-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IPdm/DdhNhS28mXkdrjFfXJAj8xyJ2FC3DVcqbkYpKorfq832oms50fqJD6oaYkL nuHSYteqdMwSk3InADeCUQ== 0000950134-96-002700.txt : 19960607 0000950134-96-002700.hdr.sgml : 19960607 ACCESSION NUMBER: 0000950134-96-002700 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960606 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCDERMOTT J RAY SA CENTRAL INDEX KEY: 0000934590 STANDARD INDUSTRIAL CLASSIFICATION: WATER, SEWER, PIPELINE, COMM AND POWER LINE CONSTRUCTION [1623] IRS NUMBER: 721278896 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-13570 FILM NUMBER: 96577534 BUSINESS ADDRESS: STREET 1: 1450 POYDRAS ST STREET 2: PO BOX 61829 CITY: NEW ORLEANS STATE: LA ZIP: 70112-6050 BUSINESS PHONE: 5045874956 MAIL ADDRESS: STREET 1: 1450 POYDRAS STREET STREET 2: PO BOX 61829 CITY: NEW ORLEANS STATE: LA ZIP: 70161-1829 10-K405 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 1 0 - K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _____________________ to ____________________ Commission File Number 1-13570 J. RAY McDERMOTT, S.A. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) REPUBLIC OF PANAMA 72-1278896 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1450 Poydras Street, New Orleans, Louisiana 70112-6050 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, including area code (504) 587-5300 -------------- Securities Registered Pursuant to Section 12(b) of the Act: Name of each Exchange Title of each class on which registered ------------------- --------------------- Common Stock, $0.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant was $305,343,980 as of April 23, 1996. The number of shares outstanding of the Company's Common Stock at April 23, 1996 was 40,197,946. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the Company's 1996 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. 2 J. RAY McDERMOTT, S. A. INDEX - FORM 10-K PART 1
PAGE Items 1. & 2. BUSINESS AND PROPERTIES A. General 1 B. Description of Operations General 2 Foreign Operations 6 Raw Materials 7 Customers and Competition 7 Backlog 7 Factors Affecting Demand 8 C. Patents and Licenses 8 D. Insurance 8 E. Employees 9 F. Environmental Regulations and Matters 9 G. Transactions With Related Parties 9 Item 3. LEGAL PROCEEDINGS 11 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
II 3 INDEX - FORM 10-K PART II
PAGE Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS 13 Item 6. SELECTED FINANCIAL DATA 14 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General 15 Fiscal Year 1996 vs Fiscal Year 1995 16 Fiscal Year 1995 vs Fiscal Year 1994 18 Effects of Inflation and Changing Prices 19 Liquidity and Capital Resources 19 New Accounting Standards 21 Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Company Report on Consolidated Financial Statements 22 Report of Independent Auditors 23 Consolidated Balance Sheet - March 31, 1996 and 1995 24 Consolidated Statement of Income for the Three Fiscal Years ended March 31, 1996 26 Consolidated Statement of Equity for the Three Fiscal Years ended March 31, 1996 28 Consolidated Statement of Cash Flows for the Three Fiscal Years ended March 31, 1996 30 Notes to Consolidated Financial Statements 32 Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE 56
III 4 INDEX - FORM 10-K PART III
PAGE Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 57 Item 11. EXECUTIVE COMPENSATION 57 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 57 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 57
PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 58 Signatures 61
IV 5 P A R T I Items 1. and 2. BUSINESS AND PROPERTIES A. GENERAL During fiscal year 1995, McDermott International, Inc. contributed substantially all of its marine construction services business to J. Ray McDermott, S.A. ("JRM"), a new company incorporated under the laws of the Republic of Panama in 1994. Also, on January 31, 1995, JRM acquired Offshore Pipelines, Inc. (the "Merger"). Prior to the Merger with Offshore Pipelines, Inc. ("OPI"), JRM was a wholly owned subsidiary of McDermott International, Inc.; as a result of the Merger, JRM is a majority owned subsidiary of McDermott International, Inc. McDermott International, Inc. received as consideration for its contribution to JRM: 3,200,000 shares of JRM Series A $2.25 Cumulative Convertible Preferred Stock; $231,000,000 of 9% Senior Subordinated Notes due 2001; 24,668,297 shares of JRM common stock; and other consideration. 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. 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. The discussion set forth below under Items 1. and 2., Business and Properties, describes the business of JRM as currently conducted after the Merger. 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 Panama 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. JRM, together with its subsidiaries and joint ventures, supplies worldwide services for the offshore oil and gas exploration and production and hydrocarbon processing industries, and to other marine construction companies. Principal activities include the design, engineering, fabrication and installation of offshore drilling and production platforms and other specialized structures, modular facilities, marine pipelines and subsea production systems and onshore construction and maintenance services. JRM has a continuing program of reviewing joint venture, acquisition and disposition opportunities. 1 6 B. DESCRIPTION OF OPERATIONS GENERAL JRM's services include the basic and detailed design, engineering, fabrication and installation of offshore drilling and production platforms and other specialized structures, modular facilities, marine pipelines, and subsea production systems. JRM also provides comprehensive project management services, feasibility studies, engineering services, subsea trenching services, diving services, and removal, salvage and refurbishment services for offshore fixed platforms. JRM and its joint ventures operate throughout the world in all major offshore oil and gas producing regions, including the Gulf of Mexico, the North Sea, West Africa, South America, the Middle East, India and the Far East. JRM conducts operations both directly and through its participation in joint ventures, some of which it manages and others of which are managed by other marine construction contractors. Some of JRM's joint ventures are consolidated for financial reporting purposes while others (including the HeereMac joint venture and McDermott-ETPM West, Inc., both of which are described below) are accounted for using the equity method. JRM's joint ventures are largely financed through their own resources, including, in some cases, stand alone borrowing arrangements. Historically, JRM has obtained funds from its joint ventures primarily through chartering arrangements, whereby it charters vessels to the joint ventures for use in their operations, as well as through distributions from the joint ventures. While JRM and other parties to the joint venture arrangements generally must agree on the amount of cash flow to be distributed, the joint ventures have historically distributed to their respective owners cash in excess of estimated working capital requirements, based on the owners' relative ownership percentages. The HeereMac joint venture was formed with Heerema Offshore Construction Group, Inc. ("Heerema") in January 1989 and utilizes the specialized, heavy-lift marine construction vessels which were previously owned by the two parties. Each party has a 50% interest in the joint venture, and Heerema has responsibility for its day-to-day operations (although major decisions relating to the joint venture operations require the approval of JRM). In March 1996, JRM and Heerema, through their respective subsidiaries, sold to companies included in the HeereMac joint venture the semi submersible derrick vessels which they were formerly chartering to the joint venture (JRM's DB 101 and DB 102 and Heerema's Hermod and Balder). JRM formed its initial joint venture with ETPM S.A., McDermott-ETPM, in April 1989 to provide general marine construction services to the petroleum industry in West Africa, South America, the Middle East and India and offshore pipelaying services in the North Sea. With the addition of two new joint venture operating companies in March 1995, JRM and ETPM S.A. have expanded their joint venture's operations to include the Far East region and to begin jointly pursuing subsea contracting work on a worldwide basis. Most of the operating companies in the McDermott-ETPM joint venture are majority-owned and controlled by JRM. However, the operations of McDermott-ETPM West, Inc., which conducts operations in the North Sea, South America and West Africa, are managed and controlled by ETPM S.A. ETPM S.A. has dedicated all of its marine construction assets to the joint ventures with JRM, including three combination derrick- pipelaying vessels and fabrication yards in Sharjah, U.A.E. 2 7 and Tchengue, Gabon. JRM currently charters 4 combination derrick-pipelaying vessels and 1 pipelaying vessel to the joint venture and provides the use of its facilities in Jebel Ali and Ras-al-Khaimah in the U.A.E., Batam Island, Indonesia and Warri, Nigeria. JRM participates in numerous other joint ventures (including 49%-owned joint ventures in Mexico and Malaysia) involving operations in foreign countries that require majority-ownership by local interests. Through a subsidiary, JRM also participates in an equally owned joint venture with the Brown & Root Energy Services unit of Halliburton Company ("Brown & Root"), which was formed in February 1995 to combine the operations of JRM's Inverness and Brown & Root's Nigg fabrication facilities in Scotland. In April 1996, JRM and Teleglobe, Inc., a Canadian telecommunications company ("Teleglobe"), formed a joint venture, McDermott Submarine Cable Systems Limited, to install and maintain submarine fiber optic cable. JRM and Teleglobe own 79.4% and 20.6%, respectively, of the joint venture. JRM owns or operates 6 fabrication facilities throughout the world. JRM's principal domestic fabrication yard is located on 1,114 acres of land, under lease, near Morgan City, Louisiana. JRM also owns or operates fabrication facilities near Corpus Christi, Texas, near Inverness, Scotland, in Indonesia on Batam Island, in Jebel Ali, U.A.E. and in Warri, Nigeria. JRM's fabrication facilities are equipped with a wide variety of heavy-duty construction and fabrication equipment, including cranes, welding equipment, machine tools and robotic and other automated equipment, most of which is movable. JRM has the capability to fabricate a full range of offshore structures, from conventional jacket-type fixed platform to deepwater platform configurations employing compliant-tower, tension leg, floating production platform and spar technology. JRM also fabricates platform deck structures and modular components, including complete production processing systems, hydrocarbon separation and treatment systems, pressure and flow control systems and personnel quarters. Expiration dates, including renewal options, of leases covering land for JRM's principal operations follow: Ras-al-Khaimah, U.A.E. Year 1996 Morgan City, Louisiana Years 2000-2033 Jebel Ali, U.A.E. Year 2005 Batam Island, Indonesia Year 2008 Warri, Nigeria Year 2065 JRM expects to renew the lease at Ras-al-Khaimah, U.A.E., which is negotiated on an annual basis. JRM owns or, through its ownership interests in joint ventures, has interests in the largest fleet of marine equipment used in major offshore construction. The nucleus of a "construction spread" is a large derrick barge, pipelaying barge or combination derrick-pipelaying barge capable of offshore operations for an extended period of time in remote locations. JRM owns or, through ownership interests in joint ventures, has interests in 12 derrick vessels, 6 pipelaying vessels, 11 combination derrick-pipelaying vessels and 3 pipe burying vessels. The lifting capacities of the derrick and combination derrick-pipelaying vessels range from 250 to 13,200 tons. These vessels range in length from 400 to 660 feet and are fully equipped with stiff leg or revolving cranes, auxiliary cranes, welding equipment, pile- driving hammers, anchor 3 8 winches and a variety of additional gear. Some of these vessels hold various records for heavy lifts and installations of deepwater pipelines in different regions of the world. The largest vessels are the derrick barge DB 102, which is one of the world's largest semi submersible derrick vessels in both size and lifting capacity and provides quarters for approximately 750 workers, and the LB 200, a semi submersible pipelaying vessel capable of laying 60-inch diameter pipe (including concrete coating) and operating in water depths of up to 2,000 feet. To support the operations of these major marine construction vessels, JRM and its joint ventures also own or lease a substantial number of other vessels, such as tugboats, utility boats, launch barges and cargo barges. In connection with its construction and pipelaying activities, JRM conducts diving operations which, because of the water depths involved, require sophisticated equipment, including diving bells and an underwater habitat. 4 9 The following table describes the major marine construction vessels owned and utilized in the conduct of JRM's marine construction business and their location as of March 31, 1996.
Maximum Maximum Derrick Pipe Vessel By Location Vessel Type Lift Diameter ------------------ ----------- ----- -------- (tons) (inches) United States DB 16 Derrick 860 - DB 28 Derrick/Pipelay 860 40 DB 50 Derrick 4,000 - BB 316 Pipe Bury - - BB 356 Pipe Bury - - LB 30 Pipelay - 60 LB 280 Pipelay - 48 SLC 5000 Shearleg 5,000 - Ocean Builder (1) Derrick/Pipelay 2,000 48 Mexico and South America DB 15 Derrick/Pipelay 860 40 DB II Derrick 600 - Europe and West Africa DLB 1 Derrick/Pipelay 250 24 LB Pipeliner 6 Pipelay - 16 MV Norlift Pipelay - 10 MV Northern Explorer Pipe Bury - - LB 200 Semi Submersible Pipelay - 60 Middle East DB 27 Derrick/Pipelay 2,400 60 Far East DB 17 Derrick/Pipelay 860 60 DB 26 Derrick/Pipelay 900 60 DLB KP1 Derrick/Pipelay 800 60
- -------------------- (1) JRM is chartering and operating the vessel and has an option to purchase the vessel at the end of the five-year charter term. 5 10 The following table describes the major marine construction vessels owned by McDermott International's joint venture companies and utilized in the conduct of their marine construction business and their location as of March 31, 1996.
Maximum Maximum Derrick Pipe Vessel By Location Vessel Type Lift Diameter ------------------ ----------- ---- -------- (tons) (inches) United States Balder Semi Submersible Derrick 7,000 - Europe and West Africa DB101 Semi Submersible Derrick 3,500 - DB102 Semi Submersible Derrick 13,200 - Far East Hermod Semi Submersible Derrick 9,000 - Teknik Pada Derrick/Pipelay 1,100 60 Teknik Perdana Derrick/Pipelay 750 60 Mexico Huasteco Derrick/Pipelay 2,000 48 Mixte Derrick 800 - Olmeca II Pipelay - 48 Sara Maria Derrick 550 -
FOREIGN OPERATIONS The amount of JRM's revenues and operating income derived from operations outside of the United States, and the approximate percentages of those revenues and operating income to JRM's total revenues and total operating income, respectively, follows:
REVENUES OPERATING INCOME (1) FISCAL YEAR AMOUNT PERCENT AMOUNT PERCENT (Dollars in thousands) 1996 $ 835,551 68% $ 24,204 73% 1995 778,134 69% 76,639 114% 1994 842,585 71% 50,746 85%
Revenues and operating income presented above include the contribution of OPI from January 31, 1995 and do not include the operating results of JRM's equity investees. - -------------------- (1) Before corporate expenses. 6 11 RAW MATERIALS The raw materials used by JRM, such as carbon and alloy steel in various forms, welding gases, concrete, fuel oil and gasoline, are available from many sources and JRM is not dependent upon any single supplier or source. Although shortages of certain of these raw materials and fuels have existed from time to time, no serious shortage exists at the present time. CUSTOMERS AND COMPETITION JRM's principal customers are oil and gas companies (including foreign government owned companies). Customers generally contract with JRM for the design, engineering, fabrication and installation of offshore drilling and production platforms and other specialized structures, modular facilities, marine pipelines and subsea production systems and onshore construction and maintenance services. Contracts are usually awarded on a competitive bid basis. There are a number of companies which compete effectively with JRM, the HeereMac joint venture, McDermott-ETPM and JRM's various other joint ventures in each of the separate marine construction phases in various parts of the world. BACKLOG As of March 31, 1996 and 1995, JRM's backlog amounted to $977,896,000 and $1,002,968,000, respectively. Of the March 31, 1996 backlog, it is expected that approximately $791,958,000 will be recognized in revenues in fiscal year 1997, $141,408,000 in fiscal year 1998, and $44,530,000 thereafter. Backlog at March 31, 1996, includes a contract award of $233,614,000 awarded to McDermott-ETPM East, Inc. joint venture by the Ras Laffan Liquified Natural Gas Company of Qatar. The project is for the installation of offshore power and communication cables, fabrication and installation of living quarters and wellhead platforms, and overall project management. Not included in JRM's backlog is a letter of award for $180,000,000 received after March 31, 1996 from Total Myanmar Exploration and Production for the management, engineering, supply, construction, installation, hook-up and commissioning of two wellhead platforms; and quarters, flare and production platform facilities for the Yadana Development Project. This is the first offshore development in Myanmar and is expected to be completed by May 1998. Not included in JRM's backlog at March 31, 1996 and 1995 was backlog relating to contracts to be performed by its unconsolidated foreign joint ventures of approximately $1,374,000,000 and $978,000,000, respectively. Included in backlog to be performed by JRM's unconsolidated joint ventures is $230,350,000 related to a contract awarded during fiscal year 1995 by Statoil A/S to the McDermott-ETPM West, Inc. joint venture to install up to three large diameter gas pipelines in the North Sea. Installation of the pipelines is scheduled to start during fiscal year 1997 and continue through fiscal year 2000. Work is performed on a fixed price, cost plus or day rate basis or combination thereof. JRM attempts to cover increased costs of anticipated changes in labor, material and service costs 7 12 of long-term contracts either through an estimation of such changes, which is reflected in the original price, or through price escalation clauses. Most long-term contracts have provisions for progress payments. FACTORS AFFECTING DEMAND The activity of JRM depends mainly on the capital expenditures of oil and gas companies and foreign governments for developmental construction. These expenditures are influenced by the selling price of oil and gas along with the cost of production and delivery, the terms and conditions of offshore leases, the discovery rates of new reserves offshore, the ability of the oil and gas industry to raise capital, and local and international political and economic conditions. Oil company capital exploration and production budgets in calendar year 1996 are higher than 1995 expenditures. While oil prices remain flat, natural gas prices have increased significantly as compared to calendar year 1995. Expenditures in both domestic and international areas are expected to increase; domestic at a higher rate. Worldwide demand for offshore drilling rigs has increased and this, historically, has been a leading indicator for an increase in the need for marine construction services. JRM's markets are expected to begin to emerge from the competitive environment that has put pressure on margins in prior periods. C. PATENTS AND LICENSES JRM owns or has exclusive rights to use, for marine construction purposes, a number of patents relating to offshore platform design, fabrication and installation and pipelaying operations. JRM also co-owns several other patents relating to such operations. Although in the aggregate these patents are important to JRM, JRM does not consider any single patent to be of a critical or essential nature. In general, JRM depends on its technological capabilities and the application of know-how rather than patents in the conduct of its business. D. INSURANCE JRM's offshore construction business is subject to the usual risks of operations at sea, with additional exposure due to the utilization of expensive construction equipment, sometimes under extreme weather conditions, often in remote areas of the world. In addition, JRM operates in many cases on or in proximity to existing offshore facilities which are subject to damage by JRM and such damage could result in the escape of oil and gas into the sea. 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. Among such risks are war and confiscation of property in certain areas of the world and pollution liability in excess of relatively low limits. Depending on competitive conditions and other factors, JRM endeavors to obtain contractual protection against uninsured risks from its customers. However, there is no assurance that insurance or contractual indemnity protection, when obtained, will be sufficient or effective under all circumstances or against all hazards to which JRM may be subject. Prior to JRM's acquisition of OPI, one of OPI's vessels was severely damaged during a typhoon while under going final work in connection with its refurbishment. Estimates for the 8 13 repair of the vessel, together with out-of-pocket costs, total more than $45,000,000. At the time of the casualty loss, insurance policies had been issued insuring the vessel for its full value. Efforts to settle the claim with underwriters, however, have been unsuccessful, and resort to the courts may be necessary to collect the amount claimed. Management believes that the underwriters' refusal to satisfactorily adjust the claim is without basis and is of the opinion that the outcome of any necessary litigation will be favorable. E. EMPLOYEES At March 31, 1996, JRM employed, under its direct supervision, approximately 10,400 persons compared with 10,200 at March 31, 1995. JRM considers its relationship with its employees to be satisfactory. None of these employees are members of labor unions. F. ENVIRONMENTAL REGULATIONS AND MATTERS JRM is subject to the existing and evolving standards relating to the environment. These laws include the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, and similar laws which provide for responses to and liability for releases of hazardous substances into the environment; and the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and other federal laws, each as amended, and similar foreign, state or local counterparts to these federal laws, which regulate air emissions, water discharges, hazardous substances and wastes, and require public disclosure related to use of various hazardous substances. JRM's operations are also governed by laws and regulations relating to workplace safety and worker health, primarily Occupational Safety and Health Act and regulations promulgated thereunder. JRM believes that its facilities are in substantial compliance with current regulatory standards. JRM's compliance with U.S. federal, state and local environmental control and protection regulations necessitated capital expenditures of $300,000 in fiscal year 1996, and it expects such capital expenditures will not be material for the foreseeable future. JRM cannot predict all of the environmental requirements or circumstances which will exist in the future but it anticipates that environmental control and protection standards will become increasingly stringent and costly. Complying with existing environmental regulations resulted in a charge against income before taxes of approximately $1,209,000 in fiscal year 1996. Compliance with existing government regulations controlling the discharge of materials into the environment, or otherwise relating to the protection of the environment does not have, nor is it expected to have, a material adverse effect upon the consolidated financial position of JRM. G. TRANSACTIONS WITH RELATED PARTIES JRM has material transactions occurring during the normal course of operations with McDermott International and other affiliated companies. JRM has also entered into various agreements with International and its subsidiaries. (See Note 6 to the consolidated financial statements.) JRM purchased engineering services from McDermott International based on charges to unrelated parties for similar work and for general and administrative activities based on an 9 14 allocation of cost. Effective April 1, 1996, JRM and McDermott International, through subsidiaries, created an equally owned joint venture which is a preferred (but not exclusive) provider of engineering services to certain subsidiaries of McDermott International in the U.S. for onshore-related work and to JRM for offshore-related work. The charges for such services are to be 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 will be reviewed periodically by the parties. While JRM'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 JRM's other insurance programs are insured, by wholly owned insurance subsidiaries of McDermott International. The premiums charged by such insurance companies of McDermott International for such insurance are based upon the claims experience and forecasted activities of JRM and its subsidiaries. Management believes this approach is more cost effective as there is generally no commercial market for insurance on the same economic terms for these types of exposure. 10 15 Item 3. LEGAL PROCEEDINGS JRM is named as a defendant in numerous lawsuits arising in the ordinary course of business, some of which involve substantial damage claims. While the outcome of these lawsuits cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the consolidated financial position of JRM. 11 16 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. 12 17 P A R T I I Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS JRM's Common Stock commenced trading on the New York Stock Exchange on January 31, 1995. High and low stock prices for fiscal year ended March 31, 1996 and from January 31, 1995 through March 31, 1995 follow: FISCAL YEAR 1996
SALES PRICE ----------- QUARTER ENDED HIGH LOW - ------------- ---- --- June 30, 1995 $ 28-5/8 $ 21-1/2 September 30, 1995 24-3/8 20-3/4 December 31, 1995 22-7/8 15 March 31, 1996 21-7/8 16
JANUARY 31 - MARCH 31, 1995 SALES PRICE -----------
HIGH LOW ---- --- $ 27-1/4 $ 19-5/8
JRM has not paid any dividends on its Common Stock since inception, and management does not anticipate any such dividends will be paid for the foreseeable future. As of March 31, 1996, the approximate number of record holders of Common Stock was 173. 13 18 Item 6. SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS ENDED MARCH 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands) Revenues $1,227,841 $1,127,320 $1,193,881 $1,601,060 $1,903,281 Income (Loss) before Cumulative Effect of Accounting Changes $ 187 $ 60,700 $ 119,137 $ 95,756 $ (2,874) Net Income (Loss) $ 187 $ 59,374 $ 119,137 $ 37,011 $ (2,874) Net Loss Applicable to Common Stock $ (7,524) - - - - Primary and Fully Diluted Loss Per Common Share $ (0.19) - - - - Total Assets $1,537,745 $1,482,262 $1,007,609 $ 932,528 $ 984,063 Long-Term Debt $ 114,532 $ 93,872 $ 2,092 $ 1,115 $ 2,105 Notes Payable to McDermott International 231,000 231,000 281,419 239,301 285,097 ------- ------- ------- ------- ------- Total Long-Term Debt $ 345,532 $ 324,872 $ 283,511 $ 240,416 $ 287,202
See Note 1 to the consolidated financial statements regarding the basis of presentation of the selected financial data and the adoption of SFAS No. 112 in fiscal year 1995 and see Note 3 regarding the acquisition of OPI. Fiscal year 1993, includes the cumulative effect of accounting change of the adoption of SFAS No. 106. Results for fiscal year 1995 include the accounts and operations of OPI for the periods after the Merger. Earnings per Common Share are not presented for fiscal years 1992 through 1995 because JRM was not a separate entity with its own capital structure during those periods. 14 19 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion presents the results of operations of JRM for the periods indicated and includes the accounts of the subsidiaries, divisions and controlled joint ventures that McDermott International contributed to JRM prior to the Merger with OPI. For the periods after the Merger, the discussion includes the accounts and operations of JRM on a stand alone basis (including the contribution from OPI from January 31, 1995). For fiscal year 1994 and through the date of the Merger, certain expenses included in the consolidated financial statements include charges from McDermott International for direct costs, allocation of corporate overhead and interest on intercompany debt. Management believes that the allocation methods were reasonable, and that the allocations were representative of what costs would have been on a stand alone basis. However, the assets, liabilities and capital structure of JRM after the Merger differ significantly from the assets, liabilities and capital structure of JRM prior to the Merger (which reflected substantially all of International's marine construction services business), and accordingly, the following discussion should be read in conjunction with the Notes to the Consolidated Financial Statements. A significant portion of JRM's revenues and operating results are derived from its foreign operations. As a result, JRM's operations and financial results are affected by international factors, such as changes in foreign currency exchange rates. JRM's policy attempts to minimize its exposure to changes in foreign currency exchange rates by attempting to match foreign currency contract receipts with like foreign currency disbursements. To the extent that it is unable to match the foreign currency receipts and disbursements related to its contracts, its practice of entering into forward exchange contracts to hedge foreign currency transactions reduces the impact of foreign exchange rate movements on JRM's operating results. In recent periods, the market for marine construction services has been relatively weak. This lower level of market activity, combined with the overcapacity in the industry, has resulted in substantial pressure on pricing and operating margins. JRM's business tends to follow the overall capital expenditure cycles of the oil and gas industry. The recent focus in the offshore segment of the oil and gas industry has been on expanding exploration and development activity in deepwater and very deep water regions, such as the North Sea, the North Atlantic and the deepwater regions of the Gulf of Mexico. While this activity has not yet begun to generate significant demand for marine construction services, it has resulted in a recent increase in the demand for offshore drilling rigs, which historically has been a leading indicator for an upturn in the demand cycle for marine construction services. In general, JRM's performance is a function of the level of oil and gas development activity in the world's major hydrocarbon producing regions. As a result, JRM's revenues and profitability reflect some variability associated with the timing of the completion of significant development projects and the commencement of others as to which JRM has contracts, as well as the worldwide volume of projects and their geographic distribution. JRM's recent operating results have been adversely impacted by a substantial decline in the number of projects generating demand for marine constructions services in the Southeast Asia market. JRM believes this decline is only temporary and is largely due to project timing. This decline has had an adverse effect on other markets as a result of the migration of equipment and other resources previously allocated to the Southeast Asia market to other markets and the resultant pressure on pricing in those markets caused by the increased capacity. Based on its ongoing dialogue with existing customers with respect to possible future projects, JRM expects improvements in certain of its significant markets, including Southeast Asia and the Gulf of Mexico. JRM believes that some level of improvement in market activity is reflected in an increase in the backlog relating to contracts to be performed by JRM's unconsolidated joint ventures from $978,000,000 at March 31, 1995 to $1,374,000,000 at March 31, 1996. Notwithstanding these signs of 15 20 improvement, JRM cannot, at this time, predict the timing or extent of any improvement in the industry or the future level of demand for JRM services. The foregoing statements regarding JRM's markets and the other statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, among others, the uncertainties relating to offshore development decisions to be made by oil and gas exploration and development companies. FISCAL YEAR 1996 VS FISCAL YEAR 1995 Revenues increased $100,521,000 to $1,227,841,000 primarily due to higher purchased engineered equipment and subcontract activities in the North Sea related to the B.P. Exploration Foinaven Development program west of the Shetlands in the North Atlantic, higher revenues in North America and revenues resulting from the acquisition of OPI. These increases were partially offset by lower revenues in the Far East. Operating income by geographic area decreased $33,814,000 to $33,152,000 primarily due to higher amortization expense relating to goodwill and other intangibles resulting from the acquisition of OPI on January 31, 1995. There were also lower margins due to the completion of higher profit margin contracts in the Far East and the Middle East during fiscal year 1995, lower volume in the Far East this year, lower operating income in North America on offshore activities because of weather downtime and lower margins on certain contracts. This decrease was partially offset by higher volume and margins in North America on fabrication activities this year. In addition, there were operating losses associated with the fabrication yard in Scotland and accelerated depreciation of $4,314,000 on certain marine equipment in the Far East in the prior year. Equity in income of investees decreased $13,733,000 to $9,124,000. This decrease was primarily due to lower results from both the HeereMac and McDermott-ETPM West, Inc. joint ventures. The revenues of these two joint ventures declined from $656,490,000 to $542,772,000, primarily in the Gulf of Mexico, the Far East and the North Sea, partially offset by increased volume in West Africa. The equity income from these two joint ventures declined from $24,759,000 to $3,616,000 as a result of reduced volume and margins in the North Sea. Together these two significant investees accounted for 40% of equity earnings of investees. While both joint ventures performed at low levels during fiscal 1996, worldwide demand for offshore drilling rigs has increased and the increased level of oil and gas discoveries has resulted in an increase in these joint ventures' backlog. Equity income in fiscal year 1996 benefitted from the inclusion of the results of the CMM Mexican joint venture which was not a part of JRM's marine construction services business in the prior period and higher operating activity from the Brown & Root McDermott Fabricators Limited joint venture which was formed in the last quarter of the prior year. Backlog at March 31, 1996 and 1995 was $977,896,000 and $1,002,968,000, respectively. Not included in backlog at March 31, 1996 and 1995 was backlog relating to contracts to be performed by its unconsolidated joint ventures of approximately $1,374,000,000 and $978,000,000, respectively. 16 21 The activity of JRM (including its investees) depends mainly on the capital expenditures of oil and gas companies and foreign governments for developmental construction. These expenditures are influenced by the selling price of oil and gas along with the cost of production and delivery, the terms and conditions of offshore leases, the discovery rates of new reserves offshore, the ability of the oil and gas industry to raise capital, and local and international political and economic conditions. Oil company capital exploration and production budgets in calendar year 1996 are higher than 1995 expenditures. While oil prices remain flat, natural gas prices have increased significantly as compared to calendar year 1995. Expenditures in both domestic and international areas are expected to increase; domestic at a higher rate. Worldwide demand for offshore drilling rigs has increased and this, historically, has been a leading indicator for an increase in the need for marine construction services. JRM's markets are expected to begin to emerge from the competitive environment that has put pressure on margins in prior periods. Interest income decreased $3,284,000 to $6,014,000 primarily due to settlement of claims for interest relating to foreign tax refunds and contract claims of $4,868,000 in the prior year. Interest expense increased $17,229,000 to $42,387,000 primarily due to interest on the 12.875% Guaranteed Senior Notes which were assumed in connection with the acquisition of OPI, and changes in other debt obligations and interest rates prevailing thereon. Other-net income increased $4,162,000 to $11,190,000 primarily due to minority shareholder participation in the increased losses of the McDermott-ETPM East joint venture. The provision for income taxes decreased $3,993,000 to $4,892,000 while income before provision for income taxes and cumulative effect of accounting changes decreased $64,506,000 to $5,079,000. The reduction in income taxes is primarily due to a decrease in income and a reappraisal of approximately $4,800,000 of liabilities in certain foreign tax jurisdictions. In addition, JRM operates in many different tax jurisdictions. Within these jurisdictions, tax provisions vary because of nominal rates, allowability of deductions, credits and other benefits, and even tax basis (for example, revenue versus income). These variances, along with variances in the mix of income within jurisdictions, are responsible for shifts in the effective tax rate. As a result of these factors, the provision for income taxes was 96% of pretax income for the fiscal year ended March 31,1996, compared to a provision of 13% of pretax income for the fiscal year ended March 31, 1995 . Net income decreased $59,187,000 to $187,000. This decrease included the cumulative effect of the adoption of SFAS No. 112 of $1,326,000 in the prior year, in addition to other items described above. 17 22 FISCAL YEAR 1995 VS FISCAL YEAR 1994 Revenues decreased $66,561,000 to $1,127,320,000 primarily due to lower volume in worldwide marine and domestic fabrication operations. These decreases were partially offset by the inclusion of revenues as a result of the acquisition of OPI (approximately $44,000,000) on January 31, 1995 and Northern Ocean Services ("NOS") ($59,644,000 for the full fiscal year) in February 1994, and higher volume in foreign fabrication and procured materials. Operating income by geographic area increased $7,094,000 to $66,966,000 (including $4,993,000 from OPI) primarily due to improved margins in foreign marine operations, inclusion of the operating results of NOS for the full fiscal year, and higher volume in foreign fabrication and procured materials. These increases were partially offset by higher operating expenses. Equity in income of investees decreased $83,736,000 to $22,857,000. Both the HeereMac and McDermott-ETPM West, Inc. joint ventures performed at lower levels than in the previous year, as several large contracts were completed in fiscal 1994. The revenues of these two joint ventures declined from $895,666,000 to $656,490,000. Most of the HeereMac decline was in the North Sea. McDermott-ETPM West, Inc. also declined in the North Sea but this was partially offset by increased volume in West Africa. The equity income from these two joint ventures declined from $106,783,000 to $24,759,000. HeereMac's equity income decreased as a result of the reduced volume and reduced margins. McDermott-ETPM West, Inc.'s equity income also decreased as a result of the reduced volume, but the decrease was not as severe. McDermott-ETPM West, Inc. also had a loss provision of approximately $7,500,000 on a major North Sea contract. Together these two significant investees accounted for 108% of equity in earnings of investees. No other venture contributed significantly to the decline. Interest income increased $5,815,000 to $9,298,000 primarily due to settlement of claims for interest relating to foreign tax refunds and contract claims. Interest expense increased $5,082,000 to $25,158,000 primarily due to changes in debt obligations and interest rates prevailing thereon. Other-net income decreased $1,969,000 to $7,028,000 primarily due to minority shareholder participation in the improved results of the McDermott-ETPM East joint venture partially offset by lower foreign currency transaction losses. The provision for income taxes decreased $19,165,000 to $8,885,000 while income before provision for income taxes and cumulative effect of accounting changes decreased $77,602,000 to $69,585,000. The decrease in the provision for income taxes is primarily due to a decrease in income from operations. Net income decreased $59,763,000 to $59,374,000. This decrease included the cumulative effect of the adoption of SFAS No. 112 of $1,326,000, in addition to other items described above. 18 23 Effects of Inflation and Changing Prices JRM's financial statements are prepared in accordance with generally accepted accounting principles, using historical dollar accounting (historical cost). Statements based on historical cost, however, do not adequately reflect the cumulative effect of increasing costs and changes in the purchasing power of the dollar, especially during times of significant and continued inflation. The management of JRM is cognizant of the effects of inflation and, in order to minimize the negative impact of inflation on its operations, attempts to cover the increased cost of anticipated changes in labor, material and service costs, either through an estimation of such changes, which is reflected in an original price, or through price escalation clauses in its contracts. Liquidity and Capital Resources During fiscal year 1996, JRM's cash and cash equivalents increased $114,184,000 to $166,408,000 and total debt increased $21,146,000 to $441,662,000. During this period JRM used cash of $48,906,000 in operating activities; $38,033,000 for additions to property, plant and equipment; $29,620,000 for the conversion of a barge to a floating production unit; $7,928,000 for dividends on JRM's preferred stock; $6,827,000 for investments in equity investees; and $6,808,000 for repayment of long-term debt. Also during this period JRM received cash of $133,693,000 from the proceeds of asset sales; $37,097,000 from the return of capital from the HeereMac joint venture; and $30,000,000 from a deposit in advance on the sale of certain equipment. Lower accounts receivable are primarily due to timing of the collection of billings on contracts performed in the Middle and Far East. Decreases in trade payables reflect the settlement of the Britoil contract for Atlantic Fontier Programme Development of Foinaven Phase One Facility ("Foinaven"). Accounts payable to McDermott International increased $42,423,000, of which approximately $21,000,000 has been settled subsequent to March 31, 1996. Increases in net contracts in progress and advance billings were primarily due to the timings of billings on the Foinaven contract. Expenditures for property, plant and equipment decreased $2,049,000 to $38,033,000 in fiscal year 1996. While the majority of these expenditures were incurred to maintain and replace existing facilities, $8,669,000 was expended for installation of a new pipe reel system on a marine barge. In addition to expenditures for property, plant and equipment, JRM expended $29,620,000 in fiscal year 1996 for the conversion of a barge to a floating production unit which is now leased to a third party. The barge conversion was financed by $21,700,000 in loan facilities, of which $21,139,000 was outstanding at March 31, 1996. JRM has committed to make capital expenditures of $30,385,000 during fiscal year 1997. At March 31, 1996 and 1995, JRM had available to it various uncommitted short-term lines of credit from banks totaling $142,645,000 and $118,231,000, respectively. Borrowings by JRM against these lines of credit at March 31, 1996 and 1995 were $85,251,000 and $24,750,000, respectively. JRM also had available a $150,000,000 19 24 unsecured and committed revolving credit facility on which no borrowings were outstanding at March 31, 1996. JRM is restricted, as a result of the consolidated tangible net worth covenant in this agreement, in its ability to transfer funds to International and its subsidiaries through cash dividends or through unsecured loans or investments. As of March 31, 1996 approximately $13,000,000 of JRM's net assets were not subject to this restriction. In consideration for the contribution of substantially all of McDermott International's marine construction services business, JRM issued 3,200,000 shares of Series A $2.25 Cumulative Convertible Preferred Stock, $231,000,000 9% Senior Subordinated Notes due 2001 and a $39,750,000 Floating Rate Note at 7.69% at the Merger Date to International. The Floating Rate Note of $20,543,000 was repaid during March 1996. In addition, a subsidiary of JRM assumed all of OPI's $70,000,000 12-7/8% Guaranteed Senior Notes due 2002. The Notes due 2002 are redeemable at the option of the subsidiary of JRM after June 1997. During March 1996, JRM sold the vessels DB101 and DB102 (previously leased to the HeereMac joint venture) to the HeereMac joint venture for $240,969,000, including $30,000,000 as a deposit in advance of the sale of certain equipment. Consideration received included cash of $135,969,000 and a promissory note of $105,000,000 bearing interest at a rate of 7.75%. The cash portion of the purchase price was funded in part through a $200,000,000 stand-alone credit arrangement obtained by the HeereMac joint venture. Proceeds from the sale were used to repay JRM's Floating Rate Note to McDermott International and to repay other indebtedness of approximately $72,000,000. The remaining proceeds were invested in cash equivalents. As a result of the sale, JRM recorded a deferred gain of $103,239,000, which it is amortizing over 12 years. Working capital increased $195,997,000 to $169,409,000 at March 31, 1996 from a deficit of $26,588,000 at March 31, 1995. This increase includes the vessel sale described above. During 1997, JRM expects to obtain funds to meet capital expenditure, working capital and debt maturity requirements from operating activities and disposals of non-strategic assets. Leasing agreements for equipment, which are short-term in nature, are not expected to impact JRM's liquidity or capital resources. JRM is also considering the issuance of public debt, the proceeds of which, in part, would be used to repay its Note Payable to McDermott International of $231,000,000. JRM joint ventures are largely financed through their own resources, including, in some cases, stand-alone borrowing arrangements. Historically, JRM has obtained funds from its joint ventures through chartering arrangements, whereby it charters vessels to the joint ventures for use in their operations, as well as through distributions from the joint ventures. While JRM and other parties to the joint venture arrangements generally must agree on the amount of cash flow to be distributed, the joint ventures have historically distributed to their respective owners cash in excess of estimated working capital requirements, based on owners' relative ownership percentages. During fiscal year 1996 and 1995, JRM paid dividends of $7,200,000 and $900,000, respectively, on its Series A Preferred Stock and $511,000 and $217,000, respectively, on its Series B Preferred Stock. JRM has annual preferred stock dividend requirements of $7,200,000 on its Series A Preferred Stock. During fiscal year 1996, 458,382 shares of 20 25 Series B Preferred Stock were converted into 1,065,193 shares of common stock and the remaining 250 shares were redeemed for cash. At March 31, 1996, the ratio of long-term debt (including notes payable to McDermott International) to total stockholders' equity was 0.61 as compared with 0.58 at March 31, 1995. JRM has provided a valuation allowance ($16,216,000 at March 31, 1996) 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 ($34,444,000 at March 31, 1996) are realizable through carrybacks and future reversals of existing taxable temporary differences. Management will continue to assess the adequacy of the valuation allowance on a quarterly basis. New Accounting Standards In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective for fiscal years beginning after December 15, 1995. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 also applies to similar assets that are held for disposal, except for the assets of a discontinued operation. JRM has not yet finalized its review of the impact of this statement, but it is not expected to have a material impact on the consolidated financial statements. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," effective for fiscal years beginning after December 15, 1995. SFAS No. 123 establishes financial accounting and reporting standards for stock- based employee compensation plans. JRM has not yet finalized its review of the provisions of this statement, and accordingly, has not yet determined whether it will adopt SFAS No. 123 for expense recognition purposes, or continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and make the pro forma information disclosures required under the new standard. 21 26 Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA COMPANY REPORT ON CONSOLIDATED FINANCIAL STATEMENTS JRM has prepared the consolidated financial statements and related financial information included in this report. JRM has the primary responsibility for the financial statements and other financial information and for ascertaining that the data fairly reflects its financial position and results of operations. The financial statements were prepared in accordance with generally accepted accounting principles, and necessarily reflect informed estimates and judgments by appropriate officers of JRM with appropriate consideration given to materiality. JRM believes that it maintains an internal control structure designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with generally accepted accounting principles. The concept of reasonable assurance is based on the recognition that the cost of an internal control structure must not exceed the related benefits. Although internal control procedures are designed to achieve these objectives, it must be recognized that errors or irregularities may nevertheless occur. JRM seeks to assure the objectivity and integrity of its accounts by its selection of qualified personnel, by organizational arrangements that provide an appropriate division of responsibility and by the establishment and communication of sound business policies and procedures throughout the organization. JRM believes that its internal control structure provides reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected. JRM's accompanying consolidated financial statements have been audited by its independent auditors, who provide JRM with expert advice on the application of U.S. generally accepted accounting principles to JRM's business and also provide an objective assessment of the degree to which JRM meets its responsibility for the fairness of financial reporting. They regularly evaluate the internal control structure and perform such tests and other procedures as they deem necessary to reach and express an opinion on the fairness of the financial statements. The report of the independent auditors appears elsewhere herein. The Board of Directors pursues its responsibility for JRM's consolidated financial statements through its Audit Committee, which is composed solely of directors who are not officers or employees of JRM or its parent, International. The functions of the Audit Committee include the review of matters relating to the quality of financial reporting and internal control structure and the nature, extent and results of the audit effort. In addition, the Audit Committee is responsible for recommending the engagement of independent auditors for JRM to the Board of Directors, who in turn submit the engagement to the stockholders for their approval. The independent auditors have free access to the Audit Committee. May 15, 1996 22 27 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, 1996 and 1995, and the related consolidated statements of income, equity and cash flows for each of the three years in the period ended March 31, 1996. 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, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1996, 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 May 15, 1996 23 28 J. RAY McDERMOTT, S.A. CONSOLIDATED BALANCE SHEET MARCH 31, 1996 and 1995 ASSETS
1996 1995 ---- ---- (In thousands) Current Assets: Cash and cash equivalents $ 166,408 $ 52,224 Accounts receivable - trade 193,643 244,212 Accounts receivable - unconsolidated affiliates 46,209 56,104 Accounts receivable - other 57,421 33,830 Contracts in progress 181,375 54,947 Other current assets 57,291 28,819 - ------------------------------------------------------------------------------------------------------------- Total Current Assets 702,347 470,136 - ------------------------------------------------------------------------------------------------------------- Property, Plant and Equipment, at Cost: Land 21,175 21,948 Buildings 76,774 82,490 Machinery and equipment 1,070,326 1,374,672 Property under construction 17,958 25,607 - ------------------------------------------------------------------------------------------------------------- 1,186,233 1,504,717 Less accumulated depreciation 793,833 910,555 - ------------------------------------------------------------------------------------------------------------- Net Property, Plant and Equipment 392,400 594,162 - ------------------------------------------------------------------------------------------------------------- Excess of Cost Over Fair Value of Net Assets of Purchased Businesses Less Accumulated Amortization of $28,799,000 at March 31, 1996 and $5,483,000 at March 31, 1995 316,863 245,179 - ------------------------------------------------------------------------------------------------------------- Investment in Unconsolidated Affiliates 72,806 105,283 - ------------------------------------------------------------------------------------------------------------- Other Assets 53,329 67,502 - ------------------------------------------------------------------------------------------------------------- TOTAL $ 1,537,745 $ 1,482,262 =============================================================================================================
See accompanying notes to consolidated financial statements. 24 29 LIABILITIES AND EQUITY
1996 1995 ---- ---- (In thousands) Current Liabilities: Notes payable and current maturities of long-term debt $ 96,130 $ 55,894 Note payable to McDermott International - 39,750 Accounts payable 103,473 136,104 Accounts payable to McDermott International 47,695 5,272 Accrued contract costs 69,827 53,610 Accrued liabilities - other 120,515 105,242 Deposit on equipment sale 30,000 - Advance billings on contracts 36,581 62,495 U.S. and foreign income taxes 28,717 38,357 - ------------------------------------------------------------------------------------------------------------- Total Current Liabilities 532,938 496,724 - ------------------------------------------------------------------------------------------------------------- Long-Term Debt 114,532 93,872 - ------------------------------------------------------------------------------------------------------------- Note Payable to McDermott International 231,000 231,000 - ------------------------------------------------------------------------------------------------------------- Deferred and Non-Current Income Taxes 50,016 44,697 - ------------------------------------------------------------------------------------------------------------- Other Liabilities 55,362 56,498 - ------------------------------------------------------------------------------------------------------------- Contingencies - ------------------------------------------------------------------------------------------------------------- Stockholders' Equity: Preferred Stock, par value $.01 per share, authorized 10,000,000 shares: Series A $2.25 cumulative convertible, outstanding 3,200,000 shares (liquidation preference $160,000,000) 32 32 Series B $2.25 cumulative convertible exchangeable, outstanding 458,632 shares at March 31, 1995 - 5 Common stock, par value $0.01 per share, authorized 60,000,000 shares; outstanding 40,197,946 at March 31, 1996 and 38,649,349 at March 31, 1995 402 386 Capital in excess of par value 581,609 580,279 Deficit (14,576) (6,598) Currency translation adjustments (13,570) (14,633) - ------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 553,897 559,471 - ------------------------------------------------------------------------------------------------------------- TOTAL $ 1,537,745 $ 1,482,262 =============================================================================================================
25 30 J. RAY McDERMOTT, S.A. CONSOLIDATED STATEMENT OF INCOME FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1996
1996 1995 1994 ---- ---- ---- (In thousands) Revenues $ 1,227,841 $ 1,127,320 $ 1,193,881 Costs and Expenses: Cost of operations (excluding depreciation and amortization) 1,004,412 887,223 976,636 Depreciation and amortization 85,566 70,372 53,627 Selling, general and administrative expenses 116,725 114,165 115,428 - ------------------------------------------------------------------------------------------------------------- 1,206,703 1,071,760 1,145,691 - ------------------------------------------------------------------------------------------------------------- Operating Income before Equity in Income of Investees 21,138 55,560 48,190 Equity in Income of Investees 9,124 22,857 106,593 - ------------------------------------------------------------------------------------------------------------- Operating Income 30,262 78,417 154,783 - ------------------------------------------------------------------------------------------------------------- Other Income (Expense): Interest income 6,014 9,298 3,483 Interest expense (42,387) (25,158) (20,076) Other-net 11,190 7,028 8,997 - ------------------------------------------------------------------------------------------------------------- (25,183) (8,832) (7,596) - ------------------------------------------------------------------------------------------------------------- Income before Provision for Income Taxes and Cumulative Effect of Accounting Change 5,079 69,585 147,187 Provision for Income Taxes 4,892 8,885 28,050 - ------------------------------------------------------------------------------------------------------------- Income before Cumulative Effect of Accounting Change 187 60,700 119,137 Cumulative Effect of Accounting Change - (1,326) - - ------------------------------------------------------------------------------------------------------------- Net Income $ 187 $ 59,374 $ 119,137 ============================================================================================================= Net Loss Applicable to Common Stock (after Preferred Stock dividends) $ (7,524) ===================================================================
26 31 CONTINUED
1996 ---- LOSS PER COMMON AND COMMON EQUIVALENT SHARE (PRIMARY AND FULLY DILUTED) $ (0.19) =============================================================================== CASH DIVIDENDS: Per preferred share $ 2.25 - -------------------------------------------------------------------------------
Earnings per share are not presented for fiscal years 1995 and 1994 because JRM was not a separate entity with its own capital structure for those periods. See accompanying notes to consolidated financial statements. Significant related party transactions are disclosed in Note 6. 27 32 J. RAY McDERMOTT, S.A. CONSOLIDATED STATEMENT OF EQUITY FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1996 (In thousands, except for share amounts)
Preferred Stock ---------------------------------------------------------------- Series A Series B -------------------------- ---------------------------- Par Par Shares Value Shares Value ------ ----- ------ ----- Balance March 31, 1993 - $ - - $ - - ------------------------------------------------------------------------------------------------------------- Net income - - - - Translation adjustments - - - - Distributions to McDermott International - - - - - ------------------------------------------------------------------------------------------------------------- Balance March 31, 1994 - - - - - ------------------------------------------------------------------------------------------------------------- Net Income - - - - Preferred dividends - - - - Translation adjustments - - - - Distributions to McDermott International - - - - Contribution of McDermott International's marine con- struction services business 3,200,000 32 - - Acquisition of Offshore Pipelines, Inc. - - 458,632 5 Exercise of stock options - - - - Loss on investments - - - - - ------------------------------------------------------------------------------------------------------------- Balance March 31, 1995 3,200,000 32 458,632 5 - ------------------------------------------------------------------------------------------------------------- Net income - - - - Preferred dividends - - - - Preferred stock conversion - - (458,632) (5) Translation adjustments - - - - Exercise of stock options - - - - Tax benefit on exercise of stock options - - - - Restricted stock purchases - net - - - - Contributions to thrift plan - - - - Deferred career executive stock plan expense - - - - Loss on investments - - - - Minimum pension liability - - - - Division of McDermott International pension plan - - - - - ------------------------------------------------------------------------------------------------------------- Balance March 31, 1996 3,200,000 $ 32 - $ - =============================================================================================================
See accompanying notes to consolidated financial statements. 28 33
Common Stock ------------------------ Capital Currency Par In Excess Owner's Translation Shares Value Of Par Value Deficit Equity Adjustments Total ------ ------ ------------ ------- --------- ----------- ---------- - $ - $ - $ - $ 191,104 $ (21,481) $ 169,623 - -------------------------------------------------------------------------------------------------------------- - - - - 119,137 - 119,137 - - - - - (5,444) (5,444) - - - - (30,295) - (30,295) - -------------------------------------------------------------------------------------------------------------- - - - - 279,946 (26,925) 253,021 - -------------------------------------------------------------------------------------------------------------- - - - (5,106) 64,480 - 59,374 - - - (1,117) - - (1,117) - - - - - 12,292 12,292 - - - - (46,249) - (46,249) 24,668,297 246 231,277 - (298,177) - (66,622) 13,917,946 139 348,573 - - - 348,717 63,106 1 429 - - - 430 - - - (375) - - (375) - -------------------------------------------------------------------------------------------------------------- 38,649,349 386 580,279 (6,598) - (14,633) 559,471 - -------------------------------------------------------------------------------------------------------------- - - - 187 - - 187 - - - (7,711) - - (7,711) 1,065,193 11 (13) - - - (7) - - - - - 1,063 1,063 353,978 4 1,527 - - - 1,531 - - 2,629 - - - 2,629 49,070 - 39 - - - 39 80,356 1 1,585 - - - 1,586 - - 148 - - - 148 - - - (452) - - (452) - - - (2) - - (2) - - (4,585) - - - (4,585) - -------------------------------------------------------------------------------------------------------------- 40,197,946 $ 402 $ 581,609 $ (14,576) $ - $ (13,570) $ 553,897 ==============================================================================================================
29 34 J. RAY McDERMOTT, S.A. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1996 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1996 1995 1994 ---- ---- ---- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 187 $ 59,374 $ 119,137 - ------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 85,566 70,372 53,627 Equity in income of investees less dividends (6,833) 42,810 (47,414) Gain on sale and disposal of assets (2,530) (1,862) (2,997) Provision for (benefit from) deferred taxes (2,338) (35,769) 3,616 Other (3,461) 1,253 (23,410) Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable 49,005 28,290 85,955 Net contracts in progress and advance billings (150,121) 13,081 25,506 Accounts payable (23,430) (46,707) (29,490) Accrued contract costs 16,217 (692) (14,836) Accrued liabilities (3,142) (32,997) (24,336) Income taxes (9,927) 9,958 (6,525) Other, net 1,901 (28,086) (3,315) - ------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (48,906) 79,025 135,518 - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition - 10,828 - Purchases of property, plant and equipment (38,033) (40,082) (18,898) Proceeds from sale and disposal of assets 133,693 15,580 3,938 Investment in asset held for lease (29,620) (6,711) - Increase in notes receivable from McDermott International - (16,802) (50,096) Investments in equity investees (6,827) (398) - Returns of capital from equity investees 37,097 - - Deposit on equipment sale 30,000 - - Other (452) (375) - - ------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 125,858 (37,960) (65,056) - -------------------------------------------------------------------------------------------------------------
30 35 CONTINUED INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1996 1995 1994 ---- ---- ---- (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt $ (6,808) $ (132) $ - Issuance of long-term debt 32,756 2,348 - Increase in short-term borrowings 36,001 22,348 1,627 Decrease in notes payable to McDermott International (20,542) (19,705) (13,927) Distributions to McDermott International - (46,249) (30,295) Issuance of common stock 4,197 430 - Preferred dividends paid (7,928) (900) - Other (523) (667) (410) - ------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 37,153 (42,527) (43,005) - ------------------------------------------------------------------------------------------------------------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH 79 343 (1,108) - ------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 114,184 (1,119) 26,349 - ------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 52,224 53,343 26,994 - ------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 166,408 $ 52,224 $ 53,343 ============================================================================================================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 41,905 $ 23,146 $ 20,080 Income taxes (net of refunds) $ 11,277 $ 21,910 $ 15,233 - -------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 31 36 J. RAY McDERMOTT, S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1996 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 periods 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 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, 1996. 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 32 37 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Change in Accounting Policy Postemployment Benefits - 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 $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. Income Taxes Income taxes have been provided using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes". 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. 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 ($1,916,000), $711,000, and ($2,029,000) for fiscal years 1996, 1995 and 1994, 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 33 38 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 $7,639,000 relating to commercial contract claims whose final settlement is subject to future negotiations or other procedures which had not been completed at March 31, 1996.
1996 1995 ---- ---- (In thousands) Included in Contracts in Progress are: Costs incurred less costs of revenue recognized $ 52,119 $ 2,795 Revenues recognized less billings to customers 129,256 52,152 - ------------------------------------------------------------------------------------------------------------- Contracts in Progress $ 181,375 $ 54,947 ============================================================================================================= Included in Advance Billings on Contracts are: Billings to customers less revenues recognized $ 52,071 $ 67,839 Costs incurred less costs of revenue recognized (15,490) (5,344) - ------------------------------------------------------------------------------------------------------------- Advance Billings on Contracts $ 36,581 $ 62,495 =============================================================================================================
Included in accounts receivable - trade are amounts representing retainages on contracts as follows:
1996 1995 ---- ---- (In thousands) Retainages $ 21,705 $ 20,864 =============================================================================================================
All of the 1996 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 34 39 estimated and accrued over the period of time between drydockings, and such accruals are charged to operations currently. Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased Businesses Excess of the 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 assess 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 computation was antidilutive. Capitalization of Interest Cost In fiscal years 1996, 1995 and 1994, total interest cost incurred was $43,712,000, $25,325,000 and $20,456,000, respectively, of which $1,325,000, $167,000 and $380,000, 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. Accounting for Long-Lived Assets JRM is currently reviewing SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective for fiscal years beginning after December 15, 1995. SFAS No. 121 established financial accounting and reporting standards for long-lived assets and certain identifiable intangibles. JRM has not yet finalized its review of the impact of this statement, but it is not expected to have a material impact on the consolidated financial statements. Stock-Based Compensation JRM accounts for its stock compensation arrangements under the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," but is reviewing the provisions of SFAS No. 123 "Accounting for Stock-Based Compensation," 35 40 which is effective for fiscal years beginning after December 15, 1995. SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. JRM has not yet finalized its review of the provisions of this statement, and accordingly, has not yet determined whether it will adopt SFAS No. 123 for expense recognition purposes, or continue to follow APB Opinion No. 25, and make the proforma information disclosures required under the new standard. 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 years ended March 31, 1995 and 1994 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 fiscal year 1994 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) for fiscal year 1995; revenues of $1,533,155,000, and net income of $118,666,000 ($2.62 per share primary and $2.58 fully diluted) for fiscal year 1994. 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, 1993. NOTE 4 - INVESTMENTS IN UNCONSOLIDATED AFFILIATES Transactions with unconsolidated affiliates which are accounted for by the equity method included sales to ($135,051,000, $136,681,000 and $78,748,000 in fiscal years 1996, 1995 and 1994, respectively, including approximately $44,491,000, $54,657,100 and $49,121,000, respectively, attributable to leasing activities) and purchases from ($9,109,000, $1,119,000, and $131,608,000 in fiscal years 1996, 1995 and 1994, respectively) these entities. Included in non-current Other Assets at March 31, 1995 was 36 41 a 4% interest bearing note receivable of $5,000,000 from an unconsolidated affiliate. Included in Accounts payable at March 31, 1996 and 1995 were $4,471,000 and $3,815,000, respectively, of payables to unconsolidated affiliates. 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 deposit in advance on the sale of certain marine equipment, and a 7.75% note receivable of $105,000,000 and recorded a deferred gain of $103,239,000, which is being amortized over HeereMac's 12 year depreciable lives of the vessels. The note receivable, net of the deferred gain is included in investments in joint ventures. In addition to the vessel sale in fiscal year 1996, JRM received $37,097,000 as a return on 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 to the HeereMac joint venture for $9,101,000. In fiscal year 1994, JRM recognized revenues of $131,000,000 on work subcontracted to HeereMac. At March 31, 1996 and 1995, property, plant and equipment included $141,293,000 and $402,479,000, and accumulated depreciation included $89,312,000 and $230,674,000, respectively, of marine equipment that is leased to unconsolidated investees. Dividends received from unconsolidated investees were $2,291,000, $65,667,000 and $59,179,000 in fiscal years 1996, 1995 and 1994, respectively. Undistributed earnings in unconsolidated affiliates were $27,506,000 and $25,929,000, respectively, at March 31, 1996 and 1995. 37 42 Summarized combined balance sheet and income statement information based on the most recent financial information for equity investments in joint ventures and other entities are presented below:
1996 1995 ---- ----- (In thousands) Current Assets $ 407,205 $ 400,197 Non-Current Assets 622,900 202,673 - ------------------------------------------------------------------------------------------------------------- Total Assets $ 1,030,105 $ 602,870 ============================================================================================================= Current Liabilities $ 405,818 $ 341,306 Non-Current Liabilities 464,337 68,152 Owners' Equity 159,950 193,412 - ------------------------------------------------------------------------------------------------------------- Total Liabilities and Owners' Equity $ 1,030,105 $ 602,870 =============================================================================================================
1996 1995 1994 ---- ----- ---- (In thousands) Revenues $ 907,151 $ 725,225 $ 896,412 Gross Profit $ 203,102 $ 153,075 $ 318,503 Income before Provision for Income Taxes $ 16,396 $ 52,899 $ 213,862 Provision for Income Taxes 2,297 4,193 8,025 - ------------------------------------------------------------------------------------------------------------- Net Income $ 14,099 $ 48,706 $ 205,837 =============================================================================================================
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. 38 43 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, 1996 and 1995 were as follows:
1996 1995 ---- ---- (In thousands) Deferred tax assets: Accrued provisions for facility closings $ 354 $ 1,480 Accrued vacation pay 935 704 Accrued liabilities for self-insurance (including postretirement health care benefits) 9,902 582 Accrued liabilities for executive and employee incentive compensation 1,567 1,670 Long-term contracts 4,973 3,837 Investments in joint ventures and affiliated companies - 5,179 Accrued pension liability 2,449 - Accrued drydock liability 2,771 1,086 Net operating loss carryforwards 21,520 17,323 Foreign tax credits - 15,662 Property, plant and equipment 1,057 4,351 Other 5,132 1,074 - ------------------------------------------------------------------------------------------------------------- Total deferred tax assets 50,660 52,948 Valuation allowance for deferred tax assets (16,216) (21,091) - ------------------------------------------------------------------------------------------------------------- Total deferred tax assets - net 34,444 31,857 - ------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment 27,808 30,031 Long-term contracts 10,149 10,064 Prepaid pension costs - 1,846 Investment in joint ventures and affiliated companies 762 - Other 2,695 3,882 - ------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 41,414 45,823 - ------------------------------------------------------------------------------------------------------------- Net deferred tax liabilities $ 6,970 $ 13,966 =============================================================================================================
39 44 Income before provision for income taxes and cumulative effect of accounting changes was as follows:
1996 1995 1994 ---- ---- ---- (In thousands) U.S. $ (1,362) $ (3,265) $ 18,435 Other than U.S. 6,441 72,850 128,752 - --------------------------------------------------------------------------------------------------------------- $ 5,079 $ 69,585 $ 147,187 ===============================================================================================================
The provision for income taxes consists of:
1996 1995 1994 ---- ---- ---- (In thousands) Current: U.S. - Federal $ 986 $ 30,514 $ 3,388 Other than U.S. 6,244 14,140 21,046 - --------------------------------------------------------------------------------------------------------------- Total current 7,230 44,654 24,434 - --------------------------------------------------------------------------------------------------------------- Deferred: U.S. - Federal 5,426 (31,742) (2,579) Other than U.S. (7,764) (4,027) 6,195 - --------------------------------------------------------------------------------------------------------------- Total deferred (2,338) (35,769) 3,616 - --------------------------------------------------------------------------------------------------------------- Provision for Income Taxes $ 4,892 $ 8,885 $ 28,050 ===============================================================================================================
The current provision for other than U.S. income taxes in 1996, 1995 and 1994 includes a reduction of $3,763,000, $1,323,000 and $21,987,000, respectively, for the benefit of net operating loss carryforwards. NOTE 6 - RELATED PARTY TRANSACTIONS Transactions with subsidiaries, divisions and controlled joint ventures of McDermott International that are not disclosed elsewhere, are as follows:
1996 1995 1994 ---- ---- ---- (In thousands) Sale of marine construction services $ 10,243 $ 2,652 $ 1,221 Purchase of engineering and other services 56,008 16,672 7,981 Insurance premiums 12,908 21,602 30,114 Postretirement health care benefits - 6,075 8,029 Pension expense (benefit) (843) (6,679) 1,030 Selling, general and administrative expense 11,900 19,690 21,240 Interest income 787 2,920 1,433 Interest expense 21,831 20,169 18,799
40 45 The non-current notes payable to McDermott International are 9% Senior Subordinated Notes due 2001 ("9% Notes") and are redeemable at any time after September 15, 1997 (subject to any required approvals), in whole or in part, for cash, at the option of JRM, initially at a price of 105% of the principal amount, and thereafter at prices declining annually to 100% of the principal amount after September 15, 2000. The terms of the 9% Notes impose certain restrictions or limitations on, among other things, the ability of JRM to pledge its assets as security for certain indebtedness or to incur debt ranking senior to these notes. During fiscal year 1996, an agreement was reached between JRM and McDermott International whereas JRM can repurchase the 9% Notes at their face value, without any premium, plus accrued interest with part of the proceeds from a public debt offering that JRM is considering in fiscal year 1997. Included in Accounts receivable-trade are receivables from McDermott International of $7,668,000 at March 31, 1995. 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 year 1996 and will receive additional payments of $1,500,000 per year over the next four years. In fiscal year 1995, JRM entered into an office sublease with an affiliate of a director (who resigned in April 1996) of JRM. Under the sublease which expires no later than March 1997, the affiliate is required to make monthly rental payments of approximately $18,000. During fiscal year 1996, the affiliate paid $185,000 under the sublease. Under another agreement, the affiliate manages and operates JRM's offshore producing oil and gas property for a monthly fee of $48,000 and reimbursement of certain costs. During fiscal year 1996, JRM paid $576,000 to the affiliate for out-of- pocket expenses for the management and operations of its 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 to date JRM has earned approximately $179,000 as a result of this production payment. In addition, JRM owns 140,000 shares of common stock of this affiliate and 20,000 units in a limited partnership which is also an affiliate of 41 46 this director. JRM has a $15,000,000 contract to fabricate and install a platform with the limited partnership. JRM also has entered into agreements with two affiliates of a director of JRM pursuant to which JRM will design, fabricate and install several offshore pipelines or structures. The value of these agreements exceeds $80,000,000. As of March 31, 1996, these affiliates have paid to JRM approximately $59,000,000 for work completed under these agreements. The affiliates of the director have been invoiced for an additional $3,300,000 that 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 for fiscal year 1996 was approximately $11,900,000. 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. JRM maintains employment agreements with certain officers and employees which contain change in control provisions that would entitle each to receive two times his three-year average annual salary plus continuation of certain benefits if there is a change in control of JRM (as defined) and a termination of his employment within two years after a change in control. These agreements also provide medical and health insurance benefits for a two-year period following the termination of employment. 42 47 NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT
1996 1995 ---- ---- (In thousands) Long-term debt consists of: Unsecured debt: 12.87d% Guaranteed Senior Notes due 2002 ($70,000,000 face value) $ 74,473 $ 74,933 Other notes payable 13,401 5,771 Secured debt: Floating rate notes interest at one month LIBOR plus 2% (6.63% inclusive at March 31, 1996) due 1999 21,139 - Capitalized Lease Obligations 16,398 19,812 - ------------------------------------------------------------------------------------------------------------- 125,411 100,516 Less amounts due within one year 10,879 6,644 - ------------------------------------------------------------------------------------------------------------- $ 114,532 $ 93,872 ==============================================================================================================
Notes payable and current maturities of long-term debt consist of:
1996 1995 ---- ---- (In thousands) Short-term lines of credit: Unsecured $ 85,251 $ 24,750 Secured - 24,500 Current maturities of long-term debt 10,879 6,644 - ------------------------------------------------------------------------------------------------------------- $ 96,130 $ 55,894 ============================================================================================================== Weighted average interest rate on short-term borrowings 6.88% 7.86% ==============================================================================================================
In connection with the Merger, JRM assumed OPI's $70,000,000 12-7/8% Guaranteed Senior Notes ("12.875% Notes"). The 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. JRM is restricted, as a result of covenants in this credit agreement, in its ability to transfer funds to International and its subsidiaries through cash dividends or through unsecured loans or investments. 43 48 Maturities of long-term debt during the five fiscal years subsequent to March 31, 1995 are as follows: 1997 - $10,879,000; 1998 - $11,117,000; 1999 - $15,595,000; 2000 - $70,000; 2001 - $2,000. At March 31, 1996 and 1995, JRM had available to it various uncommitted short-term lines of credit from banks totalling $142,645,000 and $118,231,000, respectively. Borrowings by JRM against these lines of credit at March 31, 1996 and 1995 were $85,251,000 and $24,750,000, respectively. JRM also had available a $150,000,000 unsecured and committed revolving credit facility on which no borrowings were outstanding at March 31, 1996. JRM is restricted, as a result of the consolidated tangible net worth covenant in this agreement, in its ability to transfer funds to International and its subsidiaries through cash dividends or through unsecured loans or investments. 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 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, 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. 44 49 U.S. Pension Plans The net periodic pension cost for JRM's pension plans for fiscal year 1996 included the following components:
(In thousands) Service cost - benefits earned during the period $ 2,976 Interest cost on projected benefit obligation 3,533 Actual return on plan assets (6,484) Net amortization and deferral 2,286 - -------------------------------------------------------------------------------------------------------------- Net periodic pension cost $ 2,311 ==============================================================================================================
The following table sets forth the U.S. plans' funded status and the amount recognized in the consolidated financial statements at March 31, 1996:
(In thousands) Actuarial present value of benefit obligations: Vested benefit obligation $ 29,946 ============================================================================================================== Accumulated benefit obligation $ 40,174 ============================================================================================================== Projected benefit obligation $ 58,377 Plan assets at fair value 46,904 - -------------------------------------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets (11,473) Unrecognized net loss 15,432 Adjustment required to recognize minimum liability (57) Unrecognized prior service cost (9,323) Unrecognized transition asset (1,577) - -------------------------------------------------------------------------------------------------------------- Net pension liability $ (6,998) ==============================================================================================================
The assumptions used in determining the funded status and net periodic pension cost of the U.S. plans were: Actuarial assumptions: Discount rate 7.25% - -------------------------------------------------------------------------------------------------------------- Rate of increase in future compensation levels 5.0% - -------------------------------------------------------------------------------------------------------------- Expected long-term rate of return on plan assets 8.5% - --------------------------------------------------------------------------------------------------------------
45 50 Non-U.S. Pension Plans The net periodic pension cost for JRM's pension plans for fiscal years 1996, 1995 and 1994 included the following components:
1996 1995 1994 ---- ---- ---- (In thousands) Service cost - benefits earned during the period $ 332 $ 1,450 $ 1,544 Interest cost on projected benefit obligation 829 3,342 4,130 Actual return on plan assets (1,046) (1,240) (14,608) Net amortization and deferral 30 (7,303) 2,679 - ------------------------------------------------------------------------------------------------------------ Net periodic pension cost (benefit) $ 145 $ (3,751) $ (6,255) ============================================================================================================
Due to a reduction in workforce at one foreign subsidiary, net income in fiscal year 1994 includes a net after-tax loss of $1,456,000 resulting from the recognition of a curtailment of a plan. The following table sets forth the non-U.S. plan's funded status and the amount recognized in JRM's consolidated financial statements:
1996 ---- (In thousands) Actuarial present value of benefit obligations: Vested benefit obligation $ 7,409 ============================================================================================================ Accumulated benefit obligation $ 7,997 ============================================================================================================ Projected benefit obligation $ 10,437 Plan assets at fair value 11,772 - ------------------------------------------------------------------------------------------------------------ Plan assets in excess of projected benefit obligation 1,335 Unrecognized net gain (663) Unrecognized transition asset (817) - ------------------------------------------------------------------------------------------------------------ Net pension liability $ (145) ============================================================================================================
The assumptions used in determining the funded status and net periodic pension cost of the U.K. plans were:
1996 1995 1994 ---- ---- ---- Actuarial assumptions: Discount rate 8.25% 8.25% 7.5% - ------------------------------------------------------------------------------------------------------------ Rate of increase in future compensation levels 5.0% 5.0% 6.0% - ------------------------------------------------------------------------------------------------------------ Expected long-term rate of return on plan assets 8.5% 8.5% 8.0% - ------------------------------------------------------------------------------------------------------------
46 51 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. The following table sets forth the amounts recognized in the consolidated financial statements at March 31:
1996 1995 ---- ---- (In thousands) Accumulated Postretirement Benefit Obligation: Retirees $ 663 $ - Fully eligible active participants 1,363 1,313 Other active plan participants 14,805 11,539 - ------------------------------------------------------------------------------------------------------------ Accrued postretirement benefit cost $ 16,831 $ 12,852 ============================================================================================================ Weighted-average discount rate 7.25% 8.25% ============================================================================================================
The accumulated postretirement benefit obligation in the above table includes $16,048,000 and $12,264,000 for health care plans and $783,000 and $588,000 for life insurance plans at March 31, 1996 and 1995, respectively. For the period January 31 to March 31, 1995, net periodic postretirement benefit cost was $337,000. Net periodic postretirement benefit cost for fiscal year 1996 included the following components:
(In thousands) Service cost $ 767 Interest cost 1,060 - ------------------------------------------------------------------------------------------------------------ Net periodic postretirement benefit cost $ 1,827 ============================================================================================================
For measurement purposes, a weighted-average annual assumed rate of increase in the per capita cost of covered health care claims of 10-3/4% was assumed for 1996 and 11-1/2% for 1995. For 1997, a rate of 9-3/4% was assumed. The rate was assumed to decrease gradually to 5% 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, 1996 by $2,676,000 and the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost for fiscal year 1996 by $307,000. 47 52 NOTE 9- CAPITAL STOCK At March 31, 1996 and 1995, 15,592,108 and 12,081,354 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") and, in fiscal year 1995, Series B $2.25 Cumulative Convertible Exchangeable Preferred Stock, the exercise of stock options, awards of restricted stock under JRM's stock incentive plans and, in fiscal year 1996, contributions to the Thrift Plan. Series A Preferred Stock At March 31, 1996 and 1995, 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 $52.00 per share, after January 31, 1997 (subject to any required approvals) and prior to January 31, 2000, provided that the last reported sales price of JRM Common Stock in its principal trading market for any 20 trading days within a period of 30 consecutive trading days ending not more than five days prior to the date the Series A Preferred Stock is called for redemption is at least $55.74 after January 31, 2000. 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. Stock Incentive Plans The following table summarizes activity related to stock options under JRM's stock incentive plans:
1996 1995 ---- ---- Options outstanding, April 1 1,078,242 - Issued January 31,1995 under the terms of the Merger Agreement (See Note 3) - 897,818 Granted 387,910 243,530 Exercised (353,978) (63,106) Cancelled/forfeited (20,080) - - ------------------------------------------------------------------------------------------------------------- Options outstanding, March 31, 1,092,094 1,078,242 =============================================================================================================
48 53
1996 1995 ---- ---- Options exercisable at March 31, 557,440 834,712 ============================================================================================================= Average price: Outstanding options $ 13.4726 $ 9.4574 Exercisable options $ 8.7745 $ 5.6158 ============================================================================================================= Shares available at March 31, that may be granted for options 3,839,570 4,156,470 =============================================================================================================
No further awards can be made under the OPI Incentive Compensation Program. At March 31, 1996, 480,734 were outstanding and exercisable. A total of 3,533,600 shares of Common Stock are available for grants of options, and rights to purchase shares, to officers and key employees under the Executive Long-Term Incentive Compensation Plan. 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. A total of 54,240 rights have been granted to purchase shares at par value ($1.00 per share) under the Executive Long-Term Incentive Compensation Plan at March 31, 1996. A total of 96,700 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. 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 par value ($1.00 per share) subject to restrictions on transfer, which lapse at the end of such term. A total of 1,100 rights have been granted to purchase shares at par value ($1.00 per share) under the Director Stock Plan at March 31, 1996. 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 no less than 100% of the fair 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. 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. 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 49 54 was reserved for possible issuance to be used as the JRM employer match for employee contributions to the Thrift Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies. 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 year 1996, 80,356 shares were issued as employer contributions pursuant to the Plan. At March 31, 1996, 4,919,644 shares remained available for issuance. NOTE 10 - CONTINGENCIES AND COMMITMENTS 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, 1996 are as follows: 1997 - $7,384,000; 1998 - $5,850,000; 1999 - $3,606,000; 2000 - $2,596,000; 2001 - $2,200,000; and thereafter - $18,176,000. Total rental expense for fiscal years 1996, 1995 and 1994 was $66,617,000, $79,098,000, and $87,531,000, 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. Prior to JRM's acquisition of OPI, one of OPI's vessels was severely damaged during a typhoon while under going final work in connection with its refurbishment. Estimates for the repair of the vessel, together with out-of-pocket costs, total more than $45,000,000. At the time of the casualty loss, insurance policies had been issued insuring the vessel for its full value. Efforts to settle the claim with underwriters, however, have been unsuccessful, and resort to the courts may be necessary to collect the amount claimed. Management believes that the underwriters' refusal to satisfactorily adjust the claim is without basis and is of the opinion that the outcome of any necessary litigation will be favorable. Commitments for capital expenditures amounted to approximately $30,385,000 at March 31, 1996, all of which relates to fiscal year 1997. JRM is contingently liable under standby letters of credit totaling $168,413,000 (including $51,500,000 issued on behalf of unconsolidated foreign joint ventures) at March 31, 1996, issued in the normal course of business. JRM has guaranteed $33,455,000 of loans to and $18,981,000 of standby letters of credit issued by certain unconsolidated foreign joint ventures of JRM at March 31, 1996. In addition, JRM has guaranteed $13,333,000 of loans to a third party at March 31, 1996. 50 55 NOTE 11 - 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, 1996 and 1995, the allowance for possible losses deducted from Accounts receivable-trade on the balance sheet was $584,000 and $795,000, respectively. NOTE 12 - 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, 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. At March 31, 1995, JRM had forward exchange contracts to purchase $10,134,000 in foreign currencies (primarily Pound Sterling), and to sell $60,445,000 in foreign currencies (primarily Dutch Guilders and Malaysian Ringgits), at varying maturities through fiscal year 1996. 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 in income 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, 1996 and 1995, JRM had deferred gains of $123,000 and $537,000, respectively, and deferred losses of $18,000 and $1,570,000, respectively, related to forward exchange contracts. All of the forward exchange contracts at March 31, 1996 are expected to be recognized during fiscal year 1997. 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. 51 56 NOTE 13 - 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 amount reported in the balance sheet for cash and cash equivalents approximates its fair value. Long and short-term debt: The fair values of JRM's 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, 1996 and 1995, JRM had total debt (excluding capitalized leases and notes payable to McDermott International) with a carrying value of $194,264,000 and $129,954,000 and a fair value of $207,700,000 and $130,814,000, respectively. Notes payable to and receivable from McDermott International: The fair values of JRM's notes payable to McDermott International are calculated using estimated prices based on current yields for debt issues of similar quality and terms. At March 31, 1996 and 1995, JRM's total notes payable issued to McDermott International had carrying values of $231,000,000 and $270,750,000, respectively, which approximate fair values. Note receivable from an unconsolidated affiliate: At March 31, 1996, it was not practicable to estimate the fair value of JRM's 7.75% Note receivable with the HeereMac joint venture because there are no quoted market prices and the time of its settlement cannot yet be determined. Foreign currency exchange contracts: The fair values of foreign currency forward exchange contracts are estimated by obtaining quotes from brokers. At March 31, 1996 and 1995, JRM had net forward exchange contracts to sell foreign currencies with notional values of $52,924,000 and $50,311,000 and fair values of $50,022,000 and $51,647,000, respectively. NOTE 14 - 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: 1996--customer A $198,453,000 (16%), customer B $190,000,000 (15%); 1995--customer B $118,820,000 (11%); and 1994-- customer C $174,688,000 (15%), customer D $160,195,000 (13%). 52 57 At March 31, 1996 and 1995 receivables of $6,824,000 and $6,230,000, respectively, were due from minority shareholders participating in JRM's majority-owned joint ventures, primarily ETPM S.A. Sales to ETPM S.A. were $1,801,000 and $3,133,000, respectively, for the fiscal years ended March 31, 1995 and 1994. There were no sales to ETPM S.A. in fiscal year 1996. In fiscal years 1996, 1995 and 1994 equipment charters and overhead expenses of $4,118,000, $4,938,000 and $6,330,000, respectively, were charged by ETPM S.A. to the McDermott-ETPM joint venture. 53 58 Information about JRM's Operations in Different Geographic Areas.
1996 1995 1994 ---- ---- ---- (In thousands) REVENUES(1) - -------- United States $ 392,290 $ 349,186 $ 351,296 Europe and West Africa 483,317 322,817 142,525 Middle East 142,931 129,010 154,791 Far East 206,629 326,307 545,269 Other Foreign (including transfer eliminations) 2,674 - - - ------------------------------------------------------------------------------------------------------------- Total Revenues $ 1,227,841 $ 1,127,320 $ 1,193,881 ============================================================================================================= OPERATING INCOME - ---------------- Operating Income (Loss) by Geographic Area(2): United States $ 8,948 $ (9,673) $ 9,126 Europe and West Africa 25,000 21,862 4,563 Middle East (2,805) 17,469 11,694 Far East 1,209 38,804 36,040 Other Foreign 800 (1,496) (1,551) - ------------------------------------------------------------------------------------------------------------- Total Operating Income by Geographic Area 33,152 66,966 59,872 - ------------------------------------------------------------------------------------------------------------- Total Equity in Income of Investees 9,124 22,857 106,593 - ------------------------------------------------------------------------------------------------------------- General Corporate Expenses (2) (12,014) (11,406) (11,682) - ------------------------------------------------------------------------------------------------------------- Total Operating Income $ 30,262 $ 78,417 $ 154,783 ============================================================================================================= IDENTIFIABLE ASSETS United States $ 468,277 $ 312,131 $ 293,344 Europe and West Africa 533,167 609,618 411,271 Middle East 136,985 206,463 101,141 Far East 230,717 271,233 195,967 Other Foreign 12,715 - 5,886 Corporate 155,884 82,817 - - ------------------------------------------------------------------------------------------------------------- Total $ 1,537,745 $ 1,482,262 $ 1,007,609 =============================================================================================================
(1) Net of inter-geographic area revenues in fiscal years 1996, 1995 and 1994 as follows: United States -$23,426,000, $4,820,000 and $16,537,000; Europe and West Africa - $1,058,000, $5,074,000 and $15,543,000; Middle East - $14,589,000, $36,802,000 and $2,660,000; Far East - $477,000, $341,000 and $475,000; and Other Foreign - $11,022,000, $26,259,000, and none. (2) Fiscal years 1995 and 1994 have been restated to reflect the allocation of certain expenses to the geographic areas which previously were included in General Corporate Expenses. This restatement reduced Operating Income by Geographic Area and General Corporate Expenses by $11,217,000 and $9,558,000 in fiscal years 1995 and 1994, respectively, from amounts previously reported. 54 59 NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED) The following tables set forth selected unaudited quarterly financial information for the fiscal years ended March 31,1996 and 1995:
1996 ---- Q U A R T E R E N D E D JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1995 1995 1995 1996 ---- ---- ---- ---- (In thousands) Revenues $ 311,803 $ 355,957 $ 272,236 $ 287,845 Operating income (loss) 11,516 16,014 18,709 (15,977) Net income (loss) 3,267 9,099 6,110 (18,289) Primary and Fully Diluted Earnings (Loss) per Share: Net Income 0.03 0.18 0.11 (0.50)
1995 ---- Q U A R T E R E N D E D JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1994 1994 1994 1995 ---- ---- ---- ---- (In thousands) Revenues $ 279,046 $ 279,322 $ 247,190 $ 321,762 Operating income (loss) 16,799 32,481 31,071 (1,934) Income (loss) before cumulative effect of accounting change 14,024 29,649 18,017 (990) Net income (loss) 12,698 29,649 18,017 (990)
Pre-tax results for the quarter ended September 30, 1994 include the settlement of claims for interest on certain foreign tax refunds of $2,233,000 and the acceleration of depreciation on certain marine construction equipment of $4,314,000. Results for the quarter ended December 31, 1994 include the settlement of claims for interest on certain foreign tax refunds of $2,163,000. Results for the quarter ended March 31, 1995 included a reduction in taxes due to settlement of outstanding tax issues of $5,200,000. 55 60 Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 56 61 P A R T I I I Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT There are no family relationships between any of the executive officers, directors or persons nominated to be such, and except as, described in JRM's Proxy Statement for the 1996 Annual Meeting of Stockholders, no executive officer was elected to his position pursuant to any arrangements or understanding between himself and any other person. Information required by this item with respect to directors and executive officers is incorporated by reference to the material appearing under the heading "Election of Directors" in JRM's Proxy Statement for the 1996 Annual Meeting of Stockholders. Item 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference to the material appearing under the heading "Compensation of Executive Officers" and "Certain Transactions" in JRM's Proxy Statement for the 1996 Annual Meeting of Stockholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is incorporated by reference to the material appearing under the headings "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Directors and Executive Officers" in JRM's Proxy Statement for the 1996 Annual Meeting of Stockholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference to the material appearing under the heading "Compensation of Executive Officers" and "Certain Transactions" in JRM's Proxy Statement for the 1996 Annual Meeting of Stockholders. 57 62 P A R T I V Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K (a) The following documents are filed as part of this Annual Report or incorporated by reference: 1. CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors Consolidated Balance Sheet March 31, 1996 and 1995 Consolidated Statement of Income for the Three Fiscal Years ended March 31, 1996 Consolidated Statement of Equity for the Three Fiscal Years ended March 31, 1996 Consolidated Statement of Cash Flows for the Three Fiscal Years Ended March 31, 1996 Notes to Consolidated Financial Statements for the Three Fiscal Years Ended March 31, 1996 2. CONSOLIDATED FINANCIAL SCHEDULES All required schedules will be filed by amendment to this Form 10-K on Form 10-K/A. 3. EXHIBITS
Exhibit No. Description ----------- ------------ 2.1 Agreement and Plan of Merger dated as of June 2, 1994 (as amended) by and among J. Ray McDermott, S.A., McDermott International, Inc., MCB I, Inc. and Offshore Pipelines, Inc. (1) 3.1 Certificate of Incorporation of J.Ray McDermott, S.A. including Resolutions of J. Ray McDermott, S.A. containing the Designation of Rights, Preferences and Privilege of Series A Preferred Stock and Series B Preferred Stock.(1) 3.2 Bylaws of J. Ray McDermott, S.A. (1) 4.1 Form of Common Stock Certificate. (1)
58 63 4.2 Form of Series B Preferred Stock Certificate. (1) JRM is a party to long-term debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of JRM and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-X, JRM agrees to furnish a copy of such instruments to the Commission upon request. 10.1 Contribution and Sale Agreement dated as of August 16, 1994, between J. Ray McDermott, S.A. and McDermott International, Inc. (1) 10.2 Services Agreement dated as of August 16, 1994, between J. Ray McDermott, S.A. and McDermott International, Inc. (1) 10.3 Transition Services Agreement dated as of August 16, 1994, between J. Ray McDermott, S.A. and McDermott International, Inc. (1) 10.4 Letter Agreement between J. Ray McDermott, S.A. and McDermott International, Inc. (1) 10.5* Form of Noncompetition Agreements between J. Ray McDermott, S.A., J. Ray McDermott Holdings, Inc. (formerly MCB I, Inc.) and Frank C. Wade. (1) 10.6* Form of Noncompetition Agreement between J. Ray McDermott, S.A., and Mike H. Lam. (1) 10.7* Form of Employment and Noncompetition Agreement between J. Ray McDermott, S.A., and Richard R. Foreman. (1) 10.8* Form of Employment and Noncompetition Agreement between J. Ray McDermott, S.A., and Don W. Wilson. (1) 10.9* Form of Deferred Compensation Agreement between Offshore Pipelines, Inc (as assumed by a subsidiary of J. Ray McDermott, S.A.) and Richard R. Foreman and Mike H. Lam. (2) 10.10* Form of Contingent Severance Agreements (as assumed by a subsidiary of J. Ray McDermott, S.A.). (3) 10.11* Offshore Pipelines, Inc. Incentive Compensation Program. (3) 10.12* J. Ray McDermott, S.A. Senior Management Stock Option Plan.
59 64 10.13* J. Ray McDermott, S.A. Nonemployee Director Stock Plan. (1) 10.14* J. Ray McDermott, S.A. Short-Term Incentive Compensation Plan.(1) 10.15* J. Ray McDermott, S.A. Executive Long-Term Incentive Compensation Plan (1) 10.16 Indenture, dated as of July 2, 1992, among Offshore Pipelines, Inc. and affiliated entities and NationsBank of Texas, N.A., pertaining to the 12 7/8 % Guaranteed Senior Notes due July 15, 2002. (1) 10.17 Registration Rights Agreement between J. Ray McDermott, S.A. and McDermott International, Inc. (1) 11 Statement Re Computation of Per Share Loss 21 Significant Subsidiaries of J. Ray McDermott, S.A. 23 Consent of Independent Auditors 27 Financial Data Schedule
- -------------------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K. (1) Incorporated by reference from the Registration Statement on Form S-4, as amended, of J. Ray McDermott, S.A. (Registration No. 33-87592). (2) Incorporated by reference from the Annual Report on Form 10-K of Offshore Pipelines, Inc. filed with the Commission on October 29, 1992. (3) Incorporated by reference from the Registration Statement on Form S-1, as amended, of Offshore Pipelines, Inc. (Registration No. 33-59958). FORM 8-K REPORTS (b) A current report on Form 8-K, Item 2 and Item 7, was filed on March 25, 1996. 60 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. J. RAY McDERMOTT, S.A. June 5, 1996 /s/Robert E. Howson ------------------------------------- By: Robert E. Howson Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title --------- ----- s/Robert E. Howson Chairman of the Board, Chief - ------------------------------ Executive Officer and Director Robert E. Howson (Principal Executive Officer) s/Richard R. Foreman Executive Vice President - ------------------------------ Chief Financial Officer Richard R. Foreman (Principal Financial Officer) s/Daniel R. Gaubert Vice President, Finance - ------------------------------ (Principal Accounting Officer) Daniel R. Gaubert s/John F. Bookout Director - ------------------------------ John F. Bookout s/Rick L. Burdick Director - ------------------------------ Rick L. Burdick
61 66
Signature Title --------- ----- s/Lodwrick M. Cook Director - ------------------------------ Lodwrick M. Cook s/Brock A. Hattox Director - ------------------------------ Brock A. Hattox s/Mike H. Lam President, Marine Construction - ------------------------------ Services and Director Mike H. Lam s/J. Howard Macdonald Director - ------------------------------ J. Howard Macdonald s/Cedric E. Ritchie Director - ------------------------------ Cedric E. Ritchie s/Thomas P. Tatham Director - ------------------------------ Thomas P. Tatham s/James J. Wildasin President, Europe and Subsea - ------------------------------ Development and Director James J. Wildasin
June 5, 1996 62 67 INDEX TO EXHIBITS
Sequentially Numbered Exhibit No. Description Pages - ----------- ----------- ----- 2.1 Agreement and Plan of Merger dated as of June 2, 1994 (as amended) by and among J. Ray McDermott, S.A., McDermott International, Inc., MCB I, Inc. and Offshore Pipelines, Inc. (1) 3.1 Certificate of Incorporation of J.Ray McDermott, S.A. including Resolutions of J. Ray McDermott, S.A. containing the Designation of Rights, Preferences and Privilege of Series A Preferred Stock and Series B Preferred Stock. (1) 3.2 Bylaws of J. Ray McDermott, S.A. (1) 4.1 Form of Common Stock Certificate. (1) 4.2 Form of Series B Preferred Stock Certificate. (1) JRM is a party to long-term debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of JRM and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-X, JRM agrees to furnish a copy of such instruments to the Commission upon request. 10.1 Contribution and Sale Agreement dated as of August 16, 1994, between J. Ray McDermott, S.A. and McDermott International, Inc. (1) 10.2 Services Agreement dated as of August 16, 1994, between J. Ray McDermott, S.A. and McDermott International, Inc. (1) 10.3 Transition Services Agreement dated as of August 16, 1994, between J. Ray McDermott, S.A. and McDermott International, Inc. (1) 10.4 Letter Agreement between J. Ray McDermott, S.A. and McDermott International, Inc. (1) 10.5* Form of Noncompetition Agreements between J. Ray McDermott, S.A., J. Ray McDermott Holdings, Inc. (formerly MCB I, Inc.) and Frank C. Wade. (1) 10.6* Form of Noncompetition Agreement between J. Ray McDermott, S.A., and Mike H. Lam. (1)
63 68 10.7* Form of Employment and Noncompetition Agreement between J. Ray McDermott, S.A., and Richard R. Foreman. (1) 10.8* Form of Employment and Noncompetition Agreement between J. Ray McDermott, S.A., and Don W. Wilson. (1) 10.9* Form of Deferred Compensation Agreement between Offshore Pipelines, Inc (as assumed by a subsidiary of J. Ray McDermott, S.A.) and Richard R. Foreman and Mike H. Lam. (2) 10.10* Form of Contingent Severance Agreements (as assumed by a subsidiary of J. Ray McDermott, S.A.). (3) 10.11* Offshore Pipelines, Inc. Incentive Compensation Program. (3) 10.12* J. Ray McDermott, S.A. Senior Management Stock Option Plan. 10.13* J. Ray McDermott, S.A. Nonemployee Director Stock Plan. (1) 10.14* J. Ray McDermott, S.A. Short-Term Incentive Compensation Plan. (1) 10.15* J. Ray McDermott, S.A. Executive Long-Term Incentive Compensation Plan. (1) 10.16 Indenture, dated as of July 2, 1992, among Offshore Pipelines, Inc. and affiliated entities and NationsBank of Texas, N.A., pertaining to the 12 7/8 % Guaranteed Senior Notes due July 15, 2002. (1) 10.17 Indenture between J. Ray McDermott, S.A. and NationsBank of Texas, N.A. pertaining to the 9% Convertible Subordinated Debentures due July 15, 2007. (1) 10.18 Registration Rights Agreement between J. Ray McDermott, S.A. and McDermott International, Inc. (1) 11 Statement Re Computation of Per Share Loss 21 Significant Subsidiaries of J. Ray McDermott, S.A. 23 Consent of Independent Auditors 27 Financial Data Schedule
* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K. 64 69 (1) Incorporated by reference from the Registration Statement on Form S-4, as amended, of J. Ray McDermott, S.A. (Registration No. 33-87592). (2) Incorporated by reference from the Annual Report on Form 10-K of Offshore Pipelines, Inc. filed with the Commission on October 29, 1992. (3) Incorporated by reference from the Registration Statement on Form S-1, as amended, of Offshore Pipelines, Inc. (Registration No. 33-59958). FORM 8-K REPORTS (b) A current report on Form 8-K, Item 2 and Item 7, was filed on March 25, 1996. 65 EX-11 2 STATEMENT RE COMPUTATION OF PER SHARE LOSS 1 EXHIBIT ll J. RAY MCDERMOTT, S.A. STATEMENT RE COMPUTATION OF PER SHARE LOSS FOR THE FISCAL YEAR ENDED MARCH 31, 1996 (In thousands, except shares and per share amounts) PRIMARY AND FULLY DILUTED Net Income $ 187 - -------------------------------------------------------------------------------------------------------------- Less dividend requirements of preferred stock: Series A (7,200) Series B (511) - -------------------------------------------------------------------------------------------------------------- Net loss for primary computation $ (7,524) ============================================================================================================== Weighted average number of common shares outstanding during the year 39,499,972 ============================================================================================================== Net loss per common and common equivalent share (1) $ (0.19) ==============================================================================================================
(1) Net loss per common and common equivalent share assuming full dilution is the same as primary. Earnings per share are not presented for fiscal years 1995 and 1994 because JRM was not a separate entity with its own capital structure for those periods. 66 EX-21 3 SIGNIFICANT SUBSIDIARIES J. RAY MCDERMOTT, S.A. 1 EXHIBIT 21 J. RAY MCDERMOTT, S.A. SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT FISCAL YEAR ENDED MARCH 31, 1996
ORGANIZED PERCENTAGE UNDER THE OF NAME OF COMPANY LAWS OF OWNERSHIP J. Ray McDermott Holdings, Inc. Delaware 100 J. Ray McDermott, Inc. Delaware 100 McDermott Holdings (U.K.) Limited United Kingdom 100 McDermott Engineering (Europe) Limited United Kingdom 100 Hydro Marine Services, Inc. Panama 100 Malmac Sdn. Bhd. Malaysia 100
The subsidiaries omitted from the foregoing list do not, considered in the aggregate, constitute a significant subsidiary. 67 EX-23 4 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 33-87592, No. 33-60369, No. 33-60373 and No. 33-60371) of J. Ray McDermott, S.A. of our report dated May 15, 1996 with respect to the consolidated financial statements of J. Ray McDermott, S.A. included in this Annual Report (Form 10-K) for the year ended March 31, 1996. ERNST & YOUNG LLP New Orleans, Louisiana June 3, 1996 68 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM J. RAY MCDERMOTT'S MARCH 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000 12-MOS MAR-31-1996 MAR-31-1996 166,408 1,638 232,093 38,451 188,515 702,347 1,186,233 793,833 1,537,745 532,938 0 402 0 32 553,463 1,537,745 1,227,841 1,227,841 1,206,703 1,206,703 0 0 42,387 5,079 4,892 187 0 0 0 187 (0.19) (0.19)
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