under Part 1, Item 3 (Legal Proceedings) (other than the last
paragraph thereof) of the Company 10-K;
(b) liabilities or obligations incurred in the ordinary course of
business since the Company Balance Sheet Date;
(c) liabilities or obligations that would not reasonably be expected to
have, individually or in the aggregate, a material adverse effect on the
Company; and
(d) liabilities or obligations under this Agreement or incurred in
connection with the transactions contemplated hereby.
Section 4.12. Compliance with Laws and Court Orders. Except as
disclosed in the Company SEC Documents filed prior to the date hereof, the
Company and each of its subsidiaries is and has been in compliance with all
applicable laws, rules, regulations, judgments, injunctions, orders or decrees,
except for such matters as would not reasonably be expected to have,
individually or in the aggregate, a material adverse effect on the Company.
Section 4.13. Litigation. Except as set forth in the Company SEC
Documents filed prior to the date hereof, there is no action, suit,
investigation or proceeding pending against, or, to the knowledge of the
Company, threatened against or affecting, the Company, any of its subsidiaries
or any of their respective properties before any court or arbitrator or before
or by any governmental body, agency or official, domestic or foreign, that would
reasonably be expected to have, individually or in the aggregate, a material
adverse effect on the Company.
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Section 4.14. Finders' Fees. Except for Simmons & Company International,
a copy of whose engagement agreement has been provided to Parent, there is no
investment banker, broker, finder or other intermediary that has been retained
by or is authorized to act on behalf of the Company or any of its subsidiaries
who might be entitled to any fee or commission from the Company or any of its
affiliates in connection with the transactions contemplated by this Agreement.
Section 4.15. Opinion of Financial Advisor. The Company has received the
opinion of Simmons & Company International, financial advisor to the Company, to
the effect that, as of the date of this Agreement, the consideration to be paid
in the Offer and the Merger is fair to the Company's stockholders (other than
Parent) from a financial point of view; it being understood and acknowledged by
Parent that such opinion has been rendered for the benefit of the Board of
Directors of the Company, and is not intended to, and may not, be relied upon by
Parent or its stockholders.
ARTICLE 5
Representations and Warranties of Parent
Except as disclosed to Company in writing prior to the date hereof, Parent
represents and warrants to the Company that:
Section 5.1. Corporate Existence and Power. Parent is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all corporate powers and all governmental
licenses, authorizations, permits, consents and approvals required to carry on
its business as now conducted, except for such matters as would not have,
individually or in the aggregate, a material adverse effect on Parent. Parent is
duly qualified to do business as a foreign corporation and is in good standing
in each jurisdiction where such qualification is necessary, except for those
jurisdictions where the failure to be so qualified would not have, individually
or in the aggregate, a material adverse effect on Parent. Parent has heretofore
delivered to the Company true and complete copies of the certificate of
incorporation and bylaws of Parent as currently in effect.
Section 5.2. Corporate Authorization. (a) The execution, delivery and
performance by Parent of this Agreement and the consummation by Parent of the
transactions contemplated hereby are within the corporate powers of Parent and
have been duly authorized by all necessary corporate action on the part of
Parent. This Agreement constitutes a valid and binding agreement of each of
Parent.
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Section 5.3. Governmental Authorization. The execution, delivery and
performance by Parent and Merger Subsidiary of this Agreement and the
consummation by Parent and Merger Subsidiary of the transactions contemplated
hereby require no action by or in respect of, or filing with, any governmental
body, agency, official or authority, domestic or foreign, other than (i) the
filing and recordation in the Public Registry Office of the Republic of Panama
of the Certificate of Merger, (ii) compliance with any applicable requirements
of the 1934 Act or any other securities laws (whether state or foreign) or any
applicable provisions of Panama Law (including Executive Decree No. 18 of March
14, 1994 of the Republic of Panama), and (iii) any actions or filings the
absence of which would not reasonably be expected to have, individually or in
the aggregate, a material adverse effect on Parent or materially to impair the
ability of Parent and Merger Subsidiary to consummate the transactions
contemplated by this Agreement.
Section 5.4. Non-Contravention. The execution, delivery and performance
by Parent of this Agreement and the consummation by Parent of the transactions
contemplated hereby do not and will not (i) contravene, conflict with, or result
in any violation or breach of any provision of the certificate of incorporation
or bylaws of Parent, (ii) assuming compliance with the matters referred to in
Section 5.03, contravene, conflict with or result in a violation or breach of
any provision of any law, rule, regulation, judgment, injunction, order or
decree, (iii) require any consent or other action by any person under,
constitute a default under, or cause or permit the termination, cancellation,
acceleration or other change of any right or obligation or the loss of any
benefit to which Parent or any of its subsidiaries is entitled under any
provision of any agreement or other instrument binding upon Parent or any of its
subsidiaries or any license, franchise, permit, certificate, approval or other
similar authorization affecting, or relating in any way to, the assets or
business of the Parent and its subsidiaries or (iv) result in the creation or
imposition of any Lien on any asset of the Parent or any of its subsidiaries,
except, in the case of clauses (ii), (iii) and (iv), for such matters as would
not reasonably be expected to have, individually or in the aggregate, a material
adverse effect on Parent or materially to impair the ability of Parent and
Merger Subsidiary to consummate the transactions contemplated by this Agreement.
Section 5.5. Disclosure Documents. (a) The information with respect to
Parent and any of its subsidiaries that Parent furnishes to the Company in
writing specifically for use in any Company Disclosure Document will not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading (i) in the case of the
Company Proxy Statement, as supplemented or amended, if applicable, at the time
such Company
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Proxy Statement or any amendment or supplement thereto is first
mailed to stockholders of the Company and at the time such stockholders vote on
adoption of this Agreement, and (ii) in the case of any Company Disclosure
Document other than the Company Proxy Statement, at the time of the filing of
such Company Disclosure Document or any supplement or amendment thereto and at
the time of any distribution or dissemination thereof.
(b) The Offer Documents, when filed, distributed or disseminated, as
applicable, will comply as to form in all material respects with the applicable
requirements of the 1934 Act and, at the time of the filing thereof, at the time
of any distribution or dissemination thereof and at the time of consummation of
the Offer, will not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements made therein, in the
light of the circumstances under which they were made, not misleading, provided
that this representation and warranty will not apply to statements or omissions
included in the Offer Documents based upon information furnished to Parent or
Merger Subsidiary in writing by the Company specifically for use therein.
Section 5.6. Finders' Fees'. Except for Merrill Lynch, Pierce, Fenner &
Smith Incorporated, whose fee will be paid by Parent, there is no investment
banker, broker, finder or other intermediary that has been retained by or is
authorized to act on behalf of Parent who might be entitled to any fee or
commission from Parent or any of its affiliates in connection with the
transactions contemplated by this Agreement.
Section 5.7. Financing. At the expiration of the Offer, the Merger
Subsidiary will have available cash sufficient to consummate the Offer and the
Merger and to pay all expenses in connection with the transactions contemplated
hereby.
ARTICLE 6
Covenants of the Company
The Company agrees that:
Section 6.1. Conduct of the Company. From the date hereof until the
Effective Time, the Company and its subsidiaries shall conduct their business in
the ordinary course consistent with past practice and shall use commercially
reasonable efforts to preserve intact their business organizations and
relationships with third parties and to keep available the services of their
present officers and
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employees. Without limiting the generality of the foregoing, from the date
hereof until the Effective Time, without the prior written consent of Parent:
(a) the Company will not adopt or propose any change to its certificate
of incorporation or bylaws;
(b) the Company will not, and will not permit any of its subsidiaries
to, merge or consolidate with any other person or acquire a material amount of
stock or assets of any other person;
(c) the Company will not, and will not permit any of its subsidiaries
to, sell, lease, license or otherwise dispose of any significant subsidiary or
any material amount of assets or property except (i) pursuant to existing
contracts or commitments and (ii) in the ordinary course consistent with past
practice;
(d) the Company will not, and will not permit any of its subsidiaries
to, take any action that would make any representation and warranty of the
Company hereunder inaccurate in any respect at, or as of any time prior to, the
Effective Time; and
(e) the Company will not, and will not permit any of its subsidiaries
to, agree or commit to do any of the foregoing.
Section 6.2. Stockholder Meeting; Proxy Material. (a) The Company shall
cause a meeting of its stockholders (the "COMPANY STOCKHOLDER MEETING") to be
duly called and held as soon as reasonably practicable after consummation of the
Offer for the purpose of voting on the approval and adoption of this Agreement
and the Merger. In connection with such meeting, the Company will, if required
by law, (i) promptly prepare and file with the SEC, use its best efforts to have
cleared by the SEC and thereafter mail to its stockholders as promptly as
practicable the Company Proxy Statement and related proxy materials for such
meeting, (ii) use its commercially reasonable efforts to obtain the necessary
approvals by its stockholders of this Agreement and the transactions
contemplated hereby and (iii) otherwise comply with all legal requirements
applicable to such meeting.
(b) Except as provided in the next sentence, the Board of Directors of
the Company shall recommend the Offer and the approval and adoption of this
Agreement and the Merger by the Company's stockholders. The Independent
Committee of the Board of Directors of the Company (the "INDEPENDENT COMMITTEE")
shall be permitted to withdraw, or modify in a manner adverse to Parent, its
recommendation to its stockholders, but only if (i) the Company has complied
with the terms of Section 6.03, (ii) the Independent Committee
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determines in good faith (after consultation with independent legal counsel)
that failure to take such action would be reasonably likely to be inconsistent
with its fiduciary duties under applicable law and (iii) the Independent
Committee shall have delivered to Parent a prior written notice advising Parent
that it intends to take such action. Nothing contained in this Agreement shall
prevent the Board of Directors of the Company from complying with Rule 14e-2
under the 1934 Act with respect to any Acquisition Proposal. "ACQUISITION
PROPOSAL" means any offer or proposal for a merger, consolidation, share
exchange, business combination or other similar transaction involving the
Company or any of its subsidiaries or the acquisition of any substantial
equity interest in or substantial portion of the assets of the Company or any
of its subsidiaries, other than the transactions contemplated by this Agreement.
Section 6.3. No Solicitation. (a) From the date hereof until the
termination hereof, the Company will not, and will cause its subsidiaries and
the officers, directors, employees and other agents and advisors of the Company
and its subsidiaries not to, directly or indirectly, (i) take any action to
solicit, initiate or encourage the submission of any Acquisition Proposal or
(ii) disclose any nonpublic information relating to, or afford access to the
properties, books or records of, the Company or any of its subsidiaries to, or
engage in any discussions or negotiations with, any person who is considering
making or has made an Acquisition Proposal; provided that the Company may
furnish nonpublic information or afford access to properties, books and records
to any person who is considering making or has made an Acquisition Proposal and
may negotiate or otherwise engage in substantive discussions with any person who
has made an Acquisition Proposal if (w) the Company has complied with the
foregoing terms of this Section 6.03, (x) the Independent Committee determines
in good faith (after consultation with independent legal counsel) that failure
to take such action would be reasonably likely to be inconsistent with its
fiduciary duties under applicable law, (y) such person executes a
confidentiality agreement on terms no less favorable to the Company than those
contained in Section 8.07 and (z) the Company shall have delivered to Parent a
prior written notice advising Parent that it intends to take such action.
(b) The Company will notify Parent promptly (but in no event later than
24 hours) after receipt by the Company (or any of its advisors) of any
Acquisition Proposal or any request for nonpublic information relating to, or
access to the properties, books or records of, the Company or any of its
subsidiaries by any person who is considering making or has made an Acquisition
Proposal. The Company shall identify the person making, and the terms and
conditions of, any such Acquisition Proposal or request. The Company shall keep
Parent fully informed, on a current basis, of the status and details of any such
Acquisition Proposal or request. The Company shall, and shall cause its
subsidiaries and the
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officers, directors, employees and other agents and advisors of the Company
and its subsidiaries to, cease immediately and cause to be terminated all
activities, discussions or negotiations, if any, with any persons conducted
prior to the date hereof with respect to any Acquisition Proposal.
ARTICLE 7
Covenants of Parent
Parent agrees that:
Section 7.1. Certain Obligations of Parent. Parent will take all action
necessary to cause Merger Subsidiary to be organized and to become a party to
this Agreement as promptly as practicable and to perform its obligations under
this Agreement and to consummate the Offer and the Merger on the terms and
conditions set forth in this Agreement. The Parent will not, and will cause its
subsidiaries not to, directly or indirectly, take any action to knowingly cause
the Company to violate its representations, warranties or covenants under this
Agreement;
Section 7.2. Voting of Shares. Parent agrees to vote all shares of Common
Stock and Preferred Stock beneficially owned by it in favor of adoption of this
Agreement and the Merger at the Company Stockholder Meeting.
Section 7.3. Director and Officer Liability. Parent shall cause the
Surviving Corporation, and the Surviving Corporation hereby agrees, to do the
following:
(a) After the Effective Time, the Surviving Corporation shall indemnify
and hold harmless the present and former officers and directors of the Company
(each an "INDEMNIFIED PERSON") in respect of acts or omissions occurring at or
prior to the Effective Time to the extent required under Panama Law or provided
under the Company's certificate of incorporation and bylaws or any agreement any
Indemnified Person may have with the Company, in each case, as in effect on the
date hereof; provided that such indemnification shall be subject to any
limitation imposed from time to time under applicable law.
(b) For six years after the Effective Time, the Surviving Corporation
shall provide officers' and directors' liability insurance in respect of acts or
omissions occurring prior to the Effective Time covering each such Indemnified
Person currently covered by the Company's officers' and directors' liability
insurance policy on terms with respect to coverage and amount no less favorable
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than those of such policy in effect on the date hereof, provided that, in
satisfying its obligation under this Section 7.03(b), the Surviving Corporation
shall not be obligated to pay premiums in excess of 200% of the amount per annum
the Company paid in its last full fiscal year, which amount Company has
disclosed to Parent prior to the date hereof.
(c) In the event the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other person and is not the
continuing or surviving corporation or entity of that consolidation or merger or
(ii) transfers all or substantially all its properties and assets to any person,
then and in each such case the Surviving Corporation will cause proper
provisions to be made so that the successors and assigns of the Surviving
Corporation assume the obligations set forth in this Section 7.03.
(d) The rights of each Indemnified Person under this Section 7.03 shall
be in addition to any rights such person may have under the certificate of
incorporation or bylaws of the Company or any of its subsidiaries, under Panama
Law or under any agreement any Indemnified Person may have with the Company.
These rights shall survive consummation of the Merger and are intended to
benefit, and shall be enforceable by, each Indemnified Person.
ARTICLE 8
Covenants of Parent and the Company
The parties hereto agree that:
Section 8.1. Best Efforts. Subject to the terms and conditions of this
Agreement, Company and Parent will use their best efforts to take, or cause to
be taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate the
transactions contemplated by this Agreement.
Section 8.2. Certain Filings. The Company and Parent shall cooperate with
one another (i) in connection with the preparation of the Company Disclosure
Documents and the Offer Documents, (ii) in determining whether any action by or
in respect of, or filing with, any governmental body, agency, official, or
authority is required, or any actions, consents, approvals or waivers are
required to be obtained from parties to any material contracts, in connection
with the consummation of the transactions contemplated by this Agreement and
(iii) in taking such actions or making any such filings, furnishing information
required in
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connection therewith or with the Company Disclosure Documents or the
Offer Documents and seeking timely to obtain any such actions, consents,
approvals or waivers.
In connection with such cooperation, Parent and the Company will (i) not
agree to participate in any meeting or discussion with any governmental
authority in respect of any filings, investigation or other inquiry concerning
this Agreement or the Offer or the Merger unless it consults with the other
party in advance and, to the extent permitted by such governmental authority,
gives representatives of the Independent Committee the opportunity to attend and
participate thereat and (ii) furnish the other party and representatives of the
Independent Committee with copies of all correspondence, filings and
communications between them and their affiliates and their respective
representatives, on the one hand, and any government or regulatory authority or
members or their respective staffs, on the other hand, with respect to this
Agreement or the Offer or the Merger.
Section 8.3. Public Announcements. Parent and the Company will consult
with each other before issuing any press release or making any public statement
with respect to this Agreement or the transactions contemplated hereby and,
except as may be required by applicable law or any listing agreement with any
national securities exchange, will not issue any such press release or make any
such public statement prior to such consultation.
Section 8.4. Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Merger
Subsidiary, any deeds, bills of sale, assignments or assurances and to take and
do, in the name and on behalf of the Company or Merger Subsidiary, any other
actions and things to vest, perfect or confirm of record or otherwise in the
Surviving Corporation any and all right, title and interest in, to and under any
of the rights, properties or assets of the Company acquired or to be acquired by
the Surviving Corporation as a result of, or in connection with, the Merger.
Section 8.5. Access to Information. From the date hereof until the
Effective Time and subject to the provisions of applicable law and Section 8.07,
the Company shall (i) give to Parent and its authorized representatives
reasonable access to the offices, properties, books and records of the Company
and such financial and other information as may reasonably be requested and (ii)
instruct its authorized representatives to cooperate with the other party in its
investigation. Any investigation pursuant to this Section 8.05 shall be
conducted in such manner as not to interfere unreasonably with the conduct of
the business of the other party. No information or knowledge obtained in any
investigation pursuant to this
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Section 8.05 shall affect or be deemed to modify any representation or warranty
made by any party hereunder.
Section 8.6. Notices of Certain Events. Each of the Company and Parent
shall promptly notify the other of:
(a) any notice or other communication from any person alleging that the
consent of such person is or may be required in connection with the transactions
contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings commenced
or, to its knowledge, threatened against, relating to or involving or otherwise
affecting the Company or any of its subsidiaries that, if pending on the date of
this Agreement, would have been required to have been disclosed pursuant to
Section 4.13 or that relate to the consummation of the transactions contemplated
by this Agreement.
Section 8.7. Confidentiality. Prior to the Effective Time and after any
termination of this Agreement, each of Parent and the Company will hold, and
will use its best efforts to cause its officers, directors, employees and other
agents or advisors to hold, in confidence, unless compelled to disclose by
judicial or administrative process or by other requirements of law, all
confidential documents and information concerning the other party furnished to
it or its affiliates or any of their agents or advisors in connection with the
transactions contemplated by this Agreement, except to the extent that such
information can be shown to have been (iA previously known on a nonconfidential
basis by such party, (ii) in the public domain through no fault of such party or
(iii) later lawfully acquired by such party on a nonconfidential basis from
sources other than the other party, provided that each of Parent and the Company
may disclose such information to its officers, directors, employees and other
agents or advisors in connection with the transactions contemplated by this
Agreement so long as such party informs such persons of the confidential nature
of such information and directs them to treat it confidentially. Each of Parent
and the Company shall satisfy its obligation to hold any such information in
confidence if it exercises the same care with respect to such information as it
would take to preserve the confidentiality of its own similar information. If
this Agreement is terminated, each of Parent and the Company will, and will use
its best efforts to cause its officers, directors, employees and other agents
and advisors to, destroy or deliver to the other party, upon request, all
documents and other materials, and all copies thereof, that it or
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its affiliates or any of their agents or advisors obtained, or that were
obtained on their behalf, from the other party in connection with this Agreement
and that are subject to such confidence.
ARTICLE 9
Conditions to the Merger
Section 9.1. Conditions to Obligations of Each Party. The respective
obligations of the Company, Parent and Merger Subsidiary to consummate the
Merger are subject to the satisfaction of the following conditions:
(a) this Agreement shall have been approved and adopted by the
stockholders of the Company in accordance with Panama Law and applicable listing
requirements;
(b) Merger Subsidiary shall have purchased shares of Common Stock
pursuant to the Offer;
(c) no preliminary or permanent injunction or other order, decree or
ruling by any court or governmental body or regulatory authority in the United
States or the Republic of Panama which prevents consummation of the Merger or
the payment of the Merger Consideration shall have been issued and remain in
effect (each party agreeing to use its reasonable efforts to have any such
injunction, order, decree or ruling lifted); and
(d) no statute, rule or regulation of any government or governmental
agency in the United States or the Republic of Panama shall prevent the
consummation of the Merger or the payment of the Merger Consideration or make
the consummation of the Merger or the payment of the Merger Consideration
illegal.
ARTICLE 10
Termination
Section 10.1. Termination. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time
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(notwithstanding any approval of this Agreement by the stockholders of the
Company):
(a) by mutual written agreement of the Company and Parent;
(b) by either the Company or Parent, if:
(i) the Offer has not been consummated on or before July 31,
1999, provided that the right to terminate this Agreement pursuant to this
Section 10.01(b)(i) shall not be available to any party whose breach of any
provision of this Agreement results in the failure of the Offer to be
consummated by such time; or
(ii) there shall be any law or regulation that makes acceptance
for payment of, and payment for, the shares of Common Stock pursuant to the
Offer or consummation of the Merger illegal or otherwise prohibited or any
judgment, injunction, order or decree of any court or governmental body
having competent jurisdiction enjoining Merger Subsidiary from accepting
for payment of, and paying for, the shares of Common Stock pursuant to the
Offer or Company or Parent from consummating the Merger and such judgment,
injunction, order or decree shall have become final and nonappealable;
provided, however, that the party seeking to terminate this Agreement
pursuant to this clause (ii) shall have used commercially reasonable best
efforts to remove any such judgment, injunction, order or decree; or
(c) by Parent, if prior to the acceptance for payment of shares of
Common Stock under the Offer, (i) the Board of Directors of the Company shall
have failed to recommend, or shall have withdrawn or modified in a manner
adverse to Parent its approval or recommendation of the Offer or the Merger or
(iiA the Company shall have failed to perform in all material respects its
obligations hereunder.
The party desiring to terminate this Agreement pursuant to this Section
10.01 (other than pursuant to Section 10.01(a)) shall give notice of such
termination to the other party.
Section 10.2. Effect of Termination. If this Agreement is terminated
pursuant to Section 10.01, this Agreement shall become void and of no effect
without liability of any party (or any stockholder, director, officer, employee
or other agent or advisor of such party) to the other party hereto, provided
that, if such termination shall result from the willful (i) failure of either
party to fulfill a condition to the performance of the obligations of the other
party or (ii) failure of
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either party to perform a covenant hereof, such party shall be fully liable
for any and all liabilities and damages incurred or suffered by the other party
as a result of such failure. The provisions of Sections 8.03, 8.06(c) and 8.07
and Article 11 shall survive any termination hereof pursuant to Section 10.01.
ARTICLE 11
Miscellaneous
Section 11.1. Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including facsimile transmission) and
shall be given,
if to Parent or Merger Subsidiary, to:
McDermott International Inc.
1450 Poydras Street
P.O. Box 61961 - 70112
New Orleans, LA 70161-1961
Attention: S. Wayne Murphy
Facsimile: (504) 587-6153
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Christopher Mayer
Fax: (212) 450-4800
if to the Company, to:
J. Ray McDermott, S.A
801 North Eldridge Street
Houston, Texas 77079
Attention: R.H. "Bobby" Rawle
Facsimile: (281) 870-5125
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with copies to:
c/o Wm. J. Johnson Associates
9545 Katy Freeway
Suite 470
Houston, Texas 77024
Attention: William J. Johnson
Facsimile: (713) 461-6195
Baker & Botts, L.L.P.
One Shell Plaza
Houston, Texas 77002-4995
Attention: R. Joel Swanson, Esq.
Facsimile: (713) 229-1330
or such other address or facsimile number as such party may hereafter specify
for the purpose by notice to the other parties hereto. All such notices,
requests and other communications shall be deemed received on the date of
receipt by the recipient thereof if received prior to 5 p.m. on any business
day. Otherwise, any such notice, request or communication shall be deemed not
to have been received until the next succeeding business day.
Section 11.2. Survival of Representations and Warranties. The
representations and warranties and agreements contained herein shall not survive
the Effective Time, except for the agreements set forth in Sections 7.03 and
8.07 and Article 11.
Section 11.3. Amendments; No Waivers. (a) Any provision of this Agreement
may be amended or waived prior to the Effective Time if, but only if, such
amendment or waiver is in writing and is signed, in the case of an amendment, by
each party to this Agreement or, in the case of a waiver, by each party against
whom the waiver is to be effective, provided that, after the adoption of this
Agreement by the stockholders of the Company and without their further approval,
no such amendment or waiver shall reduce the amount or change the kind of
consideration to be received in exchange for any shares of capital stock of the
Company.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
Section 11.4. Expenses. (a) Except as otherwise provided in this Section,
all costs and expenses incurred in connection with this Agreement shall be paid
by the party incurring such cost or expense.
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(b) The Company agrees to pay Parent a fee in immediately available
funds equal to $10 million promptly, but in no event later than two business
days, after the termination of this Agreement by Parent pursuant to Section
10.01(c):
Section 11.5. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the prior written consent of each other party hereto, except that Parent
or Merger Subsidiary may transfer or assign, in whole or from time to time in
part, to one or more of their affiliates, the right to enter into the
transactions contemplated by this Agreement, but any such transfer or assignment
will not relieve Parent or Merger Subsidiary of its obligations hereunder.
Section 11.6. Governing Law. Except to the extent that Panama Law is
mandatorily applicable to this Agreement, this Agreement shall be governed by
and construed in accordance with the laws of the State of New York (without
regard to the conflicts of law rules of such state).
Section 11.7. Jurisdiction. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in connection
with, this Agreement or the transactions contemplated hereby may be brought in
any federal court located in the State of New York or any New York state court,
and each of the parties hereby consents to the jurisdiction of such courts (and
of the appropriate appellate courts therefrom) in any such suit, action or
proceeding and irrevocably waives, to the fullest extent permitted by law, any
objection that it may now or hereafter have to the laying of the venue of any
such suit, action or proceeding in any such court or that any such suit, action
or proceeding brought in any such court has been brought in an inconvenient
form. Process in any such suit, action or proceeding may be served on any party
anywhere in the world, whether within or without the jurisdiction of any such
court. Without limiting the foregoing, each party agrees that service of
process on such party as provided in Section 11.01 shall be deemed effective
service of process on such party.
Section 11.8. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
Section 11.9. Counterparts; Effectiveness. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
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This Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto. Except as
provided in Section 7.03, no provision of this Agreement is intended to confer
any rights, benefits, remedies, obligations or liabilities hereunder upon any
person other than the parties hereto and their respective successors and
assigns.
Section 11.10. Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements and understandings, both oral and
written, between the parties with respect to the subject matter of this
Agreement.
Section 11.11. Captions. The captions herein are included for convenience
of reference only and shall be ignored in the construction or interpretation
hereof.
Section 11.12. 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 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
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner materially adverse to any party. Upon such
a determination, the parties shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner so that the transactions contemplated hereby be
consummated as originally contemplated to the fullest extent possible.
Section 11.13. Specific Performance. The parties hereto agree that
irreparable damage would occur if any provision of this Agreement were not
performed in accordance with the terms hereof and that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
or to enforce specifically the performance of the terms and provisions hereof in
any federal court located in the State of New York or any New York state court,
in addition to any other remedy to which they are entitled at law or in equity.
Section 11.14. Definitions and Usage. (a) For purposes of this Agreement:
"AFFILIATE" means, with respect to any person, any other person directly or
indirectly controlling, controlled by, or under common control with such person.
"MATERIAL ADVERSE EFFECT" means, with respect to any person means a
material adverse effect on the business, assets, financial condition or results
of operations of such person and its subsidiaries, taken as a whole, except any
such
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effect resulting from or arising in connection with (i) this Agreement or the
transactions contemplated hereby, (ii) changes in conditions affecting the
marine construction industries generally or (iii) changes in economic,
regulatory or political conditions generally.
"PERSON" means an individual, corporation, partnership, limited liability
company, association, trust or other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"SIGNIFICANT SUBSIDIARY" means any subsidiary that constitutes a
"significant subsidiary" of any person within the meaning of Rule 1-02 of
Regulation S-X under the 1934 Act.
"SUBSIDIARY" means, with respect to any person, any entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at any time directly or indirectly owned by such person.
(b) A reference in this Agreement to any statute shall be to such
statute as amended from time to time, and to the rules and regulations
promulgated thereunder.
(c) Each of the following terms is defined in the Section set forth
opposite such term:
TERM SECTION
1933 Act.............................................. 2.04(b)
1934 Act.............................................. 2.05(d)
1994 Plan............................................. 2.05(a)
Acquisition Proposal.................................. 6.02(b)
Adjusted Option....................................... 2.04(a)
affiliate............................................. 11.14(a)
Certificate of Merger................................. 2.01(b)
Certificates.......................................... 2.03(a)
Common Share Price.................................... 1.01(a)
Common Stock.......................................... 1.01(a)
Company............................................... Recitals
Company 10-K.......................................... 4.06(a)
Company 10-Q.......................................... 4.07(a)
Company Balance Sheet................................. 4.08
Company Balance Sheet Date............................ 4.08
Company Disclosure Documents.......................... 4.09(a)
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TERM SECTION
- ---- -------
Company Proxy Statement............................... 4.09(a)
Company SEC Documents................................. 4.07(a)
Company Stockholder Meeting........................... 6.02(a)
Company Stock Option.................................. 2.04(a)
Effective Time........................................ 2.01(b)
Exchange Agent........................................ 2.03(a)
GAAP.................................................. 4.08
Indemnified Person.................................... 7.03(a)
Independent Committee................................. 6.02(b)
Lien.................................................. 4.04
material adverse effect............................... 11.14(a)
Merger................................................ 2.01(a)
Merger Consideration.................................. 2.02(a)
Merger Subsidiary..................................... 1.01(a)
Minimum Condition..................................... 1.01(a)
Offer................................................. 1.01(a)
Offer Documents....................................... 1.01(b)
Panama Law............................................ 1.02(a)
Parent................................................ Recitals
Parent Stock.......................................... 2.04(a)
Performance Shares.................................... 2.05(b)
person................................................ 11.14(a)
Preferred Stock....................................... 4.02(a)
Replacement Performance Award......................... 2.05(b)
Replacement Restricted Award.......................... 2.05(a)
Restricted Shares..................................... 2.05(a)
Schedule 14D-1........................................ 1.01(b)
Schedule 14D-9........................................ 1.02(b)
SEC................................................... 1.01(b)
significant subsidiary................................ 11.14(a)
subsidiary............................................ 11.14(a)
Surviving Corporation................................. 2.01(a)
33
<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.
J. RAY MCDERMOTT, S.A.
By: /s/ R. H. Rawle
------------------------------------
Name: R. H. Rawle
Title: President and
Chief Operating Officer
MCDERMOTT INTERNATIONAL, INC.
By: /s/ Roger E. Tetrault
--------------------------------------
Name: Roger E. Tetrault
Title: Chairman and
Chief Executive Officer
34
<PAGE>
ANNEX I
Notwithstanding any other provision of the Offer, Merger Subsidiary shall not be
required to accept for payment or pay for any shares of Common Stock, and may,
subject to the terms of this Agreement, terminate the Offer, if (i) at the
expiration of the Offer, the Minimum Condition has not been satisfied or (ii) at
any time on or after May 7, 1999 and prior to the acceptance for payment of
shares of Common Stock, any of the following conditions exist:
(a) any injunction, judgment, order or decree of a court of competent
jurisdiction shall have been entered and not withdrawn or any law or regulation
shall exist that prohibits the consummation of the Offer or the Merger; or
(b) the Company shall have breached its representations and warranties
set forth in this Agreement or failed to perform any of its obligations,
covenants or agreements under this Agreement (other than any breaches or
failures to perform that, in the aggregate, do not have a material adverse
effect on the Company); or
(c) this Agreement shall have been terminated in accordance with its
terms.
Except for the Minimum Condition (which may be waived only with the consent
of the Company, Parent and Merger Subsidiary), the foregoing conditions are for
the sole benefit of Parent and Merger Subsidiary and may, subject to the terms
of this Agreement, be waived by Parent and Merger Subsidiary in whole or in part
at any time and from time to time in their discretion.
35
<PAGE>
ANNEX B
May 6, 1999
Independent Committee of the
Board of Directors
J. Ray McDermott, S.A.
1450 Poydras Street
New Orleans, LA 70112-6050
Members of the Independent Committee:
You have requested the opinion of Simmons & Company International ("Simmons") as
investment bankers as to the fairness, from a financial point of view, to the
holders (the "Public Stockholders") of common stock ("Company Common Stock") of
J. Ray McDermott, S.A. (the "Company"), other than McDermott International, Inc.
("McDermott") or its affiliates, of the consideration to be received by them
pursuant to the terms of that certain Agreement and Plan of Merger to be dated
May 7, 1999 between the Company and McDermott (the "Merger Agreement") which,
among other things, (i) requires a wholly owned subsidiary ("Newco") of
McDermott to offer to purchase all the outstanding shares of Company Common
Stock (other than shares owned by McDermott) at a net cash price of $35.62 per
share (the "Tender Offer") and (ii) provides, following completion of the Tender
Offer, for the merger (the "Merger") of Newco with and into the Company pursuant
to which each then outstanding share of Company Common Stock (other than shares
owned by McDermott and Newco) will be converted into the right to receive $35.62
in cash. Unless the context otherwise requires, references in this opinion to
the Company and McDermott include their respective subsidiaries.
Consummation of the Tender Offer is subject, among other things, to the
condition that a majority of the shares of Company Common Stock held by the
Public Stockholders shall have been tendered and not withdrawn (the "Minimum
Condition"). The conditions precedent to consummation of the Merger include (i)
consummation of the Tender Offer, (ii) approval of the Merger Agreement and the
Merger by the holders (including McDermott and Newco) of two-thirds of the
outstanding shares of Company Common Stock at a meeting of the holders of the
Company Common Stock called for such purpose, (iii) the condition that the
Tender Offer shall be consummated on or before July 31, 1999 and (iv)
fulfillment of the covenant that there shall have been no waiver or modification
of certain specified Tender Offer conditions, including no change that waives
the Minimum Condition, decreases the consideration to be paid per share of
Company Common Stock or the number of shares of Company Common Stock sought in
the Tender Offer.
Simmons is acting as financial adviser to the Independent Committee of the Board
of Directors of the Company in connection with the Merger Agreement. Simmons,
as a specialized, energy-related investment banking firm, is engaged, among
other things, in the valuation of businesses and their
<PAGE>
Independent Committee of the
Board of Directors
J. Ray McDermott, S.A.
May 6, 1999
Page 2
securities in connection with mergers and acquisitions, in the management and
underwriting of sales of equity and debt to the public and in private placements
of equity and debt. In addition, in the ordinary course of business, Simmons may
actively trade the securities of the Company and McDermott for its own account
and for the accounts of customers and, accordingly, may at any time hold a long
or short position in such securities. Simmons has from time to time been engaged
by the Company and McDermott to provide general corporate financial advisory
services.
Before rendering this opinion, Simmons reviewed and analyzed, among other
things, the following: (i) the most recent draft (dated May 5, 1999) of the
Merger Agreement and certain amendments thereto (dated May 6, 1999); (ii) the
financial statements and other information concerning the Company contained in
the Company's Annual Reports on Form 10-K for each of the three fiscal years
ended March 31, 1998, the Company's Quarterly Reports on Form 10-Q for the
quarters ended June 30, 1998, September 30, 1998 and December 31, 1998, the
Company's Current Report on Form 8-K dated July 30, 1998, and the Company's
Proxy Statement dated July 1, 1998; (iii) certain business and financial
information relating to the Company, including certain limited financial
forecasts prepared by management of the Company, provided to Simmons by the
Company; (iv) certain publicly available information concerning the trading of,
and the trading market for, the Company Common Stock; (v) certain publicly
available information with respect to certain other companies that we believe to
be comparable to the Company and the trading markets for certain of such other
companies' securities; (vi) certain publicly available information concerning
estimates of the future operating performances of the Company and the comparable
companies prepared by industry analysts unaffiliated with either the Company or
McDermott; and (vii) certain publicly available information concerning the
nature and terms of certain other transactions we considered relevant to the
inquiry. We also met with certain officers and employees of the Company and
McDermott to discuss the foregoing, as well as other matters we believed to be
relevant to this opinion. We were not requested to approach and we did not
approach any unaffiliated persons or entities with respect to the acquisition of
the Company, any of its subsidiaries, any of their assets, or the shares of
Company Common Stock held by the Public Stockholders.
In arriving at this opinion, we, with your consent, assumed and relied upon the
accuracy and completeness of all the foregoing information (other than financial
forecasts) and did not independently verify any of such information. With
respect to the limited financial forecasts, we utilized certain information set
forth therein and assumed that such information was reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of the Company as to the future financial performance of the Company.
We did not conduct a physical inspection of any of the assets, operations or
facilities of the Company and did not make or receive any independent evaluation
or appraisal of any assets or liabilities (contingent or otherwise) of the
Company. Without limiting the foregoing, we note that the Company is subject to
the governmental investigations and litigation described in note (6) (the
"HeereMac Litigation")
<PAGE>
Independent Committee of the
Board of Directors
J. Ray McDermott, S.A.
May 6, 1999
Page 3
to the interim financial statements of the Company included in its Quarterly
Report on Form 10-Q for the quarter ended December 31, 1998, and that, upon
consummation of the Merger, the Public Stockholders will be relieved of the
exposure to the potential risk that the Company will be forced to pay damages in
connection with the HeereMac Litigation in excess of any current accruals
therefor. We express no opinion with respect to any matter relating to any of
such litigation.
In conducting our analysis and arriving at our opinion expressed herein, we
considered such financial and other factors as we deemed appropriate under the
circumstances including, without limitation, the following: (i) the historical
and current financial position and results of operations of the Company; (ii)
the business prospects of the Company; (iii) the historical and current market
for the Company Common Stock and for the equity securities of certain other
companies we believed to be comparable to the Company; and (iv) the nature and
terms of certain other acquisition transactions that we believe to be relevant.
In rendering our opinion, we took into account the fact that McDermott owns 63%
of the outstanding Company Common Stock. We also took into account our
assessment of general economic, market and financial conditions and our
experience in connection with similar transactions and securities' valuations
generally. The opinion expressed herein is necessarily based upon conditions as
they exist and can be evaluated on, and on the information made available at,
the date hereof.
In its capacity as financial adviser to the Independent Committee, Simmons will
receive a customary fee for its services which is in part contingent upon
effectuation of the transactions contemplated by the Merger Agreement. This
opinion is for the use and benefit of the Independent Committee. This opinion
does not address the merits of the underlying decision by the Company to enter
into the Merger Agreement and does not constitute a recommendation to any
stockholder as to how such stockholder should respond to the Tender Offer or
vote on the Merger Agreement or Merger or on any matter related thereto. We are
not expressing any opinion herein as to the prices at which the Company Common
Stock will trade following announcement of the Tender Offer or the Merger.
Based upon and subject to the foregoing, we are of the opinion that the
consideration to be received by the Public Stockholders pursuant to the Tender
Offer and the Merger in accordance with the Merger Agreement is fair, from a
financial point of view, to the Public Stockholders.
Very truly yours,
SIMMONS & COMPANY INTERNATIONAL
/s/ Frederick W. Charlton
Frederick W. Charlton
Managing Director
<PAGE>
ANNEX C
May 7, 1999
Board of Directors
and
Finance Committee of the Board of Directors of
McDermott International, Inc.
1450 Poydras Street
New Orleans, LA 70112-6050
Members of the Board of Directors and Finance Committee:
J. Ray McDermott, S.A. (the "Company") and McDermott International, Inc.
(the "Parent") entered into an Agreement and Plan of Merger, dated as of May 7,
1999 (the "Agreement"), pursuant to which (i) a wholly owned subsidiary of the
Parent ("Merger Subsidiary") would commence a tender offer (the "Offer") for all
the outstanding shares of the Company's common stock, par value $.01 per share
(the "Shares"), not held by the Parent, for $35.62 per share, net to the seller
in cash (the "Common Share Price"), and (ii) Merger Subsidiary would be merged
with the Company in a merger (the "Merger") in which Shares not acquired in the
Offer, other than Shares held in treasury or held by the Parent or any affiliate
of the Parent, would be converted into the right to receive the Common Share
Price. The Offer and the Merger, taken together, are referred to as the
"Transaction."
You have asked us whether, in our opinion, the Common Share Price to be
paid by the Parent pursuant to the Transaction is fair from a financial point of
view to the Parent.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial
information relating to the Company and the Parent that we deemed
to be relevant;
(2) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities
and prospects of the Company and the Parent, as well as the amount
and timing of the cost savings and related expenses and synergies
expected to result from the Transaction (the "Expected Synergies"),
furnished to us by the Company and the Parent respectively;
(3) Conducted discussions with members of senior management and
representatives of the Company and the Parent concerning the
matters described in clauses (1) and (2) above, as well as their
respective businesses and prospects before and after giving effect
to the Transaction and the Expected Synergies;
1
<PAGE>
(4) Reviewed the market prices and valuation multiples for the Shares
and compared them with those of certain publicly traded companies
that we deemed to be relevant;
(5) Reviewed the results of operations of the Company and compared them
with those of certain publicly traded companies that we deemed to
be relevant;
(6) Compared the proposed financial terms of the Transaction with the
financial terms of certain other transactions which we deemed to be
relevant;
(7) Participated in discussions and negotiations among representatives
of the Company and the Parent and their financial and legal
advisors;
(8) Reviewed the potential pro forma impact of the Transaction on the
Parent;
(9) Reviewed the Agreement; and
(10) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or the Parent or been furnished with any such
evaluation or appraisal. In addition, we have not assumed any obligation to
conduct any physical inspection of the properties or facilities of the Company
or the Parent. With respect to the financial forecast information and the
Expected Synergies furnished to or discussed with us by the Company or the
Parent, we have assumed that they have been reasonably prepared and reflect the
best currently available estimates and judgment of the Company's or the Parent's
management as to the expected future financial performance of the Company or the
Parent, as the case may be, and the Expected Synergies.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. We have assumed that in the course of obtaining the
necessary regulatory or other consents or approvals (contractual or otherwise)
for the Transaction, no restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Transaction.
We are acting as financial advisor to the Parent in connection with the
Transaction and will receive a fee from the Parent for our services, a
significant portion of which is contingent upon the consummation of the
Transaction. In addition, the Parent has agreed to indemnify us for certain
liabilities arising out of our engagement. We have, in the past provided
financial advisory and financial services to the Parent and the Company and may
continue to do so and have received, and may receive, fees for the rendering of
such services. In addition, in the ordinary course of our business, we may
actively trade the Shares as well as securities of the Parent for our own
account and for the accounts of customers and, accordingly, may at any time hold
a long or short position in such securities.
2
<PAGE>
This opinion is solely for the use and benefit of the Board of Directors of
the Parent and the Finance Committee of the Board of Directors in their
evaluation of the Transaction and shall not be used for any other purpose. Our
opinion does not address the merits of the underlying decision by the Parent to
engage in the Transaction. This opinion is not intended to be relied upon or
confer any rights or remedies upon any employee, creditor, shareholder or other
equity holder of the Parent, or any other party. This opinion shall not be
reproduced, disseminated, quoted, summarized or referred to at any time, in any
manner or for any purpose, nor shall any public references to Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") or any of its affiliates
be made by the Parent or any of its affiliates, without the prior written
consent of Merrill Lynch.
We are not expressing any opinion herein as to the prices at which the
Parent's shares will trade following the announcement or consummation of the
Transaction.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Common Share Price to be paid by the Parent pursuant
to the Transaction is fair from a financial point of view to the Parent.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
3
<PAGE>
ANNEX D
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
J. Ray McDermott, S.A.
We have audited the accompanying consolidated balance sheet of J. Ray
McDermott, S.A. as of March 31, 1997 and 1996, and the related consolidated
statements of income (loss), equity and cash flows for each of the three years
in the period ended March 31, 1997. 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 J. Ray
McDermott, S.A. at March 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for postemployment benefits in 1995.
ERNST & YOUNG LLP
New Orleans, Louisiana
July 10, 1997
D-1
<PAGE>
J. RAY McDERMOTT, S.A.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
ASSETS ---------- ----------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................ $ 134,948 $ 166,408
Short-term investments in debt securities............ 75,516 --
Accounts receivable--trade........................... 261,621 193,643
Accounts receivable--unconsolidated affiliates....... 58,324 46,209
Accounts receivable--other........................... 32,113 57,421
Contracts in progress................................ 81,900 181,375
Other current assets................................. 23,972 57,291
---------- ----------
Total Current Assets................................ 668,394 702,347
Property, Plant and Equipment, at Cost:
Land................................................. 20,839 21,175
Buildings............................................ 78,962 76,774
Machinery and equipment.............................. 1,054,776 1,070,326
Property under construction.......................... 18,424 17,958
---------- ----------
1,173,001 1,186,233
Less accumulated depreciation........................ 816,271 793,833
---------- ----------
Net Property, Plant and Equipment...................... 356,730 392,400
---------- ----------
Excess of Cost Over Fair Value of Net Assets of
Purchased Businesses Less Accumulated Amortization of
$52,405,000 at March 31, 1997 and $28,799,000 at March
31, 19996............................................. 296,394 316,863
---------- ----------
Investment in unconsolidated Affiliates................ 81,981 72,806
---------- ----------
Other Assets........................................... 56,169 53,329
---------- ----------
TOTAL............................................... $1,459,668 $1,537,745
========== ==========
<CAPTION>
LIABILITIES AND EQUITY
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term
debt................................................ $ 109,095 $ 96,130
Accounts payable..................................... 144,388 103,473
Accounts payable to McDermott International.......... -- 47,695
Accrued contract costs............................... 63,586 69,827
Accrued liabilities--other........................... 110,366 120,515
Deposit on equipment sale............................ -- 30,000
Advance billings on contracts........................ 86,542 36,581
U.S. and foreign income taxes........................ 22,282 28,717
---------- ----------
Total Current Liabilities........................... 536,259 532,938
---------- ----------
Long-Term Debt......................................... 273,443 114,532
---------- ----------
Note Payable to McDermott International -- 231,000
---------- ----------
Deferred and Non-Current Income Taxes.................. 42,556 50,016
---------- ----------
Other Liabilities...................................... 71,452 55,362
---------- ----------
Contingencies
---------- ----------
Stockholders' Equity:
Preferred Stock, authorized 10,000,000 shares;
outstanding 3,200,000 shares Series A $2.25
cumulative convertible, par value $.01 per share,
(liquidation preference $160,000,000)............... 32 32
Common stock, par value $0.01 per share, authorized
60,000,000 shares; outstanding 40,617,792 at March
31, 1997 and 40,197,946 at March 31, 1996........... 406 402
Capital in excess of par value....................... 590,263 581,609
Deficit.............................................. (33,463) (14,576)
Currency translation adjustments..................... (21,280) (13,570)
---------- ----------
Total Stockholders' Equity.......................... 535,958 553,897
---------- ----------
TOTAL............................................... $1,459,668 $1,537,745
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
D-2
<PAGE>
J. RAY McDERMOTT, S.A.
CONSOLIDATED STATEMENT OF INCOME (LOSS)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Revenues.................................. $1,367,587 $1,227,841 $1,127,320
---------- ---------- ----------
Costs and Expenses:
Cost of operations (excluding
depreciation and amortization)......... 1,158,025 1,000,751 883,513
Depreciation and amortization........... 96,469 85,566 70,372
Selling, general and administrative
expenses............................... 116,977 116,725 114,165
---------- ---------- ----------
1,371,471 1,203,042 1,068,050
---------- ---------- ----------
Gain on Asset Disposals and Impairments--
net...................................... 29,019 2,530 1,862
Operating Income before Equity in Income
of Investees............................. 25,135 27,329 61,132
Equity in Income (Loss) of Investees...... (8,064) 9,124 22,857
---------- ---------- ----------
Operating income........................ 17,071 36,453 83,989
---------- ---------- ----------
Other Income (Expense):
Interest income......................... 16,387 6,014 9,298
Interest expense........................ (40,043) (42,387) (25,158)
Other--net.............................. 7,314 4,999 1,456
---------- ---------- ----------
(16,342) (31,374) (14,404)
---------- ---------- ----------
Income before Provision for Income Taxes
and Cumulative Effect of Accounting
Change................................... 729 5,079 69,585
Provision for Income Taxes................ 12,555 4,892 8,885
---------- ---------- ----------
Income (Loss) before Cumulative Effect of
Accounting Change........................ (11,826) 187 60,700
Cumulative Effect of Accounting Change.... -- -- (1,326)
---------- ---------- ----------
Net Income (Loss)......................... $ (11,826) $ 187 $ 59,374
========== ========== ==========
Net Loss Applicable to Common Stock (after
Preferred Stock dividends)............... $ (19,026) $ (7,524)
========== ==========
Loss Per Common and Common Equivalent
Share (Primary and Fully Diluted)........ $ (0.47) $ (0.19)
========== ==========
CASH DIVIDENDS:
Per preferred share..................... $ 2.25 $ 2.25
========== ==========
</TABLE>
Earnings per share are not presented for fiscal year 1995 because JRM was
not a separate entity with its own capital structure for that period.
See accompanying notes to consolidated financial statements.
D-3
<PAGE>
J. RAY McDERMOTT, S.A.
CONSOLIDATED STATEMENT OF EQUITY
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997
(In thousands, except for share amounts)
<TABLE>
<CAPTION>
Preferred Stock
-------------------------------
Series A Series B Common Stock
--------------- --------------- ---------------- Capital In Currency
Par Par Par Excess Of Owner's Translation
Shares Value Shares Value Shares Value Par Value Deficit Equity Adjustments Total
--------- ----- -------- ----- ---------- ----- ---------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance March
31, 1994........ -- $-- -- $-- -- $ -- $ -- $ -- $279,946 $(26,925) $253,021
--------- --- -------- --- ---------- ---- -------- -------- -------- -------- --------
Net Income...... -- -- -- -- -- -- -- (5,106) 64,480 -- 59,374
Preferred
dividends....... -- -- -- -- -- -- -- (1,117) -- -- (1,117)
Translation
adjustments..... -- -- -- -- -- -- -- -- -- 12,292 12,292
Distributions to
McDermott
International... -- -- -- -- -- -- -- -- (46,249) -- (46,249)
Contribution of
McDermott
International's
marine
construction
services
business........ 3,200,000 32 -- -- 24,668,297 246 231,277 -- (298,177) -- (66,622)
Acquisition of
Offshore
Pipelines,
Inc............. -- -- 458,632 5 13,917,946 139 348,573 -- -- -- 348,717
Exercise of
stock options... -- -- -- -- 63,106 1 429 -- -- -- 430
Loss on
investments..... -- -- -- -- -- -- -- (375) -- -- (375)
--------- --- -------- --- ---------- ---- -------- -------- -------- -------- --------
Balance March
31, 1995........ 3,200,000 32 458,632 5 38,649,349 386 580,279 (6,598) -- (14,633) 559,471
--------- --- -------- --- ---------- ---- -------- -------- -------- -------- --------
Net income...... -- -- -- -- -- -- -- 187 -- -- 187
Preferred
dividends....... -- -- -- -- -- -- -- (7,711) -- -- (7,711)
Preferred stock
conversion...... -- -- (458,632) (5) 1,065,193 11 (13) -- -- -- (7)
Translation
adjustments..... -- -- -- -- -- -- -- -- -- 1,063 1,063
Exercise of
stock options... -- -- -- -- 353,978 4 1,527 -- -- -- 1,531
Tax benefit on
exercise of
stock options... -- -- -- -- -- -- 2,629 -- -- -- 2,629
Restricted stock
purchases--net.. -- -- -- -- 49,070 -- 39 -- -- -- 39
Contributions to
thrift plan..... -- -- -- -- 80,356 1 1,585 -- -- -- 1,586
Deferred career
executive stock
plan expense.... -- -- -- -- -- -- 148 -- -- -- 148
Loss on
investments..... -- -- -- -- -- -- -- (452) -- -- (452)
Minimum pension
liability....... -- -- -- -- -- -- -- (2) -- -- (2)
Division of
McDermott
International
pension plan.... -- -- -- -- -- -- (4,585) -- -- -- (4,585)
--------- --- -------- --- ---------- ---- -------- -------- -------- -------- --------
Balance March
31, 1996........ 3,200,000 32 -- -- 40,197,946 402 581,609 (14,576) -- (13,570) 553,897
--------- --- -------- --- ---------- ---- -------- -------- -------- -------- --------
Net Loss........ -- -- -- -- -- -- -- (11,826) -- -- (11,826)
Preferred
dividends....... -- -- -- -- -- -- -- (7,200) -- -- (7,200)
Translation
adjustments..... -- -- -- -- -- -- -- -- -- (7,710) (7,710)
Exercise of
stock options... -- -- -- -- 297,524 3 2,841 -- -- -- 2,844
Tax benefit on
exercise of
stock options... -- -- -- -- -- -- 1,724 -- -- -- 1,724
Restricted stock
purchases--net.. -- -- -- -- 45,210 -- (9) -- -- -- (9)
Contributions to
thrift plan..... -- -- -- -- 77,112 1 1,892 -- -- -- 1,893
Deferred career
executive stock
plan expense.... -- -- 963 -- -- -- 963
Gain on
investments..... -- -- -- -- -- -- -- 137 -- -- 137
Minimum pension
liability....... -- -- -- -- -- -- -- 2 -- -- 2
Purchase of
assets from
International... -- -- -- -- -- -- 1,243 -- -- -- 1,243
--------- --- -------- --- ---------- ---- -------- -------- -------- -------- --------
Balance March
31, 1997........ 3,200,000 $32 -- $-- 40,617,792 $406 $590,263 $(33,463) $ -- $(21,280) $535,958
========= === ======== === ========== ==== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
D-4
<PAGE>
J. RAY McDERMOTT, S.A.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)................................. $(11,826) $ 187 $59,374
-------- -------- -------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 96,469 85,566 70,372
Equity in income or loss of investees, less
dividends....................................... 8,064 (6,833) 42,810
Gain on asset disposals and impairments-net...... (29,019) (2,530) (1,862)
Benefit from deferred taxes...................... (7,600) (2,338) (35,769)
Other............................................ 3,779 (3,461) 1,253
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable.............................. (52,378) 49,005 28,290
Net contracts in progress and advance billings... 147,151 (150,121) 13,081
Accounts payable................................. (9,019) (23,430) (46,707)
Accrued contract costs........................... (6,241) 16,217 (692)
Accrued liabilities.............................. (12,859) (3,142) (32,997)
Income taxes..................................... (418) (9,927) 9,958
Other, net....................................... (16,712) 1,901 (28,086)
-------- -------- -------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... 109,391 (48,906) 79,025
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition....................................... -- -- 10,828
Purchases of property, plant and equipment........ (56,790) (38,033) (40,082)
Proceeds from asset disposals..................... 57,636 133,693 15,580
Purchases of short-term investments--net.......... (74,866) -- --
Investment in asset held for lease................ (1,821) (29,620) (6,711)
Increase in notes receivable from McDermott
International.................................... -- -- (16,802)
Investments in equity investees................... (3,908) (6,827) (398)
Returns from investees............................ 12,500 37,097 --
Deposit on equipment sale......................... -- 30,000 --
Other............................................. 137 (452) (375)
-------- -------- -------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES....................................... (67,112) 125,858 (37,960)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt......................... $(13,090) $ (6,808) $ (132)
Issuance of long-term debt........................ 244,375 32,756 2,348
Increase (decrease) in short-term borrowings...... (72,094) 36,001 22,348
Decrease in notes payable to McDermott
International.................................... (231,000) (20,542) (19,705)
Distributions to McDermott International.......... -- -- (46,249)
Issuance of common stock.......................... 4,569 4,197 430
Preferred dividends paid.......................... (7,200) (7,928) (900)
Other............................................. -- (523) (667)
-------- -------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES....................................... (74,440) 37,153 (42,527)
-------- -------- -------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH.......... 701 79 343
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... (31,460) 114,184 (1,119)
-------- -------- -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.... 166,408 52,224 53,343
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......... $134,948 $166,408 $52,224
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized)............. $ 35,816 $ 41,905 $23,146
Income taxes (net of refunds).................... $ 22,823 $ 11,277 $21,910
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
D-5
<PAGE>
J. RAY McDERMOTT, S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997
NOTE 1--BASIS OF PRESENTATION
J. Ray McDermott, S.A. ("JRM") was incorporated on March 22, 1994 in the
Republic of Panama and had no significant operations prior to January 31, 1995
when McDermott International, Inc. ("International") contributed substantially
all of its marine construction services business to JRM and JRM acquired
Offshore Pipelines, Inc. ("OPI"). See Note 3 to the consolidated financial
statements.
JRM issued 3,200,000 shares of Series A $2.25 Cumulative Convertible
Preferred Stock; 24,668,297 shares of common stock; $231,000,000 of 9% Senior
Subordinated Notes due 2001 and a Floating Rate Demand Note of $39,750,000 to
International in exchange for its marine construction services business
excluding certain assets and liabilities which were retained by International.
The contribution of International's marine construction services business to
JRM was accounted for in a manner similar to a pooling of interests and the
financial statements reflect International's historical cost of the assets and
liabilities contributed. For the period prior to the contribution, the
financial statements include charges from International for direct costs and
allocations of corporate overhead and other costs. Management believes that
the allocation methods were reasonable and that the allocations were
representative of what the costs would have been on a stand alone basis.
NOTE 2--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.
The consolidated financial statements include the accounts of JRM, and all
subsidiaries and controlled joint ventures. Investments in joint ventures and
other entities which JRM does not control but has significant influence over
are accounted for on the equity method. Differences between the cost of equity
method investments and the amount of underlying equity in net assets of the
investees are amortized systematically to income. All significant intercompany
transactions and accounts have been eliminated. Certain amounts previously
reported have been reclassified to conform with the presentation at March 31,
1997.
Unless the context otherwise requires, hereinafter, "JRM" will be used to
mean J. Ray McDermott, S.A. and its consolidated subsidiaries; "International"
will be used to mean McDermott International, Inc., a Panamanian corporation
that is the parent company of the McDermott group of companies and the
majority owner of JRM; and "McDermott International" will be used to mean 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.
Accounting Change
Effective April 1, 1994, JRM adopted Statement of Financial Accounting
Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment
Benefits," in accounting for disability benefits and other types of benefits
paid to employees, their beneficiaries and covered dependents after active
employment, but before retirement. The cumulative effect as of April 1, 1994
of this change in accounting was to reduce net income by
D-6
<PAGE>
$1,326,000 (net of income taxes of $72,000). Other than the cumulative effect,
the accounting change had no material effect on the results of fiscal year
1995. Prior to April 1, 1994, JRM recognized the cost of providing most of
these benefits on a cash basis.
Investments
JRM'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 in
shareholders' equity. 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 in a separate component of equity.
Foreign currency transaction adjustments are reported in income. Included in
Other Income (Expense) are transaction gains (losses) of $1,108,000,
($1,916,000), and $711,000 for fiscal years 1997, 1996 and 1995, respectively.
Contracts and Revenue Recognition
Contract revenues and related costs are principally recognized on a
percentage of completion method for individual contracts or components thereof
based upon work performed or a cost to cost method, as applicable to the
product or activity involved. 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. There are no
unbilled revenues which will not 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 $508,000 and $7,639,000 relating
to commercial contract claims whose final settlement is subject to future
determination through negotiations or other procedures which had not been
completed at March 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Included in Contracts in Progress are:
Costs incurred less costs of revenue recognized....... $ 59,660 $ 52,119
Revenues recognized less billings to customers........ 22,240 129,256
-------- --------
Contracts in Progress................................. $ 81,900 $181,374
======== ========
Included in Advance Billings on Contracts are:
Billings to customers less revenues recognized........ $123,100 $ 52,071
Costs incurred less costs of revenue recognized....... (36,558) (15,490)
-------- --------
Advance Billings on Contracts......................... $ 86,542 $ 36,581
======== ========
</TABLE>
D-7
<PAGE>
Included in accounts receivable--trade are amounts representing retainages
on contracts as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Retainages................................................ $13,693 $21,705
======= =======
</TABLE>
All of the 1997 retainages are expected to be collected within the next
year.
Depreciation, Maintenance and Repairs and Drydocking Expenses
Except for major marine vessels, property, plant and equipment is
depreciated on the straight-line method, using estimated economic useful lives
of 8 to 30 years for buildings and 2 to 20 years for machinery and equipment.
Major marine vessels are depreciated on 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.
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, and such accruals are charged to operations currently.
Amortization of Excess Cost Over Fair Value of Net Assets of Purchased
Businesses
Excess of cost over fair value of net assets of purchased businesses
primarily pertains to the acquisition of OPI and is being amortized on a
straight-line basis over 15 years. Management periodically reviews goodwill to
access recoverability, and impairments would be recognized in operating
results if a permanent diminution in value were to occur.
Earnings Per Share
Primary earnings per share is based on the weighted average number of common
and dilutive common equivalent shares outstanding during the year. Fully
diluted earnings per share is the same as primary since the computations were
antidilutive.
Capitalization of Interest Cost
In fiscal years 1997, 1996 and 1995, total interest cost incurred was
$40,760,000, $43,712,000 and $25,325,000, respectively, of which $717,000,
$1,325,000 and $167,000, respectively, was capitalized.
Cash Equivalents
Cash equivalents are highly liquid investments, with maturities of three
months or less when purchased.
Derivative Financial Instruments
Derivatives, primarily forward exchange contracts, are utilized to minimize
exposure and reduce risk from foreign exchange fluctuations in the regular
course of business. Gains and losses relating to qualifying hedges of firm
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.
D-8
<PAGE>
NOTE 3--ACQUISITION
On January 31, 1995, JRM acquired OPI, a full-range provider of offshore
marine construction and other related services to the oil and gas industry.
Pursuant to the Merger Agreement, OPI investors received 13,867,946 shares of
JRM common stock; options to acquire 897,818 shares of JRM common stock and
458,632 shares of JRM Series B $2.25 Cumulative Convertible Exchangeable
Preferred Stock in exchange for all of the outstanding common stock, common
stock options and preferred stock of OPI. The acquisition was accounted for by
the purchase method and, accordingly, the purchase price ($369,868,000,
including direct costs of acquisition and non-compete agreements) was
allocated to the underlying assets and liabilities based upon preliminary fair
values at the date of acquisition which resulted in excess cost over fair
value of net assets acquired of $235,000,000. During fiscal year 1996, JRM
completed certain asset and liability valuations related primarily to joint
ventures, property, plant and equipment, and preacquisition contingencies
resulting in an increase in excess cost over fair value of net assets acquired
of $95,000,000. Additionally, during fiscal year 1996 management completed its
assessment of the amortization period of excess of cost over fair value of net
assets acquired and determined the amortization period should be 15 years.
Operating results have been included in the Consolidated Statement of Income
from the acquisition date.
Unaudited pro forma results of operations for fiscal year ended March 31,
1995 assuming that the contribution by McDermott International of
substantially all of its marine construction services business to JRM and the
acquisition of OPI had occurred as of the beginning of the fiscal year are:
revenues of $1,442,694,000, income before cumulative effect of accounting
change of $42,617,000 ($0.88 per share primary and fully diluted) and net
income of $41,291,000 ($0.84 per share primary and fully diluted). The pro
forma financial information is presented for informational purposes only and
is not necessarily indicative of the operating results that would have
occurred had the transaction been completed as of April 1, 1994.
NOTE 4--INVESTMENTS IN UNCONSOLIDATED AFFILIATES
During the fourth quarter of fiscal year 1997, and effective as of the
beginning of the year, JRM changed from the equity to the cost method of
accounting for its investment in the HeereMac joint venture as a result of
JRM's determination that it is unable to exercise significant influence over
HeereMac's operating and financial policies. Equity income of HeereMac was
$1,083,000 and $6,244,000 in fiscal years 1996 and 1995, respectively.
Transactions with unconsolidated affiliates included sales to ($110,150,000,
$135,051,000 and $136,681,000 in fiscal years 1997, 1996 and 1995,
respectively, including approximately $9,609,000, $44,491,000 and $54,657,000,
respectively, attributable to leasing activities) and purchases from
($8,765,000, $9,109,000, and $1,119,000 in fiscal years 1997, 1996 and 1995,
respectively) these entities. Included in non-current Other Assets at March
31, 1997 was $2,102,000 of accounts receivable from an unconsolidated
affiliate. Included in Accounts payable at March 31, 1997 and 1996 were
$11,792,000 and $4,471,000, respectively, of payables to unconsolidated
affiliates.
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. 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
and recorded a deferred gain of $103,239,000, which was being amortized over
HeereMac's depreciable lives of the vessels prior to the change to the cost
method of accounting for JRM's investment in HeereMac. Subsequent to the
change, the deferred gain is recognized by JRM as the note is repaid. The note
receivable ($92,500,000 at March 31, 1997), net of the deferred gain
($90,803,000 at March 31, 1997) is included in investment in unconsolidated
affiliates. In addition to the vessel sale in fiscal year 1996, JRM received
$37,097,000 as a return of capital from the HeereMac joint venture.
In fiscal year 1995, JRM contributed various marine construction barges with
a cost of $102,602,000 and accumulated depreciation of $76,763,000 and sold a
derrick barge for $9,101,000 to the HeereMac joint venture.
D-9
<PAGE>
At March 31, 1997 and 1996, property, plant and equipment included
$141,409,000 and $141,293,000, and accumulated depreciation included
$102,242,000 and $89,312,000, respectively, of marine equipment that is leased
to unconsolidated investees. Dividends received from unconsolidated investees
accounted for by the equity method were $2,291,000 and $65,667,000 in fiscal
years 1996 and 1995, respectively. Undistributed earnings in unconsolidated
affiliates accounted for by the equity method were $12,937,000 and
$27,506,000, respectively, at March 31, 1997 and 1996.
Summarized combined balance sheet and income statement information based on
the most recent financial information for investments in entities accounted
for by the equity method are presented below:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
(In thousands)
<S> <C> <C>
Current Assets....................................... $293,779 $ 407,205
Non-Current Assets................................... 109,410 622,900
-------- ----------
Total Assets....................................... $403,189 $1,030,105
======== ==========
Current Liabilities.................................. $311,478 $ 405,818
Non-Current Liabilities.............................. 13,513 464,337
Owners' Equity....................................... 78,198 159,950
-------- ----------
Total Liabilities and Owners' Equity............... $403,189 $1,030,105
======== ==========
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Revenues.................................... $846,659 $907,151 $725,225
Gross Profit................................ $ 66,777 $203,102 $153,075
Income (Loss) before Provision for Income
Taxes...................................... $ (5,924) $ 16,396 $ 52,899
Provision for Income Taxes.................. 7,227 2,297 4,193
-------- -------- --------
Net Income (Loss)......................... $(13,151) $ 14,099 $ 48,706
======== ======== ========
</TABLE>
NOTE 5--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 JRM is not subject to income tax in Panama on income
earned outside of Panama. Therefore, there is no expected relationship between
the provision for income taxes and income 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 (not only
with respect to nominal rate but also with respect to the allowability of
deductions, credits and other benefits) and 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. JRM and certain of its subsidiaries keep
books and file tax returns on the completed contract method of accounting.
Prior to the January 31, 1995 contribution by International, the U.S.
subsidiaries and divisions of JRM were included in the U.S. federal income tax
return filed by McDermott Incorporated ("McDermott"), a subsidiary of
International. McDermott's policy for allocation of U.S. federal income taxes
provided generally that the U.S. subsidiaries and divisions of JRM compute the
provision for U.S. federal income taxes on a separate company basis.
Subsequent to the contribution, these U.S. subsidiaries and divisions are
included in the U.S. federal tax return filed by J. Ray McDermott Holdings,
Inc., a subsidiary of JRM.
D-10
<PAGE>
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, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Accrued liabilities for postretirement health care
benefits................................................ $ 7,127 $ 9,902
Accrued liabilities for executive and employee incentive
compensation............................................ 2,043 1,567
Long-term contracts...................................... 3,176 4,973
Accrued pension liability................................ 4,125 2,449
Accrued drydock liability................................ 2,219 2,771
Investments in joint ventures and affiliated companies... 1,599 --
Operating loss carryforwards............................. 32,595 21,520
Property, plant and equipment............................ 1,036 1,057
Accrued provisions for facility closings................. 104 354
Accrued vacation pay..................................... 1,041 935
Other.................................................... 4,932 5,132
-------- --------
Total deferred tax assets.............................. 59,997 50,660
Valuation allowance for deferred tax assets.............. (19,136) (16,216)
-------- --------
Total deferred tax assets--net......................... 40,861 34,444
-------- --------
Deferred tax liabilities:
Property, plant and equipment............................ 31,105 27,808
Long-term contracts 4,394 10,149
Investment in joint ventures and affiliated companies -- 762
Prepaid pension costs.................................... 1,488 --
Other.................................................... 1,583 2,695
-------- --------
Total deferred tax liabilities......................... 38,570 41,414
-------- --------
Net deferred tax assets (liabilities).................. $ 2,291 $ (6,970)
======== ========
</TABLE>
Income before provision for income taxes and cumulative effect of accounting
change was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
U.S............................................ $(7,851) $(1,362) $(3,265)
Other than U.S................................. 8,580 6,441 72,850
------- ------- -------
$ 729 $ 5,079 $69,585
======= ======= =======
</TABLE>
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ --------
(In thousand)
<S> <C> <C> <C>
Current:
U.S.--Federal............................... $15,568 $ 986 $ 30,514
U.S.--State and local....................... (366) -- --
Other than U.S.............................. 4,953 6,244 14,140
------- ------ --------
Total current............................. 20,155 7,230 44,654
------- ------ --------
Deferred:
U.S.--Federal............................... (6,080) 5,426 (31,742)
U.S.--State and local....................... (2,585) -- --
Other than U.S.............................. 1,065 (7,764) (4,027)
------- ------ --------
Total deferred............................ (7,600) (2,338) (35,769)
------- ------ --------
Provision for Income Taxes.................... $12,555 $4,892 $ 8,885
======= ====== ========
</TABLE>
D-11
<PAGE>
The current provision for other than U.S. income taxes in 1997, 1996 and
1995 includes a reduction of $2,021,000, $3,763,000 and $1,323,000,
respectively, for the benefit of net operating loss carryforwards. Initial
recognition of OPI pre-acquisition tax benefits in fiscal year 1997 resulted
in a reduction of excess cost over fair value of assets acquired of
$3,115,000.
JRM would be subject to U.S. withholding taxes on distributions of earnings
from its U.S. subsidiaries. No U.S. withholding taxes have been provided as
these earnings are considered indefinitely reinvested.
NOTE 6--RELATED PARTY TRANSACTIONS
Transactions with subsidiaries, divisions and controlled joint ventures of
McDermott International that are not disclosed elsewhere, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Sale of marine construction services............. $16,611 $10,243 $ 2,652
Purchase of engineering and other services....... 15,941 56,008 16,672
Insurance premiums............................... 8,012 12,908 21,602
Postretirement health care benefits.............. -- -- 6,075
Pension benefit.................................. 1,094 843 6,679
Selling, general and administrative expense...... 13,987 11,900 19,690
Interest income.................................. -- 787 2,920
Interest expense................................. 6,655 21,831 20,169
</TABLE>
Included in Accounts receivable--trade at March 31, 1997 are receivables
from International of $2,543,000.
During fiscal year 1997, JRM paid a $231,000,000 note payable to
International and purchased from International certain diving support
equipment and systems for $3,573,000 and nine cranes for use in JRM's
fabrication and construction activities for $8,295,000.
In connection with the acquisition of OPI, two directors and two officers of
JRM entered into noncompetition agreements. As consideration, such directors
and officers received a total of approximately $10,131,000 (including 50,000
shares of JRM's common stock valued at $1,131,000) during fiscal year 1995. In
addition, one director (who resigned in April 1996) received $1,500,000 in
fiscal years 1997 and 1996 and will receive additional payments of $1,500,000
per year over the next three years.
In fiscal year 1995, JRM entered into an office sublease with an affiliate
of a director (who resigned in April 1996) of JRM which expired in March 1997.
During fiscal years 1997 and 1996, the affiliate paid $216,000 and $185,000,
respectively, under the sublease. Under another agreement, JRM paid $576,000
to the affiliate in each of fiscal years 1997 and 1996 and reimbursed the
affiliate for out-of-pocket expenses for the management and operations of
JRM's offshore producing oil and gas property. Also during fiscal year 1996,
JRM fabricated a caisson for the affiliate for $84,000. JRM sold an offshore
jacket and deck to the affiliate for $1,100,000 during fiscal year 1995 and
received approximately $2,000,000 from the affiliate during fiscal year 1996
pursuant to a contract to refurbish, transport and install the jacket and
deck.
JRM entered into agreements with an affiliate of another director of JRM
pursuant to which, the subsidiary acquired interests in certain offshore oil
and gas property. During fiscal year 1996 and 1995, JRM paid $2,036,000 and
$3,000,000, respectively, to the affiliate under the agreements in connection
with the acquisition of its interests and the development of such 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. Pursuant to the terms of the agreements entered
into in connection with such sale, JRM 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 on production and
JRM earned approximately $1,093,000 and $179,000 in fiscal years 1997 and
1996,
D-12
<PAGE>
respectively, as a result of this production payment. In addition, JRM owns
140,000 shares of common stock of this affiliate and 40,000 units in a limited
partnership which is also an affiliate of this director.
JRM has also entered into agreements with two affiliates of a director of
JRM to design, fabricate and install several offshore pipelines or 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, of
which $432,000 remained unpaid and is expected to be paid in the ordinary
course of business.
In connection with the acquisition of OPI, JRM entered into various
agreements under which McDermott International provides administrative and
technical services to JRM. These services include, but are not limited to:
accounting, treasury, tax administration and other financial services; human
relations; computing and telecommunications; corporate officer and
secretarial; purchasing; and marine systems and automation. The cost of these
services to JRM was $11,900,000 for fiscal years 1997 and 1996. Fiscal year
1997 selling, general and administrative expense also included $2,087,000 for
corporate officer severance.
Effective April 1, 1996, JRM and International, through subsidiaries,
created a joint venture which is consolidated in JRM. The joint venture is a
preferred (but not exclusive) provider of engineering services to certain
subsidiaries of International in the U.S. for onshore-related work and to JRM
for offshore-related work. The charges for such services are based on charges
to unrelated parties for similar work and for general and administrative
activities based on allocation of cost. Arrangements for pricing these
services is reviewed periodically by the parties. During fiscal year 1997, the
joint venture charged International and its subsidiaries approximately
$10,867,000 for such services.
Effective January 31, 1995, JRM sold to McDermott International those assets
and liabilities comprising the shipyard business located in Morgan City,
Louisiana that were included in the business contributed by McDermott
International with the Merger. In consideration, JRM received $4,802,000.
Certain officers and employees of JRM participate in certain benefit plans
which involve the issuance of International Common Stock.
NOTE 7--NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Long-term debt consists of:
Unsecured debt:
9.375% Senior Subordinated Notes due 2006 ($250,000,000
principal amount)......................................... $244,610 $ --
12.875% Guaranteed Senior Notes due 2002 ($70,000,000
principal amount--callable July 15, 1997)................. 73,958 74,473
Other notes payable........................................ 14,143 13,401
Secured debt:
Floating rate notes interest at one month LIBOR plus 2%
(7.4375% inclusive at March 31, 1997) due 1999............ 12,693 21,139
Capitalized Lease Obligations.............................. 13,276 16,398
-------- --------
358,680 125,411
Less amounts due within one year............................. 85,237 10,879
-------- --------
$273,443 $114,532
======== ========
</TABLE>
D-13
<PAGE>
Notes payable and current maturities of long-term debt consist of:
<TABLE>
<CAPTION>
1997 1996
-------- -------
(In thousands)
<S> <C> <C>
Short-term lines of credit--unsecured................ $ 23,858 $85,251
Current maturities of long-term debt................. 85,237 10,879
-------- -------
$109,095 $96,130
======== =======
Weighted average interest rate on short-term
borrowings.......................................... 6.95% 6.88%
======== =======
</TABLE>
During fiscal year 1997, JRM issued $250,000,000 principal amount 9.375%
Senior Subordinated Notes due 2006 ("9.375% Notes"). The 9.375% Notes are
redeemable, for cash, at the option of JRM in whole or in part, at any time on
or after July 15, 2001 at a price of 104.688% of the principal amount, and
thereafter at prices declining annually to 100% of the principal amount on or
after July 15, 2004. The 12.875% Guaranteed Senior Notes ("12.875% Notes") are
subject to mandatory sinking fund requirements beginning on July 15, 2000
calculated to retire 50% of the original principal amount prior to maturity in
2002. The 12.875% Notes are redeemable, for cash, at the option of JRM, at any
time on or after July 15, 1997, in whole or in part, at a price of 106.4% of
the principal amount, and thereafter at prices declining annually to 100% of
the principal amount on or after July 15, 2000. The 12.875 % Notes are
included in current maturities of long-term debt at March 31, 1997 due to
JRM's decision to redeem the 12.875% Notes in whole on July 15, 1997.
Maturities of long-term debt during the five fiscal years subsequent to
March 31, 1997 are as follows: 1998--$85,237,000 (including the 12.875%
Notes); 1999--$14,582,000; 2000--$38,000; 2001--$38,000; 2002--$42,000.
At March 31, 1997 and 1996, JRM had available various uncommitted short-term
lines of credit from banks totaling $34,174,000 and $142,645,000,
respectively. Borrowings by JRM against these lines of credit at March 31,
1997 and 1996 were $23,858,000 and $85,251,000, respectively. JRM is also a
party to an unsecured and committed revolving credit facility (the "JRM
Revolver") with a group of banks. There were no borrowings outstanding at
March 31, 1997 and 1996 under the JRM Revolver. As a condition to borrowing
under the facility, JRM must comply with certain requirements. Presently, JRM
cannot satisfy these requirements and cannot borrow under the JRM Revolver.
The JRM Revolver also limits the amount of funds which JRM can borrow from
other sources and JRM is currently at such limits.
JRM is restricted, as a result of covenants in its credit agreements, in
paying cash dividends to its public shareholders or in transferring funds
through cash dividends (including annual cash dividends of $7,200,000 on its
Series A Preferred Stock held by International) or through unsecured loans to
or investments in International. At March 31, 1997, JRM could pay no cash
dividends to its common stock holders, including International, could pay up
to $9,600,000 of cash dividends on its Series A Preferred Stock held by
International, and could make unsecured loans to or investments in
International of approximately $10,142,000.
NOTE 8--PENSION PLANS AND POSTRETIREMENT BENEFITS
Pension Plans--Prior to fiscal year 1996, JRM provided retirement benefits,
primarily through employee participation, in non-contributory pension plans of
McDermott International (See Note 6). Effective April 1, 1995, new plans were
established for employees of JRM. As a result, a subsidiary of International
transferred to JRM an accrued pension liability of approximately $4,585,000
relating to employees covered under the new plan and transferred to the plan
assets, which were equal to the projected benefit obligation, of approximately
$40,456,000.
JRM provides retirement benefits through employee participation in two non-
contributory pension plans for substantially all of its salaried employees,
except 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 or the
D-14
<PAGE>
United Kingdom. Plan benefits are based on final average compensation and
years of service. JRM's funding policy is to fund the applicable pension plan
to meet minimum funding requirements of the Employee Retirement Income
Security Act of 1974 ("ERISA") and to fund the other pension plan as
recommended by the respective plan actuary in accordance with applicable law.
At January 1, 1997 and 1996, approximately one-half of total plan assets were
invested in listed stocks and bonds. The remaining assets were held in foreign
equity funds, U.S. Government securities and investments of a short-term
nature.
JRM also provides benefits to employees in the United Kingdom through
participation of certain of its subsidiaries and affiliate companies in a
contributory pension plan (the U.K. plan) sponsored by McDermott
International. JRM's policy was to fund the U.K. plan to meet the minimum
requirements as recommended by the plan actuary and in accordance with
applicable law. Under the terms of the Merger Agreement, this plan was
excluded from the contribution of McDermott International's marine
construction services business at January 31, 1995, but former employees of
McDermott International's marine construction services business who
transferred to JRM will continue to participate in this plan until a new one
is established.
U.S. Pension Plans
The net periodic pension cost for fiscal year 1997 and 1996 included the
following components:
<TABLE>
<CAPTION>
1997 1996
------ ------
(In
thousands)
<S> <C> <C>
Service cost--benefits earned during the period........... $4,927 $2,976
Interest cost on projected benefit obligation............. 4,263 3,533
Actual return on plan assets.............................. (5,841) (6,484)
Net amortization and deferral............................. 1,857 2,286
------ ------
Net periodic pension cost................................. $5,206 $2,311
====== ======
</TABLE>
The following table sets forth the U.S. plans' funded status and the amounts
recognized in the consolidated financial statements:
<TABLE>
<CAPTION>
1997 1996
-------- -------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.......................... $ 35,218 $29,946
======== =======
Accumulated benefit obligation..................... $ 43,903 $40,174
======== =======
Projected benefit obligation....................... $ 65,480 $58,377
Plan assets at fair value............................ 52,582 46,904
-------- -------
Projected benefit obligation in excess of plan
assets.............................................. (12,898) (11,473)
Unrecognized net loss................................ 10,701 15,432
Adjustment required to recognize minimum liability... (41) (57)
Unrecognized prior service cost...................... (8,684) (9,323)
Unrecognized transition asset........................ (1,261) (1,577)
-------- -------
Net pension liability................................ $(12,183) $(6,998)
======== =======
</TABLE>
The assumptions used in determining the funded status of the U.S. plans
were:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Actuarial assumptions:
Discount rate............................................... 7.5% 7.25%
--- ----
Rate of increase in future compensation levels.............. 5.0% 6.0%
--- ----
Expected long-term rate of return on plan assets............ 8.5% 8.5%
--- ----
</TABLE>
D-15
<PAGE>
Non-U.S. Pension Plan
The net periodic pension cost (benefit) for fiscal years 1997, 1996 and 1995
included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
----- ------- -------
(In thousands)
<S> <C> <C> <C>
Service cost--benefits earned during the
period....................................... $ 459 $ 332 $ 1,450
Interest cost on projected benefit
obligation................................... 766 829 3,342
Actual return on plan assets.................. (756) (1,046) (1,240)
Net amortization and deferral................. (403) 30 (7,303)
----- ------- -------
Net periodic pension cost (benefit)........... $ 66 $ 145 $(3,751)
===== ======= =======
</TABLE>
The following table sets forth the non-U.S. plan's funded status and the
amounts recognized in the consolidated financial statements:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation........................... $ 8,198 $ 7,409
======= =======
Accumulated benefit obligation...................... $ 8,594 $ 7,997
======= =======
Projected benefit obligation........................ $10,989 $10,437
Plan assets at fair value............................. 12,328 11,772
------- -------
Plan assets in excess of projected benefit
obligation........................................... 1,339 1,335
Unrecognized net gain................................. (831) (663)
Unrecognized transition asset......................... (719) (817)
------- -------
Net pension liability................................. $ (211) $ (145)
======= =======
</TABLE>
The assumptions used in determining the funded status of the non-U.S. plan
were:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Actuarial assumptions:
Discount rate......................................... 7.25% 8.25% 8.25%
---- ---- ----
Rate of increase in future compensation levels........ 5.0% 5.0% 5.0%
---- ---- ----
Expected long term rate of plan assets................ 8.5% 8.5% 8.5%
---- ---- ----
</TABLE>
Postretirement Health Care and Life Insurance Benefits--JRM offers
postretirement health care and life insurance benefits to substantially all of
its regular full time employees who retire and receive retirement income from
a defined benefit pension plan funded by JRM, except certain non-resident
alien retired employees who are not citizens of a European Community country,
or who, while employed, did not earn income in the United States, Canada or
the United Kingdom. JRM shares the cost of providing these benefits, except
for certain life insurance plans, with all affected retirees. JRM does not
fund any of its plans.
D-16
<PAGE>
The following table sets forth the amounts recognized in the consolidated
financial statements at March 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees.............................................. $ 1,233 $ 663
Fully eligible active participants.................... 2,467 1,363
Other active plan participants........................ 13,810 14,805
------- -------
17,510 16,831
Unrecognized net gain................................... 1,220 --
------- -------
Accrued postretirement benefit cost..................... $18,730 $16,831
======= =======
Weighted average discount rate.......................... 7.50% 7.25%
======= =======
</TABLE>
The accumulated postretirement benefit obligation includes $16,322,000 and
$16,048,000 for health care plans and $1,188,000 and $783,000 for life
insurance plans at March 31, 1997 and 1996, respectively.
Net periodic postretirement benefit cost for fiscal years 1997 and 1996
included the following components:
<TABLE>
<CAPTION>
1997 1996
------ ------
(In
thousands)
<S> <C> <C>
Service cost............................................... $1,289 $ 767
Interest cost.............................................. 1,383 1,060
Net amortization and deferral.............................. 150 --
------ ------
Net periodic postretirement benefit cost................... $2,822 $1,827
====== ======
</TABLE>
For measurement purposes, a weighted-average annual assumed rate of increase
in the per capita cost of covered health care claims of 7 1/2% was assumed for
1997 and 10 3/4% for 1996. For 1998, a rate of 6 1/2% was assumed. The rate
was assumed to decrease gradually to 4% in 2005 and remain at that level
thereafter. The health care cost trend rate assumption has a significant
effect on the amounts reported. For example, increasing the assumed health
care cost trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of March 31, 1997 by
$2,697,000 and the aggregate of the service cost and interest cost components
of net periodic postretirement benefit cost for fiscal year 1997 by $404,000.
NOTE 9--IMPAIRMENT OF LONG-LIVED ASSETS
During the quarter ended March 31, 1997 management identified certain long-
lived assets that are no longer expected to recover their entire carrying
value through future cash flows. The assets include non-core, surplus and
obsolete property and equipment. Fair value was generally determined based on
sales prices of comparable assets. Impairment losses to write the assets down
to estimated fair values totaled $19,228,000.
During the quarter ended March 31, 1997, management decided to sell a
certain vessel and related equipment of a non-core business and to sell or
otherwise dispose of certain other assets. As a result, impairment losses
totaling $12,162,000 were recognized to reduce the property and equipment to
estimated fair values less the costs to sell. Prior to recognition of the
impairment losses, the carrying value of these assets totaled approximately
$18,950,000. Excluding the impairment losses, results of operations for fiscal
year 1997 for these assets were not material. Management expects to sell or
dispose of these assets within the next year.
D-17
<PAGE>
NOTE 10--CAPITAL STOCK
At March 31, 1997 and 1996, 15,172,402 and 15,592,108 shares, respectively,
of Common Stock were reserved for issuance in connection with the conversion
of Series A $2.25 Cumulative Convertible Preferred Stock ("Series A Preferred
Stock"), the exercise of stock options, awards of restricted stock under JRM's
stock incentive plans and contributions to the Thrift Plan.
Series A Preferred Stock
At March 31, 1997 and 1996, 3,200,000 shares of Series A Preferred Stock
were owned by International. Shares of Series A Preferred Stock have one vote
per share and a liquidation preference of $50.00 per share. Dividends on
Series A Preferred Stock are cumulative at the annual rate of $2.25 per share.
Each share of Series A Preferred Stock is redeemable for cash at the option
of JRM, at any time through January 31, 2000 provided certain conditions are
met, or anytime after January 31, 2000 at a price equal to $52.00 per share,
plus accrued and unpaid dividends.
Each share of Series A Preferred Stock is convertible into 1.794 shares of
Common Stock at any time after a call by JRM for redemption of any or all of
the outstanding Series A Preferred Stock or at any time after January 31,
2000.
Series B Preferred Stock
During fiscal year 1996, 458,382 shares of Series B Preferred Stock were
converted into 1,065,193 shares of Common Stock and the remaining 250 shares
were redeemed for cash.
NOTE 11--STOCK PLANS
A total of 3,298,111 shares of Common Stock are available for grants to
officers and key employees of options, and rights to purchase shares, under
the Executive Long-Term Incentive Compensation Plan at March 31, 1997. The
Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options,
Stock Appreciation Rights, Restricted Stock, Performance Shares, and
Performance Units. Options to purchase shares are granted at not less than
100% of the fair market value on the date of the grant, become exercisable at
such time or times as determined when granted and expire ten years after the
date of grant. Pursuant to the program, eligible employees may be granted
rights to purchase shares of Common Stock at $1.00 per share subject to
restrictions on transfer which lapse at such times and circumstances as
specified when granted. Through March 31, 1997, a total of 112,940 rights
(including 58,700 rights granted in fiscal year 1997 with a weighted average
fair value of $23.78 per right) have been granted to purchase shares under the
Executive Long-Term Compensation Plan.
A total of 94,600 shares of Common Stock are available for grants of
options, and rights to purchase shares, to non-employee directors under the
Nonemployee Director Stock Plan at March 31, 1997. Options to purchase 600,
200, and 200 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, are fully vested and exercisable on the date of
grant and expire ten years after the date of the grant. Rights to purchase
300, 100 and 100 shares are granted on the first, second and third years,
respectively, of a Director's term, at $1.00 per share, subject to
restrictions on transfer which lapse at the end of such term. Through March
31, 1997, a total of 2,300 rights have been granted to purchase shares under
the Nonemployee Director Stock Plan.
Under the 1995 Senior Management Stock Option 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 ten years after the date
of grant.
D-18
<PAGE>
In the event of a change in control of JRM, all three programs have
provisions that may cause restrictions to lapse and accelerate the
exercisability of options outstanding.
JRM has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options, and not the fair
value accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation." Pro forma results assuming application of the fair value method
of SFAS No. 123 to JRM's stock-based awards would not be materially different
from those reported.
The following table summarizes activity for JRM's stock option plans (share
data in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
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..... 1,092 $13.47 1,078 $ 9.46 -- $ --
Issued January 31, 1995
per the terms of the
merger agreement (See
Note 3)................. -- -- -- -- 898 $ 5.70
Granted.................. 276 $24.33 388 $16.76 243 $22.63
Exercised................ (297) $ 9.56 (354) $ 4.32 (63) $ 6.81
Cancelled/forfeited...... (32) $18.91 (20) $22.63 -- --
----- ------ ----- ------ ----- ------
Outstanding, March 31.... 1,039 $17.31 1,092 $13.47 1,078 $ 9.46
===== ====== ===== ====== ===== ======
Exercisable, March 31.... 490 $13.15 557 $ 8.77 835 $ 5.62
===== ====== ===== ====== ===== ======
</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, 1997 (share data in
thousands):
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------------------------------------------------------
Weighted
Average Weighted
Range of Remaining Average
Exercise Contractual Exercise
Prices Outstanding Life Price
-------- ----------- ----------- --------
<S> <C> <C> <C>
$6.00-$9.13 242 3.7 $ 6.00
$16.69-$25.00 797 9.0 $20.74
-----
$6.00-$25.00 1,039 7.8 $17.31
=====
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
-----------------------------------------------------------------------------------------
Weighted
Range of Average
Exercise Exercise
Prices Exercisable Price
-------- ----------- --------
<S> <C> <C>
$6.00-$9.13 242 $ 6.00
$16.69-$25.00 248 $20.12
---
$6.00-$25.00 490 $13.15
===
</TABLE>
Thrift Plan
Certain employees of JRM participate in the Thrift Plan for Employees of
McDermott Incorporated and Participating Subsidiary and Affiliated Companies,
which is a defined contribution plan maintained by a subsidiary of McDermott
International. On June 5, 1995, a maximum of 5,000,000 of the authorized and
unissued shares of JRM's Common Stock was reserved for possible issuance to be
used as the JRM employer match for
D-19
<PAGE>
employee contributions to the Plan. Such employer contributions equal 50% of
the first 6% of compensation, as defined in the 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 1997 and 1996, 77,112 and 80,356 shares, respectively, were
issued as employer contributions pursuant to the Plan. At March 31, 1997 and
1996, 4,842,532 and 4,919,644 shares, respectively, remained available for
issuance.
NOTE 12--CONTINGENCIES AND COMMITMENTS
Investigations--JRM and International are conducting an internal
investigation, with the assistance of outside counsel, of allegations of
wrongdoing by a limited number of former employees of JRM and International
and by others. JRM and International notified the appropriate authorities in
April 1997. In June 1997, International received a federal grand jury subpoena
for documents relating principally to an investigation of possible anti-
competitive activity in the heavy-lift barge service business of JRM and
HeereMac. In July 1997, International received an informal request from the
Securities and Exchange Commission for the voluntary production of documents.
JRM and International are cooperating with the authorities. The allegations
which are the subject of the internal investigation, if true, and the outcome
of the grand jury proceedings, could result in civil and/or criminal
liability. At this time, JRM and International do not have sufficient
information to predict the ultimate outcome of this matter.
Litigation--JRM and certain of its officers, directors and subsidiaries are
defendants in numerous legal proceedings. Management believes that the outcome
of these proceedings will not have a material adverse effect upon the
consolidated financial position of JRM.
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, 1997 are as follows: 1998--$3,354,000; 1999--$2,104,000;
2000--$807,000; 2001--$708,000; 2002--$534,000; and thereafter--$11,018,000.
Total rental expense for fiscal years 1997, 1996 and 1995 was $67,990,000,
$66,617,000, and $79,098,000, respectively. These expense figures include
contingent rentals and are net of sublease income, both of which are not
material.
Other--JRM maintains liability and property insurance that it considers
normal in the industry. However, certain risks are either not insurable or
insurance is available only at rates which JRM considers uneconomical.
Commitments for capital expenditures amounted to approximately $19,520,000
at March 31, 1997, all of which relates to fiscal year 1998.
JRM is contingently liable under standby letters of credit totaling
$248,165,000 (including $46,249,000 issued on behalf of unconsolidated foreign
joint ventures) at March 31, 1997, issued in the normal course of business.
JRM has guaranteed $17,840,000 of loans to and $17,714,000 of standby letters
of credit issued by certain unconsolidated foreign joint ventures of JRM at
March 31, 1997.
NOTE 13--FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
The principal customers of JRM are the offshore oil, natural gas and
hydrocarbon processing industries and other marine construction companies.
These concentrations of customers may impact JRM'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. However, JRM's management
believes that the portfolio of receivables is well diversified and that such
diversification minimizes any potential credit risk. Receivables are generally
not collateralized.
JRM believes that its provision for possible losses on uncollectible
accounts receivable is adequate for its credit loss exposure. At March 31,
1997 and 1996, the allowance for possible losses deducted from Accounts
receivable-trade on the balance sheet was $3,634,000 and $584,000,
respectively.
D-20
<PAGE>
NOTE 14--INVESTMENTS
The following is a summary of available-for-sale securities at March 31,
1997:
<TABLE>
<CAPTION>
Gross Estimated
Amortized Unrealized Fair
Cost Losses Value
--------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Debt securities:
Obligations of U.S.
government agencies...... $ 55,552 $ 36 $ 55,516
Other debt securities..... 61,150 -- 61,150
-------- ------ --------
Total debt securities... 116,702 36 116,666
-------- ------ --------
Equity securities........... 2,009 1,015 994
-------- ------ --------
Total....................... $118,711 $1,051 $117,660
======== ====== ========
</TABLE>
The amortized cost and estimated fair value amounts of debt securities above
include $41,150,000 in other debt securities which are reported as cash
equivalents.
Proceeds and gross realized gains on sales of available-for-sale securities
were approximately $4,589,000 and $20,000, respectively, for fiscal year 1997.
At March 31, 1997, all of JRM's available-for-sale debt securities were due in
one year or less.
NOTE 15--DERIVATIVE FINANCIAL INSTRUMENTS
JRM operates internationally, 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. JRM 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, 1997, JRM had forward exchange contracts to purchase $66,969,000 in
foreign currencies (primarily Pound Sterling), and to sell $257,000 in foreign
currencies (primarily Singapore Dollars), at varying maturities through fiscal
year 1998. At March 31, 1996, JRM had forward exchange contracts to purchase
$6,766,000 in foreign currencies (primarily Pound Sterling), and to sell
$59,690,000 in foreign currencies (primarily Dutch Guilders, Saudi Riyals and
Pound Sterling), at varying maturities through fiscal year 1997.
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 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, 1997 and 1996, JRM had deferred gains of $2,127,000 and
$123,000, respectively, and deferred losses of $46,000 and $18,000,
respectively, related to forward exchange contracts which will primarily be
recognized in accordance with the percentage of completion method of
accounting.
JRM 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 the counterparties. The amount of such exposure is
generally the unrealized gains in such contracts.
D-21
<PAGE>
NOTE 16--FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by JRM 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.
Investment securities: 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. The carrying amounts for investments are their
estimated fair values (see Note 14).
Note receivable from an unconsolidated affiliate: It was not practicable to
estimate the fair value of JRM's 7.75% Note Receivable from the HeereMac joint
venture because there are no quoted market prices and the time of its
settlement cannot yet be determined.
Long and short-term debt: The fair values of debt instruments are based on
quoted market prices or where quoted prices are not available, on the present
value of 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. At March 31, 1997 and 1996, JRM had total debt
(excluding capitalized leases and notes payable to McDermott International)
with carrying values of $369,262,000 and $194,264,000 and fair values of
$387,322,000 and $207,700,000, respectively.
Note payable to McDermott International: The fair value of JRM's note
payable to McDermott International was calculated using estimated prices based
on current yields for debt issues of similar quality and terms. At March 31,
1996, JRM's note payable to McDermott International had a carrying value of
$231,000,000 which approximated fair value.
Foreign currency exchange contracts: The fair values of foreign currency
forward exchange contracts are estimated by obtaining quotes from brokers. JRM
had net forward exchange contracts to purchase foreign currencies with
notional values of $66,712,000 and fair values of $67,107,000 at March 31,
1997 and to sell foreign currencies with notional values of $52,924,000 and
fair values of $50,022,000, at March 31, 1996.
NOTE 17--SEGMENT REPORTING
JRM operates in a single business segment and supplies worldwide services
for the offshore oil, natural gas and hydrocarbon processing industries, and
to other marine construction companies. Principal activities include the
design, engineering, fabrication and installation of marine pipelines and
offshore structures and subsea production systems for development drilling and
production, transportation of oil and gas and onshore construction and
maintenance services. JRM also provides vessel chartering operations,
principally to its unconsolidated affiliates.
JRM does not believe it is dependent on any one customer. Sales to major
customers that exceeded 10% of revenues were: 1997--customer A $235,590,000
(17%), customer B $153,274,000 (11%); 1996--customer A $190,000,000 (15%),
customer B $198,453,000 (16%); and 1995--customer A $118,820,000 (11%).
At March 31, 1997 and 1996 receivables of $4,388,000 and $6,824,000,
respectively, were due from minority shareholders participating in JRM's
consolidated joint ventures, primarily ETPM S.A. In fiscal years 1997, 1996
and 1995 equipment charters and overhead expenses of $3,995,000, $4,118,000
and $4,938,000, respectively, were charged by ETPM S.A. to the McDermott-ETPM
joint venture.
D-22
<PAGE>
Information about JRM's Operations in Different Geographic Areas.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
REVENUES(1)
United States............................. $ 563,809 $ 392,290 $ 349,186
Europe and West Africa.................... 377,631 483,317 322,817
Middle East............................... 196,285 142,931 129,010
Far East.................................. 222,427 206,629 326,307
Other Foreign (including transfer
eliminations)............................ 7,435 2,674 --
---------- ---------- ----------
Total Revenues........................ $1,367,587 $1,227,841 $1,127,320
========== ========== ==========
OPERATING INCOME
Operating Income (Loss) by Geographic
Area(2):
United States........................... $ 9,797 $ 11,285 $ (6,977)
Europe and West Africa.................. (1,193) 25,756 24,024
Middle East............................. 3,908 (886) 18,038
Far East................................ (4,969) 2,062 38,931
Other Foreign(3)........................ 34,202 1,126 (1,478)
---------- ---------- ----------
Total Operating Income by Geographic
Area................................. 41,745 39,343 72,538
---------- ---------- ----------
Total Equity in Income (Loss) of
Investees................................ (8,064) 9,124 22,857
---------- ---------- ----------
General Corporate Expenses(2)............. (16,610) (12,014) (11,406)
---------- ---------- ----------
Total Operating Income................ $ 17,071 $ 36,453 $ 83,989
========== ========== ==========
IDENTIFIABLE ASSETS
United States........................... $ 468,410 $ 448,397 $ 312,131
Europe and West Africa.................. 439,781 541,361 609,618
Middle East............................. 153,208 141,568 206,463
Far East................................ 188,937 237,820 271,233
Other Foreign........................... 26,079 12,715 --
Corporate............................... 183,253 155,884 82,817
---------- ---------- ----------
Total................................. $1,459,668 $1,537,745 $1,482,262
========== ========== ==========
</TABLE>
- --------
(1) Net of inter-geographic area revenues in fiscal years 1997, 1996 and 1995
as follows: United States-- $15,138,000, $23,426,000 and $4,820,000;
Europe and West Africa--$1,139,000, $1,058,000 and $5,074,000; Middle
East--$1,265,000, $14,589,000 and $36,802,000; Far East--$680,000,
$477,000 and $341,000; and Other Foreign--$3,666,000, $11,022,000 and
$26,259,000.
(2) Fiscal years 1996 and 1995 have been restated to conform to the 1997
presentation which includes gains and losses on asset disposals and
impairments in Operating Income. This restatement increased Operating
Income by Geographic Area and Total Operating Income by $6,191,000 and
$5,572,000 in fiscal years 1996 and 1995, respectively, from amounts
previously reported.
(3)Includes a gain on the sale of two derrick barges of $30,232,000 in fiscal
year 1997.
D-23
<PAGE>
NOTE 18--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial
information for the fiscal years ended March 31,1997 and 1996. Operating
income (loss) includes gains and losses on asset disposals and impairments to
conform with the presentation in the Consolidated Statement of Income (Loss).
<TABLE>
<CAPTION>
1997
---------------------------------------------
Quarter Ended
---------------------------------------------
June 30, September 30, December 31, March 31,
1996 1996 1996 1997
-------- ------------- ------------ ---------
(In thousands)
<S> <C> <C> <C> <C>
Revenues........................ $389,189 $368,055 $316,899 $293,444
Operating income (loss)......... 12,807 907 48,443 (45,086)
Net income (loss)............... 5,635 (12,637) 38,857 (43,681)
Primary and Fully Diluted
Earnings (Loss) per Share...... 0.09 (0.36) 0.83 (1.12)
</TABLE>
Quarterly results have been restated to reflect the discontinuance of the
equity method for JRM's investment in HeereMac. This restatement reduced
operating income by $7,894,000 and $26,388,000 and net income by $6,798,000
($0.17 per share) and $25,308,000 ($0.63 per share) for the quarters ended
June 30 and September 30, respectively, and increased operating income by
$10,052,000 and net income by $11,307,000 ($0.24 per share) for the quarter
ended December 31. Pretax results for the quarter ended December 31, 1996
include gains on asset disposals of $42,128,000, including realization of
$12,271,000 of the deferred gain on the sale of major marine vessels to
HeereMac, and favorable workers' compensation adjustments of $5,693,000.
Pretax results for the quarter ended March 31, 1997 include gains on asset
disposals of $17,220,000, asset impairment losses of $31,390,000 and a
$4,889,000 provision for employee severance costs.
<TABLE>
<CAPTION>
1996
---------------------------------------------
Quarter Ended
---------------------------------------------
June 30, September 30, December 31, March 31,
1995 1995 1995 1996
-------- ------------- ------------ ---------
(In thousands)
<S> <C> <C> <C> <C>
Revenues........................ $311,803 $355,957 $272,236 $287,845
Operating income (loss)......... 13,357 20,294 17,836 (15,034)
Net income (loss)............... 3,267 9,099 6,110 (18,289)
Primary and Fully Diluted
Earnings (Loss) per Share...... 0.03 0.18 0.11 (0.50)
</TABLE>
D-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
J. Ray McDermott, S.A.
We have audited the accompanying consolidated balance sheet of J. Ray
McDermott, S.A. as of March 31, 1998 and 1997, and the related consolidated
statements of income (loss), stockholders' equity and cash flows for each of
the three 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 J. Ray
McDermott, S.A. at March 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
New Orleans, Louisiana
May 19, 1998, except for
the fifth and sixth
paragraphs of Note 11, as
to which the date is June
1, 1998
D-25
<PAGE>
J. RAY McDERMOTT, S.A.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
ASSETS ---------- ----------
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................ $ 152,011 $ 136,795
Short-term investments in debt securities............ -- 75,516
Accounts receivable--trade........................... 227,538 266,705
Accounts receivable--unconsolidated affiliates....... 45,072 58,776
Accounts receivable--other........................... 26,327 32,392
Contracts in progress................................ 71,084 81,689
Other current assets................................. 45,634 39,937
---------- ----------
Total Current Assets............................... 567,666 691,810
---------- ----------
Property, Plant and Equipment, at Cost:
Land................................................. 20,851 20,839
Buildings............................................ 80,668 78,962
Machinery and equipment.............................. 1,070,640 1,081,532
Property under construction.......................... 10,289 18,885
---------- ----------
1,182,448 1,200,218
Less accumulated depreciation........................ 839,298 819,087
Net Property, Plant and Equipment...................... 343,150 381,131
---------- ----------
Investments in Debt Securities......................... 543,658 --
---------- ----------
Excess of Cost Over Fair Value of Net Assets of
Purchased Businesses Less Accumulated Amortization of
$8,542,000 at March 31, 1998 and $53,563,000 at March
31, 1997.............................................. 22,153 304,018
---------- ----------
Investment in Unconsolidated Affiliates................ 29,069 72,712
---------- ----------
Other Assets........................................... 43,024 57,121
---------- ----------
TOTAL.............................................. $1,548,720 $1,506,792
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term
debt................................................ $ 31,272 $ 115,565
Accounts payable..................................... 162,792 147,859
Accounts payable to McDermott International.......... 8,388 5,178
Notes payable to McDermott International............. -- 9,040
Accrued contract costs............................... 88,518 63,586
Accrued liabilities--other........................... 110,345 93,710
Advance billings on contracts........................ 91,549 93,069
Accrued employee benefits............................ 44,572 22,083
U.S. and foreign income taxes........................ 23,057 22,282
---------- ----------
Total Current Liabilities.......................... 560,493 572,372
---------- ----------
Long-Term Debt......................................... 245,822 275,487
---------- ----------
Deferred and Non-Current Income Taxes.................. 46,989 42,556
---------- ----------
Other Liabilities...................................... 78,854 65,398
---------- ----------
Contingencies..........................................
---------- ----------
Stockholders' Equity:
Preferred Stock, authorized 10,000,000 shares;
outstanding 3,200,000 shares Series A $2.25
cumulative convertible, par value $.01 per share,
(liquidation preference $160,000,000)............... 32 32
Common stock, par value $0.01 per share, authorized
60,000,000 shares; issued 41,130,328 at March 31,
1998 and 40,617,792 at March 31, 1997............... 411 406
Capital in excess of par value....................... 615,515 619,020
Retained Earnings (Deficit).......................... 35,103 (47,032)
Currency translation adjustments..................... (20,962) (21,447)
Treasury stock at cost; 362,500 shares at March 31,
1998................................................ (13,537) --
---------- ----------
Total Stockholders' Equity......................... 616,562 550,979
---------- ----------
TOTAL.............................................. $1,548,720 $1,506,792
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
D-26
<PAGE>
J. RAY McDERMOTT, S.A.
CONSOLIDATED STATEMENT OF INCOME (LOSS)
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Revenues.................................. $1,855,486 $1,408,469 $1,259,451
---------- ---------- ----------
Costs and Expenses:
Cost of operations (excluding
depreciation and amortization)......... 1,555,272 1,190,321 1,022,532
Depreciation and amortization........... 93,843 99,675 86,400
Selling, general and administrative
expenses............................... 112,313 124,264 125,619
---------- ---------- ----------
1,761,428 1,414,260 1,234,551
---------- ---------- ----------
Gain (Loss) on Asset Disposals and
Impairments--Net......................... (40,119) 29,021 2,530
---------- ---------- ----------
Operating Income before Income (Loss) from
Investees................................ 53,939 23,230 27,430
Income (Loss) from Investees.............. 70,236 (7,833) 9,124
---------- ---------- ----------
Operating Income........................ 124,175 15,397 36,554
---------- ---------- ----------
Other Income (Expense):
Interest income......................... 26,252 16,558 6,092
Interest expense........................ (30,793) (41,578) (43,307)
Other--net.............................. 4,177 8,455 5,058
---------- ---------- ----------
(364) (16,565) (32,157)
---------- ---------- ----------
Income (Loss) before Provision for Income
Taxes.................................... 123,811 (1,168) 4,397
Provision for Income Taxes................ 34,851 11,732 5,677
---------- ---------- ----------
Net Income (Loss)......................... $ 88,960 $ (12,900) $ (1,280)
========== ========== ==========
Net Income (Loss) Applicable to Common
Stock (after Preferred Stock Dividends).. $ 81,760 $ (20,100) $ (8,991)
========== ========== ==========
Earnings (loss) per common share:
Basic................................... $ 2.00 $ (0.50) $ (0.23)
Diluted................................. $ 1.89 $ (0.50) $ (0.23)
========== ========== ==========
Cash Dividends:
Per preferred share..................... $ 2.25 $ 2.25 $ 2.25
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
D-27
<PAGE>
J. RAY McDERMOTT, S.A.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1998
(In thousands, except for share amounts)
<TABLE>
<CAPTION>
Preferred Stock
---------------------------------------
Series A Series B Common Stock
------------------- ------------------- ----------------- Capital In Retained Currency
Par Excess Of Earnings Translation Treasury
Shares Par Value Shares Par Value Shares Value Par Value (Deficit) Adjustments Stock Total
--------- --------- -------- --------- ---------- ----- ---------- --------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance March
31, 1995 ....... 3,200,000 $32 458,632 $ 5 38,649,349 $386 $580,279 $(6,598) $(14,633) $ -- $559,471
--------- --- -------- --- ---------- ---- -------- ------- -------- -------- --------
Acquisitions
(See Note 2).... -- -- -- -- -- -- 24,587 (11,028) 737 -- 14,296
--------- --- -------- --- ---------- ---- -------- ------- -------- -------- --------
Balance March
31, 1995, as
restated........ 3,200,000 32 458,632 5 38,649,349 386 604,866 (17,626) (13,896) -- 573,767
--------- --- -------- --- ---------- ---- -------- ------- -------- -------- --------
Net loss........ -- -- -- -- -- -- -- (1,280) -- -- (1,280)
Preferred
dividends....... -- -- -- -- -- -- -- (7,711) -- -- (7,711)
Preferred stock
conversion...... -- -- (458,632) (5) 1,065,193 11 (13) -- -- -- (7)
Translation
adjustments -- -- -- -- -- -- -- -- 737 -- 737
Exercise of
stock options... -- -- -- -- 353,978 4 1,527 -- -- -- 1,531
Tax benefit on
exercise of
stock options... -- -- -- -- -- -- 2,629 -- -- -- 2,629
Restricted stock
purchases--net.. -- -- -- -- 49,070 -- 39 -- -- -- 39
Contributions to
thrift plan..... -- -- -- -- 80,356 1 1,585 -- -- -- 1,586
Deferred career
excessive stock
plan expense.... -- -- -- -- -- -- 148 -- -- -- 148
Loss on
investments..... -- -- -- -- -- -- -- (452) -- -- (452)
Minimum pension
liability....... -- -- -- -- -- -- -- (2) -- -- (2)
Division of
McDermott
International
pension plan.... -- -- -- -- -- -- (4,585) -- -- -- (4,585)
Acquisition of
net assets from
International... -- -- -- -- -- -- 4,170 -- -- -- 4,170
--------- --- -------- --- ---------- ---- -------- ------- -------- -------- --------
Balance March
31, 1996........ 3,200,000 32 -- -- 40,197,946 402 610,366 (27,071) (13,159) -- 570,570
--------- --- -------- --- ---------- ---- -------- ------- -------- -------- --------
Net loss........ -- -- -- -- -- -- -- (12,900) -- -- (12,900)
Preferred
dividends....... -- -- -- -- -- -- -- (7,200) -- -- (7,200)
Translation
adjustments..... -- -- -- -- -- -- -- -- (8,288) -- (8,288)
Exercise of
stock options... -- -- -- -- 297,524 3 2,841 -- -- -- 2,844
Tax benefit on
exercise of
stock options... -- -- -- -- -- -- 1,724 -- -- -- 1,724
Restricted stock
purchases--net.. -- -- -- -- 45,210 -- (9) -- -- -- (9)
Contributions to
thrift plan..... -- -- -- -- 77,112 1 1,892 -- -- -- 1,893
Deferred career
executive stock
plan expense.... -- -- -- -- -- -- 963 -- -- -- 963
Gain on
investments..... -- -- -- -- -- -- -- 137 -- -- 137
Minimum pension
liability....... -- -- -- -- -- -- -- 2 -- -- 2
Acquisition of
net assets from
International... -- -- -- -- -- -- 1,243 -- -- -- 1,243
--------- --- -------- --- ---------- ---- -------- ------- -------- -------- --------
Balance March
31, 1997........ 3,200,000 32 -- -- 40,617,792 406 619,020 (47,032) (21,447) -- 550,979
--------- --- -------- --- ---------- ---- -------- ------- -------- -------- --------
Net loss........ -- -- -- -- -- -- -- 88,960 -- -- 88,960
Preferred
dividends....... -- -- -- -- -- -- -- (7,200) -- -- (7,200)
Translation
adjustments..... -- -- -- -- -- -- -- -- 485 -- 485
Exercise of
stock options... -- -- -- -- 442,519 4 5,595 -- -- -- 5,599
Tax benefit on
exercise of
stock options... -- -- -- -- -- -- 2,576 -- -- -- 2,576
Restricted stock
purchases--net.. -- -- -- -- (3,620) -- (30) -- -- -- (30)
Contributions to
thrift plan..... -- -- -- -- 65,727 1 2,218 -- -- -- 2,219
Deferred career
executive stock
plan expense.... -- -- -- -- -- -- 1,510 -- -- -- 1,510
Gain on
investments..... -- -- -- -- -- -- -- 375 -- -- 375
Acquisition of
net assets from
International... -- -- -- -- -- -- (15,671) -- -- -- (15,671)
Purchases of
treasury stock.. -- -- -- -- -- -- -- -- -- (13,537) (13,537)
Termination of
directors'
retirement
plan............ -- -- -- -- 7,910 -- 297 -- -- -- 297
--------- --- -------- --- ---------- ---- -------- ------- -------- -------- --------
Balance March
31, 1998........ 3,200,000 $32 -- $-- 41,130,328 $411 $615,515 $35,103 $(20,962) $(13,537) $616,562
========= === ======== === ========== ==== ======== ======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
D-28
<PAGE>
J. RAY McDERMOTT, S.A.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)............................... $ 88,960 $(12,900) $ (1,280)
--------- -------- --------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................. 93,843 99,675 86,400
Income or loss of investees, less dividends... (7,309) 7,833 (6,833)
(Gain) loss on asset disposals and
impairments--net............................. 40,119 (29,021) (2,530)
Provision for (benefit from) deferred taxes... 2,846 (7,600) (2,338)
Other......................................... 3,091 4,258 (3,461)
Changes in assets and liabilities:
Accounts receivable.......................... 55,030 (50,289) 50,870
Net contracts in progress and advance
billings.................................... 6,635 154,811 (148,553)
Accounts payable............................. 15,746 (20,759) (13,198)
Accrued contract costs....................... 24,932 (6,241) 16,217
Accrued liabilities.......................... 37,572 (13,868) (1,988)
Income taxes................................. (836) (1,498) (8,055)
Other, net................................... 11,370 (4,307) (6,633)
--------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES..................................... 371,999 120,094 (41,382)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment...... (27,145) (64,261) (46,659)
Proceeds from asset disposals................... 287,241 57,650 133,693
Purchases of investments........................ (545,066) (79,435) --
Sales and maturities of investments............. 79,290 4,569 --
Acquisition of net assets from International.... (14,543) -- --
Investment in asset held for lease.............. -- (1,821) (29,620)
Investments in equity investees................. (205) (3,908) (6,827)
Returns from investees.......................... 2,124 12,500 37,097
Deposit on equipment sale....................... -- -- 30,000
Other........................................... -- 137 (452)
--------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES..................................... (218,304) (74,569) 117,232
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt....................... $ (84,352) $(11,022) $ (5,666)
Issuance of long-term debt...................... -- 244,375 32,756
Increase (decrease) in short-term borrowing..... (26,068) (73,451) 36,530
Decrease in notes payable to McDermott
International.................................. (9,040) (229,180) (17,143)
Issuance of common stock........................ 5,599 4,569 4,197
Preferred dividends paid........................ (7,200) (7,200) (7,928)
Purchases of treasury stock..................... (13,537) -- --
Other........................................... (4,376) (4,432) (4,024)
--------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES..................................... (138,974) (76,341) 38,722
--------- -------- --------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH........ 495 701 79
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 15,216 (30,115) 114,651
--------- -------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.. 136,795 166,910 52,259
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR........ $ 152,011 $136,795 $166,910
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized).......... $ 32,620 $ 37,351 $ 42,825
Income taxes (net of refunds)................. $ 30,736 $ 22,823 $ 11,277
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
D-29
<PAGE>
J. RAY McDERMOTT, S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1998
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.
The consolidated financial statements include the accounts of JRM, and its
subsidiaries and controlled joint ventures. Investments in joint ventures and
other entities which JRM does not control, but has significant influence over,
are accounted for on the equity method. Differences between the cost of equity
method investments and the amount of underlying equity in net assets of the
investees are amortized systematically to income. All significant intercompany
transactions and accounts have been eliminated. Certain amounts previously
reported have been reclassified to conform with the presentation at March 31,
1998.
Unless the context otherwise requires, hereinafter "JRM" means J. Ray
McDermott, S.A. and its consolidated subsidiaries; "International" means
McDermott International, Inc., a Panamanian corporation that is the parent
company of the McDermott group of companies and the majority owner of JRM; and
"McDermott International" means 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.
Accounting Changes
Earnings Per Share--In December 1997, JRM adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes the dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All previously reported
earnings per share amounts have been restated to conform to the new
requirements.
Segments--During the fiscal year ended March 31, 1998, JRM adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No. 131 did not
affect results of operations or financial position, but did affect the
disclosure of segment information.
Investments
JRM'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 in
stockholders' equity. Investment securities available for current operations
are classified in the balance sheet as current assets while securities held
for long-term investment 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.
D-30
<PAGE>
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 in a separate component of equity.
Foreign currency transaction adjustments are reported in income. Included in
Other Income (Expense) are transaction gains (losses) of $4,520,000,
$1,108,000, and ($1,916,000) for fiscal years 1998, 1997 and 1996,
respectively. In fiscal year 1998, a gain of $1,005,000 was transferred from
currency translation adjustment and included in gain (loss) on asset disposals
and impairments--net due to the sale of a foreign investment.
Contracts and Revenue Recognition
Contract revenues and related costs are principally recognized on a
percentage of completion method for individual contracts or components thereof
based upon work performed or a cost to cost method, as applicable to the
product or activity involved. 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. There are no
unbilled revenues which will not 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. Certain partnering contracts
contain a risk and reward element, whereby a portion of total compensation is
tied to overall performance of the alliance partners.
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Included in Contracts in Progress are:
Costs incurred less costs of revenue recognized....... $ 20,028 $ 59,449
Revenues recognized less billings to customers........ 51,056 22,240
-------- --------
Contracts in Progress................................. $ 71,084 $ 81,689
======== ========
Included in Advance Billings on Contracts are:
Billings to customers less revenues recognized........ $106,470 $129,627
Costs incurred less costs of revenue recognized....... (14,921) (36,558)
-------- --------
Advance Billings on Contracts......................... $ 91,549 $ 93,069
======== ========
</TABLE>
Included in accounts receivable--trade are amounts representing retainages
on contracts as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Retainages.............................................. $ 14,945 $ 13,693
======== ========
</TABLE>
All of the 1998 retainages are expected to be collected within the next
year.
Depreciation, Maintenance and Repairs and Drydocking Expenses
Except for major marine vessels, property, plant and equipment is
depreciated on the straight-line method, using estimated economic useful lives
of 8 to 30 years for buildings and 2 to 20 years for machinery and equipment.
Major marine vessels are depreciated on the units-of-production method based
on the utilization of
D-31
<PAGE>
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.
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, and such accruals are charged to operations currently.
Amortization of Excess Cost Over Fair Value of Net Assets of Purchased
Businesses
Excess of cost over fair value of net assets of purchased businesses at
March 31, 1998 primarily pertains to the acquisitions of Talleres Navales del
Golfo, S.A. de C.V. and Northern Ocean Services Limited and is being amortized
on a straight-line basis over 10 years. Management periodically reviews
goodwill to assess recoverability, and impairments would be recognized in
operating results if a permanent diminution in value were to occur. During
fiscal year 1998, management concluded goodwill associated with the
acquisition of Offshore Pipelines, Inc. ("OPI") in 1995 no longer had value
and recorded a charge for the remaining goodwill of $262,901,000 (see Note 8).
Capitalization of Interest Cost
In fiscal years 1998, 1997 and 1996, total interest cost incurred was
$31,687,000, $42,295,000 and $44,632,000, respectively, of which $894,000,
$717,000 and $1,325,000, 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
Derivatives, primarily forward exchange contracts, are utilized to minimize
exposure and reduce risk from foreign exchange fluctuations in the regular
course of business. Gains and losses relating to qualifying hedges of firm
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
JRM 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.
NOTE 2--ACQUISITIONS
During fiscal year 1998, JRM acquired 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, from
International for an aggregate purchase price of $14,543,000. These
acquisitions have been accounted for in a manner similar to a pooling of
interests and accordingly, the consolidated financial statements have been
restated.
D-32
<PAGE>
The restatement effects for periods prior to acquisition are:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In thousands, except
per share amounts)
<S> <C> <C> <C>
Revenues....................................... $30,947 $40,882 $31,610
Operating Income (Loss)........................ 690 (1,674) 101
Net Income (Loss).............................. 2,873 (1,074) (1,467)
Earnings (loss) per share:
Basic........................................ $ 0.07 $ (0.03) $ (0.04)
Diluted...................................... $ 0.06 $ (0.03) $ (0.04)
</TABLE>
NOTE 3--INVESTMENT IN UNCONSOLIDATED AFFILIATES
Transactions with unconsolidated affiliates included sales to ($140,389,000,
$110,150,000 and $134,358,000 in fiscal years 1998, 1997 and 1996,
respectively, including approximately $10,491,000, $9,609,000 and $44,491,000,
respectively, attributable to leasing activities) and purchases from
($17,003,000, $8,765,000, and $9,054,000 in fiscal years 1998, 1997 and 1996,
respectively) these entities. Included in accounts payable at March 31, 1998
and 1997 were $16,959,000 and $11,792,000, respectively, of payables to
unconsolidated affiliates.
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, and Heerema had
responsibility for its day-to-day operations. Pursuant to the termination,
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,
including two launch barges and the derrick barge 101, a 3,500-ton lift
capacity, semi-submersible derrick barge. The consideration received included
a distribution of earnings of the HeereMac joint venture and payment of
principal and interest under a promissory note previously due to JRM
(approximately $100,000,000). As a result of the termination, a gain on asset
disposal of $224,472,000 and a distribution of earnings of $61,637,000 were
recorded.
During fiscal year 1997, JRM changed from the equity to the cost method of
accounting for its investment in the HeereMac joint venture as a result of
JRM's determination that it was unable to exercise significant influence over
HeereMac's operating and financial policies. Equity income of HeereMac was
$1,083,000 in fiscal year 1996.
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. 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
and recorded a deferred gain of $103,239,000, which was being amortized over
HeereMac's depreciable lives of the vessels prior to the change to the cost
method of accounting for JRM's investment in HeereMac. Subsequent to the
change, the deferred gain was recognized by JRM as the note was repaid. The
note receivable ($92,500,000 at March 31, 1997), net of the deferred gain
($90,803,000 at March 31, 1997) was included in investment in unconsolidated
affiliates. In addition to the vessel sale in fiscal year 1996, JRM received
$37,097,000 as a return of capital from the HeereMac joint venture.
At March 31, 1998 and 1997, property, plant and equipment included
$137,513,000 and $141,409,000, and accumulated depreciation included
$113,528,000 and $102,242,000, respectively, of marine equipment that is
leased to unconsolidated investees. Dividends received from unconsolidated
investees accounted for by the equity method were $1,290,000 and $2,291,000 in
fiscal years 1998 and 1996, respectively. Undistributed earnings in
unconsolidated affiliates accounted for by the equity method were $16,238,000
and $12,937,000, respectively, at March 31, 1998 and 1997.
D-33
<PAGE>
Summarized combined balance sheet and income statement information, based on
the most recent financial information, for investments in entities accounted
for by the equity method are presented below:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Current Assets......................................... $502,576 $284,726
Non-Current Assets..................................... 96,138 77,648
-------- --------
Total Assets......................................... $598,714 $362,374
-------- --------
Current Liabilities.................................... $520,799 $299,803
Non-Current Liabilities................................ 9,649 6,304
Owners' Equity......................................... 68,266 56,267
-------- --------
Total Liabilities and Owners' Equity................... $598,714 $362,374
======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- --------
(In thousands)
<S> <C> <C> <C>
Revenues................................... $1,091,056 $827,269 $907,151
---------- -------- --------
Gross Profit............................... $ 103,780 $ 63,014 $203,102
Income (Loss) before Provision for Income
Taxes..................................... $ 44,644 $ (5,504) $ 16,396
Provision for Income Taxes................. 22,003 7,227 2,297
Net Income (Loss).......................... $ 22,641 $(12,731) $ 14,099
========== ======== ========
</TABLE>
Subsequent Events--On April 3, 1998, JRM and ETPM S.A. terminated their
worldwide McDermott-ETPM joint venture. Pursuant to the termination, JRM
received net cash of approximately $105,000,000 and ETPM, S.A.'s derrick/lay
barge 1601 and minority ownership in McDermott-ETPM East, Inc. and McDermott-
ETPM Far East, Inc. ETPM S.A. received JRM's lay barge 200 and ownership in
McDermott Subsea Constructors Limited and McDermott-ETPM West, Inc. The
Consolidated Statement of Income (Loss) for fiscal years 1998, 1997, and 1996,
respectively, includes revenues of $74,096,000, $44,033,000 and $23,290,000
and operating income (loss) of $18,751,000, ($22,956,000) and ($1,086,000)
attributable to operations transferred to ETPM S.A..
Subsequent to the fiscal year end, 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 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 JRM is not subject to income tax in Panama on income
earned outside of Panama. Therefore, there is no expected relationship between
the provision for income taxes and income 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 (not only
with respect to nominal rate but also with respect to the allowability of
deductions, credits and other benefits) and 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. JRM and certain of its subsidiaries keep
books and file tax returns on the completed contract method of accounting.
D-34
<PAGE>
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, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Accrued liabilities for self-insurance (including
postretirement health care benefits).................... $ 8,324 $ 7,127
Accrued liabilities for executive and employee incentive
compensation............................................ 4,403 2,043
Long-term contracts...................................... 618 3,176
Accrued pension liability................................ 6,386 4,125
Accrued drydock liability................................ 1,966 2,219
Investments in joint ventures and affiliated companies... 2,539 1,599
Operating loss carryforwards............................. 18,032 32,595
Property, plant and equipment............................ 664 1,036
Accrued vacation pay..................................... 1,274 1,041
Other.................................................... 5,960 5,036
-------- --------
Total deferred tax assets.............................. 50,166 59,997
-------- --------
Valuation allowance for deferred tax assets.............. (17,196) (19,136)
Total deferred tax assets.............................. 32,970 40,861
-------- --------
Deferred tax liabilities:
Property, plant and equipment............................ 21,859 31,105
Long-term contracts...................................... 4,270 4,394
Prepaid pension costs.................................... 3,388 1,488
Other.................................................... 1,491 1,583
-------- --------
Total deferred tax liabilities......................... 31,008 38,570
-------- --------
Net deferred tax assets................................ $ 1,962 $ 2,291
======== ========
</TABLE>
Income (loss) before provision for income taxes was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
U.S........................................ $(202,388) $ (5,675) $ 141
Other than U.S............................. 326,199 4,507 4,256
--------- --------- --------
$ 123,811 $ (1,168) $ 4,397
========= ========= ========
</TABLE>
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Current:
U.S.--Federal............................... $26,985 $15,568 $ 1,512
U.S.--State and local....................... 2,846 (366) --
Other than U.S.............................. 2,174 4,130 6,503
------- ------- -------
Total current............................. 32,005 19,332 8,015
------- ------- -------
Deferred:
U.S.--Federal............................... (1,564) (6,080) 5,426
U.S.--State and local....................... 178 (2,585) --
Other than U.S.............................. 4,232 1,065 (7,764)
------- ------- -------
Total deferred............................ 2,846 (7,600) (2,338)
------- ------- -------
Provision for Income Taxes.................... $34,851 $11,732 $ 5,677
======= ======= =======
</TABLE>
D-35
<PAGE>
The current provision for other than U.S. income taxes in 1998, 1997 and
1996 includes a reduction of $10,427,000, $2,021,000 and $3,763,000,
respectively, for the benefit of net operating loss carryforwards. Initial
recognition of OPI pre-acquisition tax benefits in fiscal year 1997 resulted
in a reduction of excess cost over fair value of assets acquired of
$3,115,000.
JRM has provided a valuation allowance ($17,196,000 at March 31, 1998) 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 are realizable through carrybacks and future
reversals of existing taxable temporary differences and future taxable income.
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.
JRM would be subject to U.S. withholding taxes on distributions of earnings
from its U.S. subsidiaries. No U.S. withholding taxes have been provided as
these earnings are considered indefinitely reinvested.
NOTE 5--RELATED PARTY TRANSACTIONS
Transactions with subsidiaries, divisions and controlled joint ventures of
McDermott International that are not disclosed elsewhere, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Sale of marine construction services............. $22,173 $31,970 $45,226
Purchase of other services....................... 8,878 16,256 24,269
Insurance premiums............................... 8,072 8,012 12,908
Pension benefit.................................. 1,120 1,094 843
Corporate administrative expense................. 13,148 11,900 11,900
Other administrative expense..................... 5,197 6,629 6,615
Interest income.................................. -- -- 787
Interest expense................................. 97 6,655 21,831
</TABLE>
During fiscal year 1997, JRM paid a $231,000,000 note payable to
International and purchased from International certain diving support
equipment and systems for $3,573,000 and nine cranes for use in JRM's
fabrication and construction activities for $8,295,000. During fiscal year
1998, a tax adjustment of $1,128,000 on the above purchase was included in
Capital in Excess of Par Value.
Under a non-competition agreement entered into in connection with the
acquisition of OPI, a director who resigned in April 1996 received $1,500,000
in fiscal years 1998, 1997 and 1996 and will receive additional payments of
$1,500,000 per year over the next two years.
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 years 1997 and 1996, the affiliate paid $216,000 and
$185,000, respectively, under the sublease. Under another agreement, JRM paid
$576,000 to the affiliate in each of fiscal years 1997 and 1996 and reimbursed
the affiliate for out-of-pocket expenses for the management and operation of
JRM's offshore producing oil and gas property. Also during fiscal year 1996,
JRM fabricated a caisson for the affiliate for $84,000. In addition, JRM
received approximately $2,000,000 from the affiliate during fiscal year 1996
pursuant to a contract to refurbish, transport and install an offshore jacket
and deck.
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 paid $2,036,000 to the affiliate under the agreements in connection with
the acquisition of its interests and
D-36
<PAGE>
the development of such 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. Pursuant to the
terms of the agreements entered into in connection with such sale, JRM
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 on production and JRM earned approximately $1,262,000,
$1,093,000 and $179,000 in fiscal years 1998, 1997 and 1996, respectively,
under these agreements. 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 or 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.
McDermott International provides administrative services to JRM under a
service agreement. These services include, but are not limited to: accounting,
treasury, tax administration and other financial services; human relations;
public relations; corporate secretarial; and corporate officer services. The
cost of these services to JRM was $13,148,000, $11,900,000 and $11,900,000 for
fiscal years 1998, 1997 and 1996, respectively. McDermott International also
provides other administrative services which are billed directly to JRM. These
services include, but are not limited to, telecommunications and automation.
The cost of these services to JRM was $5,197,000, $6,629,000 (including
$2,087,000 for corporate officer severance) and $6,615,000 for fiscal years
1998, 1997 and 1996, respectively.
Certain officers and employees of JRM participate in certain benefit plans
which involve the issuance of International Common Stock.
NOTE 6--NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Long-term debt consists of:
Unsecured debt:
9.375% Senior Subordinated Notes due 2006 ($250,000,000
principal amount)......................................... $244,986 $244,610
12.875% Guaranteed Senior Notes due 2002 ($70,000,000
principal amount)-- redeemed July 1997.................... -- 73,958
Other notes payable........................................ 16,454 17,905
Secured debt:
Floating rate notes, interest at one month LIBOR plus 2%
(7.75% at
March 31, 1998) due 1999.................................. 4,503 12,693
Capitalized Lease Obligations.............................. 8,900 13,276
-------- --------
274,843 362,442
Less amounts due within one year............................. 29,021 86,955
-------- --------
$245,822 $275,487
======== ========
</TABLE>
Notes payable and current maturities of long-term debt consist of:
<TABLE>
<CAPTION>
1998 1997
------- --------
(In thousands)
<S> <C> <C>
Short-term lines of credit--unsecured....................... $ 2,251 $ 28,610
Current maturities of long-term debt........................ 29,021 86,955
------- --------
$31,272 $115,565
======= ========
Weighted average interest rate on short-term borrowings..... 7.69% 6.95%
======= ========
</TABLE>
D-37
<PAGE>
During fiscal year 1997, JRM issued $250,000,000 principal amount 9.375%
Senior Subordinated Notes due 2006 ("9.375% Notes"). The 9.375% Notes are
redeemable, for cash, at the option of JRM in whole or in part, at any time on
or after July 15, 2001 at a price of 104.688% of the principal amount, and
thereafter at prices declining annually to 100% of the principal amount on or
after July 15, 2004.
Maturities of long-term debt during the five fiscal years subsequent to
March 31, 1998 are as follows: 1999--$29,021,000; 2000--$721,000; 2001--
$38,000; 2002--$38,000; 2003--$39,000.
At March 31, 1998 and 1997, JRM had available various uncommitted short-term
lines of credit from banks totaling $25,234,000 and $43,091,000, respectively.
Borrowings by JRM against these lines of credit at March 31, 1998 and 1997
were $2,251,000 and $28,610,000, respectively. JRM is also a party to an
unsecured and committed revolving credit facility (the "JRM Revolver"). There
were no borrowings outstanding at March 31, 1998 and 1997 under the JRM
Revolver. As a condition to borrowing under the JRM Revolver, JRM must comply
with certain covenant requirements. Presently, JRM cannot satisfy these
requirements and cannot borrow under the JRM Revolver. The JRM Revolver also
limits the amount of funds which JRM can borrow from other sources and JRM is
presently at these limits. The JRM Revolver will expire on June 8, 1998. JRM
is currently negotiating a new three year unsecured committed revolving credit
and letter of credit facility.
JRM is restricted, as a result of covenants in its indenture relating to its
9.375% Notes, from paying cash dividends on, or repurchasing or redeeming, its
capital stock (including the shares of Common Stock and Series A Preferred
Stock held by International), or in transferring funds through unsecured loans
to or investments in International. At March 31, 1998, JRM could pay cash
dividends on, or repurchase shares of, its capital stock (including shares
held by International) in the amount of $37,633,000, could pay up to an
additional $9,600,000 of cash dividends on its Series A Preferred Stock held
by International, and could make unsecured loans to or investments in
International of approximately $30,000,000. Additionally under such indenture,
JRM is required to offer to purchase its outstanding 9.375% 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 $240,000,000 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.
NOTE 7--PENSION PLANS AND POSTRETIREMENT BENEFITS
Pension Plans--JRM provides retirement benefits through employee
participation in two non-contributory pension plans for substantially all of
its salaried employees, except 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 or the United Kingdom. Plan benefits are
based on final average compensation and years of service. JRM's funding policy
is to fund the applicable pension plan to meet minimum funding requirements of
the Employee Retirement Income Security Act of 1974 and to fund the other
pension plan as recommended by the respective plan actuary in accordance with
applicable law. At January 1, 1998 and 1997, approximately one-half of total
plan assets were invested in listed stocks and bonds. The remaining assets
were held in foreign equity funds, U.S. Government securities and investments
of a short-term nature.
JRM also provides benefits to employees in the United Kingdom through
participation of certain of its subsidiaries and affiliated companies in a
contributory pension plan sponsored by McDermott International.
D-38
<PAGE>
U.S. Pension Plans
The net periodic pension cost for fiscal years 1998, 1997 and 1996 included
the following components:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Service cost--benefits earned during the
period.................................... $ 5,246 $ 4,927 $ 2,976
Interest cost on projected benefit
obligation................................ 5,264 4,263 3,533
Actual return on plan assets............... (11,039) (5,841) (6,484)
Net amortization and deferral.............. 6,555 1,857 2,286
-------- ------- -------
Net periodic pension cost.................. $ 6,026 $ 5,206 $ 2,311
======== ======= =======
</TABLE>
The following table sets forth the U.S. plans' funded status and the amounts
recognized in the consolidated financial statements:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation......................... $ 44,974 $ 35,218
======== ========
Accumulated benefit obligation.................... $ 56,494 $ 43,903
======== ========
Projected benefit obligation...................... $ 85,017 $ 65,480
Plan assets at fair value........................... 64,231 52,582
-------- --------
Projected benefit obligation in excess of plan
assets............................................. (20,786) (12,898)
Unrecognized net loss............................... 12,790 10,701
Adjustment required to recognize minimum liability.. -- (41)
Unrecognized prior service cost..................... (8,044) (8,684)
Unrecognized transition asset....................... (949) (1,261)
-------- --------
Net pension liability............................... $(16,989) $(12,183)
======== ========
</TABLE>
The assumptions used in determining the funded status of the U.S. plans
were:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Actuarial assumptions:
Discount rate......................................... 7.0% 7.5% 7.25%
=== === ====
Rate of increase in future compensation levels........ 4.5% 5.0% 5.0%
=== === ====
Expected long-term rate of return on plan assets...... 8.5% 8.5% 8.5%
=== === ====
</TABLE>
In February 1998, JRM terminated its Retirement Plan for Non-Management
Directors and issued 7,910 shares of JRM's Common Stock to the participants in
that plan in full satisfaction of their accrued benefits under the terminated
plan.
Non-U.S. Pension Plan
The net periodic pension cost (benefit) for fiscal years 1998, 1997 and 1996
included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------- ----- -------
(In thousands)
<S> <C> <C> <C>
Service cost--benefits earned during the
period....................................... $ 434 $ 459 $ 332
Interest cost on projected benefit
obligation................................... 833 766 829
Actual return on plan assets.................. (1,822) (756) (1,046)
Net amortization and deferral................. 591 (403) 30
------- ----- -------
Net periodic pension cost..................... $ 36 $ 66 $ 145
======= ===== =======
</TABLE>
D-39
<PAGE>
The following table sets forth the non-U.S. plan's funded status and the
amounts recognized in the consolidated financial statements:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation........................... $ 9,500 $ 8,198
======= =======
Accumulated benefit obligation...................... $ 9,878 $ 8,594
======= =======
Projected benefit obligation........................ $12,359 $10,989
Plan assets at fair value............................. 13,950 12,328
------- -------
Plan assets in excess of projected benefit
obligation........................................... 1,591 1,339
Unrecognized net gain................................. (1,217) (831)
Unrecognized transition asset......................... (621) (719)
------- -------
Net pension liability................................. $ (247) $ (211)
======= =======
</TABLE>
The assumptions used in determining the funded status of the non-U.S. plan
were:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Actuarial assumptions:
Discount rate......................................... 7.0% 7.25% 8.25%
==== ==== ====
Rate of increase in future compensation levels........ 4.5% 5.0% 5.0%
==== ==== ====
Expected long-term rate of return on plan assets...... 8.25% 8.5% 8.5%
==== ==== ====
</TABLE>
Postretirement Health Care and Life Insurance Benefits--JRM offers
postretirement health care and life insurance benefits to substantially all of
its regular full-time employees who retire and receive retirement income from
a defined benefit pension plan funded by JRM, except certain non-resident
alien retired employees who are not citizens of a European Community country,
or who, while employed, did not earn income in the United States, Canada or
the United Kingdom. JRM shares the cost of providing these benefits, except
for certain life insurance plans, with all affected retirees. JRM does not
fund any of these plans.
The following table sets forth the amounts recognized in the consolidated
financial statements at March 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees.............................................. $ 2,156 $ 1,233
Fully eligible active participants.................... 2,668 2,467
Other active plan participants........................ 14,322 13,810
------- -------
19,146 17,510
Unrecognized net gain................................... 1,493 1,220
------- -------
Accrued postretirement benefit cost..................... $20,639 $18,730
======= =======
Weighted average discount rate.......................... 7.00% 7.50%
</TABLE>
The accumulated postretirement benefit obligation includes $18,228,000 and
$16,322,000 for health care plans and $918,000 and $1,188,000 for life
insurance plans at March 31, 1998 and 1997, respectively.
D-40
<PAGE>
Net periodic postretirement benefit cost for fiscal years 1998, 1997 and
1996 included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Service cost....................................... $1,065 $1,289 $ 767
Interest cost...................................... 1,309 1,383 1,060
Net amortization and deferral...................... (88) 150 --
------ ------ ------
Net periodic postretirement benefit cost........... $2,286 $2,822 $1,827
====== ====== ======
</TABLE>
For measurement purposes, a weighted-average annual assumed rate of increase
in the per capita cost of covered health care claims of 6 1/2% was assumed for
1998, 7 1/2% for 1997 and 10 3/4% for 1996. For 1999, a rate of 5 1/2% was
assumed. The rate was assumed to decrease gradually to 4% in 2005 and remain
at that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation as of March
31, 1998 by $3,039,000 and the aggregate of the service cost and interest cost
components of net periodic postretirement benefit cost for fiscal year 1998 by
$443,000.
Subsequent Event--Effective April 1, 1998, JRM terminated all postretirement
health care and life insurance benefits for employees. As a result of the
termination, the total accumulated postretirement benefit obligation of JRM
will decrease. On the same date, the pension plan 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. As
a result of the amendment to the plan, the total projected benefit obligation
of JRM will increase. The decrease in the accumulated postretirement benefit
obligation will be measured against the increase in the total projected
benefit obligation of the pension plan, and any resulting gain or loss will be
recognized in the first quarter of fiscal year 1999. The actuarial
calculations of the decrease in the total accumulated postretirement benefit
obligation and the increase in the projected benefit obligation of the pension
plan have not yet been finalized.
NOTE 8--IMPAIRMENT OF LONG-LIVED ASSETS
During fiscal year 1998, management concluded that the goodwill associated
with the acquisition of OPI no longer had value and recorded a charge for the
remaining goodwill of $262,901,000. The decision was based on the lack of
volume related to OPI, the departure of key OPI executives from JRM and the
disposal of significant OPI joint ventures and major OPI vessels. Annual
amortization of the OPI goodwill was approximately $21,800,000.
During fiscal years 1998 and 1997, management identified certain long-lived
assets that are no longer expected to recover their entire carrying value
through future cash flows. The assets include non-core, surplus and obsolete
property and equipment. Fair value was generally determined based on sales
prices of comparable assets. Impairment losses to write down the property,
plant and equipment to estimated fair value totaled $2,891,000 and
$19,228,000, respectively, in fiscal years 1998 and 1997.
During fiscal year 1998, management decided to sell a Floating Production,
Storage and Offloading System ("FPSO"). As a result, an impairment loss of
$7,000,000 was recognized to reduce the FPSO to its estimated fair value less
costs to sell. Prior to recognition of the impairment loss, the carrying value
of the FPSO was approximately $21,500,000. Excluding the impairment loss, net
income for fiscal year 1998 for the FPSO was $2,774,000. Management expects to
sell the FPSO within the next year.
During fiscal year 1997, management decided to sell a certain vessel and
related equipment of a non-core business and to sell or otherwise dispose of
certain other assets. As a result, impairment losses totaling $12,162,000 were
recognized to reduce the property and equipment to estimated fair values less
the costs to sell.
D-41
<PAGE>
Prior to recognition of the impairment losses, the carrying value of these
assets totaled approximately $18,950,000. Excluding the impairment losses,
results of operations for fiscal year 1997 for these assets were not material.
Substantially all of these assets were disposed of in fiscal year 1998, with
no significant gain or loss recognized.
NOTE 9--CAPITAL STOCK
At March 31, 1998 and 1997, 14,634,966 and 15,172,402 shares, respectively,
of Common Stock were reserved for issuance in connection with the possible
conversion of Series A $2.25 Cumulative Convertible Preferred Stock ("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, 1998 and 1997, 3,200,000 shares of Series A Preferred Stock
were owned by International. Shares of Series A Preferred Stock are entitled
to one vote per share, voting as a single class with the Common Stock, and a
liquidation preference of $50.00 per share. Dividends on Series A Preferred
Stock are cumulative at the annual rate of $2.25 per share. Series A Preferred
Stock is redeemable for cash at the option of JRM, at any time through January
31, 2000 provided that the last reported sales price of JRM's Common Stock in
its principal trading market for any 20 trading days within a period of 30
consecutive trading days is at least $55.74, or any time after January 31,
2000 at a price equal to $52.00 per share, plus accrued and unpaid dividends.
Each share of Series A Preferred Stock is convertible into 1.794 shares of
Common Stock at any time after a call by JRM for redemption of any or all of
the outstanding Series A Preferred Stock or at any time after January 31,
2000.
During fiscal year 1998, JRM's Board of Directors approved a plan to buy
back a limited number of shares of its Common Stock. Under the plan, JRM can
purchase 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. JRM's plan is also dependent on its ability to
satisfy its debt covenants. As of March 31, 1998, JRM had purchased 362,500
shares of its Common Stock at an average share price of $37.31 under the plan.
NOTE 10--STOCK PLANS
A total of 3,217,039 shares of Common Stock are available for stock option
grants and restricted stock awards to officers and key employees under the
Executive Long-Term Incentive Compensation Plan at March 31, 1998. 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 the grant, become exercisable at such
time or times as determined when granted and expire not more than ten years
after the date of grant. Under the Plan, eligible employees may be granted
rights to purchase shares of Common Stock at $1.00 per share, which shares are
subject to restrictions on transfer that lapse at such times and circumstances
as specified when granted. Through March 31, 1998, a total of 112,940 shares
of restricted stock (including 58,700 and 54,240 shares issued with a weighted
average fair value of $23.78 and $23.25 per share in fiscal years 1997 and
1996, respectively) have been issued under Plan. During fiscal year 1998,
performance-based awards represented by initial notional grants totaling
32,510 rights (with a weighted average fair value of $36.53 per right) to
purchase restricted shares of Common Stock 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 JRM's Common Stock over a specified
performance period.
A total of 92,500 shares of Common Stock are available for grants of
options, and rights to purchase restricted shares, to non-employee directors
under JRM's Nonemployee Director Stock Plan at March 31, 1998. Options to
purchase 600, 200, and 200 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, are fully vested and exercisable on
the date of grant and expire ten years after the date of the grant. Rights to
purchase 300, 100 and 100 shares are granted on the first, second and third
years, respectively, of a Director's term, at $1.00 per share,
D-42
<PAGE>
which shares are subject to restrictions on transfer that lapse at the end of
such term. Through March 31, 1998, a total of 3,100 shares of restricted stock
have been issued under the Nonemployee Director Stock Plan.
Under JRM's 1995 Senior Management Stock Option 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 JRM, all three programs have
provisions that may cause restrictions to lapse and accelerate the
exercisability of options outstanding.
The following table summarizes activity for JRM's stock option plans (share
data in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
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...... 1,039 $17.31 1,092 $13.47 1,078 $ 9.46
Granted................... 141 $37.54 276 $24.33 388 $16.76
Exercised................. (442) $12.64 (297) $ 9.56 (354) $ 4.32
Cancelled/forfeited....... (51) $21.21 (32) $18.91 (20) $22.63
----- ------ ----- ------ ----- ------
Outstanding, March 31..... 687 $24.21 1,039 $17.31 1,092 $13.47
===== ====== ===== ====== ===== ======
Exercisable, March 31..... 244 $21.31 490 $13.15 557 $ 8.77
===== ====== ===== ====== ===== ======
</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, 1998 (share data in
thousands):
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------------------------------------------------
Weighted
Average Weighted
Range of Remaining Average
Exercise Contractual Exercise
Prices Outstanding Life Price
-------- ----------- ----------- --------
<S> <C> <C> <C>
$ 6.00--$ 9.13 4 2.7 $ 6.18
$16.69--$17.00 220 8.1 $16.73
$22.13--$24.94 322 8.4 $23.70
$37.53--$38.66 141 5.0 $37.97
---
$ 6.00--$38.66 687 7.5 $24.21
===
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
-----------------------------------------------------------------------------------
Range of
Exercise Weighted Average
Prices Exercisable Exercise Price
-------------- ----------- ----------------
<S> <C> <C>
$6.00--$9.13 4 $ 6.18
$16.69--$17.00 66 $16.76
$22.13--$24.94 172 $23.29
$38.66 2 $38.66
---
$6.00--$38.66 244 $21.31
===
</TABLE>
D-43
<PAGE>
As discussed in Note 1, JRM applies APB 25 and related interpretations in
accounting for its stock-based compensation. Charges to income related to
stock plan awards totaled approximately $1,541,000, $965,000 and $154,000 for
the fiscal years ended March 31, 1998, 1997 and 1996, respectively. If JRM had
accounted for its stock plan awards using the alternative fair value method of
accounting under SFAS No. 123, "Accounting for Stock-Based Compensation," its
net income (loss) and earnings (loss) per share would have been the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
(In thousands, except
per share data)
<S> <C> <C> <C>
Net income (loss):
As reported................................. $88,960 $(12,900) $(1,280)
Pro forma................................... $88,839 $(13,358) $(1,368)
Basic earnings (loss) per share:
As reported................................. $ 2.00 $ (0.50) $ (0.23)
Pro forma................................... $ 1.99 $ (0.51) $ (0.23)
Diluted earnings (loss) per share:
As reported................................. $ 1.89 $ (0.50) $ (0.23)
Pro forma................................... $ 1.89 $ (0.51) $ (0.23)
</TABLE>
The above pro forma information is not indicative of future pro forma
amounts. SFAS No. 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate............................... 5.41% 6.28% 5.34%
Volatility factor of the expected market price of
JRM's common stock................................... .41 .41 .41
Expected life of the option in years.................. 3.6 5.0 5.0
Expected dividend yield of JRM's common stock......... 0% 0% 0%
</TABLE>
The weighted average fair value of the stock options granted in 1998, 1997
and 1996 was $13.85, $11.09 and $7.40, respectively.
Thrift Plan
Certain employees of JRM participate in the Thrift Plan for Employees of
McDermott Incorporated and Participating Subsidiary and Affiliated Companies
(the "Thrift Plan"), which is a defined contribution plan maintained by a
subsidiary of McDermott International. On June 5, 1995, a maximum of 5,000,000
of the authorized and unissued shares of JRM's Common Stock was reserved for
possible issuance as the JRM employer match for employee contributions to 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 1998,
1997 and 1996, 65,727, 77,112 and 80,356 shares, respectively, were issued as
employer contributions pursuant to the Thrift Plan. At March 31, 1998,
4,776,805 shares remained available for issuance.
NOTE 11--CONTINGENCIES AND COMMITMENTS
Investigations and Litigation--In March 1997, JRM and International, with
the help of outside counsel, began an investigation into allegations of
wrongdoing by a limited number of former employees of JRM and International
and others. The allegations concerned the heavy-lift business of the HeereMac
joint venture. Upon becoming aware of these allegations, JRM and International
notified authorities, including the Antitrust Division of the U. S. Department
of Justice and the European Commission. As a result of JRM's and
International's
D-44
<PAGE>
prompt disclosure of the allegations, both companies and the individuals who
were officers, directors and employees of JRM or International 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.
On December 21, 1997, following JRM's termination of its joint venture with
Heerema Offshore Construction Group, Inc. ("Heerema"), HeereMac and a HeereMac
employee 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 was fined $49,000,000 and the employee $100,000. As part of
the plea, both HeereMac and certain employees of HeereMac agreed to cooperate
fully with the Department of Justice investigation. Neither JRM, International
nor any of their officers, directors or employees was a party to those
proceedings.
JRM and International 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.
Pursuant to 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 International 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 foregoing matters. JRM and
International 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 ("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.
On June 1, 1998, Phillips Petroleum Company (individually, and on behalf of
certain co-venturers) and certain related entities filed a complaint in United
States District Court for the Southern District of Texas against JRM,
International, McDermott Incorporated, McDermott-ETPM, Inc., certain JRM
subsidiaries, HeereMac, Heerema, certain Heerema affiliates, and others. 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.
It is not possible to predict the ultimate outcome of the Department of
Justice investigation, the SEC inquiry, the companies' internal investigation,
the above referenced lawsuit, 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.
In addition to the foregoing, JRM and certain of its officers, directors and
subsidiaries are defendants in numerous other legal proceedings. Management
believes that the outcome of these proceedings will not have a material
adverse effect upon JRM's consolidated financial position or results of
operations.
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, 1998 are as follows: 1999--$5,565,000; 2000--$4,575,000;
2001--$3,753,000; 2002--$1,855,000; 2003--$1,827,000; and thereafter--
$47,685,000. Total rental expense for fiscal years 1998, 1997 and 1996 was
$74,262,000, $67,990,000 and $66,617,000, respectively. These expense amounts
include contingent rentals and are net of sublease income, neither of which
are material.
D-45
<PAGE>
Other--JRM 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 JRM considers
uneconomical.
Commitments for capital expenditures amounted to approximately $24,541,000
at March 31, 1998, all of which relates to fiscal year 1999.
JRM is contingently liable under standby letters of credit totaling
$235,736,000 (including $47,086,000 issued on behalf of unconsolidated joint
ventures) at March 31, 1998, all of which were issued in the normal course of
business.
NOTE 12--FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
The principal customers of JRM are the offshore oil, natural gas and
hydrocarbon processing industries and other marine construction companies.
These concentrations of customers may impact JRM'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. However, JRM'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.
JRM believes that its provision for possible losses on uncollectible
accounts receivable is adequate for its credit loss exposure. At March 31,
1998 and 1997, the allowance for possible losses deducted from Accounts
receivable-trade on the accompanying balance sheet was $2,164,000 and
$3,634,000, respectively.
NOTE 13--INVESTMENTS
The following is a summary of available-for-sale 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>
Debt securities:
U. S. Treasury securities and
obligations of U.S. government
agencies.......................... $182,856 $329 $656 $182,529
Corporate notes and bonds.......... 72,767 36 24 72,779
Time deposits...................... 393,070 -- -- 393,070
-------- ---- ---- --------
Total............................ $648,693 $365 $680 $648,378
======== ==== ==== ========
</TABLE>
The amortized cost and estimated fair value amounts of debt securities at
March 31, 1998 include $104,720,000 in time deposits which are reported as
cash equivalents.
The following is a summary of available-for-sale securities at March 31,
1997:
<TABLE>
<CAPTION>
Gross Estimated
Amortized Unrealized Fair
Cost Losses Value
--------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Debt securities:
Obligations of U.S. government agencies........ $ 55,552 $ 36 $ 55,516
Time deposits.................................. 61,075 -- 61,075
Other debt securities.......................... 41,150 -- 41,150
-------- ------ --------
Total debt securities........................ 157,777 36 157,741
-------- ------ --------
Equity securities................................ 2,009 1,015 994
-------- ------ --------
Total........................................ $159,786 $1,051 $158,735
======== ====== ========
</TABLE>
D-46
<PAGE>
The amortized cost and estimated fair value amounts of debt securities at
March 31, 1997 include $82,225,000 in time deposits and other debt securities
which are reported as cash equivalents.
Proceeds and gross realized losses on sales of available-for-sale securities
were approximately $1,338,000 and $672,000, respectively, for fiscal year
1998. Proceeds and gross realized gains on sales of available-for-sale
securities were approximately $4,589,000 and $20,000, respectively, for fiscal
year 1997. The amortized cost and estimated fair value of available-for-sale
debt securities at March 31, 1998, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
--------- ---------
(in thousands)
<S> <C> <C>
Debt securities:
Due in one year or less............................. $490,748 $490,732
Due after one through three years................... 69,699 69,490
Due after three years............................... 88,246 88,156
-------- --------
Total............................................. $648,693 $648,378
======== ========
</TABLE>
NOTE 14--DERIVATIVE FINANCIAL INSTRUMENTS
JRM operates internationally 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. JRM 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, 1998, JRM had forward exchange contracts to purchase $42,674,000 in
foreign currencies (primarily Pound Sterling and Singapore Dollars), and to
sell $18,910,000 in foreign currencies (primarily Singapore Dollars), at
varying maturities through fiscal year 1999. At March 31, 1997, JRM had
forward exchange contracts to purchase $66,969,000 in foreign currencies
(primarily Pound Sterling), and to sell $257,000 in foreign currencies
(primarily Singapore Dollars), at varying maturities through fiscal year 1998.
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 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, 1998 and 1997, JRM had deferred gains of $586,000 and
$2,127,000, respectively, and deferred losses of $24,000 and $46,000,
respectively, related to forward exchange contracts which will primarily be
recognized in accordance with the percentage of completion method of
accounting.
JRM 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 the counterparties. The amount of such exposure is
generally the unrealized gains in such contracts.
NOTE 15--FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by JRM 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.
Investment securities: 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
D-47
<PAGE>
investments of similar quality and terms. The carrying amounts for investments
are their estimated fair values (see Note 13).
Note receivable from an unconsolidated affiliate: At March 31, 1997, it was
not practicable to estimate the fair value of JRM's 7.75% Note Receivable from
the HeereMac joint venture because there were no quoted market prices and the
time of its settlement could not be determined.
Long and short-term debt: The fair values of debt instruments are based on
quoted market prices or, where quoted prices are not available, 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. At March 31, 1998 and 1997, JRM had total
debt (including notes payable to McDermott International and excluding
capitalized leases) with carrying values of $268,194,000 and $386,816,000 and
fair values of $293,072,000 and $404,876,000, respectively.
Foreign currency exchange contracts: The fair values of foreign currency
forward exchange contracts are estimated by obtaining quotes from brokers. At
March 31, 1998 and 1997, JRM had net forward exchange contracts to purchase
foreign currencies with notional values of $23,764,000 and $66,712,000 and
fair values of $24,238,000 and $67,107,000, respectively.
NOTE 16--SEGMENT REPORTING
JRM 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,
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 which pertain to
operations but are excluded from management's evaluation of segment
performance.
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. Other reconciling items to income (loss) before
provision for income taxes are interest income, interest expense and other--
net. Corporate assets excluded from segment assets are primarily investments
in debt securities.
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 1998, 1997 and 1996, these operations had revenues
of $288,687,000, $295,343,000 and $394,580,000, and operating income of
$6,177,000, $9,739,000 and $4,524,000, respectively.
JRM does not believe it is dependent on any one customer. Sales to major
customers that exceeded 10% of revenues were: 1998--customer A $208,299,000
(11%); 1997--customer A $235,590,000 (17%), customer B $153,274,000 (11%); and
1996--customer A $190,000,000 (15%), customer B $198,453,000 (16%). Customer A
is a customer of both the North American Operations segment and the Europe
Operations segment. Customer B is a customer of the Europe Operations segment.
D-48
<PAGE>
Segment Information for the Three Fiscal Years Ended March 31, 1998.
1. Information about JRM's Operations in Different Segments.
<TABLE>
<CAPTION>
Revenues(1) 1998 1997 1996
----------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
North American Operations................... $ 707,985 $ 566,876 $ 410,739
Middle East Operations...................... 345,146 192,578 155,212
Far East Operations......................... 336,692 221,159 206,559
Europe and West Africa Operations........... 378,037 361,633 479,716
Engineering Operations...................... 131,046 93,920 56,354
Other....................................... 34,000 30,690 28,830
Eliminations................................ (77,420) (58,387) (77,959)
---------- ---------- ----------
Total Revenues.......................... $1,855,486 $1,408,469 $1,259,451
========== ========== ==========
- --------
(1) Segment revenues are net of the following intersegment transfers:
North American Operations................... $ 89 $ 590 $ 10,624
Middle East Operations...................... 2,168 -- 14,589
Europe and West Africa Operations........... 315 1,274 768
Engineering Operations...................... 58,465 46,684 37,809
Other....................................... 16,383 9,839 14,169
---------- ---------- ----------
Total Intersegment Transfers.............. $ 77,420 $ 58,387 $ 77,959
========== ========== ==========
</TABLE>
D-49
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
OPERATING INCOME:
Segment Operating Income (Loss):
North American Operations....................... $ 75,588 $ 30,076 $ 40,097
Middle East Operations.......................... 34,292 1,432 3,376
Far East Operations............................. (11,306) (4,016) 9,567
Europe and West Africa Operations............... 15,093 (17,514) 16,245
Engineering Operations.......................... 3,775 5,960 (2,756)
Other........................................... (10,320) (5,119) (29,615)
--------- -------- --------
Total Segment Operating Income................ $ 107,122 $ 10,819 $ 36,914
--------- -------- --------
Gain (Loss) On Asset Disposals and Impairments--
Net:
North American Operations(1).................... $ (6,532) $ 19,626 $ 236
Middle East Operations.......................... (34) (176) 668
Far East Operations............................. 817 792 225
Europe and West Africa Operations(2)............ 224,552 21,758 756
Engineering Operations.......................... (25) (14) --
Other(3)........................................ (258,897) (12,965) 645
--------- -------- --------
Total Gain (Loss) on Asset Disposals and
Impairments--Net............................. $ (40,119) $ 29,021 $ 2,530
--------- -------- --------
Income (Loss) From Investees:
North American Operations....................... $ 4,539 $ 7,439 $ 4,332
Far East Operations............................. 4,253 (815) 1,178
Europe and West Africa Operations(4)............ 59,748 (14,584) 3,302
Other........................................... 1,696 127 312
--------- -------- --------
Total Income (Loss) from Investees............ $ 70,236 $ (7,833) $ 9,124
--------- -------- --------
SEGMENT INCOME (LOSS):
North American Operations....................... $ 73,595 $ 57,141 $ 44,665
Middle East Operations.......................... 34,258 1,256 4,044
Far East Operations............................. (6,236) (4,039) 10,970
Europe and West Africa Operations............... 299,393 (10,340) 20,303
Engineering Operations.......................... 3,750 5,946 (2,756)
Other........................................... (267,521) (17,957) (28,658)
--------- -------- --------
Total Segment Income (Loss)................... 137,239 32,007 48,568
--------- -------- --------
General Corporate Expenses...................... (13,064) (16,610) (12,014)
--------- -------- --------
Total Operating Income.......................... $ 124,175 $ 15,397 $ 36,554
========= ======== ========
</TABLE>
- --------
(1) Fiscal year 1998 includes the write-down of certain marine vessels in the
amount of $9,891,000.
(2) Fiscal year 1998 includes a $224,472,000 gain on asset disposal resulting
from the termination of the HeereMac joint venture.
(3) Fiscal year 1998 includes the write-off of $262,901,000 of goodwill
associated with the acquisition of OPI.
(4) Fiscal year 1998 includes a $61,637,000 distribution of earnings resulting
from the termination of the HeereMac joint venture.
D-50
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
SEGMENT ASSETS
North American Operations..................... $ 281,331 $ 303,093 $ 285,696
Middle East Operations........................ 95,761 103,518 88,432
Far East Operations........................... 121,529 116,611 139,977
Europe and West Africa Operations............. 250,574 367,978 428,726
Engineering Operations........................ 20,274 25,712 28,209
Other(1)...................................... 104,674 396,890 478,690
---------- ---------- ----------
Total Segment Assets........................ 874,143 1,313,802 1,449,730
---------- ---------- ----------
Corporate Assets............................ 674,577 192,990 165,281
---------- ---------- ----------
Total Assets................................ $1,548,720 $1,506,792 $1,615,011
========== ========== ==========
- --------
(1) At March 31, 1997 and 1996, Other segment assets include $279,218,000 and
$304,333,000, respectively, of goodwill associated with the acquisition of
OPI. Corresponding amortization of this goodwill is reflected among the
reportable segments.
CAPITAL EXPENDITURES
North American Operations(1).................. $ 11,916 $ 37,603 $ 63,001
Middle East Operations........................ 4,915 7,028 7,498
Far East Operations........................... 1,684 8,551 2,947
Europe and West Africa Operations(2).......... 35,071 12,280 12,274
Engineering Operations........................ 447 529 549
Other......................................... 3,671 91 1,208
---------- ---------- ----------
Total Capital Expenditures.................. $ 57,704 $ 66,082 $ 87,477
========== ========== ==========
- --------
(1) Fiscal year 1996 includes property, plant and equipment of $11,198,000 of
an acquired company.
(2) Fiscal year 1998 includes property, plant and equipment of $30,559,000
acquired through the termination of the HeereMac joint venture.
DEPRECIATION AND AMORTIZATION
North American Operations..................... $ 28,883 $ 30,451 $ 19,315
Middle East Operations........................ 6,183 6,518 7,488
Far East Operations........................... 10,231 10,942 10,701
Europe and West Africa Operations............. 31,488 35,642 28,115
Engineering Operations........................ 1,895 2,407 1,797
Other......................................... 13,656 11,783 17,631
---------- ---------- ----------
Segment Depreciation and Amortization....... 92,336 97,743 85,047
---------- ---------- ----------
Corporate Depreciation and Amortization..... 1,507 1,932 1,353
---------- ---------- ----------
Total Depreciation and Amortization......... $ 93,843 $ 99,675 $ 86,400
========== ========== ==========
INVESTMENTS IN UNCONSOLIDATED AFFILIATES
North American Operations..................... $ 77 $ -- $ --
Far East Operations........................... 10,075 7,946 8,760
Europe and West Africa Operations............. 13,887 61,431 60,839
Other......................................... 5,030 3,335 3,207
---------- ---------- ----------
Total Investments in Unconsolidated
Affiliates................................. $ 29,069 $ 72,712 $ 72,806
========== ========== ==========
</TABLE>
D-51
<PAGE>
2. Information about JRM's Service Lines
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Revenues:
--Offshore Operations..................... $ 743,114 $ 591,021 $ 548,634
--Fabrication Operations.................. 455,306 376,257 311,609
--Engineering Operations.................. 276,422 235,672 248,329
--Procurement Activities.................. 425,440 240,108 235,884
-- Adjustments and Eliminations........... (44,796) (34,589) (85,005)
---------- ---------- ----------
Total Revenues.......................... $1,855,486 $1,408,469 $1,259,451
========== ========== ==========
</TABLE>
3. Information about JRM's Operations in Different Countries
<TABLE>
<S> <C> <C> <C>
Revenues:
--United States.............................. $ 657,068 $ 468,168 $ 383,738
--United Kingdom............................. 324,063 284,594 400,705
--Qatar...................................... 261,015 99,085 57,837
--Indonesia.................................. 143,644 45,299 29,910
--Myanmar.................................... 110,692 51,014 --
--Other Countries............................ 359,004 460,309 387,261
---------- ---------- ----------
Total Revenues............................. $1,855,486 $1,408,469 $1,259,451
========== ========== ==========
- --------
(1) Revenues are allocated based on the location of the customer.
Property, Plant and Equipment:
--United States.............................. $ 129,551 $ 139,277 $ 137,411
--United Kingdom............................. 73,621 83,091 90,603
--Netherlands................................ 45,347 33,868 47,894
--Singapore.................................. 20,009 20,974 35,561
--Angola..................................... -- 26,194 35,228
--Other Countries............................ 74,622 77,727 66,162
---------- ---------- ----------
Total Property, Plant and Equipment........ $ 343,150 $ 381,131 $ 412,859
========== ========== ==========
</TABLE>
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial
information for the fiscal years ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998
---------------------------------------------
Quarter Ended
---------------------------------------------
June 30, September 30, December 31, March 31,
1997 1997 1997 1998
-------- ------------- ------------ ---------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Revenues................... $478,223 $506,046 $458,094 $413,123
Operating income........... 21,019 37,314 51,039 14,803
Net income................. 8,110 18,894 51,114 10,842
Earnings per common share:
Basic.................... 0.16 0.42 1.20 0.22
Diluted.................. 0.15 0.40 1.08 0.22
</TABLE>
D-52
<PAGE>
Pretax results for the quarter ended December 31, 1997 include a gain of
$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 a
$5,419,000 provision for employee severance costs.
<TABLE>
<CAPTION>
1998
---------------------------------------------
Quarter Ended
---------------------------------------------
June 30, September 30, December 31, March 31,
1996 1996 1996 1997
-------- ------------- ------------ ---------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
Revenues........................ $397,160 $376,235 $331,043 $304,031
Operating income (loss)......... 13,620 (265) 48,002 (45,960)
Net income (loss)............... 5,670 (13,125) 38,694 (44,139)
Earnings (loss) per common
share:
Basic......................... 0.10 (0.37) 0.91 (1.13)
Diluted....................... 0.10 (0.37) 0.83 (1.13)
</TABLE>
Pretax results for the quarter ended December 31, 1996 include gains on
asset disposals of $42,128,000, including realization of $12,271,000 of the
deferred gain on the sale of major marine vessels to HeereMac, and favorable
workers' compensation adjustments of $5,693,000. Pretax results for the
quarter ended March 31, 1997 include gains on asset disposals of $17,220,000,
asset impairment losses of $31,390,000 and a $4,889,000 provision for employee
severance costs.
NOTE 18--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
----------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands, except shares and
per share amounts)
<S> <C> <C> <C>
Basic:
Net income (loss)......................... $ 88,960 $ (12,900) $ (1,280)
Dividends on preferred stocks............. (7,200) (7,200) (7,711)
---------- ---------- ----------
Net income (loss) for basic computation... $ 81,760 $ (20,100) $ (8,991)
========== ========== ==========
Weighted average common shares............ 40,926,294 40,357,026 39,481,227
========== ========== ==========
Basic earnings (loss) per common share.... $ 2.00 $ (0.50) $ (0.23)
========== ========== ==========
Diluted:
Net income (loss)......................... $ 88,960 $ (12,900) $ (1,280)
Dividends on preferred stocks............. -- (7,200) (7,711)
---------- ---------- ----------
Net income (loss) for diluted
computation.............................. $ 88,960 $ (20,100) $ (8,991)
========== ========== ==========
Weighted average common shares (basic).... 40,926,294 40,357,026 39,481,227
Effect of dilutive securities:
Stock options and restricted stock...... 289,521 -- --
Series A $2.25 cumulative preferred
stock.................................. 5,740,940 -- --
---------- ---------- ----------
Adjusted weighted average common shares
and assumed conversions.................. 46,956,755 40,357,026 39,481,227
========== ========== ==========
Diluted earnings (loss) per common share.. $ 1.89 $ (0.50) $ (0.23)
========== ========== ==========
</TABLE>
D-53
<PAGE>
ANNEX E
J. RAY McDERMOTT, S.A.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
12/31/98 3/31/98
ASSETS ----------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................ $ 123,325 $ 152,011
Accounts receivable--trade........................... 169,504 227,538
Accounts receivable--unconsolidated affiliates....... 31,959 45,072
Accounts receivable--other........................... 21,973 26,327
Contracts in progress................................ 45,092 71,084
Other current assets................................. 30,563 45,634
---------- ----------
Total Current Assets............................... 422,416 567,666
---------- ----------
Property, Plant and Equipment, at Cost................. 975,604 1,182,448
Less accumulated depreciation........................ 696,796 839,298
---------- ----------
Net Property, Plant and Equipment.................. 278,808 343,150
---------- ----------
Investments in Debt Securities......................... 752,059 543,658
---------- ----------
Excess of Cost over Fair Value of Net Assets of
Purchased Businesses Less Accumulated Amortization of
$3,246,000 at December 31, 1998 and $8,542,000 at
March 31, 1998........................................ 11,708 22,153
---------- ----------
Investment in Unconsolidated Affiliates................ 14,568 29,069
---------- ----------
Other Assets........................................... 36,030 43,024
---------- ----------
TOTAL.............................................. $1,515,589 $1,548,720
========== ==========
<CAPTION>
12/31/98 3/31/98
LIABILITIES AND STOCKHOLDERS' EQUITY ----------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
Current Liabilities:
Notes payable and current maturities of long-term
debt................................................ $ 4,944 $ 31,272
Accounts payable..................................... 122,786 171,180
Accrued contract costs............................... 49,660 88,518
Accrued liabilities--other........................... 123,042 110,345
Advance billings on contracts........................ 70,131 91,549
Accrued employee benefits............................ 44,200 44,572
U.S. and foreign income taxes........................ 31,233 23,057
---------- ----------
Total Current Liabilities.......................... 445,996 560,493
---------- ----------
Long-Term Debt......................................... 245,756 245,822
---------- ----------
Deferred and Non-Current Income Taxes.................. 26,605 46,989
---------- ----------
Other Liabilities...................................... 64,128 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 41,241,543 at December 31,
1998 and 41,130,328 at March 31, 1998............... 412 411
Capital in excess of par value....................... 619,268 615,515
Retained earnings.................................... 193,341 35,418
Treasury stock at cost, 2,200,200 shares at December
31, 1998 and 362,500 shares at March 31, 1998....... (71,809) (13,537)
Accumulated other comprehensive loss................. (8,140) (21,277)
---------- ----------
Total Stockholders' Equity......................... 733,104 616,562
---------- ----------
TOTAL.............................................. $1,515,589 $1,548,720
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
E-1
<PAGE>
J. RAY McDERMOTT, S.A.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
------------------ ----------------------
12/31/98 12/31/97 12/31/98 12/31/97
-------- -------- ---------- ----------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Revenues.......................... $313,348 $458,094 $1,032,999 $1,442,363
-------- -------- ---------- ----------
Costs and Expenses:
Cost of operations (excluding
depreciation and
amortization).................. 256,867 383,081 809,521 1,196,677
Depreciation and amortization... 13,126 22,208 40,310 77,746
Selling, general and
administrative expenses........ 24,402 25,374 78,544 79,573
-------- -------- ---------- ----------
294,395 430,663 928,375 1,353,996
-------- -------- ---------- ----------
Gain (Loss) on Asset Disposals and
Impairments--Net................. (4,229) (40,330) 38,849 (40,306)
-------- -------- ---------- ----------
Operating Income (Loss) before
Income (Loss) from Investees..... 14,724 (12,899) 143,473 48,061
Income (Loss) from Investees...... (2,398) 63,938 7,335 61,311
-------- -------- ---------- ----------
Operating Income................ 12,326 51,039 150,808 109,372
-------- -------- ---------- ----------
Other Income (Expense):
Interest income................. 11,639 6,961 34,631 16,549
Interest expense................ (7,433) (6,951) (20,287) (23,995)
Other--net...................... (689) 6,279 10,536 7,571
-------- -------- ---------- ----------
3,517 6,289 24,880 125
-------- -------- ---------- ----------
Income before Provision for
(Benefit from) Income Taxes...... 15,843 57,328 175,688 109,497
Provision for (Benefit from)
Income Taxes..................... (16,166) 6,214 12,365 31,379
-------- -------- ---------- ----------
Net Income........................ $ 32,009 $ 51,114 $ 163,323 $ 78,118
======== ======== ========== ==========
Net Income Applicable to Common
Stock (after Preferred Stock
Dividends)....................... $ 30,209 $ 49,314 $ 157,923 $ 72,718
======== ======== ========== ==========
Earnings per Common Share
Basic........................... $ 0.77 $ 1.20 $ 3.97 $ 1.78
Diluted......................... $ 0.71 $ 1.08 $ 3.57 $ 1.66
======== ======== ========== ==========
Cash Dividends:
Per Preferred Share............. $ 0.5625 $ 0.5625 $ 1.6875 $ 1.6875
======== ======== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
E-2
<PAGE>
J. RAY McDERMOTT, S.A.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
------------------ -----------------
12/31/98 12/31/97 12/31/98 12/31/97
-------- -------- -------- --------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Net Income................................. $32,009 $51,114 $163,323 $78,118
------- ------- -------- -------
Other Comprehensive Income (Loss):
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...... 1,118 (11,809) 5,691 1,333
Sales of investments in foreign
entities................................ -- -- 15,596 --
Unrealized gains (losses) on investments:
Unrealized gains (losses) arising during
the period, net of taxes................ (2,756) 40 2,112 209
------- ------- -------- -------
Other Comprehensive Income (Loss).......... (1,638) (11,769) 23,399 1,542
------- ------- -------- -------
Comprehensive Income....................... $30,371 $39,345 $186,722 $79,660
======= ======= ======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
E-3
<PAGE>
J. RAY McDERMOTT, S.A.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Nine Months Ended
--------------------
12/31/98 12/31/97
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................... $ 163,323 $ 78,118
--------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 40,310 77,746
Income from investees, less dividends................... 14,046 2,138
(Gain) loss on asset disposals and impairments--net..... (38,849) 40,306
Benefit from deferred taxes............................. (7,187) (5,698)
Other................................................... (2,070) (921)
Changes in assets and liabilities, net of effects from
divestitures:
Accounts receivable..................................... 45,159 49,060
Net contracts in progress and advance billings.......... 4,604 29,884
Accounts payable........................................ (47,711) (388)
Accrued contract costs.................................. (38,858) 28,351
Accrued and other current liabilities................... 56,042 20,370
Income taxes............................................ 7,886 24,804
Other, net.............................................. (48,377) 17,201
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................ 148,318 360,971
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............... (30,510) (22,004)
Proceeds from asset disposals............................ 131,568 283,841
Purchases of investments................................. (415,275) (317,350)
Sales and maturities of investments...................... 213,814 76,400
Acquisition of equity investment from McDermott
International, Inc...................................... (8,984) --
Return from (investment in) equity investees............. 6,371 (1,419)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES...... (103,016) 19,468
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt................................ $ (6,551) $ (82,697)
Decrease in short-term borrowings........................ (2,251) (24,207)
Issuance of common stock................................. 1,317 8,477
Preferred dividends paid................................. (5,400) (5,400)
Purchases of treasury stock.............................. (58,272) --
Other.................................................... (3,492) --
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES.................... (74,649) (103,827)
--------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH................. 661 485
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (28,686) 277,097
--------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......... 152,011 136,795
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 123,325 $ 413,892
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized).................... $ 14,451 $ 19,955
Income taxes (net of refunds)........................... $ 23,580 $ 11,613
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
E-4
<PAGE>
J. RAY McDERMOTT, S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 the following:
In the three and nine months ended December 31, 1998:
. a $9,600,000 charge to restructure foreign joint ventures.
In the nine months ended December 31, 1998:
. 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.
In the three and nine months ended December 31, 1997:
. a gain of $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 $262,901,000 of goodwill
associated with the acquisition of Offshore Pipelines, Inc. ("OPI").
Operating results for the nine months ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 1999. Results for the three and nine months ended December 31, 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.
E-5
<PAGE>
NOTE 3--ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss included in
stockholders' equity at December 31 and March 31, 1998 are as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(Unaudited)
(In thousands)
<S> <C> <C>
Currency Translation Adjustments.................. $(9,937) $(20,962)
Net Unrealized Gain (Loss) on Investments......... 1,797 (315)
------- --------
$(8,140) $(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 $16,602,000 and
$53,958,000 and operating income (loss) of $(3,536,000) and $7,824,000 for the
three and nine months, respectively, ended December 31, 1997, attributable to
operations transferred to ETPM S.A. Management does not expect the termination
of the McDermott-ETPM joint venture to have a material adverse effect on JRM's
consolidated financial position or results of operations.
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. JRM is also in the process of closing MMCL's
European greenfield engineering operations. While JRM is withdrawing from
traditional European engineering markets, it continues to pursue subsea
engineering work in the North Sea. In the three and nine months ended December
31, 1998, these operations had revenues of $11,674,000 and $59,699,000,
respectively, and operating income (loss) of $17,000 and $(2,159,000),
respectively. In the three and nine months ended December 31, 1997, these
operations had revenues of $58,458,000 and $246,857,000, respectively, and
operating income of $8,285,000 and $13,359,000, respectively.
During the nine months ended December 31, 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 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
partially 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 nine months ended December 31, 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
E-6
<PAGE>
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 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 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. 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.
JRM and MII are also cooperating with the Securities and Exchange Commission
(the "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 (the "Phillips Plaintiffs")
filed a lawsuit in the United States District Court for the Southern District
of Texas against JRM, MII, McDermott Incorporated, McDermott-ETPM, Inc. and
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,
which was consolidated with the Phillips Litigation. 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. This decision is
subject to further judicial review.
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 JRM, MII, 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 BP 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; Burlington Resources
Offshore, Inc. and The Louisiana Land & Exploration
E-7
<PAGE>
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.; and Shell U.K. Limited and certain of its affiliates 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 Litigation request treble
damages.
It is not possible to predict the ultimate outcome of the Department of
Justice investigation, the SEC inquiry, the companies' internal investigation,
the above-referenced lawsuits, or the other 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 JRM's consolidated financial position and results of
operations.
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 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
$196,000,000 since March 31, 1998, primarily as a result of the dispositions
of MSCL and MMCL described in Note 4.
E-8
<PAGE>
Segment Information for the Three and Nine Months Ended December 31, 1998 and
1997:
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
------------------ ----------------------
12/31/98 12/31/97 12/31/98 12/31/97
-------- -------- ---------- ----------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
North American
Operations............... $127,935 $203,539 $ 467,075 $ 558,519
Middle East Operations.... 53,844 84,972 187,367 266,964
Far East Operations....... 130,164 73,417 300,326 238,356
Europe and West Africa
Operations............... 12,398 78,602 69,883 310,990
Engineering Operations.... 10,176 28,870 48,166 102,804
Other..................... (9,566) 7,207 5,832 21,928
Eliminations(1)........... (11,603) (18,513) (45,650) (57,198)
-------- -------- ---------- ----------
Total Revenues.......... $313,348 $458,094 $1,032,999 $1,442,363
======== ======== ========== ==========
</TABLE>
- --------
(1) Segment revenues are net of the following intersegment transfers:
<TABLE>
<S> <C> <C> <C> <C>
North American Operations................ $ 930 $ 89 $ 1,981 $ 89
Middle East Operations................... -- -- 1,048 --
Far East Operations...................... -- -- 128 --
Europe and West Africa Operations........ -- 23 -- 215
Engineering Operations................... 6,366 13,551 30,600 44,683
Other.................................... 4,307 4,850 11,893 12,211
------- ------- ------- -------
Total.................................. $11,603 $18,513 $45,650 $57,198
======= ======= ======= =======
</TABLE>
E-9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- -------------------
12/31/98 12/31/97 12/31/98 12/31/97
-------- --------- -------- ---------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
OPERATING INCOME:
Segment Operating Income (Loss):
North American Operations......... $ 7,674 $ 22,147 $ 52,536 $ 66,335
Middle East Operations............ 8,456 8,678 27,466 30,101
Far East Operations............... 9,395 1,128 51,055 (13,736)
Europe and West Africa
Operations....................... (752) 1,663 (923) 9,810
Engineering Operations............ 1,135 1,666 253 9,735
Other............................. (3,976) (6,448) (16,188) (4,774)
------- --------- -------- ---------
Total Segment Operating Income.. $21,932 $ 28,834 $114,199 $ 97,471
------- --------- -------- ---------
Gain (Loss) on Asset Disposals and
Impairments--Net:
North American Operations $(3,732) $ (9,306) $ (4,592) $ (6,810)
Middle East Operations 6 5 6 141
Far East Operations............... 6 -- (8) 814
Europe and West Africa
Operations....................... (543) 219,605 35,592 220,486
Engineering Operations............ 1 (25) 1 (25)
Other............................. 33 (250,609) 7,850 (254,912)
------- --------- -------- ---------
Total Gain (Loss) on Asset
Disposals and
Impairments--Net............... $(4,229) $ (40,330) $ 38,849 $ (40,306)
------- --------- -------- ---------
Income (Loss) from Investees:
North American Operations......... $(3,651) $ 389 $ (4,358) $ (503)
Far East Operations............... 310 1,378 10,968 2,961
Europe and West Africa
Operations....................... 1,431 62,247 1,732 58,666
Other............................. (488) (76) (1,007) 187
------- --------- -------- ---------
Total Income (Loss) from
Investees...................... $(2,398) $ 63,938 $ 7,335 $ 61,311
------- --------- -------- ---------
SEGMENT INCOME (LOSS):
North American Operations......... $ 291 $ 13,230 $ 43,586 $ 59,022
Middle East Operations............ 8,462 8,683 27,472 30,242
Far East Operations............... 9,711 2,506 62,015 (9,961)
Europe and West Africa
Operations....................... 136 283,515 36,401 288,962
Engineering Operations............ 1,136 1,641 254 9,710
Other............................. (4,431) (257,133) (9,345) (259,499)
------- --------- -------- ---------
Total Segment Income............ 15,305 52,442 160,383 118,476
------- --------- -------- ---------
General Corporate Expenses.......... (2,979) (1,403) (9,575) (9,104)
------- --------- -------- ---------
Total Operating Income.............. $12,326 $ 51,039 $150,808 $ 109,372
======= ========= ======== =========
</TABLE>
E-10
<PAGE>
NOTE 8--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
12/31/98 12/31/97 12/31/98 12/31/97
----------- ----------- ----------- -----------
(Unaudited)
(In thousands, except shares and per share
amounts)
<S> <C> <C> <C> <C>
Basic:
Net income................ $ 32,009 $ 51,114 $ 163,323 $ 78,118
Dividends on preferred
stock.................... (1,800) (1,800) (5,400) (5,400)
----------- ----------- ----------- -----------
Net income for basic
computation.............. $ 30,209 $ 49,314 $ 157,923 $ 72,718
=========== =========== =========== ===========
Weighted average common
shares................... 38,985,212 41,073,649 39,781,623 40,909,416
=========== =========== =========== ===========
Basic earnings per common
share.................... $ 0.77 $ 1.20 $ 3.97 $ 1.78
=========== =========== =========== ===========
Diluted:
Net income................ $ 32,009 $ 51,114 $ 163,323 $ 78,118
Dividends on preferred
stock.................... -- -- -- --
----------- ----------- ----------- -----------
Net income for diluted
computation.............. $ 32,009 $ 51,114 $ 163,323 $ 78,118
=========== =========== =========== ===========
Weighted average common
shares (basic)........... 38,985,212 41,073,649 39,781,623 40,909,416
Effect of dilutive
securities:
Stock options and
restricted stock....... 233,761 299,928 282,426 284,718
Series A $2.25
Cumulative Convertible
Preferred Stock........ 5,740,940 5,740,940 5,740,940 5,740,940
----------- ----------- ----------- -----------
Adjusted weighted average
common shares and assumed
conversions.............. 44,959,913 47,114,517 45,804,989 46,935,074
=========== =========== =========== ===========
Diluted earnings per
common share............. $ 0.71 $ 1.08 $ 3.57 $ 1.66
=========== =========== =========== ===========
</TABLE>
NOTE 9--SUBSEQUENT EVENT
On February 4, 1999 JRM initiated an offer to purchase all of its
outstanding 9.375% Senior Subordinated Notes due July 2006 at a purchase price
of 113.046% of their principal amount, plus accrued and unpaid interest to,
but not including, the payment date. The outstanding principal amount of the
notes is $250,000,000. In connection with the offer, JRM is also soliciting
consents to certain amendments to the indenture for the 9.375% Senior
Subordinated Notes to amend or eliminate certain restrictive covenants.
Holders who tender notes for purchase by JRM pursuant to the tender offer are
required to consent to the amendments in order to have their notes accepted
for purchase. The tender offer is conditioned on, among other things, at least
a majority of the aggregate principal amount of the notes being validly
tendered and not withdrawn prior to its expiration. The offer will expire on
March 5, 1999, unless extended.
E-11
<PAGE>
Manually signed facsimile copies of the Letter of Transmittal will be accepted.
The Letter of Transmittal, Share Certificates and any other required documents
should be sent or delivered by each shareholder of the Company or such
shareholder's broker, dealer, commercial bank, trust company or other nominee to
the Depositary at its addresses set forth below.
The Depositary for the Offer is:
FIRST CHICAGO TRUST COMPANY OF NEW YORK
By Mail: By Overnight Courier:
Corporate Actions Corporate Actions
Suite 4660 Suite 4680
Post Office Box 2569 14 Wall Street
Jersey City, NJ 07303-2569 Mail Suite 4680
New York, NY 10005
By Hand:
c/o Securities Transfer and
Reporting
Services, Inc.
Attn: Corporate Actions
100 William Street, Galleria
New York, NY 10038
Questions or requests for assistance or additional copies of this Offer to
Purchase and the Letter of Transmittal may be directed to the Information Agent
or the Dealer Manager at their respective addresses and telephone numbers set
forth below. Shareholders may also contact their broker, dealer, commercial
bank or trust company for assistance concerning the Offer.
The Information Agent for the Offer is:
MORROW & CO., INC.
445 Park Avenue, 5th Floor
New York, NY 10022
Banks and Brokerage Firms Call:
(800) 662-5200
Shareholders Please Call:
(800) 566-9061
The Dealer Manager for the Offer is:
MERRILL LYNCH & CO.
World Financial Center
North Tower
New York, New York 10281-1314
(212) 449-8971 (Call Collect)
<PAGE>
LETTER OF TRANSMITTAL
TO TENDER SHARES OF COMMON STOCK
OF
J. RAY MCDERMOTT, S.A.
PURSUANT TO THE OFFER TO PURCHASE
DATED MAY 13, 1999
OF
MCDERMOTT ACQUISITION COMPANY, INC.
A WHOLLY-OWNED SUBSIDIARY OF
MCDERMOTT INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME,
ON THURSDAY, JUNE 10, 1999, UNLESS THE OFFER IS EXTENDED.
- --------------------------------------------------------------------------------
The Depositary for the Offer is:
FIRST CHICAGO TRUST COMPANY OF NEW YORK
By Mail: BY OVERNIGHT COURIER:
Corporate Actions CORPORATE ACTIONS
SUITE 4660 SUITE 4680
POST OFFICE BOX 2569 14 WALL STREET
JERSEY CITY, NJ 07303-2569 MAIL SUITE 4680
NEW YORK, NY 10005
BY HAND:
C/O SECURITIES TRANSFER AND
REPORTING SERVICES, INC.
ATTN: CORPORATE ACTIONS
100 WILLIAM STREET, GALLERIA
NEW YORK, NY 10038
----------------
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
DESCRIPTION OF SHARES TENDERED
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) Shares Tendered
(Please fill in, if blank) (Attach additional list if necessary)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Certificate Total Number of Shares Number of
Number(s)* Represented by Shares
Certificate(s)* Tendered**
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
TOTAL SHARES
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by shareholders tendering by book-entry transfer.
** Unless otherwise indicated, it will be assumed that all Shares represented
by any certificates delivered to the Depositary are being tendered. See
Instruction 4.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
This Letter of Transmittal is to be used either if certificates for Shares
(as defined below) are to be forwarded herewith or if delivery of Shares is to
be made by book-entry transfer to the Depositary's account at The Depository
Trust Company (the "Book-Entry Transfer Facility") pursuant to the book-entry
transfer procedure described under "Procedures for Accepting the Offer and
Tendering Shares" in the Offer to Purchase (as defined below). DELIVERY OF
DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH SUCH BOOK-ENTRY
TRANSFER FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY.
Shareholders whose certificates evidencing Shares ("Share Certificates") are
not immediately available or who cannot deliver their Share Certificates and all
other documents required hereby to the Depositary prior to the Expiration Date
(as defined in the Offer to Purchase) or who cannot complete the procedure for
delivery by book-entry transfer on a timely basis and who wish to tender their
Shares must do so pursuant to the guaranteed delivery procedure described under
"Procedures for Accepting the Offer and Tendering Shares" in the Offer to
Purchase. See Instruction 2.
[_] CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO
THE DEPOSITARY'S ACCOUNT AT THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE
THE FOLLOWING:
Name of Tendering Institution
--------------------------------------------
Account No. at The Depository Trust Company
----------------------------------
Transaction Code No.
---------------------------------------------------------
[_] CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Shareholder(s)
------------------------------------
Date of Execution of Notice of Guaranteed Delivery
----------------------
Name of Institution which Guaranteed Delivery
---------------------------
If delivery is by book-entry transfer:
Name of Tendering Institution
-----------------------------------------
Account No. at The Depository Trust Company
----------------------------------
<PAGE>
Transaction Code No.
---------------------------------------------------------
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
3
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to McDermott Acquisition Company, Inc., a
Panama corporation (the "Purchaser") and a wholly-owned subsidiary of McDermott
International, Inc. ("Parent"), the above-described shares of common stock, par
value $0.01 per share (the "Shares"), of J. Ray McDermott, S.A., a Panama
corporation (the "Company"), upon the terms and subject to the conditions set
forth in Purchaser's Offer to Purchase dated May 13, 1999 (the "Offer to
Purchase") and this Letter of Transmittal (which, together with any amendments
or supplements thereto or hereto, collectively constitute the "Offer"), receipt
of which is hereby acknowledged. The undersigned understands that Purchaser
reserves the right to transfer or assign, in whole or from time to time in part,
to one or more of its affiliates, the right to purchase all or any portion of
the Shares tendered pursuant to the Offer.
Upon the terms and subject to the terms and conditions of the Offer and
effective upon acceptance for payment of and payment for the Shares tendered
herewith, the undersigned hereby sells, assigns and transfers to or upon the
order of the Purchaser all right, title and interest in and to all the Shares
that are being tendered hereby (and any and all other Shares or other securities
issued or issuable in respect thereof on or after May 7, 1999) and appoints the
Depositary the true and lawful agent and attorney-in-fact of the undersigned
with respect to such Shares (and all such other Shares or securities), with full
power of substitution (such power of attorney being deemed to be an irrevocable
power coupled with an interest), to (a) deliver Share Certificates (and all such
other Shares or securities), or transfer ownership of such Shares (and all such
other Shares or securities) on the account books maintained by the Book-Entry
Transfer Facility, together, in any such case, with all accompanying evidences
of transfer and authenticity, to or upon the order of the Purchaser, (b) present
such Shares (and all such other Shares or securities) for transfer on the books
of the Company and (c) receive all benefits and otherwise exercise all rights of
beneficial ownership of such Shares (and all such other Shares or securities),
all in accordance with the terms of the Offer.
The undersigned hereby irrevocably appoints Roger E. Tetrault, Daniel R.
Gaubert and S. Wayne Murphy and each of them, as the attorneys and proxies of
the undersigned, each with full power of substitution, to exercise all voting
and other rights of the undersigned in such manner as each such attorney and
proxy or his substitute shall in his sole discretion deem proper, with respect
to all of the Shares tendered hereby which have been accepted for payment by the
Purchaser prior to the time of any vote or other action (and any and all other
Shares or other securities issued or issuable in respect thereof on or after
May 7, 1999), at any meeting of shareholders of the Company (whether annual or
special and whether or not an adjourned meeting), by written consent or
otherwise. This proxy is irrevocable and is granted in consideration of, and is
effective upon, the acceptance for payment of such Shares by the Purchaser in
accordance with the terms of the Offer. Such acceptance for payment shall
revoke any other proxy or written consent granted by the undersigned at any time
with respect to such Shares (and all such other Shares or securities), and no
subsequent proxies will be given or written consents will be executed by the
undersigned (and if given or executed, will not be deemed to be effective).
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign and transfer the Shares tendered
hereby (and any and all other Shares or other securities issued or issuable in
respect thereof on or after May 7, 1999) and that when the same are accepted for
payment by the Purchaser, the Purchaser will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claims. The undersigned will, upon request, execute
and deliver any additional documents deemed by the Depositary or the Purchaser
to be necessary or desirable to complete the sale, assignment and transfer of
the Shares tendered hereby (and all such other Shares or securities).
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned, and any obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned. Except as stated in the Offer, this tender is
irrevocable.
The undersigned understands that tenders of Shares pursuant to any one of
the procedures described in the Offer to Purchase under "Procedure for Accepting
the Offer and Tendering Shares" and in the instructions hereto will constitute
an agreement between the undersigned and the Purchaser upon the terms and
subject to the conditions of the Offer.
4
<PAGE>
Unless otherwise indicated herein in the box entitled "Special Payment
Instructions", please issue the check for the purchase price of all Shares
purchased, and return all Share Certificates evidencing Shares not purchased or
not tendered in the name(s) of the registered holder(s) appearing above under
"Description of Shares Tendered". Similarly, unless otherwise indicated in the
box entitled "Special Delivery Instructions", please mail the check for the
purchase price of all Shares purchased and all Share Certificates evidencing
Shares not tendered or not purchased (and accompanying documents, as
appropriate) to the address(es) of the registered holder(s) appearing above
under "Description of Shares Tendered". In the event that the boxes entitled
"Special Payment Instructions" and "Special Delivery Instructions" are both
completed, please issue the check for the purchase price of all Shares purchased
and return all Share Certificates evidencing Shares not purchased or not
tendered in the name(s) of, and mail such check and Share Certificates to, the
person(s) so indicated. Unless otherwise indicated herein in the box entitled
"Special Payment Instructions", please credit any Shares tendered hereby and
delivered by book-entry transfer, but which are not purchased by crediting the
account at the Book-Entry Transfer Facility. The undersigned recognizes that
Purchaser has no obligation, pursuant to the "Special Payment Instructions," to
transfer any Shares from the name of the registered holder(s) thereof if
Purchaser does not purchase any of the Shares tendered hereby.
5
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 6, 7 and 8) (SEE INSTRUCTIONS 6, 7 AND 8)
<S> <C> <C>
To be completed ONLY if the check for the purchase To be completed ONLY if the check for the purchase
price of Shares purchased (less the amount of any price of Shares purchased (less the amount of any
applicable withholding tax) or Share Certificates applicable withholding tax) or Share Certificates not
not tendered or not purchased are to be issued in tendered or not purchased are to be mailed to someone
the name of someone other than the undersigned. other than the undersigned or to the undersigned at an
address other than that shown below the undersigned's
signature(s).
--------------------------------
Issue [_] check Mail [_] check
[_] certificates to: [_] certificates to:
-------------------------------- --------------------------------
Name(s) Name(s)
-------------------------------- --------------------------------
(Please Print) (Please Print)
-------------------------------- --------------------------------
-------------------------------- --------------------------------
Address Address
-------------------------------- --------------------------------
(Zip Code) (Zip Code)
(Taxpayer Identification No.)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
-------------------------------------------
SIGN HERE
(PLEASE COMPLETE SUBSTITUTE FORM W-9 BELOW)
Signature(s) of Owners
Dated , 1999
-------------------------------------------
Name(s)
-----------------------------------------
(Please Print)
Capacity (full title)
----------------------------
Address
------------------------------------------
(Include Zip Code)
Daytime Area Code and
Telephone Number
---------------------------------
(Must be signed by registered holder(s) exactly as name(s)
appear(s) on stock certificate(s) or on a security position
listing or by person(s) authorized to become registered
holder(s) by certificates and documents transmitted herewith.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, agent, officer of a corporation or other
person acting in a fiduciary or representative capacity,
please set forth full title and see Instruction 5.)
GUARANTEE OF SIGNATURES(S)
(IF REQUIRED; SEE INSTRUCTIONS 1 AND 5)
Name of Firm
------------------------------------
Authorized Signature
-----------------------------
Dated , 1999
--------------------------------------
7
<PAGE>
PAYER: FIRST CHICAGO TRUST COMPANY OF NEW YORK
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE PART I TAXPAYER IDENTIFICATION NO.__ FOR ALL ACCOUNTS PART II For Payees Exempt
FORM W-9 ---------------------------------------------------------------------- From Backup With-
DEPARTMENT OF THE TREASURY Enter your taxpayer identification ------------------------------ holding (see enclosed
number in the appropriate box. Guidelines)
INTERNAL REVENUE SERVICE For individuals and sole proprietors, ------------------------------
this is your Social Security Number. Social Security Number
For other entities, it is your
PAYER'S REQUEST FOR Employer Identification Number. OR
TAXPAYER IDENTIFICATION NO. If you do not have a number, see
"How to Obtain a TIN" in the ------------------------------
enclosed Guidelines.
Note: If the account is in more than ------------------------------
one name, see the chart in the Employer Identification Number
enclosed Guidelines to determine
what number to enter.
- ---------------------------------------------------------------------------------------------------------------------------------
CERTIFICATION -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me and
either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal
Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near
future). I understand that if I do not provide a taxpayer identification number within (60) days, 31% of all reportable payments
made to me thereafter will be withheld until I provide a number;
(2) I am not subject to backup withholding either because (a) I am exempt from backup withholding, or (b) I have not been notified
by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a failure to report all interest
or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding; and
(3) Any information provided on this form is true, correct and complete.
- ---------------------------------------------------------------------------------------------------------------------------------
SIGNATURE DATE , 1999
------------------------------------------------ ------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE
OFFER. PLEASE REVIEW ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL
DETAILS.
</TABLE>
8
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. Guarantee of Signatures. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by a firm which is a
member of a recognized Medallion Program approved by The Securities Transfer
Associations, Inc. (an "Eligible Institution"). Signatures on this Letter of
Transmittal need not be guaranteed (a) if this Letter of Transmittal is signed
by the registered holder(s) of the Shares (which term, for purposes of this
document, shall include any participant in the Book-Entry Transfer Facility
whose name appears on a security position listing as the owner of Shares)
tendered herewith and such holder(s) have not completed the instruction entitled
"Special Payment Instructions" on this Letter of Transmittal or (b) if such
Shares are tendered for the account of an Eligible Institution. See
Instruction 5.
2. Delivery of Letter of Transmittal and Shares. This Letter of Transmittal
is to be used either if Share Certificates are to be forwarded herewith or if
delivery of Shares is to be made by book-entry transfer pursuant to the
procedures set forth in "Procedure for Accepting the Offer and Tendering Shares"
in the Offer to Purchase. Share Certificates evidencing all physically delivered
Shares, or a confirmation of a book-entry transfer into the Depositary's account
at the Book-Entry Transfer Facility of all Shares delivered electronically, as
well as a properly completed and duly executed Letter of Transmittal (or
facsimile thereof or, in the case of a book-entry transfer, an Agent's Message)
and any other documents required by this Letter of Transmittal, must be received
by the Depositary at one of its addresses set forth on the front page of this
Letter of Transmittal by the Expiration Date (as defined in the Offer to
Purchase). Shareholders whose Share Certificates are not immediately available,
who cannot deliver their Share Certificates and all other required documents to
the Depositary prior to the Expiration Date or who cannot complete the procedure
for delivery by book-entry transfer on a timely basis may tender their Shares
pursuant to the guaranteed delivery procedure described under "Procedures for
Accepting the Offer and Tendering Shares" in the Offer to Purchase. Pursuant to
such procedure: (a) such tender must be made by or through an Eligible
Institution, (b) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by the Purchaser, must be received
by the Depositary by the Expiration Date and (c) the Share Certificates
evidencing all physically delivered Shares, or a confirmation of a book-entry
transfer into the Depositary's account at the Book-Entry Transfer Facility of
all Shares delivered electronically, in each case together with a Letter of
Transmittal (or a facsimile thereof), properly completed and duly executed, with
any required signature guarantees, and any other documents required by this
Letter of Transmittal, must be received by the Depositary within three New York
Stock Exchange, Inc. trading days after the date of execution of such Notice of
Guaranteed Delivery, all as described under "Procedures for Accepting the Offer
and Tendering Shares" in the Offer to Purchase.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, SHARE CERTIFICATES AND
ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER
FACILITY, IS AT THE ELECTION AND RISK OF THE TENDERING SHAREHOLDER. SHARES WILL
BE DEEMED DELIVERED ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY
IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS
RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY
DELIVERY.
No alternative, conditional or contingent tenders will be accepted, and no
fractional Shares will be purchased. By executing this Letter of Transmittal
(or facsimile thereof), the tendering shareholder waives any right to receive
any notice of the acceptance for payment of their Shares.
3. Inadequate Space. If the space provided herein under "Description of
Shares Tendered" is inadequate, the Share Certificate numbers, the number of
Shares evidenced by such Share Certificates and the number of Shares tendered
should be listed on a separate schedule and attached hereto.
4. Partial Tenders (not applicable to shareholders who tender by book-entry
transfer). If fewer than all the Shares evidenced by any Share Certificate
delivered to the Depositary herewith are to be tendered hereby, fill in the
number of Shares which are to be tendered in the box entitled "Number of Shares
Tendered". In such cases, new Share
9
<PAGE>
Certificate(s) evidencing the remainder of the Shares that were evidenced by the
Share Certificates delivered to the Depositary herewith will be sent to the
person(s) signing this Letter of Transmittal, unless otherwise provided in the
box entitled "Special Delivery Instructions" on the reverse hereof, as soon as
practicable after the expiration or termination of the Offer. All Shares
evidenced by Share Certificates delivered to the Depositary will be deemed to
have been tendered unless otherwise indicated.
5. Signatures on Letter of Transmittal; Stock Powers and Endorsements. If
this Letter of Transmittal is signed by the registered holder(s) of the Shares
tendered hereby, the signature(s) must correspond with the name(s) as written on
the face of the Share Certificates without alteration, enlargement or any change
whatsoever.
If any of the Shares tendered hereby are held of record by two or more
persons, all such persons must sign this Letter of Transmittal.
If any of the Shares tendered hereby are registered in the names of
different holders, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal as there are different registrations of such
Shares.
If this Letter of Transmittal is signed by the registered holder(s) of the
Shares tendered hereby, no endorsements of Share Certificates or separate stock
powers are required, unless payment is to be made to, or Share Certificates
evidencing Shares not tendered or not purchased are to be issued in the name of,
a person other than the registered holder(s), in which case, the Share
Certificate(s) evidencing the Shares tendered hereby must be endorsed or
accompanied by appropriate stock powers, in either case signed exactly as the
name(s) of the registered holder(s) appear(s) on such Share Certificate(s).
Signatures on such Share Certificate(s) and stock powers must be guaranteed by
an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Shares tendered hereby, the Share Certificate(s)
evidencing the Shares tendered hereby must be endorsed or accompanied by
appropriate stock powers, in either case signed exactly as the name(s) of the
registered holder(s) appear(s) on such Share Certificate(s). Signatures on such
Share Certificate(s) and stock powers must be guaranteed by an Eligible
Institution.
If this Letter of Transmittal or any Share Certificate or stock power is
signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and proper evidence
satisfactory to Purchaser of such person's authority so to act must be
submitted.
6. Stock Transfer Taxes. Except as otherwise provided in this Instruction
6, Purchaser will pay all stock transfer taxes with respect to the sale and
transfer of any Shares to it or its order pursuant to the Offer. If, however,
payment of the purchase price of any Shares purchased is to be made to, or Share
Certificate(s) evidencing Shares not tendered or not purchased are to be issued
in the name of, a person other than the registered holder(s), the amount of any
stock transfer taxes (whether imposed on the registered holder(s), such other
person or otherwise) payable on account of the transfer to such other person
will be deducted from the purchase price of such Shares purchased, unless
evidence satisfactory to Purchaser of the payment of such taxes, or exemption
therefrom, is submitted.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE SHARE CERTIFICATES EVIDENCING THE
SHARES TENDERED HEREBY.
7. Special Payment and Delivery Instructions. If a check for the purchase
price of any Shares tendered hereby is to be issued, or Share Certificate(s)
evidencing Shares not tendered or not purchased are to be issued, in the name of
a person other than the person(s) signing this Letter of Transmittal or if such
check or any such Share Certificate is to be sent to someone other than the
person(s) signing this Letter of Transmittal or to the person(s) signing this
Letter of Transmittal but at an address other than that shown in the box
entitled "Description of Shares Tendered," the appropriate boxes on this Letter
of Transmittal must be completed. All such Shares tendered hereby by book-entry
transfer and not purchased will be returned by crediting the account at the
Book-Entry Transfer Facility from which such Shares were delivered.
10
<PAGE>
8. Substitute Form W-9. Under the federal income tax laws, the Depositary
will be required to withhold 31% of the amount of any payments made to certain
shareholders pursuant to the Offer. In order to avoid such backup withholding,
each tendering shareholder, and, if applicable, each other payee, must provide
the Depositary with such shareholder's or payee's correct taxpayer
identification number and certify that such shareholder or payee is not subject
to backup withholding by completing the Substitute Form W-9 set forth above. In
general, if a shareholder or payee is an individual, the taxpayer identification
number is the Social Security Number of such individual. If the Depositary is
not provided with the correct taxpayer identification number, the shareholder or
payee may be subject to a $50 penalty imposed by the Internal Revenue Service.
Certain shareholders or payees (including, among others, all corporations) are
not subject to these backup withholding and reporting requirements. In order to
satisfy the Depositary that a shareholder or payee qualifies as an exempt
recipient, such shareholder or payee must submit a statement, signed under
penalties of perjury, attesting to that individual's exempt status. For further
information concerning backup withholding and instructions for completing the
Substitute Form W-9 (including how to obtain a taxpayer identification number if
you do not have one, and how to complete the Substitute Form W-9 if Shares are
held in more than one name), consult the enclosed Guidelines for Certification
of Taxpayer Identification Number on Substitute Form W-9. Shareholders who are
non-resident aliens or foreign entities not subject to backup withholding must
complete a Form W-8BEN (Certificate of Foreign Status) (and not a Substitute
Form W-9) and give the Depositary a completed Form W-8BEN prior to the receipt
of any payments to avoid backup withholding. Such Form W-8BEN may be obtained
from the Depositary.
Failure to complete the Substitute Form W-9 will not, by itself, cause
Shares or Share Certificates to be deemed invalidly tendered, but may require
the Depositary to withhold 31% of the amount of any payments made pursuant to
the Offer. Backup withholding is not an additional federal income tax. Rather,
the federal income tax liability of a person subject to backup withholding will
be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained provided that the required
information is furnished to the Internal Revenue Service. NOTE: FAILURE TO
COMPLETE AND RETURN THE SUBSTITUTE FORM W-9 MAY RESULT IN BACKUP WITHHOLDING OF
31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. REQUESTS FOR ASSISTANCE
OR ADDITIONAL COPIES OF THE OFFER TO PURCHASE AND THIS LETTER OF TRANSMITTAL MAY
BE OBTAINED FROM THE INFORMATION AGENT OR THE DEALER MANAGER AT THEIR RESPECTIVE
ADDRESSES OR TELEPHONE NUMBERS SET FORTH BELOW.
11
<PAGE>
The Information Agent is:
MORROW & CO., INC.
445 PARK AVENUE, 5TH FLOOR
NEW YORK, NY 10022
BANKS AND BROKERAGE FIRMS CALL:
(800) 662-5200
SHAREHOLDERS PLEASE CALL:
(800) 566-9061
THE DEALER MANAGER IS:
MERRILL LYNCH & CO.
WORLD FINANCIAL CENTER
NORTH TOWER
NEW YORK, NEW YORK 10281-1314
(212) 449-8971 (CALL COLLECT)
<PAGE>
FOR IMMEDIATE RELEASE
NEW ORLEANS -- May 13, 1999
McDERMOTT INTERNATIONAL COMMENCES TENDER OFFER TO
PURCHASE ALL OUTSTANDING SHARES OF J. RAY McDERMOTT
McDermott International, Inc. (NYSE: MDR) announced today that it has
commenced a tender offer to acquire all outstanding shares of J. Ray McDermott,
S.A. (NYSE: JRM) not already owned by McDermott for $35.62 per share, net to the
seller in cash. The offer is being made in accordance with the terms of
McDermott's previously announced merger agreement with J. Ray McDermott. The
offer and withdrawal rights will expire at 12:00 midnight, New York City time,
on Thursday, June 10, 1999, unless the offer is extended.
The tender offer is subject to the condition that a majority of the
approximately 14.4 million outstanding shares that could be tendered by
shareholders, other than McDermott, are validly tendered and not withdrawn, as
well as other customary conditions. McDermott has obtained a commitment from
Citibank, N.A., a member of Citigroup, for necessary financing under acceptable
terms, subject to execution of a definitive agreement and other conditions.
Pursuant to the merger agreement, any shares not purchased in the offer
(other than shares owned by McDermott) will be acquired for the same price in
cash, in a second-step merger. J. Ray McDermott currently has approximately
34.0 million shares outstanding. McDermott currently owns approximately 24.3
million shares or approximately 63% of the outstanding shares of J. Ray
McDermott and approximately 14.4 million shares or approximately 37% are
publicly held.
Merrill Lynch & Co. is acting as dealer manager in connection with the
offer and Morrow & Co. is acting as information agent.
McDermott International, Inc. is a leading worldwide energy services
company. The company and its subsidiaries manufacture steam-generating
equipment, environmental equipment, and products for the U.S. government. They
also provide engineering and construction services for industrial, utility, and
hydrocarbon processing facilities, and to the offshore oil and natural gas
industry.
For additional information please contact:
Don Washington
McDermott International, Inc.
P. O. Box 61961
New Orleans, LA 70161-1961
(504) 587-4080
###
<PAGE>
ANNEX A
CONFORMED COPY
AGREEMENT AND PLAN OF MERGER
dated as of
May 7, 1999
between
J. RAY MCDERMOTT, S.A.
and
MCDERMOTT INTERNATIONAL, INC.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 THE OFFER
Section 1.01. The Offer............................................ 1
Section 1.02. Company Action....................................... 2
Section 1.03. Directors............................................ 3
ARTICLE 2 THE MERGER
Section 2.01. The Merger........................................... 4
Section 2.02. Conversion of Shares................................. 5
Section 2.03. Surrender and Payment................................ 5
Section 2.04. Stock Options........................................ 6
Section 2.05. Restricted Shares and Performance Shares............. 7
Section 2.06. Board Approval....................................... 8
Section 2.07. Withholding Rights................................... 9
ARTICLE 3 THE SURVIVING CORPORATION
Section 3.01. Certificate of Incorporation......................... 9
Section 3.02. Bylaws............................................... 9
Section 3.03. Directors and Officers............................... 9
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 4.01. Corporate Existence and Power....................... 10
Section 4.02. Corporate Authorization............................. 10
Section 4.03. Governmental Authorization.......................... 10
Section 4.04. Non-Contravention................................... 11
Section 4.05. Capitalization...................................... 11
Section 4.06. Subsidiaries........................................ 12
Section 4.07. SEC Filings......................................... 12
Section 4.08. Financial Statements................................ 13
Section 4.09. Disclosure Documents................................ 13
Section 4.10. Absence of Certain Changes.......................... 14
i
<PAGE>
Section 4.11. No Undisclosed Material Liabilities................. 16
Section 4.12. Compliance with Laws and Court Orders............... 16
Section 4.13. Litigation.......................................... 17
Section 4.14. Finders' Fees....................................... 17
Section 4.15. Opinion of Financial Advisor........................ 17
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PARENT
Section 5.01. Corporate Existence and Power....................... 17
Section 5.02. Corporate Authorization............................. 18
Section 5.03. Governmental Authorization.......................... 18
Section 5.04. Non-Contravention................................... 18
Section 5.05. Disclosure Documents................................ 19
Section 5.06. Finders' Fees....................................... 19
Section 5.07. Financing........................................... 19
ARTICLE 6 COVENANTS OF THE COMPANY
Section 6.01. Conduct of the Company.............................. 20
Section 6.02. Stockholder Meeting; Proxy Material................. 20
Section 6.03. No Solicitation..................................... 21
ARTICLE 7 COVENANTS OF PARENT
Section 7.01. Certain Obligations of Parent....................... 22
Section 7.02. Voting of Shares.................................... 22
Section 7.03. Director and Officer Liability...................... 22
ARTICLE 8 COVENANTS OF PARENT AND THE COMPANY
Section 8.01. Best Efforts........................................ 24
Section 8.02. Certain Filings..................................... 24
Section 8.03. Public Announcements................................ 24
Section 8.04. Further Assurances.................................. 25
Section 8.05. Access to Information............................... 25
Section 8.06. Notices of Certain Events........................... 25
Section 8.07. Confidentiality..................................... 25
ii
<PAGE>
ARTICLE 9 CONDITIONS TO THE MERGER
Section 9.01. Conditions to Obligations of Each Party............. 26
ARTICLE 10 TERMINATION
Section 10.01. Termination........................................ 27
Section 10.02. Effect of Termination.............................. 28
ARTICLE 11 MISCELLANEOUS
Section 11.01. Notices............................................ 28
Section 11.02. Survival of Representations and Warranties......... 29
Section 11.03. Amendments; No Waivers............................. 29
Section 11.04. Expenses........................................... 30
Section 11.05. Successors and Assigns............................. 30
Section 11.06. Governing Law...................................... 30
Section 11.07. Jurisdiction....................................... 30
Section 11.08. WAIVER OF JURY TRIAL............................... 31
Section 11.09. Counterparts; Effectiveness........................ 31
Section 11.10. Entire Agreement................................... 31
Section 11.11. Captions........................................... 31
Section 11.12. Severability....................................... 31
Section 11.13. Specific Performance............................... 32
Section 11.14. Definitions and Usage.............................. 32
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of May 7, 1999 between J. Ray
McDermott, S.A., a corporation organized under the laws of the Republic of
Panama (the "COMPANY"), and McDermott International, Inc., a corporation
organized under the laws of the Republic of Panama ("PARENT").
The parties hereto agree as follows:
ARTICLE 1
The Offer
Section 1.1. The Offer. (a) Provided that nothing shall have occurred
that would result in a failure to satisfy any of the conditions set forth in
Annex I hereto, as promptly as practicable after the date hereof, but in no
event later than five business days following the public announcement of the
terms of this Agreement, a wholly-owned subsidiary of Parent to be organized
under the laws of the Republic of Panama ("MERGER SUBSIDIARY") shall commence an
offer (the "OFFER") to purchase all of the outstanding shares of Common Stock
(other than shares beneficially owned by Parent) at a price of $35.62 per share
of Common Stock ("COMMON SHARE PRICE"), net to the seller in cash. The Offer
shall be subject to the condition that there shall be validly tendered in
accordance with the terms of the Offer, prior to the expiration date of the
Offer and not withdrawn, a number of shares of Common Stock that represents at
least a majority of the outstanding shares of Common Stock (other than shares
beneficially owned by Parent) (the "MINIMUM CONDITION") and to the other
conditions set forth in Annex I hereto. Merger Subsidiary expressly reserves
the right to waive any of the conditions to the Offer and to make any change in
the terms or conditions of the Offer, provided that no change may be made that,
without the prior written consent of the Company, waives the Minimum Condition,
changes the form of consideration to be paid, decreases the price per share of
Common Stock or the number of shares of Common Stock sought in the Offer or
imposes conditions to the Offer in addition to those set forth in Annex I.
"COMMON STOCK" means the common stock, par value $0.01 per share, of the
Company.
(b) As soon as practicable on the date of commencement of the Offer,
Merger Subsidiary shall file with the Securities and Exchange Commission ("SEC")
a Tender Offer Statement on Schedule 14D-1 (the "SCHEDULE 14D-1") with respect
to the Offer, which will contain the offer to purchase and form of the related
letter of transmittal and summary advertisement (such Schedule 14D-1 and the
documents included therein pursuant to which the Offer will be made, together
<PAGE>
with any supplements or amendments thereto, the "OFFER DOCUMENTS") and shall, as
and to the extent required by applicable federal securities laws, disseminate
the Offer Documents to the holders of Common Stock. Parent and the Company each
agrees promptly to correct any information provided by it for use in the Offer
Documents if and to the extent that such information shall have become false or
misleading in any material respect. Merger Subsidiary agrees to take all steps
necessary to cause the Schedule 14D-1 as so corrected to be filed with the SEC
and the Offer Documents as so corrected to be disseminated to holders of Common
Stock, in each case as and to the extent required by applicable federal
securities laws.
Section 1.2. Company Action. (a) The Company hereby consents to the Offer
and represents that its Board of Directors, at a meeting duly called and held
has (i) determined that this Agreement and the transactions contemplated hereby,
including the Offer and the Merger, are fair to and in the best interests of the
Company's stockholders (other than Parent), (ii) approved and adopted this
Agreement and the transactions contemplated hereby, including the Offer and the
Merger, in accordance with the laws of the Republic of Panama ("PANAMA LAW") and
(iii) resolved (subject to Section 6.02(b)) to recommend acceptance of the Offer
and approval and adoption of this Agreement and the Merger by its stockholders.
The Company further represents that Simmons & Company International has
delivered to the Company's Board of Directors its opinion that the consideration
to be paid in the Offer and the Merger is fair to the holders of Common Stock
(other than Parent) from a financial point of view. The Company will promptly
furnish Parent with a list of its stockholders, mailing labels and any available
listing or computer file containing the names and addresses of all record
holders of Common Stock and lists of securities positions of Common Stock held
in stock depositories, in each case true and correct as of the most recent
practicable date, and will provide to Parent such additional information
(including, without limitation, updated lists of stockholders, mailing labels
and lists of securities positions) and such other assistance as Parent may
reasonably request in connection with the Offer. Subject to the requirements of
applicable law, and except for such steps as are necessary to disseminate the
Offer Documents and any other documents necessary to consummate the Merger,
Parent and Merger Subsidiary and each of their affiliates, associates,
employees, agents and advisors shall hold in confidence the information
contained in any such lists, labels, listings or files, shall use such
information only in connection with the Offer and the Merger and, if this
Agreement shall be terminated and if the Company so requests, shall deliver, and
shall use their reasonable efforts to cause their affiliates, associates,
employees, agents and advisors to deliver, to the Company all copies and any
extracts or summaries from such information then in their possession or control.
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(b) As soon as practicable after the time that the Offer is commenced,
the Company shall file with the SEC and disseminate to holders of shares of
Common Stock, in each case as and to the extent required by applicable federal
securities laws, a Solicitation/Recommendation Statement on Schedule 14D-9
(together with any amendments or supplements thereto, the "SCHEDULE 14D-9") that
shall reflect the recommendations of the Company's Board of Directors referred
to above. The Company and Parent each agree promptly to correct any information
provided by it for use in the Schedule 14D-9 if and to the extent that it shall
have become false or misleading in any material respect. The Company agrees to
take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed
with the SEC and to be disseminated to holders of shares of Common Stock, in
each case as and to the extent required by applicable federal securities laws.
Section 1.3. Directors. (a) Effective upon the acceptance for payment of
shares of Common Stock pursuant to the Offer, Parent shall be entitled to
designate the number of directors, rounded to the nearest whole number, on the
Company's Board of Directors that equals the product of (i) the total number of
directors on the Company's Board of Directors and (ii) the percentage that the
number of shares of Common Stock beneficially owned by Parent bears to the total
number of outstanding shares of Common Stock and the Company shall take all
action necessary to cause Parent's designees to be elected or appointed to the
Company's Board of Directors, including, without limitation, increasing the
number of directors, and seeking and accepting resignations of incumbent
directors. At such time, the Company will also use its best efforts to cause
individuals designated by Parent to constitute the number of members, rounded to
the nearest whole number, on (i) each committee of the Board of Directors of the
Company (other than the Independent Committee) and (ii) each board of directors
of each subsidiary of the Company (and each committee thereof) that represents
the same percentage as such individuals represent on the Board of Directors of
the Company.
(b) The Company's obligations to appoint Parent's designees to the
Company's Board of Directors shall be subject to Section 14(f) of the 1934 Act
and Rule 14f-1 promulgated thereunder. The Company shall promptly take all
actions, and shall include in the Schedule 14D-9 such information with respect
to the Company and its officers and directors, as Section 14(f) and Rule 14f-1
require in order to fulfill its obligations under this Section. Parent shall
supply to the Company in writing and be solely responsible for any information
with respect to itself and its nominees, officers, directors and affiliates
required by Section 14(f) and Rule 14f-1.
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(c) During the term of this Agreement, Parent will, and will cause all
of its subsidiaries to, take all actions necessary to permit the Independent
Committee to continue in existence without diminution of its powers or duties
and its members to consist solely of the members thereof on the date hereof, or
any successors selected (with the written consent of a majority of the members
of the Independent Committee) by the Board of Directors of the Company who are
not otherwise employed by Parent or its affiliates. Any amendment, waiver or
extension of time by the Company hereunder, and any action taken by the Company
or its Board of Directors in connection therewith, shall require the concurrence
or consent of a majority of the members of the Independent Committee.
ARTICLE 2
The Merger
Section 2.1. The Merger. (a) Upon the terms and subject to the conditions
set forth in this Agreement, at the Effective Time, Merger Subsidiary shall be
merged (the "MERGER") with and into the Company in accordance with Panama Law,
whereupon the separate existence of Merger Subsidiary shall cease, and the
Company shall continue as the surviving corporation (the "SURVIVING
CORPORATION").
(b) As soon as practicable after satisfaction or, to the extent
permitted hereunder, waiver of all conditions to the Merger set forth herein,
the Company and Merger Subsidiary will file a certificate of merger, in a form
mutually acceptable to the Company and Parent and prepared and executed in
accordance with the relevant provisions of Panama Law (the "CERTIFICATE OF
MERGER"), with the Public Registry Office of the Republic of Panama and make all
other filings or recordings required in connection with the Merger. The Merger
shall become effective at such time (the "EFFECTIVE TIME") as the Company's
Certificate of Merger is recorded by the Public Registry Office of the Republic
of Panama.
(c) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, powers, privileges and franchises and be subject to all
of the obligations, liabilities, restrictions and disabilities of the Company
and Merger Subsidiary, all as provided under Panama Law.
Section 2.2. Conversion of Shares. At the Effective Time:
(a) except as otherwise provided in Section 2.02(b), each share of
Common Stock outstanding immediately prior to the Effective Time shall be
converted into the right to receive $35.62 in cash or any higher price paid for
each
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share of Common Stock pursuant to the Offer, without interest (the "MERGER
CONSIDERATION");
(b) each share of Common Stock and each share of Series A $2.25
Cumulative Convertible Preferred Stock, $.01 par value, of the Company held by
the Company as treasury stock or owned by Parent or any of its subsidiaries
immediately prior to the Effective Time shall be canceled and retired, and no
payment shall be made with respect thereto; and
(c) each share of common stock of Merger Subsidiary outstanding
immediately prior to the Effective Time shall be converted into and become one
share of common stock of the Surviving Corporation with the same rights, powers
and privileges as the shares so converted (all such shares so converted shall
constitute the only outstanding shares of capital stock of the Surviving
Corporation).
Section 2.3. Surrender and Payment. (a) Prior to the Effective Time,
Parent shall appoint an agent reasonably acceptable to the Company (the
"EXCHANGE AGENT") for the purpose of exchanging certificates representing shares
of Common Stock (the "CERTIFICATES") for the Merger Consideration. Parent will
make available to the Exchange Agent, as needed, the Merger Consideration to be
paid in respect of the shares of Common Stock. Promptly after the Effective
Time, Parent will send, or will cause the Exchange Agent to send, to each holder
of shares of Common Stock at the Effective Time a letter of transmittal and
related instructions (which shall specify that the delivery shall be effected,
and risk of loss and title shall pass, only upon proper delivery of the
Certificates to the Exchange Agent) for use in such exchange.
(b) Each holder of shares of Common Stock that have been converted into
the right to receive the Merger Consideration will be entitled to receive, upon
surrender to the Exchange Agent of a Certificate, together with a properly
completed letter of transmittal if applicable, the Merger Consideration payable
for each share of Common Stock represented by such Certificate. Until so
surrendered, each such Certificate shall represent after the Effective Time for
all purposes only the right to receive such Merger Consideration, without
interest thereon.
(c) If any portion of the Merger Consideration is to be paid to a person
other than the person in whose name the surrendered Certificate is registered,
it shall be a condition to such payment that the Certificate so surrendered
shall be properly endorsed or otherwise be in proper form for transfer and that
the person requesting such payment shall pay to the Exchange Agent any transfer
or other taxes required as a result of such payment to a person other than the
registered
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holder of such Certificate or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable.
(d) After the Effective Time, there shall be no further registration of
transfers of shares of Common Stock. If, after the Effective Time, Certificates
are presented to the Surviving Corporation, they shall be canceled and exchanged
for the Merger Consideration provided for, and in accordance with the procedures
set forth, in this Article.
(e) Any portion of the Merger Consideration made available to the
Exchange Agent pursuant to Section 2.03(a) that remains unclaimed by the holders
of shares of Common Stock six months after the Effective Time shall be returned
to Parent, upon demand, and any such holder who has not exchanged them for the
Merger Consideration in accordance with this Section prior to that time shall
thereafter look only to Parent for payment of the Merger Consideration in
respect of such shares of Common Stock. Notwithstanding the foregoing, Parent
shall not be liable to any holder of shares of Common Stock for any amounts paid
to a public official pursuant to applicable abandoned property, escheat or
similar laws.
(f) If any Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such Certificate
to be lost, stolen or destroyed and, if required by the Surviving Corporation,
the posting by such person of a bond, in such reasonable amount as the Surviving
Corporation may direct, as indemnity against any claim that may be made against
it with respect to such Certificate, the Exchange Agent will issue, in exchange
for such lost, stolen or destroyed Certificate, the Merger Consideration to be
paid in respect of the shares of Common Stock represented by such Certificate,
as contemplated by this Article.
Section 2.4. Stock Options. (a) The terms of each outstanding option to
purchase shares of Common Stock under any employee or director stock option or
compensation plan or arrangement of the Company (a "COMPANY STOCK OPTION"),
whether or not exercisable or vested, shall be adjusted as necessary so that, at
the Effective Time, each Company Stock Option outstanding immediately prior to
the Effective Time shall be deemed to constitute an option to purchase shares of
common stock, $1.00 par value, of Parent ("PARENT STOCK"), on the same terms and
conditions as were applicable under such Company Stock Option, except as set
forth below (each, as so adjusted, an "ADJUSTED OPTION"). Each Adjusted Option
shall be fully vested and shall entitle the holder to purchase a number of
shares of Parent Stock having an aggregate market value, as of the Effective
Time, equal to the aggregate market value of the shares of Common Stock
purchasable pursuant to the applicable Company Stock Option. The
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exercise price per share of Parent Stock under each Adjusted Option shall be
equal to (A) the aggregate exercise price for the shares of Common Stock
purchasable pursuant to the applicable Company Stock Option divided by (B)
the aggregate number of shares of Parent Stock deemed purchasable pursuant to
such Adjusted Stock Option. Notwithstanding the foregoing, any fractional
share of Parent Stock resulting from the foregoing adjustment of a Company Stock
Option shall be rounded down to the nearest whole share. For purposes of this
Section 2.04, the market value of a share of Parent Stock as of the Effective
Time shall be deemed to be the closing sale price of such share on the New York
Stock Exchange on the trading day immediately preceding the Effective Time.
The market value of a share of Common Stock as of the Effective Time shall be
deemed the Merger Consideration.
(b) Prior to the Effective Time, the Company shall (i) make any
amendments to the terms of such stock option or compensation plans or
arrangements that are necessary to give effect to the transactions contemplated
by this Section 2.04 and (ii) to the extent required, use its best efforts to
obtain any consents from holders of Company Stock Options. At the Effective
Time, except to the extent otherwise required by the existing stock option
agreements, all references to the Company in the stock option agreements
covering outstanding options to purchase Common Stock will be deemed to refer to
Parent. Parent will assume all the Company's obligations with respect to those
options as so amended and will, from and after the Effective Time, make
available for issuance on exercise of those options all shares of Parent Stock
covered thereby and maintain an effective registration statement under the
Securities Act of 1933 (the "1933 ACT") which covers those shares.
Section 2.5. Restricted Shares and Performance Shares. (a) As soon as
practicable after the date hereof, the Company shall provide each person who
holds restricted shares of Common Stock ("RESTRICTED SHARES") under the J. Ray
McDermott, S.A. Restated 1994 Executive Long-Term Incentive Compensation Plan
(the "1994 PLAN") or the J. Ray McDermott, S.A. Non-Employee Director Stock Plan
the opportunity to make an irrevocable election either to: (i) receive a cash
payment, as of the Effective Time, in respect of such Restricted Shares (whether
or not then vested); or (ii) receive a replacement award (a "REPLACEMENT
RESTRICTED AWARD"), as of the Effective Time, of Parent Stock having an
aggregate fair market value (as of the Effective Time) equal to the product of
(A) the number of Restricted Shares to which such Replacement Restricted Award
relates and (B) the Merger Consideration. Each Replacement Restricted Award
shall be issued on the same terms, and subject to identical restrictions, as
applied to the Restricted Shares to which such Replacement Restricted Award
relates (without taking into account any accelerated vesting as a result of the
Merger).
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(b) As soon as practicable after the date hereof, the Company shall
provide each person who holds performance restricted shares ("PERFORMANCE
SHARES") under the 1994 Plan the opportunity to make an irrevocable election
either to: (i) receive a cash payment, as of the Effective Time, in respect of
such Performance Shares in accordance with the terms of Section 12.1 of the 1994
Plan; or (ii) receive a replacement award (a "REPLACEMENT PERFORMANCE AWARD"),
as of the Effective Time, of performance shares denominated in shares of Parent
Stock and having the following terms. Each Replacement Performance Award shall
represent the notional grant of a number of shares of Parent Stock having an
aggregate fair market value, as of the Effective Time, equal to the product of
(A) the number of notional shares of Common Stock originally granted pursuant to
the Performance Shares to which such Replacement Restricted Award relates and
(B) the Merger Consideration. Each Replacement Restricted Award shall be
subject to a two-year vesting period upon terms identical to those that apply,
under the 1994 Plan, to Performance Shares as of the end of the initial two-year
measurement period.
(c) Prior to the Effective Time, the Company shall make any amendments
to the terms of such compensation plans or arrangements that are necessary to
give effect to the transactions contemplated by this Section 2.05. At the
Effective Time, except to the extent otherwise required by the existing
restricted stock and performance share agreements, all references to the Company
in the agreements covering Restricted Shares and Performance Shares will be
deemed to refer to Parent. Parent will assume all the Company's obligations
with respect to Restricted Shares and Performance Shares and will, from and
after the Effective Time, make available for issuance as necessary all shares of
Parent Stock covered by the Replacement Restricted Awards and Replacement
Performance Awards and maintain an effective registration statement under the
1933 Act which covers those shares.
(d) For purposes of this Section 2.05, the market value of a share of
Parent Stock as of the Effective Time shall be deemed to be the closing sale
price of such share on the New York Stock Exchange on the trading day
immediately preceding the Effective Time.
Section 2.6. Board Approval. Parent agrees that the Parent Board of
Directors or the Compensation Committee of the Parent Board of Directors shall
at or prior to the Effective Time adopt resolutions specifically approving, for
purposes of Rule 16b-3 under the Exchange Act of 1934 (the "1934 ACT"), the
receipt pursuant to Sections 2.04 and 2.05 of Adjusted Options and Parent Stock
by officers and directors of the Company who will become officers or directors
of the Parent subject to Rule 16b-3.
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Section 2.7. Withholding Rights. Each of the Surviving Corporation and
Parent shall be entitled to deduct and withhold from the consideration otherwise
payable to any person pursuant to this Article such amounts as it is required to
deduct and withhold with respect to the making of such payment under any
provision of federal, state, local or foreign tax law. If the Surviving
Corporation or Parent, as the case may be, so withholds amounts, such amounts
shall be treated for all purposes of this Agreement as having been paid to the
holder of the shares of Common Stock or options or other rights in respect of
which the Surviving Corporation or Parent, as the case may be, made such
deduction and withholding.
ARTICLE 3
The Surviving Corporation
Section 3.1. Certificate of Incorporation. The certificate of
incorporation of Merger Subsidiary in effect at the Effective Time shall be the
certificate of incorporation of the Surviving Corporation until amended in
accordance with its terms and applicable law, provided that, at the Effective
Time, such certificate of incorporation shall be amended to provide that the
name of the corporation shall be J. Ray McDermott, S.A.
Section 3.2. Bylaws. The bylaws of Merger Subsidiary in effect at the
Effective Time shall be the bylaws of the Surviving Corporation until amended in
accordance with its terms, the certificate of incorporation of the Surviving
Corporation and applicable law.
Section 3.3. Directors and Officers. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance with
applicable law, (i) the directors of Merger Subsidiary at the Effective Time
shall be the directors of the Surviving Corporation and (ii) the officers of the
Company at the Effective Time shall be the officers of the Surviving
Corporation.
ARTICLE 4
Representations and Warranties of the Company
Except as disclosed to Parent in writing prior to the date hereof, the
Company represents and warrants to Parent that:
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Section 4.1. Corporate Existence and Power. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
Republic of Panama and has all corporate powers and all governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted, except for such matters as would not have,
individually or in the aggregate, a material adverse effect on the Company. The
Company is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where such qualification is necessary, except for
those jurisdictions where the failure to be so qualified would not have,
individually or in the aggregate, a material adverse effect on the Company. The
Company has heretofore delivered to Parent true and complete copies of the
certificate of incorporation and bylaws of the Company as currently in effect.
Section 4.2. Corporate Authorization. (a) The execution, delivery and
performance by the Company of this Agreement and the consummation by the Company
of the transactions contemplated hereby are within the Company's corporate
powers and, except for the required approval of the Company's stockholders in
connection with the Merger, have been duly authorized by all necessary corporate
action on the part of the Company. The affirmative vote of (i) the holders of
two-thirds of the outstanding shares of the Series A $2.25 Cumulative
Convertible Preferred Stock, $.01 par value, of the Company ("PREFERRED STOCK"),
voting separately as a class and (ii) the holders of two-thirds of the
outstanding shares of Common Stock, voting separately as a class, are the only
votes of the holders of any of the Company's capital stock necessary in
connection with the consummation of the Merger. This Agreement constitutes a
valid and binding agreement of the Company.
Section 4.3. Governmental Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation by the Company
of the transactions contemplated hereby require no action by or in respect of,
or filing with, any governmental body, agency, official or authority, domestic
or foreign, other than (i) the filing and recordation in the Public Registry
Office of the Republic of Panama of the Certificate of Merger, (ii) compliance
with any applicable requirements of the 1934 Act or any other securities laws
(whether state or foreign) or any applicable provisions of Panama Law (including
Executive Decree No. 18 of March 14, 1994 of the Republic of Panama), and (iii)
any actions or filings the absence of which would not reasonably be expected to
have, individually or in the aggregate, a material adverse effect on the Company
or materially to impair the ability of the Company to consummate the
transactions contemplated by this Agreement.
Section 4.4. Non-Contravention. The execution, delivery and performance
by the Company of this Agreement and the consummation of the
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transactions contemplated hereby do not and will not (i) contravene, conflict
with, or result in any violation or breach of any provision of the certificate
of incorporation or bylaws of the Company, (ii) assuming compliance with the
matters referred to in Section 4.03, contravene, conflict with or result in a
violation or breach of any provision of any applicable law, rule, regulation,
judgment, injunction, order or decree, (iii) require any consent or other action
by any person under, constitute a default under, or cause or permit the
termination, cancellation, acceleration or other change of any right or
obligation or the loss of any benefit to which the Company or any of its
subsidiaries is entitled under any provision of any agreement or other
instrument binding upon the Company or any of its subsidiaries or any license,
franchise, permit, certificate, approval or other similar authorization
affecting, or relating in any way to, the assets or business of the Company
and its subsidiaries or (iv) result in the creation or imposition of any Lien
on any asset of the Company or any of its subsidiaries except, in the case of
clauses (ii), (iii) and (iv), for such matters as would not reasonably be
expected to have, individually or in the aggregate, a material adverse effect
on the Company or materially to impair the ability of the Company to
consummate the transactions contemplated by this Agreement. "LIEN" means,
with respect to any property or asset, any mortgage, lien, pledge, charge,
security interest, encumbrance or other adverse claim of any kind in respect of
such property or asset.
Section 4.5. Capitalization. (a) The authorized capital stock of the
Company consists of 60,000,000 shares of common stock, $.01 par value, and
10,000,000 shares of preferred stock, $.01 par value, of which 3,200,000 shares
are designated as Series A $2.25 Cumulative Convertible Preferred Stock. As of
March 31, 1999, there were outstanding (i) 39,060,814 shares of Common Stock and
employee and director options to purchase an aggregate of 839,471 shares of
Common Stock (of which options to purchase an aggregate of 405,934 shares of
Common Stock were exercisable) and (ii) 3,200,000 shares of Preferred Stock.
All outstanding shares of capital stock of the Company have been duly authorized
and validly issued and are fully paid and nonassessable.
(b) Except as set forth in this Section 4.05 and for changes since March
31, 1999 resulting from the exercise of employee or director stock options or
the conversion of Preferred Stock outstanding on such date, there are no
outstanding (i) shares of capital stock or voting securities of the Company,
(ii) securities of the Company convertible into or exchangeable for shares of
capital stock or voting securities of the Company or (iii) options or other
rights to acquire from the Company or other obligation of the Company to issue
any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of the Company. There are
no outstanding obligations of the Company or any of its subsidiaries to
repurchase, redeem or otherwise acquire any of the securities referred to in
clauses (i), (ii) or (iii) above.
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Section 4.6. Subsidiaries. (a) Each significant subsidiary of the Company
is a corporation duly incorporated, validly existing and in good standing under
the laws of its jurisdiction of incorporation, has all corporate powers and all
governmental licenses, authorizations, permits, consents and approvals required
to carry on its business as now conducted, except for such matters as would not
have, individually or in the aggregate, a material adverse effect on the
Company. Each such significant subsidiary is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction where such
qualification is necessary, except for such matters as would not have,
individually or in the aggregate, a material adverse effect on the Company. All
significant subsidiaries of the Company and their respective jurisdictions of
incorporation are identified in the Company's annual report on Form 10-K for the
fiscal year ended March 31, 1998 (the "COMPANY 10-K").
(b) Except as set forth in the Company SEC Documents filed prior to the
date hereof, all of the outstanding capital stock of, or other voting securities
or ownership interests in, each subsidiary of the Company, is owned by the
Company, directly or indirectly, free and clear of any Lien and free of any
other limitation or restriction (including any restriction on the right to vote,
sell or otherwise dispose of such capital stock or other voting securities or
ownership interests). There are no outstanding (i) securities of the Company or
any of its subsidiaries convertible into or exchangeable for shares of capital
stock or other voting securities or ownership interests in any subsidiary of the
Company or (ii) options or other rights to acquire from the Company or any of
its subsidiaries, or other obligation of the Company or any of its subsidiaries
to issue, any capital stock or other voting securities or ownership interests
in, or any securities convertible into or exchangeable for any capital stock or
other voting securities or ownership interests in, any subsidiary of the
Company. There are no outstanding obligations of the Company or any of its
subsidiaries to repurchase, redeem or otherwise acquire any of the securities
referred to in clauses (i) or (ii) above.
Section 4.7. SEC Filings. (a) The Company has delivered to Parent (i) the
Company's annual report on Form 10-K for its fiscal year ended March 31, 1998,
(ii) its quarterly reports on Form 10-Q for its fiscal quarters ended June 30,
1998, September 30, 1998 and December 31, 1998, (iii) its proxy or information
statements relating to meetings of, or actions taken without a meeting by, the
stockholders of the Company held since March 31, 1998 and (iv) all of its other
reports, statements, schedules and registration statements filed with the SEC
pursuant to the 1933 Act or the 1934 Act, as the case may be, since March 31,
1998 (the documents referred to in this Section 4.07(a), collectively, the
"COMPANY SEC DOCUMENTS"). The Company's quarterly report on Form 10-Q
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for its fiscal quarter ended December 31, 1998 is referred to herein as the
"COMPANY 10-Q".
(b) As of its filing date, each Company SEC Document complied as to form
in all material respects with the applicable requirements of the 1933 Act or the
1934 Act, as the case may be. Each Company SEC Document filed pursuant to the
1934 Act did not, as of its filing date, and each Company SEC Document filed
pursuant to the 1933 Act did not, as of the date it became effective, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
Section 4.8. Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of the
Company included in the Company SEC Documents fairly present in all material
respects, in conformity with generally accepted accounting principles ("GAAP")
applied on a consistent basis (except as may be indicated in the notes thereto),
the consolidated financial position of the Company and its consolidated
subsidiaries as of the dates thereof and their consolidated results of
operations and cash flows for the periods then ended (subject to normal year-end
adjustments in the case of any unaudited interim financial statements). For
purposes of this Agreement, "COMPANY BALANCE SHEET" means the consolidated
balance sheet of the Company and its consolidated subsidiaries as of December
31, 1998 as set forth in the Company 10-Q and "COMPANY BALANCE SHEET DATE" means
December 31, 1998.
Section 4.9. Disclosure Documents. (a) Each document required to be filed
by the Company with the SEC or required to be distributed or otherwise
disseminated by the Company to the Company's stockholders in connection with the
transactions contemplated by this Agreement (the "COMPANY DISCLOSURE
DOCUMENTS"), including, without limitation, the Schedule 14D-9, the proxy or
information statement of the Company (the "COMPANY PROXY STATEMENT"), if any, to
be filed with the SEC in connection with the Merger, and any amendments or
supplements thereto, when filed, distributed or disseminated, as applicable,
will comply as to form in all material respects with the applicable requirements
of the 1934 Act.
(b) (i) The Company Proxy Statement, as supplemented or amended, if
applicable, at the time such Company Proxy Statement or any amendment or
supplement thereto is first mailed to stockholders of the Company and at the
time such stockholders vote on adoption of this Agreement and at the Effective
Time, and (ii) any Company Disclosure Document (other than the Company Proxy
Statement), at the time of the filing of such Company Disclosure Document or
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any supplement or amendment thereto and at the time of any distribution or
dissemination thereof, will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
made therein, in the light of the circumstances under which they were made, not
misleading. The representations and warranties contained in this Section will
not apply to statements or omissions included in the Company Disclosure
Documents based upon information furnished to the Company in writing by Parent
specifically for use therein.
(c) The information with respect to the Company or any of its
subsidiaries that the Company furnishes to Parent in writing specifically for
use in the Offer Documents, at the time of the filing thereof, at the time of
any distribution or dissemination thereof and at the time of the consummation of
the Offer, will not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
Section 4.10. Absence of Certain Changes. Since the Company Balance Sheet
Date, (i) the business of the Company and its subsidiaries has been conducted
in the ordinary course consistent with past practices and (ii) except as
disclosed in the Company SEC Documents filed prior to the date hereof and except
for developments relating to matters described under Part 1, Item 3 (Legal
Proceedings) (other than the last paragraph thereof) of the Company 10-K, there
has not been:
(a) any event, occurrence, development or state of circumstances or
facts that has had or would reasonably be expected to have, individually or in
the aggregate, a material adverse effect on the Company;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of the Company, or any
repurchase, redemption or other acquisition by the Company or any of its
subsidiaries of any outstanding shares of capital stock or other securities of,
or other ownership interests in, the Company or any of its subsidiaries, except
in the administration of its stock option plans consistent with past practice;
(c) any material amendment of any outstanding security of the Company or
any of its subsidiaries;
(d) any incurrence, assumption or guarantee by the Company or any of its
subsidiaries of any material indebtedness for borrowed money other than in the
ordinary course of business and in amounts and on terms consistent with past
practices;
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(e) any creation or other incurrence by the Company or any of its
subsidiaries of any Lien on any material asset other than in the ordinary course
of business consistent with past practices;
(f) any making of any material loan, advance or capital contributions
to or investment in any person other than loans, advances or capital
contributions to or investments in its wholly-owned subsidiaries in the ordinary
course of business consistent with past practices;
(g) any damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business or assets of the Company or any of
its subsidiaries that would have, individually or in the aggregate, a material
adverse effect on the Company;
(h) any transaction or commitment made, or any contract or agreement
entered into, by the Company or any of its subsidiaries relating to its assets
or business (including the acquisition or disposition of any assets) or any
relinquishment by the Company or any of its subsidiaries of any contract or
other right, in either case, material to the Company and its subsidiaries, taken
as a whole, other than transactions and commitments in the ordinary course of
business consistent with past practices and those contemplated by this
Agreement;
(i) any material change in any method of accounting or accounting
principles or practice by the Company or any of its subsidiaries, except for any
such change required by reason of a concurrent change in GAAP or Regulation S-X
under the 1934 Act;
(j) any (i) grant of any severance or termination pay to (or amendment
to any existing arrangement with) any director or officer of the Company or any
of its significant subsidiaries, (ii) increase in benefits payable under any
existing severance or termination pay policies or employment agreements, (iii)
entering into any employment, deferred compensation or other similar agreement
(or any amendment to any such existing agreement) with any director or officer
of the Company or any of its significant subsidiaries, (iv) establishment,
adoption or amendment (except as required by applicable law) of any collective
bargaining, bonus, profit-sharing, thrift, pension, retirement, deferred
compensation, compensation, stock option, restricted stock or other benefit plan
or arrangement covering any director or officer of the Company or any of its
significant subsidiaries or (v) increase in compensation, bonus or other
benefits payable to any director or officer of the Company or any of its
significant subsidiaries, other than in the ordinary course of business
consistent with past practice; or
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(k) any material labor dispute, other than routine individual
grievances, or any activity or proceeding by a labor union or representative
thereof to organize any employees of the Company or any of its subsidiaries,
which employees were not subject to a collective bargaining agreement at the
Company Balance Sheet Date, or any material lockouts, strikes, slowdowns, work
stoppages or threats thereof by or with respect to such employees.
Section 4.11. No Undisclosed Material Liabilities. There are no
liabilities or obligations of the Company or any of its subsidiaries required to
be disclosed on a consolidated balance sheet of the Company and its consolidated
subsidiaries prepared in accordance with GAAP, other than:
(a) liabilities or obligations disclosed or provided for in the Company
Balance Sheet or in the notes thereto or in the Company SEC Documents filed
prior to the date hereof or in connection with developments relating to matters
described under Part 1, Item 3 (Legal Proceedings) (other than the last
paragraph thereof) of the Company 10-K;
(b) liabilities or obligations incurred in the ordinary course of
business since the Company Balance Sheet Date;
(c) liabilities or obligations that would not reasonably be expected to
have, individually or in the aggregate, a material adverse effect on the
Company; and
(d) liabilities or obligations under this Agreement or incurred in
connection with the transactions contemplated hereby.
Section 4.12. Compliance with Laws and Court Orders. Except as
disclosed in the Company SEC Documents filed prior to the date hereof, the
Company and each of its subsidiaries is and has been in compliance with all
applicable laws, rules, regulations, judgments, injunctions, orders or decrees,
except for such matters as would not reasonably be expected to have,
individually or in the aggregate, a material adverse effect on the Company.
Section 4.13. Litigation. Except as set forth in the Company SEC
Documents filed prior to the date hereof, there is no action, suit,
investigation or proceeding pending against, or, to the knowledge of the
Company, threatened against or affecting, the Company, any of its subsidiaries
or any of their respective properties before any court or arbitrator or before
or by any governmental body, agency or official, domestic or foreign, that would
reasonably be expected to have, individually or in the aggregate, a material
adverse effect on the Company.
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Section 4.14. Finders' Fees. Except for Simmons & Company International,
a copy of whose engagement agreement has been provided to Parent, there is no
investment banker, broker, finder or other intermediary that has been retained
by or is authorized to act on behalf of the Company or any of its subsidiaries
who might be entitled to any fee or commission from the Company or any of its
affiliates in connection with the transactions contemplated by this Agreement.
Section 4.15. Opinion of Financial Advisor. The Company has received the
opinion of Simmons & Company International, financial advisor to the Company, to
the effect that, as of the date of this Agreement, the consideration to be paid
in the Offer and the Merger is fair to the Company's stockholders (other than
Parent) from a financial point of view; it being understood and acknowledged by
Parent that such opinion has been rendered for the benefit of the Board of
Directors of the Company, and is not intended to, and may not, be relied upon by
Parent or its stockholders.
ARTICLE 5
Representations and Warranties of Parent
Except as disclosed to Company in writing prior to the date hereof, Parent
represents and warrants to the Company that:
Section 5.1. Corporate Existence and Power. Parent is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all corporate powers and all governmental
licenses, authorizations, permits, consents and approvals required to carry on
its business as now conducted, except for such matters as would not have,
individually or in the aggregate, a material adverse effect on Parent. Parent is
duly qualified to do business as a foreign corporation and is in good standing
in each jurisdiction where such qualification is necessary, except for those
jurisdictions where the failure to be so qualified would not have, individually
or in the aggregate, a material adverse effect on Parent. Parent has heretofore
delivered to the Company true and complete copies of the certificate of
incorporation and bylaws of Parent as currently in effect.
Section 5.2. Corporate Authorization. (a) The execution, delivery and
performance by Parent of this Agreement and the consummation by Parent of the
transactions contemplated hereby are within the corporate powers of Parent and
have been duly authorized by all necessary corporate action on the part of
Parent. This Agreement constitutes a valid and binding agreement of each of
Parent.
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Section 5.3. Governmental Authorization. The execution, delivery and
performance by Parent and Merger Subsidiary of this Agreement and the
consummation by Parent and Merger Subsidiary of the transactions contemplated
hereby require no action by or in respect of, or filing with, any governmental
body, agency, official or authority, domestic or foreign, other than (i) the
filing and recordation in the Public Registry Office of the Republic of Panama
of the Certificate of Merger, (ii) compliance with any applicable requirements
of the 1934 Act or any other securities laws (whether state or foreign) or any
applicable provisions of Panama Law (including Executive Decree No. 18 of March
14, 1994 of the Republic of Panama), and (iii) any actions or filings the
absence of which would not reasonably be expected to have, individually or in
the aggregate, a material adverse effect on Parent or materially to impair the
ability of Parent and Merger Subsidiary to consummate the transactions
contemplated by this Agreement.
Section 5.4. Non-Contravention. The execution, delivery and performance
by Parent of this Agreement and the consummation by Parent of the transactions
contemplated hereby do not and will not (i) contravene, conflict with, or result
in any violation or breach of any provision of the certificate of incorporation
or bylaws of Parent, (ii) assuming compliance with the matters referred to in
Section 5.03, contravene, conflict with or result in a violation or breach of
any provision of any law, rule, regulation, judgment, injunction, order or
decree, (iii) require any consent or other action by any person under,
constitute a default under, or cause or permit the termination, cancellation,
acceleration or other change of any right or obligation or the loss of any
benefit to which Parent or any of its subsidiaries is entitled under any
provision of any agreement or other instrument binding upon Parent or any of its
subsidiaries or any license, franchise, permit, certificate, approval or other
similar authorization affecting, or relating in any way to, the assets or
business of the Parent and its subsidiaries or (iv) result in the creation or
imposition of any Lien on any asset of the Parent or any of its subsidiaries,
except, in the case of clauses (ii), (iii) and (iv), for such matters as would
not reasonably be expected to have, individually or in the aggregate, a material
adverse effect on Parent or materially to impair the ability of Parent and
Merger Subsidiary to consummate the transactions contemplated by this Agreement.
Section 5.5. Disclosure Documents. (a) The information with respect to
Parent and any of its subsidiaries that Parent furnishes to the Company in
writing specifically for use in any Company Disclosure Document will not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading (i) in the case of the
Company Proxy Statement, as supplemented or amended, if applicable, at the time
such Company
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Proxy Statement or any amendment or supplement thereto is first
mailed to stockholders of the Company and at the time such stockholders vote on
adoption of this Agreement, and (ii) in the case of any Company Disclosure
Document other than the Company Proxy Statement, at the time of the filing of
such Company Disclosure Document or any supplement or amendment thereto and at
the time of any distribution or dissemination thereof.
(b) The Offer Documents, when filed, distributed or disseminated, as
applicable, will comply as to form in all material respects with the applicable
requirements of the 1934 Act and, at the time of the filing thereof, at the time
of any distribution or dissemination thereof and at the time of consummation of
the Offer, will not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements made therein, in the
light of the circumstances under which they were made, not misleading, provided
that this representation and warranty will not apply to statements or omissions
included in the Offer Documents based upon information furnished to Parent or
Merger Subsidiary in writing by the Company specifically for use therein.
Section 5.6. Finders' Fees'. Except for Merrill Lynch, Pierce, Fenner &
Smith Incorporated, whose fee will be paid by Parent, there is no investment
banker, broker, finder or other intermediary that has been retained by or is
authorized to act on behalf of Parent who might be entitled to any fee or
commission from Parent or any of its affiliates in connection with the
transactions contemplated by this Agreement.
Section 5.7. Financing. At the expiration of the Offer, the Merger
Subsidiary will have available cash sufficient to consummate the Offer and the
Merger and to pay all expenses in connection with the transactions contemplated
hereby.
ARTICLE 6
Covenants of the Company
The Company agrees that:
Section 6.1. Conduct of the Company. From the date hereof until the
Effective Time, the Company and its subsidiaries shall conduct their business in
the ordinary course consistent with past practice and shall use commercially
reasonable efforts to preserve intact their business organizations and
relationships with third parties and to keep available the services of their
present officers and
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employees. Without limiting the generality of the foregoing, from the date
hereof until the Effective Time, without the prior written consent of Parent:
(a) the Company will not adopt or propose any change to its certificate
of incorporation or bylaws;
(b) the Company will not, and will not permit any of its subsidiaries
to, merge or consolidate with any other person or acquire a material amount of
stock or assets of any other person;
(c) the Company will not, and will not permit any of its subsidiaries
to, sell, lease, license or otherwise dispose of any significant subsidiary or
any material amount of assets or property except (i) pursuant to existing
contracts or commitments and (ii) in the ordinary course consistent with past
practice;
(d) the Company will not, and will not permit any of its subsidiaries
to, take any action that would make any representation and warranty of the
Company hereunder inaccurate in any respect at, or as of any time prior to, the
Effective Time; and
(e) the Company will not, and will not permit any of its subsidiaries
to, agree or commit to do any of the foregoing.
Section 6.2. Stockholder Meeting; Proxy Material. (a) The Company shall
cause a meeting of its stockholders (the "COMPANY STOCKHOLDER MEETING") to be
duly called and held as soon as reasonably practicable after consummation of the
Offer for the purpose of voting on the approval and adoption of this Agreement
and the Merger. In connection with such meeting, the Company will, if required
by law, (i) promptly prepare and file with the SEC, use its best efforts to have
cleared by the SEC and thereafter mail to its stockholders as promptly as
practicable the Company Proxy Statement and related proxy materials for such
meeting, (ii) use its commercially reasonable efforts to obtain the necessary
approvals by its stockholders of this Agreement and the transactions
contemplated hereby and (iii) otherwise comply with all legal requirements
applicable to such meeting.
(b) Except as provided in the next sentence, the Board of Directors of
the Company shall recommend the Offer and the approval and adoption of this
Agreement and the Merger by the Company's stockholders. The Independent
Committee of the Board of Directors of the Company (the "INDEPENDENT COMMITTEE")
shall be permitted to withdraw, or modify in a manner adverse to Parent, its
recommendation to its stockholders, but only if (i) the Company has complied
with the terms of Section 6.03, (ii) the Independent Committee
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determines in good faith (after consultation with independent legal counsel)
that failure to take such action would be reasonably likely to be inconsistent
with its fiduciary duties under applicable law and (iii) the Independent
Committee shall have delivered to Parent a prior written notice advising Parent
that it intends to take such action. Nothing contained in this Agreement shall
prevent the Board of Directors of the Company from complying with Rule 14e-2
under the 1934 Act with respect to any Acquisition Proposal. "ACQUISITION
PROPOSAL" means any offer or proposal for a merger, consolidation, share
exchange, business combination or other similar transaction involving the
Company or any of its subsidiaries or the acquisition of any substantial
equity interest in or substantial portion of the assets of the Company or any
of its subsidiaries, other than the transactions contemplated by this Agreement.
Section 6.3. No Solicitation. (a) From the date hereof until the
termination hereof, the Company will not, and will cause its subsidiaries and
the officers, directors, employees and other agents and advisors of the Company
and its subsidiaries not to, directly or indirectly, (i) take any action to
solicit, initiate or encourage the submission of any Acquisition Proposal or
(ii) disclose any nonpublic information relating to, or afford access to the
properties, books or records of, the Company or any of its subsidiaries to, or
engage in any discussions or negotiations with, any person who is considering
making or has made an Acquisition Proposal; provided that the Company may
furnish nonpublic information or afford access to properties, books and records
to any person who is considering making or has made an Acquisition Proposal and
may negotiate or otherwise engage in substantive discussions with any person who
has made an Acquisition Proposal if (w) the Company has complied with the
foregoing terms of this Section 6.03, (x) the Independent Committee determines
in good faith (after consultation with independent legal counsel) that failure
to take such action would be reasonably likely to be inconsistent with its
fiduciary duties under applicable law, (y) such person executes a
confidentiality agreement on terms no less favorable to the Company than those
contained in Section 8.07 and (z) the Company shall have delivered to Parent a
prior written notice advising Parent that it intends to take such action.
(b) The Company will notify Parent promptly (but in no event later than
24 hours) after receipt by the Company (or any of its advisors) of any
Acquisition Proposal or any request for nonpublic information relating to, or
access to the properties, books or records of, the Company or any of its
subsidiaries by any person who is considering making or has made an Acquisition
Proposal. The Company shall identify the person making, and the terms and
conditions of, any such Acquisition Proposal or request. The Company shall keep
Parent fully informed, on a current basis, of the status and details of any such
Acquisition Proposal or request. The Company shall, and shall cause its
subsidiaries and the
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officers, directors, employees and other agents and advisors of the Company
and its subsidiaries to, cease immediately and cause to be terminated all
activities, discussions or negotiations, if any, with any persons conducted
prior to the date hereof with respect to any Acquisition Proposal.
ARTICLE 7
Covenants of Parent
Parent agrees that:
Section 7.1. Certain Obligations of Parent. Parent will take all action
necessary to cause Merger Subsidiary to be organized and to become a party to
this Agreement as promptly as practicable and to perform its obligations under
this Agreement and to consummate the Offer and the Merger on the terms and
conditions set forth in this Agreement. The Parent will not, and will cause its
subsidiaries not to, directly or indirectly, take any action to knowingly cause
the Company to violate its representations, warranties or covenants under this
Agreement;
Section 7.2. Voting of Shares. Parent agrees to vote all shares of Common
Stock and Preferred Stock beneficially owned by it in favor of adoption of this
Agreement and the Merger at the Company Stockholder Meeting.
Section 7.3. Director and Officer Liability. Parent shall cause the
Surviving Corporation, and the Surviving Corporation hereby agrees, to do the
following:
(a) After the Effective Time, the Surviving Corporation shall indemnify
and hold harmless the present and former officers and directors of the Company
(each an "INDEMNIFIED PERSON") in respect of acts or omissions occurring at or
prior to the Effective Time to the extent required under Panama Law or provided
under the Company's certificate of incorporation and bylaws or any agreement any
Indemnified Person may have with the Company, in each case, as in effect on the
date hereof; provided that such indemnification shall be subject to any
limitation imposed from time to time under applicable law.
(b) For six years after the Effective Time, the Surviving Corporation
shall provide officers' and directors' liability insurance in respect of acts or
omissions occurring prior to the Effective Time covering each such Indemnified
Person currently covered by the Company's officers' and directors' liability
insurance policy on terms with respect to coverage and amount no less favorable
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than those of such policy in effect on the date hereof, provided that, in
satisfying its obligation under this Section 7.03(b), the Surviving Corporation
shall not be obligated to pay premiums in excess of 200% of the amount per annum
the Company paid in its last full fiscal year, which amount Company has
disclosed to Parent prior to the date hereof.
(c) In the event the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other person and is not the
continuing or surviving corporation or entity of that consolidation or merger or
(ii) transfers all or substantially all its properties and assets to any person,
then and in each such case the Surviving Corporation will cause proper
provisions to be made so that the successors and assigns of the Surviving
Corporation assume the obligations set forth in this Section 7.03.
(d) The rights of each Indemnified Person under this Section 7.03 shall
be in addition to any rights such person may have under the certificate of
incorporation or bylaws of the Company or any of its subsidiaries, under Panama
Law or under any agreement any Indemnified Person may have with the Company.
These rights shall survive consummation of the Merger and are intended to
benefit, and shall be enforceable by, each Indemnified Person.
ARTICLE 8
Covenants of Parent and the Company
The parties hereto agree that:
Section 8.1. Best Efforts. Subject to the terms and conditions of this
Agreement, Company and Parent will use their best efforts to take, or cause to
be taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate the
transactions contemplated by this Agreement.
Section 8.2. Certain Filings. The Company and Parent shall cooperate with
one another (i) in connection with the preparation of the Company Disclosure
Documents and the Offer Documents, (ii) in determining whether any action by or
in respect of, or filing with, any governmental body, agency, official, or
authority is required, or any actions, consents, approvals or waivers are
required to be obtained from parties to any material contracts, in connection
with the consummation of the transactions contemplated by this Agreement and
(iii) in taking such actions or making any such filings, furnishing information
required in
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connection therewith or with the Company Disclosure Documents or the
Offer Documents and seeking timely to obtain any such actions, consents,
approvals or waivers.
In connection with such cooperation, Parent and the Company will (i) not
agree to participate in any meeting or discussion with any governmental
authority in respect of any filings, investigation or other inquiry concerning
this Agreement or the Offer or the Merger unless it consults with the other
party in advance and, to the extent permitted by such governmental authority,
gives representatives of the Independent Committee the opportunity to attend and
participate thereat and (ii) furnish the other party and representatives of the
Independent Committee with copies of all correspondence, filings and
communications between them and their affiliates and their respective
representatives, on the one hand, and any government or regulatory authority or
members or their respective staffs, on the other hand, with respect to this
Agreement or the Offer or the Merger.
Section 8.3. Public Announcements. Parent and the Company will consult
with each other before issuing any press release or making any public statement
with respect to this Agreement or the transactions contemplated hereby and,
except as may be required by applicable law or any listing agreement with any
national securities exchange, will not issue any such press release or make any
such public statement prior to such consultation.
Section 8.4. Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Merger
Subsidiary, any deeds, bills of sale, assignments or assurances and to take and
do, in the name and on behalf of the Company or Merger Subsidiary, any other
actions and things to vest, perfect or confirm of record or otherwise in the
Surviving Corporation any and all right, title and interest in, to and under any
of the rights, properties or assets of the Company acquired or to be acquired by
the Surviving Corporation as a result of, or in connection with, the Merger.
Section 8.5. Access to Information. From the date hereof until the
Effective Time and subject to the provisions of applicable law and Section 8.07,
the Company shall (i) give to Parent and its authorized representatives
reasonable access to the offices, properties, books and records of the Company
and such financial and other information as may reasonably be requested and (ii)
instruct its authorized representatives to cooperate with the other party in its
investigation. Any investigation pursuant to this Section 8.05 shall be
conducted in such manner as not to interfere unreasonably with the conduct of
the business of the other party. No information or knowledge obtained in any
investigation pursuant to this
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Section 8.05 shall affect or be deemed to modify any representation or warranty
made by any party hereunder.
Section 8.6. Notices of Certain Events. Each of the Company and Parent
shall promptly notify the other of:
(a) any notice or other communication from any person alleging that the
consent of such person is or may be required in connection with the transactions
contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings commenced
or, to its knowledge, threatened against, relating to or involving or otherwise
affecting the Company or any of its subsidiaries that, if pending on the date of
this Agreement, would have been required to have been disclosed pursuant to
Section 4.13 or that relate to the consummation of the transactions contemplated
by this Agreement.
Section 8.7. Confidentiality. Prior to the Effective Time and after any
termination of this Agreement, each of Parent and the Company will hold, and
will use its best efforts to cause its officers, directors, employees and other
agents or advisors to hold, in confidence, unless compelled to disclose by
judicial or administrative process or by other requirements of law, all
confidential documents and information concerning the other party furnished to
it or its affiliates or any of their agents or advisors in connection with the
transactions contemplated by this Agreement, except to the extent that such
information can be shown to have been (iA previously known on a nonconfidential
basis by such party, (ii) in the public domain through no fault of such party or
(iii) later lawfully acquired by such party on a nonconfidential basis from
sources other than the other party, provided that each of Parent and the Company
may disclose such information to its officers, directors, employees and other
agents or advisors in connection with the transactions contemplated by this
Agreement so long as such party informs such persons of the confidential nature
of such information and directs them to treat it confidentially. Each of Parent
and the Company shall satisfy its obligation to hold any such information in
confidence if it exercises the same care with respect to such information as it
would take to preserve the confidentiality of its own similar information. If
this Agreement is terminated, each of Parent and the Company will, and will use
its best efforts to cause its officers, directors, employees and other agents
and advisors to, destroy or deliver to the other party, upon request, all
documents and other materials, and all copies thereof, that it or
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its affiliates or any of their agents or advisors obtained, or that were
obtained on their behalf, from the other party in connection with this Agreement
and that are subject to such confidence.
ARTICLE 9
Conditions to the Merger
Section 9.1. Conditions to Obligations of Each Party. The respective
obligations of the Company, Parent and Merger Subsidiary to consummate the
Merger are subject to the satisfaction of the following conditions:
(a) this Agreement shall have been approved and adopted by the
stockholders of the Company in accordance with Panama Law and applicable listing
requirements;
(b) Merger Subsidiary shall have purchased shares of Common Stock
pursuant to the Offer;
(c) no preliminary or permanent injunction or other order, decree or
ruling by any court or governmental body or regulatory authority in the United
States or the Republic of Panama which prevents consummation of the Merger or
the payment of the Merger Consideration shall have been issued and remain in
effect (each party agreeing to use its reasonable efforts to have any such
injunction, order, decree or ruling lifted); and
(d) no statute, rule or regulation of any government or governmental
agency in the United States or the Republic of Panama shall prevent the
consummation of the Merger or the payment of the Merger Consideration or make
the consummation of the Merger or the payment of the Merger Consideration
illegal.
ARTICLE 10
Termination
Section 10.1. Termination. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time
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(notwithstanding any approval of this Agreement by the stockholders of the
Company):
(a) by mutual written agreement of the Company and Parent;
(b) by either the Company or Parent, if:
(i) the Offer has not been consummated on or before July 31,
1999, provided that the right to terminate this Agreement pursuant to this
Section 10.01(b)(i) shall not be available to any party whose breach of any
provision of this Agreement results in the failure of the Offer to be
consummated by such time; or
(ii) there shall be any law or regulation that makes acceptance
for payment of, and payment for, the shares of Common Stock pursuant to the
Offer or consummation of the Merger illegal or otherwise prohibited or any
judgment, injunction, order or decree of any court or governmental body
having competent jurisdiction enjoining Merger Subsidiary from accepting
for payment of, and paying for, the shares of Common Stock pursuant to the
Offer or Company or Parent from consummating the Merger and such judgment,
injunction, order or decree shall have become final and nonappealable;
provided, however, that the party seeking to terminate this Agreement
pursuant to this clause (ii) shall have used commercially reasonable best
efforts to remove any such judgment, injunction, order or decree; or
(c) by Parent, if prior to the acceptance for payment of shares of
Common Stock under the Offer, (i) the Board of Directors of the Company shall
have failed to recommend, or shall have withdrawn or modified in a manner
adverse to Parent its approval or recommendation of the Offer or the Merger or
(iiA the Company shall have failed to perform in all material respects its
obligations hereunder.
The party desiring to terminate this Agreement pursuant to this Section
10.01 (other than pursuant to Section 10.01(a)) shall give notice of such
termination to the other party.
Section 10.2. Effect of Termination. If this Agreement is terminated
pursuant to Section 10.01, this Agreement shall become void and of no effect
without liability of any party (or any stockholder, director, officer, employee
or other agent or advisor of such party) to the other party hereto, provided
that, if such termination shall result from the willful (i) failure of either
party to fulfill a condition to the performance of the obligations of the other
party or (ii) failure of
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either party to perform a covenant hereof, such party shall be fully liable
for any and all liabilities and damages incurred or suffered by the other party
as a result of such failure. The provisions of Sections 8.03, 8.06(c) and 8.07
and Article 11 shall survive any termination hereof pursuant to Section 10.01.
ARTICLE 11
Miscellaneous
Section 11.1. Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including facsimile transmission) and
shall be given,
if to Parent or Merger Subsidiary, to:
McDermott International Inc.
1450 Poydras Street
P.O. Box 61961 - 70112
New Orleans, LA 70161-1961
Attention: S. Wayne Murphy
Facsimile: (504) 587-6153
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Christopher Mayer
Fax: (212) 450-4800
if to the Company, to:
J. Ray McDermott, S.A
801 North Eldridge Street
Houston, Texas 77079
Attention: R.H. "Bobby" Rawle
Facsimile: (281) 870-5125
28
<PAGE>
with copies to:
c/o Wm. J. Johnson Associates
9545 Katy Freeway
Suite 470
Houston, Texas 77024
Attention: William J. Johnson
Facsimile: (713) 461-6195
Baker & Botts, L.L.P.
One Shell Plaza
Houston, Texas 77002-4995
Attention: R. Joel Swanson, Esq.
Facsimile: (713) 229-1330
or such other address or facsimile number as such party may hereafter specify
for the purpose by notice to the other parties hereto. All such notices,
requests and other communications shall be deemed received on the date of
receipt by the recipient thereof if received prior to 5 p.m. on any business
day. Otherwise, any such notice, request or communication shall be deemed not
to have been received until the next succeeding business day.
Section 11.2. Survival of Representations and Warranties. The
representations and warranties and agreements contained herein shall not survive
the Effective Time, except for the agreements set forth in Sections 7.03 and
8.07 and Article 11.
Section 11.3. Amendments; No Waivers. (a) Any provision of this Agreement
may be amended or waived prior to the Effective Time if, but only if, such
amendment or waiver is in writing and is signed, in the case of an amendment, by
each party to this Agreement or, in the case of a waiver, by each party against
whom the waiver is to be effective, provided that, after the adoption of this
Agreement by the stockholders of the Company and without their further approval,
no such amendment or waiver shall reduce the amount or change the kind of
consideration to be received in exchange for any shares of capital stock of the
Company.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
Section 11.4. Expenses. (a) Except as otherwise provided in this Section,
all costs and expenses incurred in connection with this Agreement shall be paid
by the party incurring such cost or expense.
29
<PAGE>
(b) The Company agrees to pay Parent a fee in immediately available
funds equal to $10 million promptly, but in no event later than two business
days, after the termination of this Agreement by Parent pursuant to Section
10.01(c):
Section 11.5. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the prior written consent of each other party hereto, except that Parent
or Merger Subsidiary may transfer or assign, in whole or from time to time in
part, to one or more of their affiliates, the right to enter into the
transactions contemplated by this Agreement, but any such transfer or assignment
will not relieve Parent or Merger Subsidiary of its obligations hereunder.
Section 11.6. Governing Law. Except to the extent that Panama Law is
mandatorily applicable to this Agreement, this Agreement shall be governed by
and construed in accordance with the laws of the State of New York (without
regard to the conflicts of law rules of such state).
Section 11.7. Jurisdiction. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in connection
with, this Agreement or the transactions contemplated hereby may be brought in
any federal court located in the State of New York or any New York state court,
and each of the parties hereby consents to the jurisdiction of such courts (and
of the appropriate appellate courts therefrom) in any such suit, action or
proceeding and irrevocably waives, to the fullest extent permitted by law, any
objection that it may now or hereafter have to the laying of the venue of any
such suit, action or proceeding in any such court or that any such suit, action
or proceeding brought in any such court has been brought in an inconvenient
form. Process in any such suit, action or proceeding may be served on any party
anywhere in the world, whether within or without the jurisdiction of any such
court. Without limiting the foregoing, each party agrees that service of
process on such party as provided in Section 11.01 shall be deemed effective
service of process on such party.
Section 11.8. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
Section 11.9. Counterparts; Effectiveness. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
30
<PAGE>
This Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto. Except as
provided in Section 7.03, no provision of this Agreement is intended to confer
any rights, benefits, remedies, obligations or liabilities hereunder upon any
person other than the parties hereto and their respective successors and
assigns.
Section 11.10. Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements and understandings, both oral and
written, between the parties with respect to the subject matter of this
Agreement.
Section 11.11. Captions. The captions herein are included for convenience
of reference only and shall be ignored in the construction or interpretation
hereof.
Section 11.12. 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 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
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner materially adverse to any party. Upon such
a determination, the parties shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner so that the transactions contemplated hereby be
consummated as originally contemplated to the fullest extent possible.
Section 11.13. Specific Performance. The parties hereto agree that
irreparable damage would occur if any provision of this Agreement were not
performed in accordance with the terms hereof and that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
or to enforce specifically the performance of the terms and provisions hereof in
any federal court located in the State of New York or any New York state court,
in addition to any other remedy to which they are entitled at law or in equity.
Section 11.14. Definitions and Usage. (a) For purposes of this Agreement:
"AFFILIATE" means, with respect to any person, any other person directly or
indirectly controlling, controlled by, or under common control with such person.
"MATERIAL ADVERSE EFFECT" means, with respect to any person means a
material adverse effect on the business, assets, financial condition or results
of operations of such person and its subsidiaries, taken as a whole, except any
such
31
<PAGE>
effect resulting from or arising in connection with (i) this Agreement or the
transactions contemplated hereby, (ii) changes in conditions affecting the
marine construction industries generally or (iii) changes in economic,
regulatory or political conditions generally.
"PERSON" means an individual, corporation, partnership, limited liability
company, association, trust or other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"SIGNIFICANT SUBSIDIARY" means any subsidiary that constitutes a
"significant subsidiary" of any person within the meaning of Rule 1-02 of
Regulation S-X under the 1934 Act.
"SUBSIDIARY" means, with respect to any person, any entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at any time directly or indirectly owned by such person.
(b) A reference in this Agreement to any statute shall be to such
statute as amended from time to time, and to the rules and regulations
promulgated thereunder.
(c) Each of the following terms is defined in the Section set forth
opposite such term:
TERM SECTION
1933 Act.............................................. 2.04(b)
1934 Act.............................................. 2.05(d)
1994 Plan............................................. 2.05(a)
Acquisition Proposal.................................. 6.02(b)
Adjusted Option....................................... 2.04(a)
affiliate............................................. 11.14(a)
Certificate of Merger................................. 2.01(b)
Certificates.......................................... 2.03(a)
Common Share Price.................................... 1.01(a)
Common Stock.......................................... 1.01(a)
Company............................................... Recitals
Company 10-K.......................................... 4.06(a)
Company 10-Q.......................................... 4.07(a)
Company Balance Sheet................................. 4.08
Company Balance Sheet Date............................ 4.08
Company Disclosure Documents.......................... 4.09(a)
32
<PAGE>
TERM SECTION
- ---- -------
Company Proxy Statement............................... 4.09(a)
Company SEC Documents................................. 4.07(a)
Company Stockholder Meeting........................... 6.02(a)
Company Stock Option.................................. 2.04(a)
Effective Time........................................ 2.01(b)
Exchange Agent........................................ 2.03(a)
GAAP.................................................. 4.08
Indemnified Person.................................... 7.03(a)
Independent Committee................................. 6.02(b)
Lien.................................................. 4.04
material adverse effect............................... 11.14(a)
Merger................................................ 2.01(a)
Merger Consideration.................................. 2.02(a)
Merger Subsidiary..................................... 1.01(a)
Minimum Condition..................................... 1.01(a)
Offer................................................. 1.01(a)
Offer Documents....................................... 1.01(b)
Panama Law............................................ 1.02(a)
Parent................................................ Recitals
Parent Stock.......................................... 2.04(a)
Performance Shares.................................... 2.05(b)
person................................................ 11.14(a)
Preferred Stock....................................... 4.02(a)
Replacement Performance Award......................... 2.05(b)
Replacement Restricted Award.......................... 2.05(a)
Restricted Shares..................................... 2.05(a)
Schedule 14D-1........................................ 1.01(b)
Schedule 14D-9........................................ 1.02(b)
SEC................................................... 1.01(b)
significant subsidiary................................ 11.14(a)
subsidiary............................................ 11.14(a)
Surviving Corporation................................. 2.01(a)
33
<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.
J. RAY MCDERMOTT, S.A.
By: /s/ R. H. Rawle
------------------------------------
Name: R. H. Rawle
Title: President and
Chief Operating Officer
MCDERMOTT INTERNATIONAL, INC.
By: /s/ Roger E. Tetrault
--------------------------------------
Name: Roger E. Tetrault
Title: Chairman and
Chief Executive Officer
34
<PAGE>
ANNEX I
Notwithstanding any other provision of the Offer, Merger Subsidiary shall not be
required to accept for payment or pay for any shares of Common Stock, and may,
subject to the terms of this Agreement, terminate the Offer, if (i) at the
expiration of the Offer, the Minimum Condition has not been satisfied or (ii) at
any time on or after May 7, 1999 and prior to the acceptance for payment of
shares of Common Stock, any of the following conditions exist:
(a) any injunction, judgment, order or decree of a court of competent
jurisdiction shall have been entered and not withdrawn or any law or regulation
shall exist that prohibits the consummation of the Offer or the Merger; or
(b) the Company shall have breached its representations and warranties
set forth in this Agreement or failed to perform any of its obligations,
covenants or agreements under this Agreement (other than any breaches or
failures to perform that, in the aggregate, do not have a material adverse
effect on the Company); or
(c) this Agreement shall have been terminated in accordance with its
terms.
Except for the Minimum Condition (which may be waived only with the consent
of the Company, Parent and Merger Subsidiary), the foregoing conditions are for
the sole benefit of Parent and Merger Subsidiary and may, subject to the terms
of this Agreement, be waived by Parent and Merger Subsidiary in whole or in part
at any time and from time to time in their discretion.
35
<PAGE>
McDermott International, Inc.
[Letterhead]
February 17, 1999
Mr. William J. Johnson, Chairman
Independent Committee of the Board of Directors
J. Ray McDermott, S.A.
801 N. Eldridge
Houston, TX 77079
Gentlemen:
In connection with the consideration of a possible transaction between your
Company and us, you have requested the right to review certain information which
is non-public, confidential, or proprietary in nature. As a condition to our
furnishing you with such information, you agree, as set forth below, to treat
confidentially such information, and any other information we or our
representatives furnish to you, whether furnished before or after the date of
this Letter Agreement, whether furnished orally or in writing or gathered by
inspection (collectively, the "Evaluation Material") and to take or abstain from
taking certain other actions as herein set forth.
You hereby agree not to use any of the Evaluation Material for any purpose
other than in connection with the possible transaction. Further, you agree that
the Evaluation Material will be kept confidential by you; provided, however that
(1) such information may be disclosed to those directors, officers, employees
and representatives of your Company (such as auditors, engineers, financial
consultants or attorneys) who need to know such information for the purpose of
evaluating the possible transaction (it being understood that such directors,
officers, employees, and representatives shall treat such information
confidentially), and (2) such information may be disclosed to others only with
our prior written consent. You shall keep a record of written Evaluation
Material furnished to you, and you shall be responsible for any breach of this
Letter Agreement by your directors, officers, employees or representatives.
<PAGE>
J. Ray McDermott Inc. 2 February 17, 1999
All communications regarding the proposed transaction and requests for
information will be submitted or directed to us or to such representatives of us
as are designated to you. Unless otherwise designated to you all notices and
other contacts, written or oral, shall be with Mr. John W. Johnstone or any
other member of the Finance Committee of the Board of Directors of McDermott
International, Inc.
Without our prior written consent, your Company will not, and you shall
cause your directors, officers, employees and representatives not to, disclose
to any person either the fact that discussions or negotiations are taking place
concerning a possible transaction with us or the terms, conditions or other
facts with respect to any such possible transaction, including the status
thereof. The term "person" as used in this Letter Agreement shall be broadly
interpreted to include, without limitation, any corporation, limited liability
company, partnership, joint venture, association, or individual, including, but
not limited to, any representatives of the news media and any of our or our
affiliates= officers, directors, employees or representatives not directly
involved in the proposed transaction. Moreover, without our prior written
consent, your Company will not, and you will direct your directors, officers,
employees and representatives not to, contact any of our or our affiliates=
officers, directors, employees or representatives concerning the possible
transactions except as otherwise provided herein.
In the event that your Company or any of your directors, officers,
employees or representatives are requested or required (by oral questions,
interrogatories, requests for information, subpoena, civil investigative demand,
or similar process) to disclose any Evaluation Material supplied to it or them
in the course of your dealings pursuant to this Letter Agreement, it is agreed
that you will, unless prohibited by applicable law or order, provide us with
prompt notice of such request(s) (but not less than 48 hours, if possible, or
such shorter period as appropriate, prior written notice of your intent to
disclose such Evaluation Material) so that we may seek an appropriate protective
order and/or waive compliance with the provisions hereof. It is further agreed
that if we do not provide you or them with such protective order or waiver prior
to the time required to make any such disclosure, you or your directors,
officers, employees or representatives are nonetheless, in the written opinion
of your counsel, Messers. Baker and Botts, legally required to disclose
Evaluation Material, you or they may disclose such Evaluation Material without
liability hereunder, provided that you have prior to the date of disclosure
complied with the notice provisions of this paragraph.
<PAGE>
J. Ray McDermott Inc. 3 February 17, 1999
We reserve the right, in our sole and absolute discretion to terminate
discussions and negotiations with your Company concerning the possible
transaction at any time. Further, in the event that no transaction is effected
between your Company and us after you have been furnished with Evaluation
Material, you and your directors, officers, employees and representatives will
promptly, upon our request, deliver to us all written Evaluation Material and
all information derived there from without retaining any copy thereof and, as to
other Evaluation Material, will continue to be bound by the terms hereof.
The term "Evaluation Material" does not include information which (i) is or
becomes available to the public other than as a result of a disclosure in breach
of this Letter Agreement by you or your directors, officers, employees and
representatives, (ii) was available to you on a non-confidential basis prior to
its disclosure to you by us, our affiliates or representatives, (iii) becomes
available to you on a non-confidential basis from a source other than us, our
affiliates or representatives, provided that such source is not bound by a
confidentiality agreement with us, our affiliates or representatives, with
respect to such information, or (iv) was independently developed by you without
reference to Evaluation Material.
Although you understanding that we and our affiliates and representatives
have endeavored and will continue in good faith to endeavor to include in the
Evaluation Material information known to us and our affiliates and
representatives which is believed to be relevant for the purpose of your
investigation concerning the possible transaction, you further understand that
we and our affiliates and representatives do not make any representation or
warranty as to the accuracy or completeness of the Evaluation Material.
Specifically, it is understood that any estimates or forecasts provided to your
Company shall not constitute commitments. You agree that neither we, our
affiliates nor representatives shall have any liability to you or any of your
directors, officers, employees and representatives resulting from the use of the
Evaluation Material by you or your directors, officers, employees and
representatives.
It is further understood and agreed that no failure or delay by us in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof preclude any other
further exercise thereof or the exercise of any right, power or privilege.
Nothing contained in this Letter Agreement shall be construed as granting
or conferring any rights of license or otherwise in the Evaluation Material
except as provided herein.
<PAGE>
J. Ray McDermott Inc. 4 February 17, 1999
Any assignment of your rights, duties or obligations agreed to in this
Letter Agreement by you without our prior written consent shall be void.
THIS LETTER AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF LOUISIANA (WITHOUT REGARD TO CONFLICTS OF LAW). ALL
SUITS, ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATED TO THIS LETTER AGREEMENT
("RELATED PROCEEDINGS") SHALL BE BROUGHT IN A COURT OF COMPETENT JURISDICTION
LOCATED IN THE CITY OF NEW ORLEANS, LOUISIANA. EACH OF WHICH COURTS SHALL BE AN
APPROPRIATE FORUM FOR ALL SUCH RELATED PROCEEDINGS. EACH PARTY HEREBY WAIVES
ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE JURISDICTION OF ANY SUCH
COURT OVER, OR THE LAYING OF VENUE IN ANY SUCH COURT OF, ANY SUCH RELATED
PROCEEDINGS.
If you are in agreement with the foregoing, please sign in the space
provided below and return a copy of this Letter Agreement to me at the address
provided above. Your signature below will constitute your agreement with
respect to the subject matter of this Letter Agreement.
Very truly yours,
McDERMOTT INTERNATIONAL, INC.
By: /s/ Roger E. Tetrault
----------------------------
Roger E. Tetrault
Chairman of the Board and
Chief Executive Officer
Agreed to and accepted
as of the date hereof:
J. RAY McDERMOTT, S.A.
By: /s/ William J. Johnson
------------------------------------
Title: Chairman of Independent Committee
---------------------------------
Date: 2-19-99
----------------------------------
<PAGE>
EXHIBIT (C)(3)
---------------------
SELECTED PORTIONS OF PROXY STATEMENT OF J. RAY MCDERMOTT, S.A. DATED JULY 1,
1998 FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD AUGUST 7, 1998
---------------------
DIRECTORS' ATTENDANCE AND COMPENSATION
Directors' Attendance and Fees; Insurance. During fiscal year 1998, there
were twelve meetings of the Board of Directors of the Company. Each Director
attended 75% or more of the aggregate of the meetings of the Board and of the
committees on which he served. No Director who is also an employee of the
Company or any of its subsidiaries is paid by the Company for his services as a
Director or as a member of any committee of the Board. All other Directors
receive an annual stipend of $20,000 plus a fee of $1,500 for each Board or
committee meeting attended and $1,000 for each telephonic Board or committee
meeting in which such Director participates.
The Company also provides travel accident insurance and health care
benefits to non-employee Directors under the same terms and conditions
applicable to employees.
Non-Employee Director Stock Plan. The Company has a Non-Employee Director
Stock Plan (the "Directors Plan") to encourage stock ownership by Directors, to
more closely align the interests of Directors with the Company's stockholders
and to provide the Company with an effective means of attracting and retaining
qualified individuals to serve on the Board of Directors. The Directors Plan,
which is administered by the Board of Directors, permits the Board to grant to
Directors who are not employees of the Company or any of its Affiliates stock
options and rights to purchase restricted stock in an aggregate of up to 100,000
shares of Common Stock. Options, which are granted at no less than 100% of the
fair market value on the date of grant, are fully vested and exercisable on the
date of grant and remain exercisable for not more than ten years thereafter.
Rights to purchase restricted Common Stock are granted at $1.00 per share.
Pursuant to the Directors Plan, each eligible Director is granted options
to purchase at fair market value 600 shares of Common Stock on the first day of
the first year of such Director's term, and 200 shares on the first day of each
subsequent year during such term. Pursuant to the Directors Plan, each eligible
Director also is granted the right to purchase 300 shares of restricted stock on
the first day of the first year of such Director's term, and 100 shares of
restricted stock on the first day of each subsequent year during such term.
Shares of restricted stock purchased under grants made during a Director's term
are subject to transfer restrictions and forfeiture provisions, which generally
lapse at the end of such term. In the event of a change in control of the
Company, all such restrictions and forfeiture provisions will lapse and options
will remain exercisable throughout their term.
During fiscal year 1998, options to acquire 1,600 shares of Common Stock
were granted, and 800 shares of restricted stock were issued, under the
Directors Plan.
-1-
<PAGE>
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of June 2, 1998 (except as otherwise
noted), the number of shares of Common Stock and McDermott International's
Common Stock, par value $1.00 per share ("McDermott Common Stock"), beneficially
owned by each Director, each Named Executive Officer, as defined in
"COMPENSATION OF EXECUTIVE OFFICERS", and all Directors and executive officers
of the Company as a group, including shares which such persons have the right to
acquire within 60 days pursuant to the exercise of stock options.
MCDERMOTT
COMMON COMMON
NAME STOCK STOCK
- ---- ----- -----
Rick L. Burdick(1) 3,660 0
Gary W. Drinkwater(2) 3,110 53,774
Robert L. Howard(3) 2,000 2,965
William J. Johnson(4) 1,420 0
Kurt S. Nelson(5) 15,277 16,810
Fred R. Oehrlein(6) 24,415 25,956
Sean C. O'Keefe 880 0
Robert H. Rawle(7) 21,902 18,656
Cedric E. Ritchie(8) 4,150 0
Roger E. Tetrault(9) 36,534 124,431
R. E. Woolbert(10) 14,066 155,843
All Directors and executive officers as a group (15 persons) 147,059 481,378
(1) Shares owned by Mr. Burdick include 1,000 shares of Common Stock that may
be acquired upon the exercise of stock options as described above, and 400
restricted shares of Common Stock as to which he has sole voting power but
no dispositive power.
(1) Shares owned by Mr. Drinkwater include 2,880 shares of Common Stock and
32,380 shares of McDermott Common Stock that may be acquired upon the
exercise of stock options as described above, and 13,480 restricted shares
of McDermott Common Stock as to which he has sole voting power but no
dispositive power. Also includes 230 shares of Common Stock and 699 shares
of McDermott Common Stock held in The Thrift Plan for Employees of
McDermott Incorporated and Participating Subsidiary and Affiliated
Companies (the "McDermott Thrift Plan") as of March 31, 1998.
(3) Shares owned by Mr. Howard include 600 shares of Common Stock and 950 shares
of McDermott Common Stock that may be acquired upon the exercise of stock
options as described above, and 300 restricted shares of Common Stock and
475 restricted shares of McDermott Common Stock as to which he has sole
voting power but no dispositive power.
(4) Shares owned by Mr. Johnson include 200 shares of Common Stock that may be
acquired upon the exercise of stock options as described above, and 100
restricted shares of Common Stock as to which he has sole voting power but
no dispositive power.
(5) Shares owned by Mr. Nelson include 10,519 shares of Common Stock and 12,100
shares of McDermott Common Stock that may be acquired upon the exercise of
stock options as described above, and 4,200 restricted shares of Common
Stock and 2,500 restricted shares of McDermott Common Stock as to which he
has sole voting power but no dispositive power. Also includes 558 shares of
Common Stock and 495 shares of McDermott Common Stock held in the McDermott
Thrift Plan as of March 31, 1998.
-2-
<PAGE>
(6) Shares owned by Mr. Oehrlein include 17,345 shares of Common Stock and
17,680 shares of McDermott Common Stock that may be acquired upon the
exercise of stock options as described above, and 6,510 restricted shares
of Common Stock and 4,180 restricted shares of McDermott Common Stock as to
which he has sole voting power but no dispositive power. Also includes 560
shares of Common Stock and 651 shares of McDermott Common Stock held in the
McDermott Thrift Plan as of March 31, 1998.
(7) Shares owned by Mr. Rawle include 14,234 shares of Common Stock and 12,820
shares of McDermott Common Stock that may be acquired upon the exercise of
stock options as described above, and 5,300 restricted shares of Common
Stock and 3,840 restricted shares of McDermott Common Stock as to which he
has sole voting power but no dispositive power. Also includes 568 shares of
Common Stock and 571 shares of McDermott Common Stock held in the McDermott
Thrift Plan as of March 31, 1998.
(8) Shares owned by Mr. Ritchie include 1,000 shares of Common Stock that may
be acquired upon the exercise of stock options as described above, and 300
restricted shares of Common Stock as to which he has sole voting power but
no dispositive power.
(9) Shares owned by Mr. Tetrault include 104,747 shares of McDermott Common
Stock that may be acquired upon the exercise of stock options as described
above, and 8,100 restricted shares of Common Stock and 18,900 restricted
shares of McDermott Common Stock as to which he has sole voting power but
no dispositive power. Also includes 259 shares of McDermott Common Stock
held in the McDermott Thrift Plan as of March 31, 1998.
(10) Shares owned by Mr. Woolbert include 9,616 shares of Common Stock and
101,980 shares of McDermott Common Stock that may be acquired upon the
exercise of stock options as described above, and 4,450 restricted shares
of Common Stock and 33,175 restricted shares of McDermott Common Stock as
to which he has sole voting but no dispositive power. Also includes 1,593
shares of McDermott Common Stock held in the McDermott Thrift Plan as of
March 31, 1998.
Total shares beneficially owned in all cases constituted less than one
percent of the outstanding shares of the applicable security, based upon total
shares outstanding on June 2, 1998, plus those shares deemed to be outstanding
pursuant to Rule 13d-3(d)(1) under the Exchange Act, less any shares held by
subsidiaries.
-3-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table furnishes information concerning all persons known to
the Company to beneficially own 5% or more of any class of voting stock of the
Company.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- -------------- ------------------------------------ --------- --------
<S> <C> <C> <C>
Common Stock.......................................... McDermott International, Inc. 24,668,297(1) 60.1%(2)
1450 Poydras Street
New Orleans, LA 70112-6050
Series A Preferred Stock (3).......................... McDermott International, Inc. 3,200,000(4) 100.00%
1450 Poydras Street
New Orleans, LA 70112-6050
</TABLE>
(1) As reported on a Schedule 13D dated February 9, 1995 filed by McDermott
International.
(2) Percent of class based upon the outstanding shares of Common Stock on June
2, 1998, plus those shares deemed to be outstanding pursuant to Rule
13d-3(d)(1) under the Exchange Act.
(3) Entitles holders thereof to one vote per share, voting as a single class
with holders of Common Stock.
(4) As footnoted on a Schedule 13D dated February 9, 1995 filed by McDermott
International with respect to its ownership of Common Stock.
-4-
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table summarizes the annual and long-term compensation for
fiscal years 1998, 1997 and 1996 of the Company's Chief Executive Officer
("CEO") and four highest paid executive officers other than the CEO
(collectively, the "Named Executive Officers"). Mr. Tetrault received his
salary from McDermott International. Under a services agreement between the
Company and McDermott International, the Company is required to pay to McDermott
International $2,000,000 annually for the services of certain of McDermott
International's executives who also serve as officers of the Company, including
the services of Mr. Tetrault as the Company's Chairman and CEO. See "CERTAIN
TRANSACTIONS - McDermott International and Affiliates". The table does not
provide any compensation information relating to the services that Mr. Tetrault
provided as an executive officer of McDermott International.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION
---------------------- ----------------------
AWARDS PAYOUTS
------ -------
SECURITIES
OTHER UNDERLYING ALL
FISCAL ANNUAL RESTRICTED STOCK LTIP OTHER
NAME PRINCIPAL POSITION YEAR SALARY BONUS COMP.(2) STOCK(3) OPTIONS PAYOUTS COMP.(4)
- ---- ------------------ ---- ------ ----- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
R.E. Tetrault Chairman & 1998 $ 0 $ 0 $ 0 $ 0 9,500 $0 $ 0
Chief Executive 1997 $ 0 $ 0 $ 0 $181,238 108,100 $0 $ 0
Officer
G.W. Drinkwater(5) Senior VP & 1998 $215,520 $193,968 $--- $ 0 8,610 $0 $5,292
Group Executive 1997 $ 92,810 $ 0 $ 18,238 $ 0 8,640 $0 $2,453
K.S. Nelson VP & Area 1998 $176,280 $141,024 $165,786 $ 0 6,110 $0 $5,139
Executive 1997 $154,595 $ 0 $261,506 $ 0 4,450 $0 $4,566
1996 $141,210 $ 19,606 $159,934 $ 52,320 9,570 $0 $4,839
F.R. Oehrlein VP & Group 1998 $196,620 $176,958 $364,130 $ 0 6,810 $0 $5,292
Executive 1997 $177,255 $ 0 $300,455 $ 0 7,590 $0 $5,360
1996 $151,670 $ 21,340 $156,093 $ 82,080 12,170 $0 $4,500
R H. Rawle President & 1998 $275,040 $302,544 $--- $ 0 12,460 $0 $5,228
Chief Operating 1997 $192,540 $ 0 $107,334 $ 0 10,090 $0 $4,614
Officer 1996 $157,540 $ 27,412 $--- $ 73,200 9,660 $0 $4,850
</TABLE>
_____________________
(1) Includes amounts earned in the fiscal year, whether or not deferred.
(2) The aggregate value of perquisites and other personal benefits are not
included if they do not exceed the lesser of $50,000 or 10 percent of the
total amount of annual salary and bonus for the applicable fiscal year.
With respect to Messrs. Nelson and Oehrlein, includes commodities, services,
housing, utilities, expenses and tax equalization associated with their
international assignments for fiscal years 1998, 1997 and 1996. With
respect to Messrs. Drinkwater and Rawle, includes relocation expenses of
$16,438 and $104,465, respectively, during fiscal year 1997.
(3) Restricted stock awards were not granted to officers of the Company for
fiscal years 1998 and 1997, except for
-5-
<PAGE>
Mr. Tetrault, who received a grant of 8,100 restricted shares of Common
Stock in fiscal year 1997 in connection with his joining the Company.
Restricted stock awards in Common Stock are valued at the closing market
price of the Common Stock on the date of grant less any amounts paid by the
executive officers for such awards ($1.00 per share). As of March 31, 1998,
the total number of restricted shares of Common Stock held by the Named
Executive Officers and their market values (based upon the closing market
price on March 31, 1998 of $42.125) are as follows: Mr. Tetrault held 8,100
shares valued at $333,113; Mr. Drinkwater held 0 shares; Mr. Nelson held
4,200 shares valued at $172,725; Mr. Oehrlein held 6,510 shares valued at
$267,724; and Mr. Rawle held 5,300 shares valued at $217,963. Dividends are
not currently paid on the Common Stock. Grants of restricted stock generally
vest fifty percent in five years with the remaining fifty percent vesting in
three to ten years based on performance. In the event of a change of control
of the Company, the Compensation Committee may cause all restrictions to
lapse. In fiscal year 1998, instead of granting restricted stock awards, the
Company granted performance stock awards, which are more fully described in
the table entitled "Long-Term Incentive Plan - Performance Stock Awards in
Fiscal Year 1998".
(4) Amounts shown for fiscal year 1998 include company matching contributions to
the McDermott Thrift Plan in the amount of $4,800 for each of Messrs.
Drinkwater, Nelson, Oehrlein and Rawle and the value of insurance premiums
paid by the Company for Messrs. Drinkwater, Nelson, Oehrlein and Rawle in
the amounts of $492, $339, $492 and $428, respectively.
(5) Prior to October 1996, Mr. Drinkwater was employed by McDermott
International. Compensation information for fiscal year 1997 only reflects
amounts received by him from the Company for the six month period between
October 1996 and March 1997.
-6-
<PAGE>
OPTION GRANT TABLE
Options granted in fiscal year 1998 vest in equal installments of one-half
on the first and second anniversaries of the date of grant and expire five years
from the date of grant. In general, vesting is contingent on continuing
employment with the Company. In the event of a change in control of the Company,
the Compensation Committee may accelerate the exercisability of any options
outstanding. The following table provides information about option grants to the
Named Executive Officers during fiscal year 1998. The Company did not grant any
stock appreciation rights to its executive officers during fiscal year 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM(1)
------------------------------------ ------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS 5% 10%
OPTIONS GRANTED TO EXERCISE EXPIRATION ------------ ------------
NAME GRANTED EMPLOYEES(2) PRICE(3) DATE DOLLAR GAINS DOLLAR GAINS
- ---- ------- ------------ -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
R.E. Tetrault
Common Stock......... 9,500 5.43 $37.5313 02/03/03 $ 98,507 $ 217,676
G.W. Drinkwater
Common Stock......... 8,610 4.93 $37.5313 02/03/03 $ 89,279 $ 197,283
K.S. Nelson
Common Stock......... 6,110 3.5 $37.5313 02/03/03 $ 63,356 $ 140,000
F.R. Oehrlein
Common Stock......... 6,810 3.9 $37.5313 02/03/03 $ 70,614 $ 156,039
R.H. Rawle
Common Stock......... 12,460 7.13 $37.5313 02/03/03 $ 129,200 $ 285,499
All Stockholders(4)... 40,767,828 --- $37.5313 -- $422,730,015 $934,122,781
</TABLE>
__________________
(1) Potential Realizable Value is based on the assumed annual growth rates for
each of the grants shown over their five-year option term. For example, if
the exercise price is $37.5313, a 5% annual growth rate over five years
results in a stock price of $47.90 per share and a 10% rate results in a
price of $60.45 per share. Actual gains, if any, on stock option exercises
are dependent on the future performance of the stock. Zero percent
appreciation in stock price will result in no gain.
(2) Based on options to acquire 174,800 shares of Common Stock granted to all
employees of the Company during fiscal year 1998.
(3) Fair market value on date of grant.
(4) Total dollar gains based on the assumed annual rates of appreciation
indicated in the table and calculated on 40,767,828 outstanding shares of
Common Stock on March 31, 1998. The Named Executive Officers' gains as a
percentage of the total dollar gains shown for all stockholders is .11%
-7-
<PAGE>
Option Exercises and Year-End Value Table
The following table provides information concerning the exercise of stock
options during fiscal year 1998 by each of the Named Executive Officers and the
value at March 31, 1998 of unexercised options held by such individuals. The
value of unexercised options reflects the increase in market value of the Common
Stock from the date of grant through March 31, 1998 (when the fair market value
of the Common Stock was $42.125 per share). The actual value realized upon
option exercise will depend on the value of the Common Stock at the time of
exercise.
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
TOTAL NUMBER OF TOTAL VALUE OF
NUMBER OF SECURITIES UNDERLYING UNEXERCISED, IN-THE-MONEY
SHARES UNEXERCISED OPTIONS HELD OPTIONS HELD AT FISCAL YEAR-END
ACQUIRED AT FISCAL YEAR-END
ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
R.E. Tetrault
Common Stock..... 0 --$ 36,034* 81,566 $675,638 $1,394,878
G.W. Drinkwater
Common Stock..... 0 --$ 2,880 14,370 $ 49,500 $ 138,552
K.S. Nelson
Common Stock..... 0 --$ 8,924 15,456 $189,527 $ 241,337
F.R. Oehrlein
Common Stock..... 0 --$ 15,317 19,983 $316,919 $ 324,626
R.H. Rawle
Common Stock..... 0 --$ 12,624 25,626 $257,508 $ 336,658
</TABLE>
____________________
* Mr. Tetrault exercised options to acquire 36,034 shares of Common Stock after
March 31, 1998 and prior to the date of this Proxy Statement.
-8-
<PAGE>
PERFORMANCE STOCK AWARDS IN FISCAL YEAR 1998
The following table provides information concerning performance stock
awards of restricted shares made to each of the Named Executive Officers during
fiscal year 1998.
LONG-TERM INCENTIVE PLAN - PERFORMANCE STOCK AWARDS
IN FISCAL YEAR 1998*
NUMBER OF
PERFORMANCE PERFORMANCE
NAME SHARES PERIOD
- ---- ------ ------
R.E. Tetrault................... 3,450 2 years
G.W. Drinkwater................. 3,450 2 years
K.S. Nelson..................... 2,350 2 years
F.R. Oehrlein................... 2,620 2 years
R.H. Rawle...................... 4,760 2 years
* No shares are issued by the Company at the time of the performance stock award
(2/3/98). Actual number of shares issued to an executive will be based on the
change in the market price of the Common Stock two years after the date of the
award. The number of shares to be received by an executive, if any, is
determined on the second anniversary of the award date by calculating the
difference between the fair market value of the Common Stock (based upon the
preceding 30 trading day average) and the fair market value of the Common
Stock on the award date. The difference is multiplied by that number of
shares in an executive's award, and the resulting product is divided by the
fair market value of the Common Stock as of the second anniversary of the
award date, calculated as described above. The resulting number is added to
(in the case of an increase in share price) or subtracted from (in the case of
a decrease in share price) the number of shares in an executive's applicable
award. The award, as adjusted (to the extent not reduced to zero), is then
issued to the executive as restricted stock as of the second anniversary of
the award date, for which the executive is required to pay $1.00 per share.
The restricted stock vests two years thereafter. Prior to vesting, such
restricted stock is nontransferable and subject to forfeiture under certain
circumstances.
-9-
<PAGE>
RETIREMENT PLANS
Pension Plan. Officers of the Company (other than those who are also
officers of McDermott International, McDermott Incorporated or The Babcock &
Wilcox Company, such as Mr. Tetrault) and all regular full time employees of the
Company or certain of its subsidiaries, except certain non-resident alien
employees who are not citizens of a European Community country or do not earn
income in the United States, Canada or the United Kingdom, were covered under
The Retirement Plan for Employees of J. Ray McDermott Holdings, Inc. (the "J.
Ray McDermott Retirement Plan"). Mr. Tetrault and other employees of McDermott
International, McDermott Incorporated or The Babcock & Wilcox Company who also
serve as officers of the Company receive their salaries from these other
companies and are covered under these companies' retirement plans. Employees do
not contribute to the J. Ray McDermott Retirement Plan and company contributions
are determined on an actuarial basis. Generally, an employee must be employed by
the Company or a subsidiary for one year prior to participating in the plan and
must have five years of continuous service to vest in any accrued benefits under
the plan. To the extent that benefits payable under these qualified plans are
limited by Section 415(b) or 401(a)(17) of the Internal Revenue Code, pension
benefits will be paid directly by the Company or a subsidiary under the terms of
the unfunded excess benefit plans maintained by them (the "Excess Plans").
The following table shows the annual benefit payable under the J. Ray
McDermott Retirement Plan at age 65 (the normal retirement age) to employees
retiring prior to April 1, 1998 in accordance with the lifetime only method of
payment and before profit sharing plan offsets. Benefits are based on the
formula of a specified percentage (dependent on years of service) of average
annual basic earnings (exclusive of bonus and allowances) during the 60
consecutive months out of the ten years prior to retirement in which such
earnings were highest ("Final Average Earnings") less a specified percentage of
anticipated social security benefits, plus a fixed pension supplement. As of
March 31, 1998, Messrs. Drinkwater, Nelson, Oehrlein and Rawle had Final Average
Earnings and years of credited service as follows: $173,108 and 24.2 years,
$142,617 and 26.11 years, $158,450 and 26.3 years, and $176,101 and 19.6 years,
respectively, under the J. Ray McDermott Retirement Plan. Unless elected
otherwise by the employee, payment will be made in the form of a joint and
survivor annuity of equivalent actuarial value to the amount shown below.
J. RAY MCDERMOTT RETIREMENT PLAN
FINAL ANNUAL BENEFITS AT AGE 65 FOR YEARS OF SERVICE INDICATED
AVERAGE ---------------------------------------------------------------------
Earnings 10 15 20 25 30 35 40
- -------- ------- ------- ------- ------- ------- -------- --------
100,000 $14,106 $21,097 $28,088 $35,080 $42,071 $ 49,062 $ 56,054
125,000 18,272 27,347 36,422 45,496 54,571 63,646 72,720
150,000 22,439 33,597 44,755 55,913 67,071 78,229 89,387
175,000 30,772 46,097 61,422 76,746 92,071 107,396 122,720
200,000 30,772 46,097 61,422 76,746 92,071 107,396 122,720
Supplemental Executive Retirement Plan. The Company is a participating
employer in McDermott International's Supplemental Executive Retirement Plan
(the "SERP"), and as a result, the SERP covers certain officers of the Company
as well as officers of McDermott International and other designated companies.
Generally, retirement benefits are based upon a specified percentage (determined
by age, years of service and date of initial participation in the SERP) of final
3-year average cash compensation (salary plus supplemental compensation for the
highest three out of the last ten years of service) or 3-year average cash
compensation prior to SERP scheduled retirement date, whichever is greater. The
maximum benefit payable to any officer that is an employee of the Company may
not exceed 60-65% (dependent upon date of initial participation in the SERP) of
such 3-year average cash compensation. Payments under the SERP will be reduced
by an amount equal to pension benefits payable under any other retirement plan
maintained by the Company, any of its subsidiary companies or any previous
employer. A death benefit is also provided under the SERP. Before giving effect
to such reductions, the approximate annual benefit payable under the SERP to
Messrs. Drinkwater, Nelson, Oehrlein and Rawle at retirement age as stated in
the SERP is 60% of each such person's final 3-year average cash
-10-
<PAGE>
compensation. No officer of McDermott International who also served as an
officer of the Company during fiscal year 1998, including Mr. Tetrault, will
receive a benefit under the SERP as a result of his service as an officer of the
Company. Such officers, however, may receive a benefit under the SERP as a
result of their service as executive officers of McDermott International based
upon the salary and bonus paid to them by such company.
A trust (the assets of which constitute corporate assets) has been
established, which is designed to ensure the payment of benefits arising under
the SERP, the Excess Plans and certain other contracts and arrangements
(collectively, the "Plans") in the event of an effective change in control of
the Company. Although the Company would retain primary responsibility for such
payments, the trust would provide for payments to designated participants, in
the form of lump sum distributions, if certain events occur following an
effective change in control of the Company, including but not limited to the
failure by the Company to make such payments and the termination of a
participant's employment under certain specified circumstances. In addition,
with respect to benefits which otherwise would have been paid in the form of an
annuity, the trust provides for certain lump sum equalization payments which,
when added to the basic lump sum payments described above, would be sufficient,
after payment of all applicable taxes, to enable each active participant
receiving a lump sum distribution to purchase an annuity that would provide such
participant with the same net after-tax stream of annuity benefits that such
participant would have realized had he retired as of the date of the lump sum
distribution and commenced to receive annuity payments at that time under the
terms of the applicable Plan, based on salary and service factors at the time of
the effective change in control. With respect to designated participants who
retire prior to an effective change in control and who receive a basic lump sum
distribution under the circumstances described above, the trust provides for
similar lump sum equalization payments, based on salary and service factors at
the time of actual retirement.
-11-
<PAGE>
CERTAIN TRANSACTIONS
MCDERMOTT INTERNATIONAL AND AFFILIATES
McDermott International owns approximately 60% of the outstanding shares of
Common Stock and all of the 3,200,000 outstanding shares of Series A Preferred
Stock of the Company, which represents approximately 63% of the voting stock of
the Company. As a result, McDermott International, either directly or through
its subsidiaries and affiliates other than the Company and its subsidiaries
(collectively, the "McDermott Group"), has provided and, subject to the
continuing approval of the Independent Committee, will continue to provide
various services to the Company and its subsidiaries in an effort to reduce
duplicative costs, overhead and resources.
Services Agreement and other Administrative Charges. Under the terms of a
Services Agreement, McDermott International provides certain services to the
Company, based primarily upon a predetermined annual fee for each such service.
Such services include accounting and financial reporting, treasury and
financing, tax administration and research, human resources, risk management,
public and investor relations, executive officer, legal and corporate secretary,
business planning and analysis, purchasing and procurement, and project
management services. For fiscal year 1998, the Company paid to McDermott
International approximately $13.1 million under the Services Agreement.
During the same period, McDermott International and other members of the
McDermott Group also provided other administrative services, including
investment portfolio management, data processing development, telecommunication
and lobbying services, and shared office space to the Company for which it paid
to McDermott International approximately $5.2 million.
The Independent Committee of the Board reviews the services provided by
McDermott International and other members of the McDermott Group to the Company
and its subsidiaries on an annual basis. After consultation with McDermott
International and giving due consideration to the legal obligations of McDermott
International, the Company may seek the provision of any of the above described
services from third parties if the Board of Directors of the Company, after
receiving the recommendation of the Independent Committee of the Board,
determines that obtaining such services from third parties is in the best
interests of the Company.
Other Arrangements and Transactions. During fiscal year 1998, the Company
and its subsidiaries purchased from McDermott International and other members of
the McDermott Group approximately $8.9 million of other services, on an as
requested basis, the costs of which were based on charges to unrelated parties
for similar work. Such services relate primarily to technology development and
research, and engineering, procurement and construction services on a power
plant project. During the same time period, the Company and its subsidiaries
provided marine construction and engineering services to McDermott International
and its subsidiaries, on the same basis, for which the Company recognized
revenue in the amount of approximately $22 million.
While the Company's employee liability, comprehensive general liability,
property, marine and other insurance programs are placed through commercial
insurance carriers, substantially all of such employee liability exposure is
reinsured, and significant deductibles under the Company's other insurance
programs are insured, by wholly-owned insurance subsidiaries of McDermott
International. The premiums charged by such insurance subsidiaries of McDermott
International for such insurance are primarily based on claims experience and
forecasted future activities of the Company and its subsidiaries. Management
believes that this approach is more cost-effective than other alternatives as
there is generally no commercial market for insurance on the same economic terms
for these types of exposures.
Effective November 30, 1997, the Company acquired from McDermott
International its 60% interest in Tallares Navales del Golfo S.A. de C.V., which
operates a shipbuilding and repair business in Vera Cruz, Mexico, for
approximately $19.7 million.
-12-
<PAGE>
Effective December 31, 1997, the Company also acquired from McDermott
International (a) its 50% interest in McDermott Engineering Houston, LLC (an
offshore and onshore engineering and design company) for approximately $2.9
million and (b) Menck GmbH (a manufacturer of marine and onshore pile-driving
hammers and associated equipment) for approximately $5.6 million and the
assumption of $6.7 million in liabilities.
All of these transactions were negotiated at arms-length by the parties
and, to the extent required, approved by the Independent Committee of the Board.
Series A Preferred Stock. During fiscal year 1998, McDermott International
as the sole holder of all of the outstanding Series A Preferred Stock of the
Company received quarterly dividend payments totalling $7.2 million from the
Company.
-13-
