-----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, T13//UnBwEArPR9FQ/uqXgxWIgDAghoK3kUrVKPtKmuuFPMwNbuacXQjjWuRukEd 5bkDd8Vh3ArxRh06D+wa3w== 0000950134-03-004888.txt : 20030331 0000950134-03-004888.hdr.sgml : 20030331 20030328180512 ACCESSION NUMBER: 0000950134-03-004888 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCDERMOTT INTERNATIONAL INC CENTRAL INDEX KEY: 0000708819 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED PLATE WORK (BOILER SHOPS) [3443] IRS NUMBER: 720593134 STATE OF INCORPORATION: R1 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08430 FILM NUMBER: 03626633 BUSINESS ADDRESS: STREET 1: 1450 POYDRAS ST CITY: NEW ORLEANS STATE: LA ZIP: 70112 BUSINESS PHONE: 5045875400 MAIL ADDRESS: STREET 1: 1450 POYDRAS ST CITY: NEW ORLEANS STATE: LA ZIP: 70161 10-K 1 d04254e10vk.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) F O R M 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _______ Commission File Number 1-8430 McDERMOTT INTERNATIONAL, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) REPUBLIC OF PANAMA 72-0593134 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 1450 POYDRAS STREET NEW ORLEANS, LOUISIANA 70112-6050 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (504) 587-5400 Securities Registered Pursuant to Section 12(b) of the Act: Name of each Exchange Title of each class on which registered ------------------- --------------------- Common Stock, $1.00 par value New York Stock Exchange Rights to Purchase Preferred Stock New York Stock Exchange (Currently Traded with Common Stock) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES [X] NO [ ] The aggregate market value of the registrant's common stock held by nonaffiliates of the registrant was $258,410,985 as of January 31, 2003. The number of shares of the registrant's common stock outstanding at January 31, 2003 was 64,831,612. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 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 registrant's 2003 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. McDERMOTT INTERNATIONAL, INC. INDEX - FORM 10-K PART I
PAGE Items 1. & 2. BUSINESS AND PROPERTIES A. General 1 B. Marine Construction Services General 3 Foreign Operations 4 Raw Materials 4 Customers and Competition 5 Backlog 5 Factors Affecting Demand 6 C. Government Operations General 6 Raw Materials 6 Customers and Competition 6 Backlog 7 Factors Affecting Demand 7 D. Patents and Licenses 7 E. Research and Development Activities 7 F. Insurance 7 G. Employees 9 H. Governmental Regulations and Environmental Matters 9 I. Risk Factors 11 J. Cautionary Statement Concerning Forward-Looking Statements 19 K. Available Information 21 Item 3. LEGAL PROCEEDINGS 21 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 28 Item 6. SELECTED FINANCIAL DATA 29 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30 General 30 Critical Accounting Policies and Estimates 32 Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 35 Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 37 Effects of Inflation and Changing Prices 39 Liquidity and Capital Resources 39 New Accounting Standards 44 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 46
i INDEX - FORM 10-K
PAGE Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Accountants 48 Consolidated Balance Sheets - December 31, 2002 and December 31, 2001 49 Consolidated Statements of Loss for the Years Ended December 31, 2002, 2001 and 2000 51 Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2002, 2001 and 2000 52 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2002, 53 2001 and 2000 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 54 Notes to Consolidated Financial Statements 55 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 102 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 102 Item 11. EXECUTIVE COMPENSATION 102 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 103 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 103 Item 14. CONTROLS AND PROCEDURES 103 PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 103 Signatures 106 Certifications 107
ii Statements we make in this Annual Report on Form 10-K which express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks, uncertainties and assumptions, including those to which we refer under the headings "Risk Factors" and "Cautionary Statement Concerning Forward-Looking Statements" in Items 1 and 2 of Part I of this report. P A R T I Items 1. and 2. BUSINESS AND PROPERTIES A. GENERAL McDermott International, Inc. ("MII") was incorporated under the laws of the Republic of Panama in 1959 and is the parent company of the McDermott group of companies, which includes: - J. Ray McDermott, S.A., a Panamanian subsidiary of MII ("JRM"), and its consolidated subsidiaries; - McDermott Incorporated, a Delaware subsidiary of MII ("MI"), and its consolidated subsidiaries; - Babcock & Wilcox Investment Company, a Delaware subsidiary of MI ("BWICO"); - BWX Technologies, Inc., a Delaware subsidiary of BWICO ("BWXT"), and its consolidated subsidiaries; and - The Babcock & Wilcox Company, an unconsolidated Delaware subsidiary of BWICO ("B&W"). In this Annual Report on Form 10-K, unless the context otherwise indicates, "we," "us" and "our" mean MII and its consolidated subsidiaries. On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S. Bankruptcy Code. B&W and these subsidiaries took this action as a means to determine and comprehensively resolve all their asbestos liability. As of February 22, 2000, B&W's operations have been subject to the jurisdiction of the Bankruptcy Court and, as a result, our access to cash flows of B&W and its subsidiaries is restricted. The B&W Chapter 11 proceedings require a significant amount of management's attention, and they represent an uncertainty in the financial marketplace. See Section I, Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Note 20 to our consolidated financial statements for further information concerning the effects of the Chapter 11 filing. Due to the bankruptcy filing, beginning on February 22, 2000, we stopped consolidating the results of operations of B&W and its subsidiaries in our consolidated financial statements and we have been presenting our investment in B&W on the cost method. The Chapter 11 filing, along with subsequent filings and negotiations, led to increased uncertainty with respect to the amounts, means and timing of the ultimate settlement of asbestos claims and the recovery of our investment in B&W. Due to this increased uncertainty, we wrote off our net investment in B&W in the quarter ended June 30, 2002. On December 19, 2002, drafts of a joint plan of reorganization and settlement agreement, together with a draft of a related disclosure statement, were filed in the Chapter 11 proceedings, and we determined that a liability related to the proposed settlement is probable and that the value is reasonably estimable. Accordingly, as of December 31, 2002, we established an estimate for the cost of the settlement of the B&W bankruptcy proceedings of $110.0 million, including related tax expense of $23.6 million. See Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Note 20 to our consolidated financial statements for further information on B&W and information regarding developments in negotiations relating to the B&W Chapter 11 proceedings. Historically, we have operated in four business segments: - Marine Construction Services includes the results of operations of JRM and its subsidiaries, which supply worldwide services to customers in the offshore oil and gas exploration and production and hydrocarbon processing industries and to other marine construction companies. This segment's principal activities include the front-end and detailed engineering, fabrication 1 and installation of offshore drilling and production platforms and other specialized structures, modular facilities, marine pipelines and subsea production systems. This segment also provides comprehensive project management and procurement services. This segment operates throughout the world in most major offshore oil and gas producing regions, including the Gulf of Mexico, West Africa, South America, the Middle East, India, the Caspian Sea and Southeast Asia. - Government Operations includes the results of operations of BWXT. This segment supplies nuclear components to the U.S. Navy and provides various services to the U.S. Government, including uranium processing, environmental site restoration services and management and operating services for various U.S. Government-owned facilities, primarily within the nuclear weapons complex of the U.S. Department of Energy ("DOE"). Government Operations also includes the results of McDermott Technology, Inc. ("MTI"). Historically, MTI performed research activities for our other segments and marketed, negotiated and administered research and development contracts. However, we have determined to decentralize our research and development activities and we are in the process of incorporating most of MTI's other operations into BWXT. - Industrial Operations included the results of operations of McDermott Engineers & Constructors (Canada) Ltd. ("MECL"), a subsidiary that we sold to a unit of Jacobs Engineering Group Inc. on October 29, 2001. - Power Generation Systems includes the results of operations of our Power Generation Group, which is conducted primarily through B&W and its subsidiaries. This segment provides a variety of services, equipment and systems to generate steam and electric power at energy facilities worldwide. Due to B&W's Chapter 11 filing, effective February 22, 2000, we no longer consolidate B&W's and its subsidiaries' results of operations in our consolidated financial statements. Through February 21, 2000, B&W's and its subsidiaries' results are reported as Power Generation Systems B&W in the segment information that follows. See Note 20 to our consolidated financial statements for information on the condensed consolidated results of B&W and its subsidiaries. Currently, excluding B&W and its subsidiaries, our operations consist of Marine Construction Services and Government Operations. The following tables summarize our revenues and operating income for the years ended December 31, 2002, 2001 and 2000. See Note 17 to our consolidated financial statements for additional information about our business segments and operations in different geographic areas.
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In Millions) REVENUES Marine Construction Services $ 1,148.0 $ 848.5 $ 757.5 Government Operations 553.8 494.0 444.0 Industrial Operations - 507.2 426.3 Power Generation Systems - B&W - - 155.8 Power Generation Systems 46.9 47.8 33.8 Eliminations - (0.6) (3.7) --------------------------------------------------------------------------- $ 1,748.7 $ 1,896.9 $ 1,813.7 ===========================================================================
2
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In Millions) OPERATING INCOME: Segment Operating Income (Loss): Marine Construction Services $ (162.6) $ 14.5 $ (33.6) Government Operations 34.6 29.3 33.2 Industrial Operations - 9.9 9.8 Power Generation Systems - B&W - - 7.2 Power Generation Systems (2.8) (3.6) (7.8) ----------------------------------------------------------------------------- $ (130.8) $ 50.1 $ 8.8 - ----------------------------------------------------------------------------- Gain (Loss) on Asset Disposals and Impairments - Net: Marine Construction Services $ (320.9) $ (3.6) $ (1.0) Government Operations - (0.1) (1.1) Industrial Operations - - (0.1) ----------------------------------------------------------------------------- $ (320.9) $ (3.7) $ (2.2) ----------------------------------------------------------------------------- Equity in Income (Loss) from Investees: Marine Construction Services $ 5.3 $ 10.4 $ 2.9 Government Operations 24.6 23.0 11.1 Industrial Operations - 0.1 0.1 Power Generation Systems - B&W - - 0.8 Power Generation Systems (2.2) 0.6 (24.6) ----------------------------------------------------------------------------- $ 27.7 $ 34.1 $ (9.7) ----------------------------------------------------------------------------- Write-off of investment in B&W (224.7) - - Other unallocated (1.5) - - Corporate (23.6) (5.1) 8.0 ----------------------------------------------------------------------------- $ (673.8) $ 75.4 $ 4.9 =============================================================================
See Note 17 to our consolidated financial statements for further information on Corporate. B. MARINE CONSTRUCTION SERVICES General In January 1995, we organized JRM and contributed substantially all of our marine construction services business to it. JRM then acquired Offshore Pipelines, Inc. ("OPI") in a merger transaction. Prior to the merger with OPI, JRM was a wholly owned subsidiary of MII. As a result of the merger, JRM became a majority-owned subsidiary of MII. In June 1999, MII acquired all of the publicly held shares of JRM common stock. The Marine Construction Services segment's business involves the front-end and detailed engineering, fabrication and installation of offshore drilling and production platforms and other specialized structures, modular facilities, marine pipelines and subsea production systems. This segment also provides comprehensive project management and procurement services. This segment operates throughout the world in most major offshore oil and gas producing regions, including the Gulf of Mexico, West Africa, South America, the Middle East, India, the Caspian Sea and Southeast Asia. At December 31, 2002, JRM owned or operated six fabrication facilities throughout the world. Its principal domestic fabrication yard and offshore base is located on 1,114 leased acres of land near Morgan City, Louisiana. It also wholly owns or operates fabrication facilities in the following locations: near Corpus Christi, Texas; in Indonesia on Batam Island; and in Jebel Ali, U.A.E. JRM also owns and operates, through a 95% interest in a consolidated subsidiary, a ship repair yard in Veracruz, Mexico, which is also used as a fabrication facility. JRM also operates a portion of the Shelfprojectstroy fabrication facility in Baku, Azerbaijan. This facility is owned by the State Oil Company of the Azerbaijan Republic. 3 JRM's fabrication facilities are equipped with a wide variety of heavy-duty construction and fabrication equipment, including cranes, welding equipment, machine tools and robotic and other automated equipment, most of which is movable. JRM can fabricate a full range of offshore structures, from conventional jacket-type fixed platforms to deepwater platform configurations employing spar, compliant-tower and tension leg technologies, as well as floating production, storage and offtake ("FPSO") 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 fabrication yards at December 31, 2002, were as follows: Morgan City, Louisiana Years 2004-2048 Jebel Ali, U.A.E. Year 2015 Batam Island, Indonesia Year 2028 Veracruz, Mexico Year 2024
JRM owns a large 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. At December 31, 2002, JRM owned or, through ownership interests in joint ventures, had interests in five derrick vessels, one pipelaying vessel and eight combination derrick-pipelaying vessels. The lifting capacities of the derrick and combination derrick-pipelaying vessels range from 600 to 5,000 tons. These vessels range in length from 350 to 698 feet and are fully equipped with stiff leg or revolving cranes, auxiliary cranes, welding equipment, pile-driving hammers, anchor winches and a variety of additional gear. JRM's largest vessel is the semisubmersible derrick barge 101, which we plan to sell in 2003. Six of the vessels are self-propelled, with two also having dynamic positioning systems. JRM also has a substantial inventory of specialized support equipment for deepwater construction and pipelay. In addition, JRM owns or leases a substantial number of other vessels, such as tugboats, utility boats, launch barges and cargo barges, to support the operations of its major marine construction vessels. JRM participates in joint ventures involving operations in foreign countries that require majority ownership by local interests. Through a subsidiary, JRM also participated 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. This joint venture was terminated effective June 30, 2001. In addition, JRM owns a 49% interest in Construcciones Maritimas Mexicanas, S.A. de C.V., a Mexican joint venture, which provides marine installation services in the Gulf of Mexico. Foreign Operations JRM's revenues, net of intersegment revenues, segment income derived from operations located outside of the United States, and the approximate percentages to our total consolidated revenues and total consolidated segment income (loss), respectively, follow:
Revenues Segment Income (Loss) Amount Percent Amount Percent (Dollars in thousands) Year ended December 31, 2002 $ 528,792 30% $ (5,128)(1) 1% Year ended December 31, 2001 $ 327,604 17% $ 8,801 11% Year ended December 31, 2000 $ 494,689 27% $ 5,865 -
(1)Excludes $313.0 million goodwill impairment charge. Raw Materials Our Marine Construction Services segment uses raw materials, such as carbon and alloy steels in various forms, welding gases, concrete, fuel oil and gasoline, which are available from many sources. JRM is not dependent upon any single supplier or source for any 4 of these materials. Although shortages of some of these materials and fuels have existed from time to time, no serious shortage exists at the present time. Customers and Competition Our Marine Construction Services segment's principal customers are oil and gas companies, including several foreign government-owned companies. These customers contract with JRM for project management, engineering, procurement, fabrication and installation of offshore drilling and production platforms and other specialized structures, modular facilities, marine pipelines and subsea production systems. Contracts are usually awarded on a competitive-bid basis. A number of companies compete effectively with JRM and its joint ventures in each of the separate marine construction phases in various parts of the world. These competitors include Global Industries, Ltd., Gulf Island Fabrication, Inc., Heerema Offshore Construction Group, Inc., Hyundai Heavy Industries, Nippon Steel Corporation, Saipem S.p.A., Stolt Offshore S.A., Technip Offshore and Horizon Offshore, Inc. Our Marine Construction Services segment performs a substantial number of projects on a fixed-price basis. This segment attempts to cover increased costs of anticipated changes in labor, material and service costs of our long-term contracts, either through an estimation of such changes, which is reflected in the original price, or through price escalation clauses. However, for first-of-a-kind projects we have undertaken in recent periods, we have been unable to forecast accurately total cost to complete until we have performed all major phases of the project. As demonstrated by our experience on these contracts, revenue, cost and gross profit realized on fixed-price contracts will often vary from the estimated amounts because of changes in job conditions and variations in labor and equipment productivity over the term of the contract. Our Marine Construction Services segment may experience reduced profitability or losses on projects as a result of these variations and the risks inherent in the marine construction industry. Backlog At December 31, 2002 and 2001, our Marine Construction Services segment's backlog amounted to $2.1 billion and $1.8 billion, respectively. This represents approximately 56% and 62% of our total consolidated backlog at December 31, 2002 and 2001, respectively. Of the December 31, 2002 backlog, we expect to recognize approximately $1.5 billion in revenues in 2003, $0.4 billion in 2004 and $0.2 billion thereafter. JRM has historically performed work on a fixed-price, cost-plus or day-rate basis or a combination thereof. More recently, certain contracts have introduced a risk-and-reward element wherein a portion of total compensation is tied to the overall performance of the partners in an alliance. Most of JRM's long-term contracts have provisions for progress payments. During the year ended December 31, 2002, our Marine Construction Services segment was awarded the following contracts, among others: - a contract for approximately $340 million for Azerbaijan International Operating Company in Baku for the fabrication of two integrated topside facilities; - a fixed-price contract for approximately $250 million for Murphy Exploration & Production Company to engineer, procure, fabricate and install a spar offshore production facility for the "Front Runner" development project in the deepwater Gulf of Mexico; - a fixed-price contract for approximately $80 million for Oil & Natural Gas Corporation Ltd., through Engineers India Limited, the prime contractor, to fabricate and install two platforms, pipelines and platform modifications in the Mumbai North Field, offshore India; - a contract for approximately $65 million for BP Trinidad and Tobago LLC to fabricate, construct and load out two offshore platforms; and 5 - a fixed-price contract for approximately $55 million for Al Khafi Joint Operations to procure, fabricate and install a utility platform and install submarine cable onshore to offshore Saudi Arabia in the Persian Gulf. Factors Affecting Demand Our Marine Construction Services segment's activity depends mainly on the capital expenditures of oil and gas companies and foreign governments for construction of development projects. Numerous factors influence these expenditures, including: - oil and gas prices, along with expectations about future prices; - the cost of exploring for, producing and delivering oil and gas; - the terms and conditions of offshore leases; - the discovery rates of new oil and gas reserves in offshore areas; - the ability of businesses in the oil and gas industry to raise capital; and - local and international political and economic conditions. See Section I for further information on factors affecting demand. C. GOVERNMENT OPERATIONS General Our Government Operations segment provides nuclear components and various services to the U.S. Government. Examples of this segment's activities include environmental restoration services and the management of government-owned facilities, primarily within the nuclear weapons complex of the DOE. This segment's principal plants are located in Lynchburg, Virginia; Barberton, Ohio; and Mount Vernon, Indiana. BWXT conducts all the operations of our Government Operations segment. Raw Materials Our Government Operations segment relies on certain sole source suppliers for materials used in its products. We believe these suppliers are viable, and we and the U.S. Government expend significant effort to maintain the supplier base. Customers and Competition Our Government Operations' segment supplies nuclear components for the U.S. Navy. There are a limited number of suppliers of specialty nuclear components, with BWXT being the largest based on revenues. Through the operations of this segment, we are also involved along with other companies in the operation of: - the Idaho National Engineering and Environmental Laboratory near Idaho Falls, Idaho; - the Rocky Flats Environmental Technology Site near Boulder, Colorado; - the Savannah River Site in Aiken, South Carolina; - the Strategic Petroleum Reserve in and around New Orleans, Louisiana; - the Pantex Site in Amarillo, Texas; - the Oak Ridge National Lab Site (the "Y-12" facility) in Oak Ridge, Tennessee; and - the Miamisburg Closure Project in Miamisburg, Ohio. All of these contracts are subject to annual funding determinations by the U.S. Government. The U.S. Government accounted for approximately 29%, 24% and 23% of our total consolidated revenues for the years ended December 31, 2002, 2001 and 2000, respectively, including 22%, 18% and 17%, respectively, related to nuclear components. 6 Backlog At December 31, 2002 and 2001, our Government Operations segment's backlog amounted to $1.7 billion and $1.0 billion, or approximately 44% and 36%, respectively, of our total consolidated backlog. Of the December 31, 2002 backlog in this segment, we expect to recognize revenues of approximately $0.5 billion in 2003, $0.4 billion in 2004 and $0.8 billion thereafter, of which we expect to recognize approximately 90% in 2005 through 2007. At December 31, 2002, this segment's backlog with the U.S. Government was $1.6 billion (of which $266.5 million had not yet been funded), or approximately 43% of our total consolidated backlog. During the year ended December 31, 2002, the U.S. Government awarded this segment new orders of approximately $1.1 billion. Factors Affecting Demand This segment's operations are generally capital-intensive on the manufacturing side. This segment may be impacted by U.S. Government budget restraints and delays. The demand for nuclear components for the U.S. Navy comprises a substantial portion of this segment's backlog. We expect that orders for nuclear components will continue to be an increasing part of backlog for the foreseeable future. See Section I for further information on factors affecting demand. D. PATENTS AND LICENSES We currently hold a large number of U.S. and foreign patents and have numerous pending patent applications. We have acquired patents and licenses and granted licenses to others when we have considered it advantageous for us to do so. Although in the aggregate our patents and licenses are important to us, we do not regard any single patent or license or group of related patents or licenses as critical or essential to our business as a whole. In general, we depend on our technological capabilities and the application of know-how rather than patents and licenses in the conduct of our various businesses. E. RESEARCH AND DEVELOPMENT ACTIVITIES We have decentralized our research and development activities and now conduct our principal research and development activities through individual business units at our various manufacturing plants and engineering and design offices. Our research and development activities cost approximately $61.6 million, $58.3 million and $50.2 million in the years ended December 31, 2002, 2001 and 2000, respectively. Contractual arrangements for customer-sponsored research and development can vary on a case-by-case basis and include contracts, cooperative agreements and grants. Of our total research and development expenses, our customers paid for approximately $47.8 million, $46.6 million and $34.8 million in the years ended December 31, 2002, 2001 and 2000, respectively. F. INSURANCE We maintain liability and property insurance in amounts we consider adequate for those risks we consider necessary. Some risks are not insurable or insurance to cover them is available only at rates that we consider uneconomical. These risks include war and confiscation of property in some areas of the world, pollution liability in excess of relatively low limits and asbestos liability. Depending on competitive conditions and other factors, we endeavor to obtain contractual protection against uninsured risks from our customers. Insurance or contractual indemnity protection, when obtained, may not be sufficient or effective under all circumstances or against all hazards to which we may be subject. Our insurance policies do not insure against liability and property damage losses resulting from nuclear accidents at reactor facilities of our utility customers. To protect against liability for damage to a customer's property, we endeavor to obtain waivers of subrogation from the customer and its insurer and are usually named as an additional insured under the utility customer's nuclear property policy. 7 To protect against liability from claims brought by third parties, we are insured under the utility customer's nuclear liability policies and have the benefit of the indemnity and limitation of any applicable liability provision of the Price-Anderson Act. The Price-Anderson Act limits the public liability of manufacturers and operators of licensed nuclear facilities and other parties who may be liable in respect of, and indemnifies them against, all claims in excess of a certain amount. This amount is determined by the sum of commercially available liability insurance plus certain retrospective premium assessments payable by operators of commercial nuclear reactors. For those sites where we provide environmental remediation services, we seek the same protection from our customers as we do for our other nuclear activities. The Price-Anderson Act, as amended, includes a sunset provision and requires renewal each time that it expires. Contracts that were entered into during a period of time that Price-Anderson was in full force and effect continue to receive the benefit of the Price-Anderson Act nuclear indemnity. The Price-Anderson Act last expired on August 1, 2002, and was subsequently extended through December 31, 2004. BWXT currently has no contracts involving nuclear materials covered by the Price-Anderson Act that are not covered by and subject to the nuclear indemnity of the Price-Anderson Act. Although we do not own or operate any nuclear reactors, we have coverage under commercially available nuclear liability and property insurance for three of our four locations that are licensed to possess special nuclear materials. The fourth location operates primarily as a conventional research center. This facility is licensed to possess special nuclear material and has a small and limited amount of special nuclear material on the premises. Two of the four facilities are located at our Lynchburg, Virginia site. These facilities are insured under a nuclear liability policy that also insures the facility of Framatome Cogema Fuel Company ("FCFC"), formerly B&W Fuel Company, which we sold during the fiscal year ended March 31, 1993. All three licensed facilities share the same nuclear liability insurance limit, as the commercial insurer would not allow FCFC to obtain a separate nuclear liability insurance policy. Due to the type or quantity of nuclear material present under contract with the U.S. Government, the two facilities in Lynchburg have statutory indemnity and limitation of liability under the Price-Anderson Act. In addition, our contracts to manufacture and supply nuclear components to the U.S. Government contain statutory indemnity clauses under which the U.S. Government has assumed the risks of public liability claims related to nuclear incidents. JRM's offshore construction business is subject to the usual risks of operations at sea. JRM has additional exposure because it uses expensive construction equipment, sometimes under extreme weather conditions, often in remote areas of the world. In many cases, JRM also operates on or in proximity to existing offshore facilities. These facilities are subject to damage that could result in the escape of oil and gas into the sea. Certain contractual protections historically provided by JRM's customers have eroded and are not available in all cases. As a result of the asbestos contained in commercial boilers and other products B&W and certain of its subsidiaries sold, installed or serviced in prior decades, B&W is subject to a substantial volume of nonemployee liability claims asserting asbestos-related injuries. The vast majority of these claims relate to exposure to asbestos occurring prior to 1977, the year in which the U.S. Occupational Safety and Health Administration adopted new regulations that impose liability on employers for, among other things, job-site exposure to asbestos. B&W received its first asbestos claims in 1983. Initially, B&W's primary insurance carrier, a unit of Travelers Group, handled the claims. B&W exhausted the limits of its primary products liability insurance coverage in 1989. Prior to its Chapter 11 filing, B&W had been handling the claims under a claims-handling program funded primarily by reimbursements from its excess-coverage insurance carriers. B&W's excess coverage available for asbestos-related products liability claims runs from 1949 through March 1986. This coverage has been provided by a total of 136 insurance companies. B&W obtained varying amounts of excess-coverage insurance for each year within that period, and within each year there are typically several increments of coverage. For each of those increments, a syndicate of insurance companies has provided the coverage. 8 B&W had agreements with the majority of its excess-coverage insurers concerning the method of allocating products liability asbestos claim payments to the years of coverage under the applicable policies. See Note 20 to our consolidated financial statements for information regarding B&W's Chapter 11 filing and liability for nonemployee asbestos claims. We have several wholly owned insurance subsidiaries that provide general and automotive liability insurance and, from time-to-time, builder's risk within certain limits, marine hull and workers' compensation insurance to our companies. These insurance subsidiaries have not provided significant amounts of insurance to unrelated parties. These captive insurers provide certain coverages for our subsidiary entities and related coverages. Claims as a result of our operations, or arising in the B&W Chapter 11 proceedings, could adversely impact the ability of these captive insurers to respond to all claims presented, although we believe such a result is unlikely. BWXT, through two of its dedicated limited liability companies, has long-term management and operating agreements with the U.S. Government for the Pantex and Y-12 facilities. Most insurable liabilities arising from these sites are not protected in our corporate insurance program but rely on government contractual agreements and certain specialized self-insurance programs funded by the U.S. Government. The U.S. Government has historically fulfilled its contractual agreement to reimburse for insurable claims, and we expect it to continue this process during our administration of these two facilities. However, it should be noted that, in most situations, the U. S. Government is contractually obligated to pay, subject to the availability of authorized government funds. As a result of the impact of the September 11, 2001 terrorist attacks, we have experienced higher costs, higher deductibles and more restrictive terms and conditions as we have renewed our insurance coverage. Specifically, several of our insurance programs, including property, onshore builder's risk and others, now contain exclusions that were not previously applicable, including war and acts of terrorism. This issue has been impacted by the Terrorism Risk Insurance Act, although at this point insurers are quite divergent in the prices and coverage they are offering. We expect to continue to maintain coverage that we consider adequate at rates that we consider economical. However, some previously insured risks may no longer be insurable or insurance to cover them will be available only at rates that we consider uneconomical. G. EMPLOYEES At December 31, 2002, we employed approximately 18,200 persons compared with 13,300 at December 31, 2001. Approximately 7,100 of our employees were members of labor unions at December 31, 2002, compared with approximately 4,700 at December 31, 2001. Many of our operations are subject to union contracts, which we customarily renew periodically. Currently, we consider our relationship with our employees to be satisfactory. H. GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS A wide range of federal, state, local and foreign laws, ordinances and regulations apply to our operations, including those relating to: - constructing and equipping electric power and other industrial facilities; - possessing and processing special nuclear materials; - workplace health and safety; and - protecting the environment. We cannot determine the extent to which new legislation, new regulations or changes in existing laws or regulations may affect our future operations. Our operations are subject to the existing and evolving legal and regulatory standards relating to the environment. These standards include the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"), the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and similar laws that provide for responses to and liability for 9 releases of hazardous substances into the environment. These standards also include similar foreign, state or local counterparts to these federal laws, which regulate air emissions, water discharges, hazardous substances and waste, and require public disclosure related to the use of various hazardous substances. Our operations are also governed by laws and regulations relating to workplace safety and worker health, primarily the Occupational Safety and Health Act and regulations promulgated thereunder. We believe that our facilities are in substantial compliance with current regulatory standards. Our compliance with U.S. federal, state and local environmental control and protection regulations necessitated capital expenditures of $0.3 million in the year ended December 31, 2002. We expect to spend another $1.4 million on such capital expenditures over the next five years. Complying with existing environmental regulations resulted in pretax charges of approximately $11.0 million in the year ended December 31, 2002. We cannot predict all of the environmental requirements or circumstances that will exist in the future but anticipate that environmental control and protection standards will become increasingly stringent and costly. We have been identified as a potentially responsible party at various cleanup sites under CERCLA. CERCLA and other environmental laws can impose liability for the entire cost of cleanup on any of the potentially responsible parties, regardless of fault or the lawfulness of the original conduct. Generally, however, where there are multiple responsible parties, a final allocation of costs is made based on the amount and type of wastes disposed of by each party and the number of financially viable parties, although this may not be the case with respect to any particular site. We have not been determined to be a major contributor of wastes to any of these sites. On the basis of our relative contribution of waste to each site, we expect our share of the ultimate liability for the various sites will not have a material adverse effect on our consolidated financial position, results of operations or liquidity in any given year. Environmental remediation projects have been and continue to be undertaken at certain of our current and former plant sites. During the fiscal year ended March 31, 1995, we decided to close B&W's nuclear manufacturing facilities in Parks Township, Armstrong County, Pennsylvania (the "Parks Facilities"), and B&W proceeded to decommission the facilities in accordance with its existing license from the Nuclear Regulatory Commission (the"NRC"). B&W subsequently transferred the facilities to BWXT in the fiscal year ended March 31, 1998. During the fiscal year ended March 31, 1999, BWXT reached an agreement with the NRC on a plan that provides for the completion of facilities dismantlement and soil restoration by 2001 and license termination in 2003. BWXT expects to request approval from the NRC to release the site for unrestricted use at that time. At December 31, 2002, the remaining provision for the decontamination, decommissioning and closing of these facilities was $0.4 million. By December 31, 2002, only a portion of the operation and maintenance aspect of the decommissioning and decontamination work at the Parks facility remained to be completed in order to receive NRC approval to terminate the NRC license. For a discussion of certain civil litigation we are involved in concerning the Parks Facilities, see Item 3. The Department of Environmental Protection of the Commonwealth of Pennsylvania ("PADEP") advised B&W in March 1994 that it would seek monetary sanctions and remedial and monitoring relief related to the Parks Facilities. The relief sought related to potential groundwater contamination resulting from previous operations at the facilities. BWXT now owns these facilities. PADEP has advised BWXT that it does not intend to assess any monetary sanctions, provided that BWXT continues its remediation program for the Parks Facilities. Whether additional nonradiation contamination remediation will be required at the Parks facility remains unclear. Results from recent sampling completed by PADEP have indicated that such remediation may not be necessary. We perform significant amounts of work for the U.S. Government under both prime contracts and subcontracts and operate certain facilities that are licensed to possess and process special nuclear materials. As a result of these activities, we are subject to continuing reviews by governmental agencies, including the Environmental Protection Agency and the NRC. The NRC's decommissioning regulations require BWXT and MTI to provide financial assurance that they will be able to pay the expected cost of decommissioning their facilities at the end of their service lives. BWXT and MTI will continue to provide financial assurance 10 aggregating $29.9 million during the year ending December 31, 2003 by issuing letters of credit for the ultimate decommissioning of all their licensed facilities, except one. This facility, which represents the largest portion of BWXT's eventual decommissioning costs, has provisions in its government contracts pursuant to which all of its decommissioning costs and financial assurance obligations are covered by the DOE. An agreement between the NRC and the State of Ohio to transfer regulatory authority for MTI's NRC licenses for byproduct and source nuclear material was finalized in December 1999. In conjunction with the transfer of this regulatory authority and upon notification by the NRC, MTI issued decommissioning financial assurance instruments naming the State of Ohio as the beneficiary. At December 31, 2002 and 2001, we had total environmental reserves (including provisions for the facilities discussed above) of $20.6 million and $21.2 million, respectively. Of our total environmental reserves at December 31, 2002 and 2001, $8.3 million and $6.1 million, respectively, were included in current liabilities. Our estimated recoveries of these costs totaling $0.2 million and $3.2 million, respectively, are included in accounts receivable - other in our consolidated balance sheet at December 31, 2002 and 2001. Inherent in the estimates of those reserves and recoveries are our expectations regarding the levels of contamination, decommissioning costs and recoverability from other parties, which may vary significantly as decommissioning activities progress. Accordingly, changes in estimates could result in material adjustments to our operating results, and the ultimate loss may differ materially from the amounts we have provided for in our consolidated financial statements. I. RISK FACTORS We have significant liquidity issues currently facing our company, including significant losses on our EPIC spar projects in the current year which require funding in 2003, as well as the need to refinance our new credit facility, which is scheduled to expire in April 2004. Due primarily to the losses incurred on the three EPIC spar projects, we expect JRM to experience negative cash flows during 2003. Completion of the EPIC spar projects has and will continue to put a strain on JRM's liquidity. JRM intends to fund its cash needs through borrowings on our new credit facility, intercompany loans from MII and sales of nonstrategic assets, including certain marine vessels. In addition, under the terms of our new credit facility, JRM's letter of credit capacity was reduced from $200 million to $100 million. This reduction does not negatively impact our ability to execute the contracts in our current backlog. However, it will likely limit JRM's ability to pursue projects from certain customers who require letters of credit as a condition of award. We are exploring other opportunities to improve our liquidity position, including better management of working capital through process improvements, negotiations with customers to relieve tight schedule requirements and to accelerate certain portions of cash collections, and alternative financing sources for letters of credit for JRM. If JRM experiences additional significant contract costs on the EPIC spar projects as a result of unforeseen events, we may be unable to fund all our budgeted capital expenditures and meet all of our funding requirements for contractual commitments. In this instance, we would be required to defer certain capital expenditures, which in turn could result in curtailment of certain of our operating activities or, alternatively, require us to obtain additional sources of financing which may not be available to us or may be cost prohibitive. MI experienced negative cash flows in 2002, primarily due to payments of taxes resulting from the exercise of MI's rights under the intercompany agreement we describe in Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources in Item 7 of this report. MI expects to meet its cash needs in 2003 through intercompany borrowings from BWXT, which BWXT may fund through borrowings under our new credit facility. MI is restricted, as a result of covenants in its debt instruments, in its ability to transfer funds to MII and MII's other subsidiaries through cash dividends or through unsecured loans or investments. On a consolidated basis, we expect to incur negative cash flows in the first three quarters of 2003. In addition, in March 2003, Moody's Investor Service lowered MI's credit rating from B2 to B3. These factors may further impact our access to capital and our ability to 11 refinance our new credit facility, which is scheduled to expire in April 2004. Given our current credit rating and operating results, there can be no assurance that we can obtain additional access to third party funds, if required. If we are unable to finalize a settlement in the B&W Chapter 11 proceedings, including obtaining the requisite approvals and Bankruptcy Court confirmation, with substantially the same terms as contained in the agreement in principle, our financial condition and results of operations may be materially and adversely affected. During the year ended December 31, 2002, we reached an agreement in principle with the Asbestos Claimants Committee (the "ACC") and the Future Claimants Representative (the "FCR") in the B&W Chapter 11 proceedings, which includes the following key terms, among others: - MII would effectively assign all its equity in B&W to a trust to be created for the benefit of the asbestos personal injury claimants. - MII and all its subsidiaries would assign, transfer or otherwise make available their rights to all applicable insurance proceeds to the trust. - MII would issue 4.75 million shares of restricted common stock and cause those shares to be transferred to the trust, and MII would effectively guarantee that those shares would have a value of $19.00 per share on the third anniversary of the date of their issuance. - MI would issue promissory notes to the trust in an aggregate principal amount of $92.0 million, with principal payments of $8.4 million per year payable over 11 years, with interest payable on the outstanding balance at the rate of 7.5% per year. The payment obligations under those notes would be guaranteed by MII. - In exchange for those contributions, MII and its subsidiaries (other than B&W and its subsidiaries) would be released and indemnified from and against claims arising from B&W's use of asbestos and would receive other protections from claims arising from B&W activities. The terms of the agreement in principle are reflected in a proposed consensual plan of reorganization that is on file with the Bankruptcy Court. At December 31, 2002, we established an estimate for the cost of the proposed settlement. However, there are continuing risks and uncertainties that will remain with us until the requisite approvals are obtained and the final settlement is reflected in a plan of reorganization that is confirmed by the Bankruptcy Court pursuant to a final, nonappealable order of confirmation. An agreed or litigated settlement, or the final decision by the Bankruptcy Court, could result in the ultimate liability exceeding amounts recorded as of December 31, 2002. The asbestos claims and the B&W Chapter 11 proceedings require a significant amount of management's attention, and they represent an uncertainty in the financial marketplace. Until the uncertainty is resolved, we may be unable to deliver to our shareholders the maximum value potentially available to them through our operations and businesses, taken as a whole. There is no assurance that the proposed joint plan of reorganization, or any amendment thereto, will be approved by the Bankruptcy Court. There are a number of issues and matters to be resolved before the ultimate outcome of the B&W Chapter 11 proceedings can be determined, including, among others, the following: - the ultimate asbestos liability of B&W and its subsidiaries; - the outcome of negotiations with the ACC, the FCR and other participants in the Chapter 11 proceedings, concerning, among other things, the size and structure of the settlement trusts to satisfy the asbestos liability and the means for funding those trusts; - the outcome of negotiations with our insurers as to additional amounts of coverage available to B&W and its subsidiaries and as to the participation of those insurers in a plan to fund the settlement trusts; 12 - the Bankruptcy Court's decisions relating to numerous substantive and procedural aspects of the Chapter 11 proceedings, including the Court's periodic determinations as to whether to extend the existing preliminary injunction that prohibits asbestos liability lawsuits and other actions for which there is shared insurance from being brought against nonfiling affiliates of B&W, including MI, JRM and MII; - the continued ability of our insurers to reimburse B&W and its subsidiaries for payments made to asbestos claimants and the resolution of claims filed by insurers for recovery of insurance amounts previously paid for asbestos personal injury claims; - the ultimate resolution of the appeals from the ruling issued by the Bankruptcy Court on February 8, 2002, which found B&W solvent at the time of a corporate reorganization completed in the fiscal year ended March 31, 1999, and the related ruling issued on April 17, 2002. See Item 3 and Note 10 to our consolidated financial statements for further information; - the outcome of objections and potential appeals involving approval of the disclosure statement and confirmation of the plan of reorganization; - final agreement regarding the proposed spin-off of the MI/B&W pension plan; and - final agreement on a tax sharing and tax separation arrangement between MI and B&W. We have significant guarantee obligations, other contingent claim exposures and collateral agreements with creditors and customers of our subsidiaries, including B&W, that may impact our flexibility in addressing the liquidity issues currently facing our company or other needs for capital that may arise in the future, including the need to refinance our new credit facility which expires in April 2004. In recent periods, MII has entered into credit arrangements to support its operating subsidiaries and, in some cases, guaranteed or otherwise become contingently liable for the credit arrangements and customer contractual obligations of its subsidiaries. These exposures include the following: - Parent guarantor exposure under our new credit facility. MII is the parent guarantor under a new $180 million credit facility for JRM and BWXT (the "New Credit Facility"). Accordingly, to the extent either JRM or BWXT borrows under that facility or obtains letters of credit under that facility, MII is liable for the obligations owing to the lenders under the facility. In addition, MII has collateralized its guaranty obligations under the New Credit Facility with 100% of the capital stock of MI and JRM. As of March 24, 2003, we had $10.1 million in cash advances and $111.7 million in letters of credit outstanding under the New Credit Facility. - B&W letter of credit exposure. At the time of the B&W bankruptcy filing, MII was a maker or a guarantor of outstanding letters of credit aggregating approximately $146.5 million ($9.4 million at December 31, 2002) that were issued in connection with the business operations of B&W and its subsidiaries. At that time, MI and BWICO were similarly obligated with respect to additional letters of credit aggregating approximately $24.9 million that were issued in connection with the business operations of B&W and its subsidiaries. Although a permitted use of B&W's $300 million debtor-in-possession revolving credit facility (the "DIP Credit Facility") is the issuance of new letters of credit to backstop or replace these preexisting letters of credit, each of MII, MI and BWICO has agreed to indemnify and reimburse B&W and its filing subsidiaries for any customer draw on any letter of credit issued under the DIP Credit Facility to backstop or replace any such preexisting letter of credit for which it has exposure and for the associated letter of credit fees paid under the facility. As of December 31, 2002, approximately $51.4 million in letters of credit have been issued under the DIP Credit Facility to replace or backstop these preexisting letters of credit. - Indemnification obligations under surety arrangements. MII has agreed to indemnify our two surety companies for obligations of various subsidiaries of MII, including B&W and several of its subsidiaries, under surety bonds issued to meet bid bond and performance bond requirements imposed by their customers. As of December 31, 2002, the aggregate outstanding amount of surety bonds that were guaranteed by MII and issued in connection with the business operations of its subsidiaries was approximately $121.0 million, of which $107.7 million related to the business operations of B&W and its subsidiaries. 13 As to the guarantee and indemnity obligations related to B&W, the proposed B&W Chapter 11 settlement contemplates indemnification and other protections for MII, MI and BWICO. The existence of these arrangements may adversely impact our flexibility in accessing new capital resources to address liquidity issues or other needs for capital that may arise in the future. We are subject to loss and other contingencies relating to allegations of wrongdoing and anticompetitive acts made against MI, JRM, MII and others involving worldwide heavy-lift activities in the marine construction services industry. In March 1997, we began an investigation into allegations of wrongdoing by a limited number of our former employees and former employees of JRM and others. The allegations concerned the heavy-lift business of one of JRM's joint ventures, which owned and operated a fleet of large derrick vessels with lifting capacities ranging from 3,500 to 13,200 tons, and JRM. On becoming aware of these allegations, we notified authorities, including the Antitrust Division of the U.S. Department of Justice ("DOJ"), the Securities and Exchange Commission ("SEC") and the European Commission. As a result of that prompt notification, the DOJ has granted immunity to MII, JRM and certain affiliates, and our officers, directors and employees at the time of disclosure, from criminal prosecution for any anticompetitive acts involving worldwide heavy-lift activities. We cooperated with the DOJ in its investigation into this and related matters. In February 2001, we were advised that the SEC had terminated its investigation and no enforcement action was recommended. The DOJ has also terminated its investigation. In June 1998, a number of major and independent oil and gas exploration and development companies filed lawsuits in the United States District Court for the Southern District of Texas against, among others, MI, JRM and MII. These lawsuits allege, among other things, that the defendants engaged in anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act, engaged in fraudulent activity and tortiously interfered with the plaintiffs' businesses in connection with certain offshore transportation and installation projects. In addition to seeking injunctions to enjoin us and the other defendants from engaging in future anticompetitive acts, actual damages and attorneys' fees, the plaintiffs are requesting treble damages. In December 2000, a number of Norwegian oil companies, including Norwegian affiliates of several of the plaintiffs in the cases pending in the Southern District of Texas, filed lawsuits against us and others for alleged violations of the Norwegian Pricing Act of 1953, in connection with projects completed offshore Norway. The plaintiffs in these lawsuits are seeking recovery of alleged actual damages in unspecified amounts. Under applicable Norwegian law, any recovery by these plaintiffs would be limited to their actual damages, and those damages would be recoverable only to the extent the plaintiffs have not received cost reimbursements or other related recoveries from their customers or other third parties. We understand that the conduct alleged by the Norwegian plaintiffs is generally the same as the conduct alleged by the plaintiffs in the cases pending in the Southern District of Texas. Although we have executed agreements to settle the heavy-lift antitrust claims filed by several of the plaintiffs in the Southern District of Texas, the litigation continues with the other plaintiffs. The ultimate outcome of this litigation or any actions that others may take in connection with the allegations we describe above could have a material adverse effect on our consolidated financial position, results of operations and cash flows. See Item 3 for additional information. Our Marine Construction Services segment derives substantially all its revenues from companies in the oil and gas exploration and production industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and gas prices. The demand for marine construction services has traditionally been cyclical, depending primarily on the capital expenditures of oil and gas companies for construction of development projects. These capital expenditures are influenced by such factors as: - prevailing oil and gas prices; - expectations about future prices; 14 - the cost of exploring for, producing and delivering oil and gas; - the sale and expiration dates of available offshore leases; - the discovery rate of new oil and gas reserves in offshore areas; - domestic and international political, military, regulatory and economic conditions; - technological advances; and - the ability of oil and gas companies to generate funds for capital expenditures. Prices for oil and gas historically have been extremely volatile and have reacted to changes in the supply of and demand for oil and natural gas (including changes resulting from the ability of the Organization of Petroleum Exporting Countries to establish and maintain production quotas), domestic and worldwide economic conditions and political instability in oil producing countries. We anticipate prices for oil and natural gas will continue to be volatile and affect the demand for and pricing of our services. A material decline in oil or natural gas prices or activities over a sustained period of time could materially adversely affect the demand for our services and, therefore, our results of operations and financial condition. War, other armed conflicts or terrorist attacks could have a material adverse effect on our business. Events leading to the war in Iraq, increasing military tension involving North Korea, as well as the terrorist attacks of September 11, 2001 and subsequent terrorist attacks and unrest, have caused instability in the world's financial and commercial markets, have significantly increased political and economic instability in some of the geographic areas in which we operate and have contributed to high levels of volatility in prices for oil and gas in recent months. The war in Iraq, as well as threats of war or other armed conflict elsewhere, may cause further disruption to financial and commercial markets and contribute to even higher levels of volatility in prices for oil and gas than those experienced in recent months. In addition, the war with Iraq could lead to acts of terrorism in the United States or elsewhere, and acts of terrorism could be directed against companies such as ours. In addition, acts of terrorism and threats of armed conflicts in or around various areas in which we operate, such as the Middle East and Indonesia, could limit or disrupt our markets and operations, including disruptions from evacuation of personnel, cancellation of contracts or the loss of personnel or assets. Although we have not experienced any material adverse effects on our results of operations as a result of armed conflicts and terrorist acts to date, we can provide no assurance that armed conflicts, terrorism and their effects on us or our markets will not significantly affect our business and results of operations in the future. We are subject to risks associated with contractual pricing in the offshore marine construction industry, including the risk that, if our actual costs exceed the costs we estimate on our fixed-price contracts, our gross margins and profitability will decline. Because of the highly competitive nature of the offshore marine construction industry, our Marine Construction Services segment performs a substantial number of its projects on a fixed-price basis. We attempt to cover increased costs of anticipated changes in labor, material and service costs of long-term contracts, either through estimates of cost increases, which are reflected in the original contract price, or through price escalation clauses. Despite these attempts, however, the revenue, cost and gross profit we realize on a fixed-price contract will often vary from the estimated amounts because of changes in job conditions and variations in labor and equipment productivity over the term of the contract. These variations and the risks generally inherent in the marine construction industry may result in the gross profits we realize being different from those we originally estimated and may result in reduced profitability or losses on projects. Specifically, during 2002, our Marine Construction Services segment has experienced material losses on its three Engineer, Procure, Install and Construct ("EPIC") spar projects: Medusa, Devils Tower and Front Runner. These contracts are first-of-a-kind as well as long-term in nature. We have experienced schedule delays and cost overruns on these contracts that have adversely impacted our financial results. These projects continue to face significant risks. In addition, we recognize revenues under our long-term contracts in the Marine Construction Services segment on a percentage-of-completion basis. Accordingly, we review contract price and cost estimates periodically as the work progresses and reflect adjustments 15 proportionate to the percentage of completion in income in the period when we revise those estimates. To the extent these adjustments result in a reduction or an elimination of previously reported profits with respect to a project, we would recognize a charge against current earnings, which could be material. At December 31, 2002, we have provided for our estimated losses on the three EPIC spar projects and other contracts which are in a loss position. Although we continually strive to improve our ability to estimate our contract costs and profitability associated with our long-term projects, it is reasonably possible that current estimates could change and adjustments to overall contract costs may continue to be significant in future periods. We face risks associated with recent legislative proposals that could change laws applicable to corporations that have completed inversion transactions. As a result of our reorganization in 1982, which we completed through a transaction commonly referred to as an "inversion," our company is a corporation organized under the laws of the Republic of Panama. Recently, the U.S. House and Senate have considered legislation that would change the tax law applicable to corporations that have completed inversion transactions. Some of the legislative proposals have contemplated retroactive application and, in certain cases, treatment of such corporations as United States corporations for United States federal income tax purposes. Some of the legislative proposals have also contemplated additional limitations on the deductibility for United States federal income tax purposes of certain intercompany transactions, including intercompany interest expense. It is possible the legislation enacted in this area could substantially increase our corporate income taxes and, consequently, decrease our future net income and increase our future cash outlays for taxes. Other legislative proposals, if enacted, could limit or even prohibit our eligibility to be awarded contracts with the U.S. Government in the future. We are unable to predict with any level of certainty the likelihood or final form in which any proposed legislation might become law or the nature of regulations that may be promulgated under any such future legislative enactments. As a result of these uncertainties, we are unable to assess the impact on us of any proposed legislation in this area. We face risks associated with investing in foreign subsidiaries and joint ventures, including the risk that we may be restricted in our ability to access the cash flows or assets of these entities. We conduct some operations through foreign subsidiaries and joint ventures. We do not manage all of these entities. Even in those joint ventures that we manage, we are often required to consider the interests of our joint venture partners in connection with decisions concerning the operations of the joint ventures. Arrangements involving these subsidiaries and joint ventures may restrict us from gaining access to the cash flows or assets of these entities. In addition, these foreign subsidiaries and joint ventures sometimes face governmentally imposed restrictions on their abilities to transfer funds to us. Our international operations are subject to political, economic and other uncertainties not encountered in our domestic operations. We derive a significant portion of our revenues from international operations, including customers in the Middle East. Our international operations are subject to political, economic and other uncertainties not encountered in domestic operations. These include: - risks of war, particularly the risks associated with the war involving the United States and Iraq, and civil unrest; - expropriation, confiscation or nationalization of our assets; - renegotiation or nullification of our existing contracts; - changing political conditions and changing laws and policies affecting trade and investment; - the overlap of different tax structures; and - the risks associated with the assertion of foreign sovereignty over areas in which our operations are conducted. Our Marine Construction Services segment may be particularly susceptible to regional conditions that may adversely affect its operations. Its major marine vessels typically require relatively long periods of time to mobilize over long distances, which could affect our ability to withdraw them from areas of conflict. Additionally, various foreign jurisdictions have laws limiting the right and ability of foreign subsidiaries and joint ventures to pay dividends and remit earnings to affiliated companies. 16 Our international operations sometimes face the additional risks of fluctuating currency values, hard currency shortages and controls of foreign currency exchange. We attempt to minimize our exposure to foreign currency fluctuations by attempting to match anticipated foreign currency contract receipts with anticipated like foreign currency disbursements. To the extent we are unable to match the anticipated foreign currency receipts and disbursements related to our contracts, we attempt to enter into forward contracts to hedge foreign currency transactions on a continuing basis for periods consistent with our committed exposures. Our operations are subject to operating risks and limits on insurance coverage, which could expose us to potentially significant liability costs. We are subject to a number of risks inherent in our operations, including: - accidents resulting in the loss of life or property; - pollution or other environmental mishaps; - adverse weather conditions; - mechanical failures; - collisions; - property losses; - business interruption due to political action in foreign countries; and - labor stoppages. We have been, and in the future we may be, named as defendants in lawsuits asserting large claims as a result of litigation arising from events such as these. Some of the risks inherent in our operations are either not insurable or insurance is available only at rates that we consider uneconomical. This has particularly been the case following the September 11, 2001 terrorist attacks in New York City and Washington, D.C., which led to significant changes in various insurance markets, including decreased coverage limits, more limited coverage, additional exclusions in coverage, increased premium costs, and increased deductibles and self insured retentions. These changes were in addition to similar changes we had seen in certain markets prior to September 11, 2001. Risks which are difficult to insure include, among others, the risk of war and confiscation of property in certain areas of the world, losses or liability resulting from acts of terrorism, certain risks relating to construction, and pollution liability. Depending on competitive conditions and other factors, we endeavor to obtain contractual protection against uninsured risks from our customers. When obtained, such contractual indemnification protection may not in all cases be supported by adequate insurance maintained by the customer. Such insurance or contractual indemnity protection may not be sufficient or effective under all circumstances or against all hazards to which we may be subject. A successful claim for which we are not fully insured could have a material adverse effect on us. BWXT, through two of its dedicated limited liability companies, has long-term management and operating agreements with the U.S. Government for the Y-12 and the Pantex facilities. Most insurable liabilities arising from these sites are not protected in our corporate insurance program but rely on government contractual agreements and certain specialized self-insurance programs funded by the U.S. Government. The U.S. Government has historically fulfilled its contractual agreement to reimburse for insurable claims and we expect it to continue this process during our administration of these two facilities. However, it should be noted that, in most situations, the U. S. Government is contractually obligated to pay, subject to the availability of authorized government funds. We have captive insurers which provide certain coverages for our subsidiary entities and related coverages. Claims as a result of our operations, or arising in the B&W Chapter 11 proceedings, could adversely impact the ability of these captive insurers to respond to all claims presented, although we believe such a result is unlikely. 17 We depend on significant customers. Some of our industry segments derive a significant amount of their revenues and profits from a small number of customers. The inability of these segments to continue to perform services for a number of their large existing customers, if not offset by contracts with new or other existing customers, could have a material adverse effect on our business and operations. Our significant customers include state and federal government agencies and utilities. In particular, our Government Operations segment derives substantially all its revenue from the U.S. Government. Some of our large multiyear contracts with the U.S. Government are subject to annual funding determinations. State and U.S. Government budget restraints and other factors affecting these governments may adversely affect our business. We may not be able to compete successfully against current and future competitors. Most industry segments in which we operate are highly competitive. Some of our competitors or potential competitors have greater financial or other resources than we have. Our operations may be adversely affected if our current competitors or new market entrants introduce new products or services with better features, performance, prices or other characteristics than those of our products and services. This is significant to our offshore business in JRM, where capital investment is becoming critical to our ability to compete. The loss of the services of one or more of our key personnel, or our failure to attract, assimilate and retain trained personnel in the future, could disrupt our operations and result in loss of revenues. Our success depends on the continued active participation of our executive officers and key operating personnel. The loss of the services of any one of these persons could adversely affect our operations. Our operations require the services of employees having the technical training and experience necessary to obtain the proper operational results. As a result, our operations depend, to a considerable extent, on the continuing availability of such personnel. If we should suffer any material loss of personnel to competitors or be unable to employ additional or replacement personnel with the requisite level of training and experience to adequately operate our equipment, our operations could be adversely affected. While we believe our wage rates are competitive and our relationships with our employees are satisfactory, a significant increase in the wages paid by other employers could result in a reduction in our workforce, increases in wage rates, or both. If either of these events occurred for a significant period of time, our financial condition and results of operations could be adversely impacted. A substantial number of our employees are members of labor unions. Although we expect to renew our union contracts without incident, if we are unable to negotiate acceptable new contracts with our unions in the future, we could experience strikes or other work stoppages by the affected employees, and new contracts could result in increased operating costs attributable to both union and non-union employees. If any such strikes or other work stoppages were to occur, or if our other employees were to become represented by unions, we could experience a significant disruption of our operations and higher ongoing labor costs. We are subject to government regulations that may adversely affect our future operations. Many aspects of our operations and properties are affected by political developments and are subject to both domestic and foreign governmental regulations, including those relating to: - construction and equipping of production platforms and other marine facilities; - marine vessel safety; - currency conversions and repatriation; - oil exploration and development; - taxation of foreign earnings and earnings of expatriate personnel; and - use of local employees and suppliers by foreign contractors. 18 In addition, our Marine Construction Services segment depends on the demand for its services from the oil and gas industry and, therefore, is affected by changing taxes, price controls and other laws and regulations relating to the oil and gas industry generally. The adoption of laws and regulations curtailing exploration and development drilling for oil and gas for economic and other policy reasons would adversely affect the operations of our Marine Construction Services segment by limiting the demand for its services. We cannot determine the extent to which our future operations and earnings may be affected by new legislation, new regulations or changes in existing regulations. Environmental laws and regulations and civil liability for contamination of the environment or related personal injuries may result in increases in our operating costs and capital expenditures and decreases in our earnings and cash flow. Governmental requirements relating to the protection of the environment, including solid waste management, air quality, water quality, the decontamination and decommissioning of former nuclear manufacturing and processing facilities and cleanup of contaminated sites, have had a substantial impact on our operations. These requirements are complex and subject to frequent change. In some cases, they can impose liability for the entire cost of cleanup on any responsible party without regard to negligence or fault and impose liability on us for the conduct of others or conditions others have caused, or for our acts that complied with all applicable requirements when we performed them. Our compliance with amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of contamination may require us to make material expenditures or subject us to liabilities that we currently do not anticipate. See Section H for further information. In addition, some of our operations and the operations of predecessor owners of some of our properties have exposed us to civil claims by third parties for liability resulting from contamination of the environment or personal injuries caused by releases of hazardous substances into the environment. For a discussion of civil proceedings of this nature in which we are currently involved, see Item 3. We are subject to other risks that we discuss in other sections of this annual report. For discussions of various factors that affect the demand for our products and services in our segments, see the discussions under the heading "Factors Affecting Demand" in each of Sections B and C. For a discussion of our insurance coverages and uninsured exposures, see Section F. For discussions of various legal proceedings in which we are involved, in addition to those we refer to above, see Item 3. In addition to the risks we describe or refer to above, we are subject to other risks, contingencies and uncertainties, including those we have referred to under the heading "Cautionary Statement Concerning Forward-Looking Statements" in Section J. J. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect our company and to take advantage of the "safe harbor" protection for forward-looking statements that applicable federal securities law affords. From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our company. These statements may include projections and estimates concerning the timing and success of specific projects and our future backlog, revenues, income and capital spending. Forward-looking statements are generally accompanied by words such as "estimate," "project," "predict," "believe," "expect," "anticipate," "plan," "goal" or other words that convey the uncertainty of future events or outcomes. In addition, sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement. In addition, various statements this Annual Report on Form 10-K contains, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. Those forward-looking statements appear in Items 1 and 2-"Business and Properties" and Item 3-"Legal Proceedings" in Part I of this report and in 19 Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the notes to our consolidated financial statements in Item 8 of Part II of this report and elsewhere in this report. These forward-looking statements speak only as of the date of this report; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following: - general economic and business conditions and industry trends; - the continued strength of the industries in which we are involved; - decisions about offshore developments to be made by oil and gas companies; - the deregulation of the U.S. electric power market; - the highly competitive nature of our businesses; - our future financial performance, including compliance with covenants in our credit facilities, availability, terms and deployment of capital; - the continued availability of qualified personnel; - operating risks normally incident to offshore exploration, development and production operations; - our ability to replace or extend our current credit facility on or before April 30, 2004, given our results of operations in 2002 and our current credit rating; - the ability of JRM to maintain its forecasted financial performance, including its ability to manage costs associated with its EPIC spar projects; - changes in, or our failure or inability to comply with, government regulations and adverse outcomes from legal and regulatory proceedings, including the results of ongoing civil lawsuits involving alleged anticompetitive practices in our marine construction business; - estimates for pending and future nonemployee asbestos claims against B&W and potential adverse developments that may occur in the Chapter 11 reorganization proceedings and related settlement discussions involving B&W and certain of its subsidiaries and MII; - the ultimate resolution of the appeals from the ruling issued by the Bankruptcy Court on February 8, 2002, which found B&W solvent at the time of a corporate reorganization completed in the fiscal year ended March 31, 1999 and the related ruling issued on April 17, 2002; - the potential impact on available insurance due to the recent increases in bankruptcy filings by asbestos-troubled companies; - the potential impact on our insurance subsidiaries of B&W asbestos-related claims under policies issued by those subsidiaries; - legislation recently proposed by members of the U.S. Congress that, if enacted, could reduce or eliminate the tax advantages we derive from being organized under the laws of the Republic of Panama; - recently proposed legislation that, if enacted, could limit or prohibit us from entering into contracts with the U.S. Government; - changes in existing environmental regulatory matters; - rapid technological changes; - realization of deferred tax assets; 20 - consequences of significant changes in interest rates and currency exchange rates; - difficulties we may encounter in obtaining regulatory or other necessary approvals of any strategic transactions; - social, political and economic situations in foreign countries where we do business, including, among others, countries in the Middle East and Southeast Asia; - the possibilities of war, other armed conflicts or terrorist attacks; - effects of asserted and unasserted claims; - our ability to obtain surety bonds and letters of credit; - the continued ability of our insurers to reimburse us for payments made to asbestos claimants; and - our ability to maintain builder's risk, liability and property insurance in amounts we consider adequate at rates that we consider economical, particularly after the impact on the insurance industry of the September 11, 2001 terrorist attacks. We believe the items we have outlined above are important factors that could cause estimates in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed many of these factors in more detail elsewhere in this report. These factors are not necessarily all the important factors that could affect us. Unpredictable or unknown factors we have not discussed in this report could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our security holders that they should (1) be aware that important factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements. K. AVAILABLE INFORMATION Our website address is www.mcdermott.com. We make available through this website under "SEC Filing," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file those materials with, or furnish those materials to, the SEC. Item 3. LEGAL PROCEEDINGS In March 1997, we, with the help of outside counsel, began an investigation into allegations of wrongdoing by a limited number of former employees of MII and JRM and others. The allegations concerned the heavy-lift business of JRM's HeereMac joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc. ("Heerema") and the heavy-lift business of JRM. Upon becoming aware of these allegations, we notified authorities, including the Antitrust Division of the DOJ, the SEC and the European Commission. As a result of our prompt disclosure of the allegations, JRM, certain other affiliates and their officers, directors and employees at the time of the disclosure were granted immunity from criminal prosecution by the DOJ for any anticompetitive acts involving worldwide heavy-lift activities. In June 1999, the DOJ agreed to our request to expand the scope of the immunity to include a broader range of our marine construction activities and affiliates. The DOJ had also requested additional information from us relating to possible anticompetitive activity in the marine construction business of McDermott-ETPM East, Inc., one of the operating companies within JRM's former McDermott-ETPM joint venture with ETPM S.A., a French company. On becoming aware of the allegations involving HeereMac, we initiated action to terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema acquired JRM's interest in exchange for cash and title to several pieces of equipment. We also terminated the McDermott-ETPM joint venture, and on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which was renamed J. Ray McDermott Middle East, Inc. 21 On December 22, 1997, HeereMac and one of its employees pled guilty to criminal charges by the DOJ that they and others had participated in a conspiracy to rig bids in connection with the heavy-lift business of HeereMac in the Gulf of Mexico, the North Sea and the Far East. HeereMac and the HeereMac employee were fined $49.0 million and $0.1 million, respectively. As part of the plea, both HeereMac and certain employees of HeereMac agreed to cooperate fully with the DOJ investigation. Neither MII, JRM nor any of their officers, directors or employees were a party to those proceedings. In July 1999, a former JRM officer pled guilty to charges brought by the DOJ that he participated in an international bid-rigging conspiracy for the sale of marine construction services. In May 2000, another former JRM officer was indicted by the DOJ for participating in a bid-rigging conspiracy for the sale of marine construction services in the Gulf of Mexico. His trial was held in February 2001 and, at the conclusion of the Government's case, the presiding judge directed a judgment of acquittal. We cooperated fully with the investigations of the DOJ and the SEC into these matters. In February 2001, we were advised that the SEC had terminated its investigation and no enforcement action was recommended. The DOJ has also terminated its investigation. In June 1998, Phillips Petroleum Company (individually and on behalf of certain co-venturers) and several related entities (the "Phillips Plaintiffs") filed a lawsuit in the U.S District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema, certain Heerema affiliates and others, alleging that the defendants engaged in anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in fraudulent activity and tortiously interfered with the plaintiffs' businesses in connection with certain offshore transportation and installation projects in the Gulf of Mexico, the North Sea and the Far East (the "Phillips Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually and on behalf of certain of its ventures and its participants (collectively, "Statoil"), filed a similar lawsuit in the same court (the "Statoil Litigation"). In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil Litigation requested punitive as well as treble damages. In January 1999, the court dismissed without prejudice, due to the court's lack of subject matter jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries sustained on any foreign projects. In July 1999, the court also dismissed the Statoil Litigation for lack of subject matter jurisdiction. Statoil appealed this dismissal to the U.S. Court of Appeals for the Fifth Circuit (the "Fifth Circuit"). The Fifth Circuit affirmed the district court decision in February 2000 and Statoil filed a motion for rehearing en banc. In September 1999, the Phillips Plaintiffs filed notice of their request to dismiss their remaining domestic claims in the lawsuit in order to seek an appeal of the dismissal of their claims on foreign projects, which request was subsequently denied. On March 12, 2001, the plaintiffs' motion for rehearing en banc was denied by the Fifth Circuit in the Statoil Litigation. The plaintiffs filed a petition for writ of certiorari to the U.S. Supreme Court. On February 20, 2002, the U.S. Supreme Court denied the petition for certiorari. The plaintiffs filed a motion for rehearing by the U.S. Supreme Court. On April 15, 2002, the U.S. Supreme Court denied the motion for rehearing. During the year ended December 31, 2002, Heerema and MII executed agreements to settle the heavy-lift antitrust claims against Heerema and MII with British Gas and Phillips, and the Court has entered an order of dismissal. In June 1998, Shell Offshore, Inc. and several related entities also filed a lawsuit in the U.S. District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema and others, alleging that the defendants engaged in anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation"). Subsequently, the following parties (acting for themselves and, in certain cases, on behalf of their respective co-venturers and for whom they operate) intervened as plaintiffs in the Shell Litigation: Amoco Production Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco Exploration and Production Inc. and certain of its affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C.; Green Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.; 22 Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also, in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and on behalf of their respective co-venturers, filed similar lawsuits in the same court, which lawsuits were consolidated with the Shell Litigation. In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Shell Litigation request treble damages. In February 1999, we filed a motion to dismiss the foreign project claims of the plaintiffs in the Shell Litigation due to the Texas district court's lack of subject matter jurisdiction, which motion is pending before the court. Subsequently, the Shell Litigation plaintiffs were allowed to amend their complaint to include non heavy-lift marine construction activity claims against the defendants. Currently, we are awaiting the court's decision on our motion to dismiss the foreign claims. During the year ended December 31, 2002, Heerema and MII executed agreements to settle heavy-lift antitrust claims against Heerema and MII with Exxon, Amoco Production Company, B.P. Exploration & Oil , Inc., Elf Exploration UK PLC and Elf Norge a.s., Total Oil Marine p.l.c., Burlington Resources Offshore, Inc., The Louisiana Land & Exploration Company, VK-Main Pass Gathering Company, LLC, Green Canyon Pipeline Company, L.L.C., Delos Gathering Company L.L.C., and the Court has entered an order of dismissal. In addition, Woodside Energy, Ltd. filed a motion of dismissal with prejudice, which was granted. Recently, we entered into a settlement agreement with Conoco, Inc. and the Court entered an order of dismissal. On December 15, 2000, a number of Norwegian oil companies filed lawsuits against MII, Heeremac, Heerema and Saipem S.p.A. for violations of the Norwegian Pricing Act of 1953 in connection with projects in Norway. Plaintiffs include Norwegian affiliates of various of the plaintiffs in the Shell Litigation pending in Houston. Most of the projects were performed by Saipem S.p.A. or its affiliates, with some by Heerema/HeereMac and none by JRM. We understand that the conduct alleged by plaintiffs is the same conduct that plaintiffs allege in the U.S. civil cases. The cases were heard by the Conciliation Boards in Norway during the first week of October 2001. The Conciliation Boards referred the cases to the court of first instance for further proceedings. The plaintiffs have one year from the date of referral to proceed with the cases. Several of the plaintiffs who filed cases before the Conciliation Boards have filed writs with the courts of first instance in order to commence the court proceedings. Settlement discussions are underway with these plaintiffs. As a result of the initial allegations of wrongdoing in March 1997, we formed a special committee of our Board of Directors to monitor and oversee our investigation into all of these matters. Our Board of Directors concluded that the special committee was no longer necessary, and it was dissolved in 2002. Because we have reached settlement agreements with the vast majority of the oil company claimants, we have adjusted our reserve to more appropriately reflect the risks and exposures of the remaining claims. B&W and Atlantic Richfield Company ("ARCO") are defendants in a lawsuit filed on June 7, 1994 by Donald F. Hall, Mary Ann Hall and others in the U. S. District Court for the Western District of Pennsylvania. The suit involves approximately 500 separate claims for compensatory and punitive damages relating to the operation of two former nuclear fuel processing facilities located in Pennsylvania (the "Hall Litigation"). The plaintiffs in the Hall Litigation allege, among other things, that they suffered personal injury, property damage and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to trial, awarding $36.7 million in compensatory damages. In June 1999, the district court set aside the $36.7 million judgment and ordered a new trial on all issues. In November 1999, the district court allowed an interlocutory appeal by the plaintiffs of certain issues, including the granting of the new trial and the court's rulings on certain evidentiary matters, which, following B&W's bankruptcy filing, the Third Circuit Court of Appeals declined to accept for review. In 1998, B&W settled all pending and future punitive damage claims in the Hall Litigation for $8.0 million for which B&W seeks reimbursement from other parties. There is a controversy between B&W and its insurers as to the amount of coverage available under 23 the liability insurance policies covering the facilities. B&W filed a declaratory judgment action in a Pennsylvania State Court seeking a judicial determination as to the amount of coverage available under the policies. On April 28, 2001, in response to cross-motions for partial summary judgment, the Pennsylvania State Court issued its ruling regarding: (1) the applicable trigger of coverage under the Nuclear Energy Liability Policies issued by B&W's insurers; and (2) the scope of the insurers' defense obligations to B&W under these policies. With respect to the trigger of coverage, the Pennsylvania State Court held that "manifestation" is an applicable trigger with respect to the underlying claims at issue. Although the Court did not make any determination of coverage with respect to any of the underlying claims, we believe the effect of its ruling is to increase the amount of coverage potentially available to B&W under the policies at issue to $320.0 million. With respect to the insurers' duty to defend B&W, the Court held that B&W is entitled to separate and independent counsel funded by the insurers. On May 21, 2001, the Court granted the insurers' motion for reconsideration of the April 25, 2001 order. On October 1, 2001, the Court entered its order reaffirming its original substantive insurance coverage rulings and further certified the order for immediate appeal by any party. B&W's insurers filed an appeal in November 2001. On November 25, 2002, the Pennsylvania Superior Court affirmed the rulings in favor of B&W on the trigger of coverage and duty to defend issues. On December 24, 2002, B&W's insurers filed a petition for the allowance of an appeal in the Pennsylvania Supreme Court. The Pennsylvania Supreme Court has not yet made any determination regarding whether to accept discretionary review of the insurers' appeal. The plaintiffs' remaining claims against B&W in the Hall Litigation have been automatically stayed as a result of the B&W bankruptcy filing. B&W filed a complaint for declaratory and injunctive relief with the Bankruptcy Court seeking to stay the pursuit of the Hall Litigation against ARCO during the pendency of B&W's bankruptcy proceeding due to common insurance coverage and the risk to B&W of issue or claim preclusion, which stay the Bankruptcy Court denied in October 2000. B&W appealed the Bankruptcy Court's Order and on May 18, 2001, the U.S. District Court for the Eastern District of Louisiana, which has jurisdiction over portions of the B&W Chapter 11 proceeding, affirmed the Bankruptcy Court's Order. We believe that all claims under the Hall Litigation will be resolved within the limits of coverage of our insurance policies; moreover, the proposed settlement agreement and plan of reorganization in the B&W Chapter 11 proceedings include an overall settlement of this dispute. However, should the B&W Chapter 11 settlement fail, or should the settlement particular to the Hall Litigation and the Apollo-Parks issue not be consummated, there may be an issue as to whether our insurance coverage is adequate and we may be materially adversely impacted if our liabilities exceed our coverage. B&W transferred the two facilities subject to the Hall Litigation to BWXT in June 1997 in connection with BWXT's formation and an overall corporate restructuring. In December 1998, a subsidiary of JRM (the "Operator Subsidiary") was in the process of installing the south deck module on a compliant tower in the Gulf of Mexico for Texaco Exploration and Production, Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of the module. In December 1999, Texaco filed a lawsuit seeking consequential damages for delays resulting from the incident, as well as costs incurred to complete the project with another contractor and uninsured losses. This lawsuit was filed in the U. S. District Court for the Eastern District of Louisiana against a number of parties, some of which brought third-party claims against the Operator Subsidiary and another subsidiary of JRM, the owner of the vessel that attempted the lift of the deck module (the "Owner Subsidiary"). Both the Owner Subsidiary and the Operator Subsidiary were subsequently tendered as direct defendants to Texaco. In addition to Texaco's claims in the federal court action, damages for the loss of the south deck module have been sought by Texaco's builder's risk insurers in claims against the Owner Subsidiary and the other defendants, excluding the Operator Subsidiary, which was an additional insured under the policy. Total damages sought by Texaco and its builder's risk insurers in the federal court proceeding approximate $280 million. Texaco's federal court claims against the Operator Subsidiary were stayed in favor of a pending binding arbitration proceeding between them required by contract, which the Operator Subsidiary initiated to collect $23 million due for work performed under the contract, and in which Texaco also sought the same consequential damages and uninsured losses as it seeks in the federal court action, and also seeks approximately $2 million in other damages not sought in the federal court action. The federal court trial, on the issue of liability only, commenced in October 2001. On March 27, 2002, the Court orally found that the Owner Subsidiary was liable to Texaco, specifically finding that Texaco had failed to sustain its burden of proof against all named defendants except the Owner Subsidiary relative to liability issues, and, alternatively, that the Operator Subsidiary's highly extraordinary negligence served as a superceding cause of the loss. The finding was subsequently set forth in a written order dated April 5, 2002, which found 24 against the Owner Subsidiary on the claims of Texaco's builder's risk insurers in addition to the claims of Texaco. On May 6, 2002, the Owner Subsidiary filed a notice of appeal of the April 5, 2002 order, which appeal it subsequently withdrew without prejudice for technical reasons. On January 13, 2003, the district court granted the Owner Subsidiary's motions for summary judgment with respect to Texaco's claims against the Owner Subsidiary, and vacated its previous findings to the contrary. The Court has not yet ruled on the Owner Subsidiary's similar motion against Texaco's builder's risk insurers. The case had been transferred to a new district court judge, but was subsequently transferred back to the original district court judge. The scheduled trial date of February 10, 2003 on damages and certain insurance issues has been continued without date. The trial in the binding arbitration proceeding commenced on January 13, 2003 and has proceeded on various dates through March 14, and will recommence on May 26, 2003 for one week and at various times thereafter. Although the Owner Subsidiary is not a party to the arbitration, we believe that the claims against the Owner Subsidiary, like those against the Operator Subsidiary, are governed by the contractual provisions which waive the recovery of consequential damages against the Operator Subsidiary and its affiliates. We plan to vigorously pursue the arbitration proceeding and any appeals process, if necessary, in the federal court action, and we do not believe that a material loss with respect to these matters is likely. In addition, we believe our insurance will provide coverage for the builder's risk and consequential damage claims in the event of liability. However, the ultimate outcome of the proceedings and any challenge by our insurers to coverage is uncertain, and an adverse ruling in either the arbitration or court proceeding or any potential proceeding with respect to insurance coverage for any losses, or any bonding requirements applicable to any appeal from an adverse ruling, could have a material adverse impact on our consolidated financial position, results of operations and cash flow. In early April 2001, a group of insurers that includes certain underwriters at Lloyd's and Turegum Insurance Company (the "Plaintiff Insurers") who have previously provided insurance to B&W under our excess liability policies filed (1) a complaint for declaratory judgment and damages against MII in the B&W Chapter 11 proceedings in the U.S. District Court for the Eastern District of Louisiana and (2) a declaratory judgment complaint against B&W in the Bankruptcy Court, which actions have been consolidated before the U.S. District Court for the Eastern District of Louisiana, which has jurisdiction over portions of the B&W Chapter 11 proceeding. The insurance policies at issue in this litigation provide a significant portion of B&W's excess liability coverage available for the resolution of the asbestos-related claims that are the subject of the B&W Chapter 11 proceeding. The consolidated complaints contain substantially identical factual allegations. These include allegations that, in the course of settlement discussions with the representatives of the asbestos claimants in the B&W bankruptcy proceeding, MII and B&W breached the confidentiality provisions of an agreement they entered into with these Plaintiff Insurers relating to insurance payments by the Plaintiff Insurers as a result of asbestos claims. They also allege that MII and B&W have wrongfully attempted to expand the underwriters' obligations under that settlement agreement and the applicable policies through the filing of a plan of reorganization in the B&W bankruptcy proceeding that contemplates the transfer of rights under that agreement and those policies to a trust that will manage the pending and future asbestos-related claims against B&W and certain of its affiliates. The complaints seek declarations that, among other things, the defendants are in material breach of the settlement agreement with the Plaintiff Insurers and that the Plaintiff Insurers owe no further obligations to MII and B&W under that agreement. With respect to the insurance policies, if the Plaintiff Insurers should succeed in terminating the settlement agreement, they seek to litigate issues under the policies in order to reduce their coverage obligations. The complaint against MII also seeks a recovery of unspecified compensatory damages. B&W filed a counterclaim against the Plaintiff Insurers, which asserts a claim for breach of contract for amounts owed and unpaid under the settlement agreement, as well as a claim for anticipatory breach for amounts that will be owed in the future under the settlement agreement. B&W seeks a declaratory judgment as to B&W's rights and the obligations of the Plaintiff Insurers and other insurers under the settlement agreement and under their respective insurance policies with respect to asbestos claims. On October 2, 2001, MII and B&W filed dispositive motions with the District Court seeking dismissal of the Plaintiff Insurers' claim that MII and B&W had materially breached the settlement agreement at issue. In a ruling issued January 4, 2002, the District Court granted MII's and B&W's motion for summary judgment and dismissed the declaratory judgment action filed by the Plaintiff Insurers. The ruling concluded that the Plaintiff Insurers' claims lacked a factual or legal basis. Our agreement with the 25 underwriters went into effect in April 1990 and has served as the allocation and payment mechanism to resolve many of the asbestos claims against B&W. We believe this ruling reflects the extent of the underwriter's contractual obligations and underscores that this coverage is available to settle B&W's asbestos claims. As a result of the January 4, 2002 ruling, the only claims that remained in the litigation were B&W's counterclaims against the Plaintiff Insurers and against other insurers. The parties agreed to dismiss without prejudice those of B&W's counterclaims seeking a declaratory judgment regarding the parties' respective rights and obligations under the settlement agreement. B&W's counterclaim seeking a money judgment for approximately $6.5 million due and owing by insurers under the settlement agreement remains pending. A trial of this counterclaim is scheduled for April 24, 2003. The parties have reached a preliminary agreement in principle to settle B&W's counterclaim for in excess of the claimed amounts, and approximately $4.3 million has been received to date from the insurers, subject to reimbursement in the event a final settlement agreement is not reached. Following the resolution of this remaining counterclaim, the Plaintiff Insurers will have an opportunity to appeal the January 4, 2002 ruling. At this point, the Plaintiff Insurers have not indicated whether they intend to pursue an appeal. On or about November 5, 2001, The Travelers Indemnity Company and Travelers Casualty and Surety Company (collectively, "Travelers") filed an adversary proceeding against B&W and related entities in the U.S. Bankruptcy Court for the Eastern District of Louisiana seeking a declaratory judgment that Travelers is not obligated to provide any coverage to B&W with respect to so-called "non-products" asbestos bodily injury liabilities on account of previous agreements entered into by the parties. On or about the same date, Travelers filed a similar declaratory judgment against MI and MII in the U.S. District Court for the Eastern District of Louisiana. The cases filed against MI and MII have been consolidated before the District Court and the ACC and the FCR have intervened in the action. On February 4, 2002, B&W and MII filed answers to Travelers' complaints, denying that previous agreements operate to release Travelers from coverage responsibility for asbestos "non-products" liabilities and asserting counterclaims requesting a declaratory judgment specifying Travelers' duties and obligations with respect to coverage for B&W's asbestos liabilities. The Court has bifurcated the case into two phases, with Phase I addressing the issue of whether previous agreements between the parties serve to release Travelers from any coverage responsibility for asbestos "non-products" claims. On August 14, 2002, the Court granted B&W's and MII's motion for leave to file an amended answer and counterclaims, adding additional counterclaims against Travelers. Discovery was completed in September 2002 and the parties filed cross-motions for summary judgment, which were heard on February 26, 2003. We are awaiting the Court's ruling on these motions. No trial date has been scheduled. On April 30, 2001, B&W filed a declaratory judgment action in its Chapter 11 proceeding in the U.S. Bankruptcy Court for the Eastern District of Louisiana against MI, BWICO, BWXT, Hudson Products Corporation and McDermott Technology, Inc. seeking a judgment, among other things, that (1) B&W was not insolvent at the time of, or rendered insolvent as a result of, a corporate reorganization that we completed in the fiscal year ended March 31, 1999, which included, among other things, B&W's cancellation of a $313 million note receivable and B&W's transfer of all the capital stock of Hudson Products Corporation, Tracy Power, BWXT and McDermott Technology, Inc. to BWICO, and (2) the transfers are not voidable. As an alternative, and only in the event that the Bankruptcy Court finds B&W was insolvent at a pertinent time and the transactions are voidable under applicable law, the action preserved B&W's claims against the defendants. The Bankruptcy Court permitted the ACC and the FCR in the Chapter 11 proceeding to intervene and proceed as plaintiff-intervenors and realigned B&W as a defendant in this action. The ACC and the FCR are asserting in this action, among other things, that B&W was insolvent at the time of the transfers and that the transfers should be voided. The Bankruptcy Court ruled that Louisiana law applied to the solvency issue in this action. Trial commenced on October 22, 2001 to determine B&W's solvency at the time of the corporate reorganization and concluded on November 2, 2001. In a ruling filed on February 8, 2002, the Bankruptcy Court found B&W solvent at the time of the corporate reorganization. On February 19, 2002, the ACC and FCR filed a motion with the District Court seeking leave to appeal the February 8, 2002 ruling. On February 20, 2002, MI, BWICO, BWXT, Hudson Products Corporation and McDermott Technology, Inc. filed a motion for summary judgment asking that judgment be entered on a variety of additional pending counts 26 presented by the ACC and FCR that we believe are resolved by the February 8, 2002 ruling. On March 20, 2002, at a hearing in the Bankruptcy Court, the judge granted this motion and dismissed all claims asserted in complaints filed by the ACC and the FCR regarding the 1998 transfer of certain assets from B&W to its parent, which ruling was memorialized in an Order and Judgment dated April 17, 2002 that dismissed the proceeding with prejudice. On April 26, 2002, the ACC and FCR filed a notice of appeal of the April 17, 2002 Order and Judgment and on June 20, 2002 filed their appeal brief. On July 22, 2002, MI, BWICO, BWXT, Hudson Products Corporation and McDermott Technology, Inc. filed their brief in opposition. The ACC and FCR have not yet filed their reply brief pending discussions regarding settlement and a consensual joint plan of reorganization. In addition, an injunction preventing asbestos suits from being brought against nonfiling affiliates of B&W, including MI, JRM and MII, and B&W subsidiaries not involved in the Chapter 11 extends through April 14, 2003. See Note 20 to our consolidated financial statements for information regarding B&W's potential liability for nonemployee asbestos claims and additional information concerning the B&W Chapter 11 proceedings. On July 12, 2002, AE Energietechnic GmbH ("Austrian Energy") applied for the appointment of a receiver in the Bankruptcy Court of Graz, Austria. Austrian Energy is a subsidiary of Babcock-Borsig AG, which filed for bankruptcy on July 4, 2002 in Germany. Babcock and Wilcox Volund ApS ("Volund"), which we sold to B&W in October 2002, is jointly and severally liable with Austrian Energy pursuant to both their consortium agreement as well as their contract with the ultimate customer, SK Energi, for construction of a biomass boiler facility in Denmark. As a result of performance delays attributable to Austrian Energy and other factors, SK Energi has asserted claims for damages associated with the failure to complete the construction and commissioning of the facility on schedule. On August 30, 2002, Volund filed a claim against Austrian Energy in the Austrian Bankruptcy Court to establish Austrian Energy's liability for SK Energi's claims, which was subsequently rejected in its entirety by Austrian Energy. On October 8, 2002, Austrian Energy notified Volund that it had terminated its consortium agreement with Volund in accordance with Austrian bankruptcy laws. Volund is pursuing its claims in the Austrian Bankruptcy Court as well as other potential remedies available under applicable law. Assuming no recovery from Austrian Energy, the cost to Volund is currently estimated at $2.5 million, which we accrued during the three months ended September 30, 2002. See Note 2 to our consolidated financial statements for information concerning the sale of Volund to B&W. In February 2002, one of our subsidiaries, J. Ray McDermott West Africa, Inc. ("JRMWA"), and Global Energy Company Limited ("GEC") entered into a joint venture agreement related to a construction project. The parties entered into an associated escrow agreement, with Citibank as the escrow agent, pursuant to which JRMWA deposited $10.2 million into an escrow account at Citibank. The joint venture agreement provided that, under certain circumstances of termination, GEC would be entitled to certain amounts from the escrow account and such transfer would constitute a full and final release of JRMWA from all obligations, and JRMWA would retain the remainder of the escrowed funds. On July 15, 2002, GEC filed two instruments with the High Court of Lagos State, Nigeria against JRMWA, and Citibank: (1) an application for injunction to restrain Citibank from remitting the sum of $10.2 million to JRMWA; and (2) a lawsuit seeking a declaration that GEC is entitled to specific performance and that the $10.2 million held by Citibank can only be exchanged for shares representing a 12.75 % interest in Nigerdock Nigeria PLC. Also on July 15, 2002, JRMWA filed an application for injunction to restrain Citibank from remitting $1.3 million to GEC, which application for injunctive relief JRMWA subsequently dismissed as duplicative. On August 19, 2002, JRMWA filed a motion to stay proceedings in Nigeria in lieu of arbitration in London, as provided for in the joint venture agreement. GEC had attempted through a series of motions to dismiss JRMWA's motion to stay proceedings in lieu of arbitration. The hearing on JRMWA's motion to stay was set for October 30, 2002 and on that date the parties agreed to a settlement. Pursuant to the settlement, GEC received $1.8 million and JRMWA received $8.4 million of the escrowed funds, JRMWA waived invoiced amounts of approximately $1.0 million and each party was granted a full and final release and discharge of all claims. This settlement was entered as an order of the Nigerian High Court on October 31, 2002. In September 2002, we were advised that the Securities and Exchange Commission and the New York Stock Exchange were conducting inquiries into the trading of MII securities occurring prior to our public announcement of August 7, 2002 with respect to our second quarter 2002 results, our revised 2002 guidance and developments in negotiations relating to the B&W Chapter 11 proceedings. We have 27 recently become aware of a formal order of investigation issued by the SEC in connection with its inquiry, pursuant to which the Staff of the SEC has requested additional information from us and several of our current and former officers and directors. We continue to cooperate fully with both inquiries and have provided all information that has been requested. Several of our current and former officers and directors have voluntarily given interviews and have responded, or are in the process of responding, to SEC subpoenas requesting additional information. Additionally, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including performance- or warranty-related matters under our customer and supplier contracts and other business arrangements. In our management's opinion, none of this litigation or disputes and claims will have a material adverse effect on our consolidated financial position, results of operations or cash flows. See Note 20 to our consolidated financial statements for information regarding B&W's potential liability for nonemployee asbestos claims and the settlement negotiations and other activities related to the B&W Chapter 11 reorganization proceedings commenced by B&W and certain of its subsidiaries on February 22, 2000. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any matter to a vote of security holders, through the solicitation of proxies or otherwise during the quarter ended December 31, 2002. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the New York Stock Exchange. High and low stock prices in the years ended December 31, 2001 and 2002 were as follows: YEAR ENDED DECEMBER 31, 2001
SALES PRICE ----------- QUARTER ENDED HIGH LOW ---- --- March 30, 2001 $ 16.850 $ 10.125 June 29, 2001 $ 14.440 $ 9.890 September 28, 2001 $ 12.020 $ 7.500 December 31, 2001 $ 12.570 $ 7.310
YEAR ENDED DECEMBER 31, 2002
SALES PRICE ----------- QUARTER ENDED HIGH LOW ---- --- March 31, 2002 $ 16.420 $ 10.950 June 30, 2002 $ 17.290 $ 5.600 September 30, 2002 $ 8.100 $ 2.950 December 31, 2002 $ 6.640 $ 2.340
In the third quarter of 2000, MII's Board of Directors determined to suspend the payment of regular dividends on MII's common stock for an indefinite period. 28 As of December 31, 2002, there were approximately 3,792 record holders of our common stock. The following table provides information on our equity compensation plans as of December 31, 2002:
Number of Weighted- Number of securities to be average securities issued upon exercise exercise price remaining of outstanding of outstanding available for Plan Category options and rights options and rights future issuance - --------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders 5,483,538 $15.16 2,101,567 Equity compensation plans not approved by security holders(1) 2,321,126 $14.08 694,849 - --------------------------------------------------------------------------------------------- Total 7,804,664 $14.84 2,796,416 =============================================================================================
(1) Reflects information on our 1992 Senior Management Stock Plan, which is our only equity compensation plan that has not been approved by our stockholders and that (1) has any outstanding awards that have not been exercised or (2) can be used for future grants of equity-based awards. See Note 9 to our consolidated financial statements for more information regarding this plan. Item 6. SELECTED FINANCIAL DATA
For the For the Nine-Month Fiscal For the Years Ended Period Ended Year Ended December 31, December 31, March 31, 2002 2001 2000(1) 1999 1999 ---- ---- ------- ------------- ---- (In thousands, except for per share amounts) Revenues $ 1,748,681 $ 1,896,948 $ 1,813,670 $ 1,844,298 $ 3,056,920 Income (Loss) from Continuing Operations $ (786,204) $ (24,422) $ (24,864) $ (1,435) $ 185,183 Income (Loss) before Extraordinary Item $ (776,735) $ (20,857) $ (22,082) $ 440 $ 192,081 Net Income (Loss) $ (776,394) $ (20,022) $ (22,082) $ 440 $ 153,362 Basic Earnings (Loss) per Common Share: Income (Loss) from Continuing Operations $ (12.71) $ (0.40) $ (0.42) $ (0.02) $ 3.14 Income (Loss) before Extraordinary Item $ (12.56) $ (0.34) $ (0.37) $ 0.01 $ 3.25 Net Income (Loss) $ (12.55) $ (0.33) $ (0.37) $ 0.01 $ 2.60 Diluted Earnings (Loss) per Common Share: Income (Loss) from Continuing Operations $ (12.71) $ (0.40) $ (0.42) $ (0.02) $ 3.05 Income (Loss) before Extraordinary Item $ (12.56) $ (0.34) $ (0.37) $ 0.01 $ 3.16 Net Income (Loss) $ (12.55) $ (0.33) $ (0.37) $ 0.01 $ 2.53 Total Assets $ 1,278,171 $ 2,103,840 $ 2,055,627 $ 3,874,891 $ 4,305,520 Current Maturities of Long-Term Debt $ 55,577 $ 209,480 $ 258 $ 87 $ 31,126 Long-Term Debt $ 86,104 $ 100,393 $ 323,157 $ 323,014 $ 323,774 Cash Dividends per Common Share $ - $ - $ 0.10 $ 0.15 $ 0.20
(1) Effective February 22, 2000, our consolidated financial results exclude the results of B&W and its consolidated subsidiaries. See Note 18 to our consolidated financial statements for significant items included in the years ended December 31, 2002 and 2001. Pretax results for the year ended December 31, 2000 include losses totaling $23.4 million to exit certain foreign joint ventures. Pretax results for the nine-month period ended December 31, 1999 include a loss on the curtailment of a foreign pension plan of $37.8 million. Our results for the fiscal year ended March 31, 1999 include: - a gain on the dissolution of a joint venture of $37.4 million; 29 - a gain on the settlement and curtailment of postretirement benefit plans of $27.6 million; - interest income of $18.6 million on domestic tax refunds; - a gain of $12.0 million from the sale of assets of a joint venture; - an $8.0 million settlement of punitive damage claims in a civil suit associated with a Pennsylvania facility we formerly operated; - an extraordinary loss on the retirement of debt of $38.7 million; - a loss of $85.2 million for estimated costs relating to estimated future nonemployee asbestos claims; - losses of $21.9 million related to impairment of assets and goodwill; - various provisions of $20.3 million related to potential settlements of litigation and contract disputes; and - the write-off of $12.6 million of receivables from a joint venture. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements we make in the following discussion which express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements, or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including the risks and uncertainties we have referred to under the headings "Risk Factors" and "Cautionary Statement Concerning Forward-Looking Statements" in Items 1 and 2 of Part I of this report. GENERAL In general, our business segments are composed of capital-intensive businesses that rely on large contracts for a substantial amount of their revenues. The amount of revenues we generate from our Marine Construction Services segment largely depends on the level of oil and gas development activity in the world's major hydrocarbon-producing regions. Our revenues from this segment reflect the variability associated with the timing of significant oil and gas development projects. We expect our Marine Construction Services segment's revenues to increase during 2003, primarily for deepwater projects and projects in the Azerbaijan sector of the Caspian Sea. We believe the oil and gas exploration and production industry is focused on deepwater projects and that the deepwater floater market will be robust over the next several years. JRM's future success is heavily dependent on its ability to compete successfully in the deepwater market. While we expect our Marine Construction Services segment revenues to increase in 2003, our Gulf of Mexico marine operations will face challenges in 2003, due to an extremely competitive environment. We are in the process of performing a strategic analysis of our Gulf of Mexico marine business and plan to take a number of actions to improve our ability to compete in this market on a rational basis. These actions may include downsizing our operational support base, selling or disposing of some of our marine equipment and other cost cutting measures. These factors may have a significant impact on our anticipated Marine Construction Services segment income in future periods. Due to the deterioration in this segment's financial performance during the year ended December 31, 2002, we revised our expectations concerning this segment's future earnings and cash flow and tested the goodwill of the Marine Construction Services segment for impairment. During the year ended December 31, 2002, we recorded an impairment charge of $313.0 million, which was the total amount of this segment's goodwill. The revenues of our Government Operations segment are largely a function of capital spending by the U.S. Government. As a supplier of nuclear components for the U.S. Navy, BWXT is a significant participant in the defense industry. We recognized an increase in bookings during the year ended December 31, 2002 that has allowed us to reach a record backlog in our Government Operations. Additionally, with BWXT's unique capability of full life-cycle management of special nuclear materials, facilities and technologies, BWXT 30 is poised to continue to participate in the continuing cleanup and management of the Department of Energy's nuclear sites and weapons complexes. We currently expect the operating results of this segment to continue to improve in 2003. The results of operations of our Industrial Operations segment include only the results of MECL, which we sold in October 2001. The results of Hudson Products Corporation ("HPC") are reported in discontinued operations. We sold HPC in July 2002. See Note 2 to our consolidated financial statements for further information on discontinued operations. In addition, we now include the results of MTI in Government Operations. MTI was previously included in our Industrial Operations segment. The results of operations of our Power Generation Systems segment include primarily the results of Volund, which we sold to B&W on October 11, 2002. See Note 2 to our consolidated financial statements for information concerning that sale. As a result of the Chapter 11 reorganization proceedings involving B&W and several of its subsidiaries, we stopped consolidating the results of operations of B&W and its subsidiaries in our consolidated financial statements and we have been presenting our investment in B&W on the cost method. The Chapter 11 filing, along with subsequent filings and negotiations, led to increased uncertainty with respect to the amounts, means and timing of the ultimate settlement of asbestos claims and the recovery of our investment in B&W. Due to this increased uncertainty, we wrote off our net investment in B&W in the quarter ended June 30, 2002. The total impairment charge of $224.7 million included our investment in B&W of $187.0 million and other related assets totaling $37.7 million, primarily consisting of accounts receivable from B&W, for which we provided an allowance of $18.2 million. This charge was precipitated by a combination of factors, including a change in our expectations regarding our ability to retain our equity in B&W. During the quarter ended September 30, 2002, we reached an agreement in principle with representatives of the present and future asbestos personal injury claimants in the B&W Chapter 11 proceedings on several key terms, which served as a basis for continuing negotiations. On December 19, 2002, drafts of a joint plan of reorganization and settlement agreement, together with a draft of a related disclosure statement, were filed in the Chapter 11 proceedings, and we determined that a liability related to the proposed settlement is probable and that the value is reasonably estimable. Accordingly, at December 31, 2002, we established an estimate for the cost of the settlement of the B&W bankruptcy proceedings of $110.0 million, including related tax expense of $23.6 million. See Note 20 to our consolidated financial statements for details regarding this estimate and for further information regarding developments in negotiations relating to the B&W Chapter 11 proceedings. Through February 21, 2000, B&W's and its subsidiaries' results are included in our segment results under Power Generation Systems - B&W (see Note 17 to our consolidated financial statements). Accordingly, B&W and its consolidated subsidiaries' pre-bankruptcy filing revenues of $155.8 million and operating income of $8.0 million are included in our consolidated financial results for the year ended December 31, 2000. At December 31, 2002, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 87, Employers' Accounting for Pensions," we recognized a minimum pension liability of approximately $452 million. This recognition resulted in a decrease in our prepaid pension asset of $122 million, an increase in our pension liability of $345 million and an increase in other intangible assets of $15 million. The increase in our minimum pension liability primarily resulted from the combination of the downturn in financial markets in 2002 and the low interest rates in effect at December 31, 2002. As negotiations relating to the B&W Chapter 11 proceedings have progressed, it has, in our judgment, become probable that we will spin off the portion of MI's qualified pension plan related to the active and retired employees of B&W as part of a final settlement. If we effect such a spin-off, we will be required to recognize any curtailment and settlement gains or losses associated with the spin-off at the time we effect the spin-off. Curtailment and settlement gains or losses are determined based on actuarial calculations as of the date of the spin-off. Based on data provided by our actuary, if this anticipated spin-off had occurred on December 31, 2002, we would have recorded curtailment and settlement losses totaling $117 million, with no associated tax benefits. In addition, based on data provided by our actuary at December 31, 2002, we would have also recorded a reduction in our charge to Other Comprehensive Income for 31 recognition of our minimum pension liability totaling approximately $226 million. If we had recorded these items at December 31, 2002, our Stockholders' Equity (Deficit) would have improved by approximately $109 million. However, under generally accepted accounting principles, we cannot record the effect of the spin-off until the event actually occurs. We anticipate that the spin-off will occur in 2003. We will record the effect of the spin-off based on actuarial calculations as of the date of the spin-off, which could be materially different from the effect that would have been recorded if the spin-off had been completed as of December 31, 2002. As a result of our reorganization in 1982, which we completed through a transaction commonly referred to as an "inversion," our company is a corporation organized under the laws of the Republic of Panama. Recently, the U.S. House and Senate have considered legislation that would change the tax law applicable to corporations that have completed inversion transactions. We have engaged an independent consultant to undertake an analysis of the potential re-domestication of MII from Panama to the U.S. Additionally, we recently entered into an agreement with two shareholders pursuant to which management will sponsor and recommend a proposal for re-domestication on the proxy statement for the annual meeting in the event the tax, costs and other considerations impacted by re-domestication are determined by our Board of Directors to be in the best interests of our shareholders. In the event that re-domestication is determined by the our Board of Directors not to be in the best interests of our shareholders, pursuant to our agreement described above, management will present the re-domestication proposal on the proxy but may recommend against it. The timing of any such management proposal is contingent upon the completion of the analysis by the independent consultant and the completion of the B&W reorganization proceedings. Effective January 1, 2002, based on a review performed by us and our independent consultants, we changed our estimate of the useful lives of new major marine vessels from 12 years to 25 years to better reflect the service lives of our assets and industry norms. Consistent with this change, we also extended the lives of major upgrades to existing vessels. We continue to depreciate our major marine vessels using the units-of-production method, based on the utilization of each vessel. The change in estimated useful lives reduced our operating loss by approximately $3.2 million for the year ended December 31, 2002. We derive a significant portion of our revenues from foreign operations. As a result, international factors, including variations in local economies and changes in foreign currency exchange rates, affect our revenues and operating results. We attempt to limit our exposure to changes in foreign currency exchange rates by attempting to match anticipated foreign currency contract receipts with like foreign currency disbursements. To the extent that we are unable to match the foreign currency receipts and disbursements related to our contracts, we enter into forward contracts to reduce the impact of foreign exchange rate movements on our operating results. Because we generally do not hedge beyond our exposure, we believe this practice minimizes the impact of foreign exchange rate movements on our operating results. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We believe the following are our most critical accounting policies that we apply in the preparation of our financial statements. These policies require our most difficult, subjective and complex judgements, often as a result of the need to make estimates of matters that are inherently uncertain. Contracts and Revenue Recognition. We generally recognize contract revenues and related costs on a percentage-of-completion method for individual contracts or combinations of contracts. Under this method, estimated contract income and resulting revenue are generally recognized based on costs incurred to date as a percentage of total estimated costs. Total estimated costs, and resulting contract income, are affected by changes in the expected cost of materials and labor, productivity, scheduling and other factors. Additionally, external factors such as weather, customer requirements and other factors outside of our control, may also affect the progress and estimated cost of a project's completion and therefore the timing of income and revenue recognition. We routinely review estimates related to our contracts and revisions to profitability are reflected in earnings immediately. If a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined. In prior years, we have had 32 significant adjustments to earnings as a result of revisions to contract estimates. Such revisions have been primarily due to the fact that many of our contracts have been "first-of-a-kind" or have been inherently difficult to estimate due to the long-term nature of the project, changing customer requirements and other factors outside of our control. In addition, for first-of-a-kind projects undertaken by our Marine Construction Services segment in recent periods, we have been unable to forecast accurately total cost to complete until we have performed all major phases of the project. As demonstrated by our experience on these contracts in 2002, revenue, cost and gross profit realized on fixed-price contracts will often vary from estimated amounts. Although we are continually striving to improve our ability to estimate our contract costs and profitability, adjustments to overall contract costs due to unforeseen events may continue to be significant in future periods. We recognize claims for extra work or for changes in scope of work in contract revenues, to the extent of costs incurred, when we believe collection is probable. Any amounts not collected are reflected as an adjustment to earnings. We regularly assess customer credit risk inherent in contract costs. We recognize contract claim income when formally agreed with the customer. Property, Plant and Equipment. We carry our property, plant and equipment at depreciated cost, reduced by provisions to recognize economic impairment when we determine impairment has occurred. Factors that impact our determination of impairment include forecasted utilization of equipment and estimates of cash flow from projects to be performed in future periods. Our estimates of cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions or changes in operating performance. It is reasonably possible that changes in such factors may negatively affect our business segments and result in future asset impairments. Except for major marine vessels, we depreciate our property, plant and equipment using the straight-line method, over estimated economic useful lives of 8 to 40 years for buildings and 2 to 28 years for machinery and equipment. We depreciate major marine vessels using the units-of-production method based on the utilization of each vessel. Our 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 and 50% of cumulative straight-line depreciation. We expense the costs of maintenance, repairs and renewals, which do not materially prolong the useful life of an asset, as we incur them except for drydocking costs. We accrue estimated drydock costs for our marine fleet over the period of time between drydockings, generally 3 to 5 years. We accrue drydock costs in advance of the anticipated future drydocking, commonly known as the "accrue in advance" method. Actual drydock costs are charged against the liability when incurred and any differences between actual costs and accrued costs are recognized over the remaining months of the drydock cycle. Our actual drydock costs often differ from our estimates due to the long period between drydockings and the inherent difficulties in estimating cost of vessel repairs, which are not necessarily visible until the drydock occurs. Pension Plans and Postretirement Benefits. We estimate income or expense related to our pension and postretirement benefit plans based on actuarial assumptions, including assumptions regarding discount rates and expected returns on plan assets. We determine our discount rate based on a review of published financial data and discussions with our actuary regarding rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of our pension obligations. Based on historical data and discussions with our actuary, we determine our expected return on plan assets based on the expected long-term rate of return on our plan assets and the market-related value of our plan assets. Changes in these assumptions can result in significant changes in our estimated pension income or expense. We revise our assumptions on an annual basis based upon changes in current interest rates, return on plan assets and the underlying demographics of our workforce. These assumptions are reasonably likely to change in future periods and may have a material impact on future earnings. 33 Loss Contingencies. We estimate liabilities for loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. We are currently involved in certain investigations and litigation as discussed in Note 10 to our consolidated financial statements. We have accrued our estimates of the probable losses associated with these matters. However, our losses are typically resolved over long periods of time and are often difficult to estimate due to the possibility of multiple actions by third parties. Therefore, it is possible future earnings could be affected by changes in our estimates related to these matters. Our most significant loss contingencies include our estimate of the cost of the potential settlement of the B&W Chapter 11 proceedings which is now dependent on the finalization of the proposed settlement based on the agreement in principle discussed in this report (see Notes 10 and 20 to our consolidated financial statements). Goodwill. SFAS No. 142, "Goodwill and Other Intangible Assets," requires that we no longer amortize goodwill, but instead perform periodic testing for impairment. It requires a two-step impairment test to identify potential goodwill impairment and measure the amount of a goodwill impairment loss. The first step of the test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. Both steps of goodwill impairment testing involve significant estimates. As a result of the write-off of the goodwill associated with our Marine Construction Services segment, our total goodwill has been substantially reduced. Environmental Clean-Up Costs. We accrue for future decommissioning of our nuclear facilities that will permit the release of these facilities to unrestricted use at the end of each facility's life, which is a requirement of our licenses from the Nuclear Regulatory Commission. We reflect the accruals, based on the estimated cost of those activities and net of any cost-sharing arrangements, over the economic useful life of each facility, which we typically estimate at 40 years. We adjust the estimated costs as further information develops or circumstances change. We do not discount costs of future expenditures for environmental cleanup to their present values. An exception to this accounting treatment relates to the work we perform for one facility, for which the U.S. Government is obligated to pay all the decommissioning costs. We recognize recoveries of environmental clean-up costs from other parties as assets when we determine their receipt is probable. Effective January 1, 2003, we will adopt SFAS No. 143, requiring us to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When we initially record such a liability, we will capitalize a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability will be accreted to its present value each period, and the capitalized cost will be depreciated over the useful life of the related asset. Upon settlement of a liability, we will settle the obligation for its recorded amount or incur a gain or loss. Deferred Taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income, carrybacks, future reversals and ongoing prudent and feasible tax planning strategies in prior years in assessing the need for a valuation allowance, given our operating results for 2002, we have not assumed that future taxable income or tax planning strategies will be available to us as of December 31, 2002 in determining our valuation allowance. If we were to subsequently determine that we would be able to realize deferred tax assets in the future in excess of our net recorded amount, an adjustment to deferred tax assets would increase income in the period such determination was made. We will continue to assess the adequacy of the valuation allowance on a quarterly basis. Any changes to our estimated valuation allowance could be material to our consolidated financial condition and results of operations. Warranty. With respect to our Marine Construction Services segment, we include warranty costs as a component of our total contract cost estimate to satisfy contractual requirements. In addition, we make specific provisions where we expect the costs of warranty to significantly exceed the accrued estimates. Factors that impact our estimate of warranty costs include prior history of warranty claims and our estimates of future costs of materials and labor. At our Marine Construction Services segment, warranty periods are generally 34 limited and we have had minimal warranty cost in prior years. It is reasonably possible that our future warranty provisions may vary from what we have experienced in the past. In our Government Operations segment, we accrue estimated expenses to satisfy contractual warranty requirements when we recognize the associated revenue on the related contracts. YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 Marine Construction Services Revenues increased 35% to $1,148.0 million. The increase is a result of increased activity for our EPIC spar projects, a topside fabrication and a pipeline installation project in the Azerbaijan sector of the Caspian Sea, two fabrication and installation projects in Southeast Asia, one deck fabricated in the Middle East for the West African market and a topsides fabrication contract at our Morgan City fabrication facility. These increases are partially offset by reduced activity on other Gulf of Mexico projects and a decline in charters to our Mexican joint venture. Pemex, the national oil company of Mexico, is the primary customer of this joint venture. Although revenues increased, segment operating income, which is before equity in income from investees, declined to a loss of $162.6 million compared with income of $14.5 million for the year ended December 31, 2001. The loss is due primarily to charges totaling $149.3 million relating to additional cost overruns, schedule delays and higher-than-expected forecasted costs to complete our three EPIC spar projects, each of which is now in a loss position. At December 31, 2002, the financial percent complete on each of these projects was estimated as follows: Medusa, 74%; Devils Tower, 48%; and Front Runner, 30%. In addition, we incurred losses on Gulf of Mexico pipeline work and a project for the South American market. We also experienced reduced activity on other Gulf of Mexico projects, lower charter activity to our Mexican joint venture and increased costs to complete a fabrication project for the West African market due to poor productivity. This project is also in a loss position. We also experienced lower utilization of our marine fleet in the Gulf of Mexico. Higher volumes from two fabrication and installation projects in Southeast Asia, a topside fabrication and a pipeline installation project in the Azerbaijan sector of the Caspian Sea and a topsides fabrication contract at our Morgan City fabrication facility partially offset these losses. In addition, we experienced lower general and administrative expenses and a favorable adjustment to potential settlements of litigation. For the year ended December 31, 2001, segment operating income included goodwill amortization expense of $18.0 million. The net loss on asset disposal and impairments for the year ended December 31, 2002 is due primarily to the goodwill impairment charge of $313.0 million. See Note 1 to our consolidated financial statements for information concerning this impairment charge. During the year ended December 31, 2002, we also recorded charges totaling approximately $15.0 million relating to a reorganization of our Western Hemisphere organization. These charges include an impairment charge of $6.8 million related to land at one of our facilities and $1.9 million to reduce to net realizable value four material barges and certain marine equipment that we expect to sell in 2003. Equity in income from investees decreased $5.1 million to $5.3 million, primarily due to a $2.4 million charge related to the impairment of an investment in an international joint venture and its favorable operating results recorded in the prior year. Favorable contract closeout adjustments associated with our U.K. joint venture partially offset these decreases. Backlog was $2.1 billion and $1.8 billion, respectively, at December 31, 2002 and 2001. At December 31, 2002, the Marine Construction Services backlog included $345.0 million related to uncompleted work on our three EPIC spar projects and $265.0 million related to other contracts in loss positions. Government Operations Revenues increased $59.8 million to $553.8 million, primarily due to higher volumes from the manufacture of nuclear components for certain U.S. Government programs, the management and operating contracts for U.S. Government-owned facilities, commercial work and other government operations. Lower volumes from commercial nuclear environmental services partially offset these increases. 35 Segment operating income, which is before equity in income from investees, increased $5.3 million to $34.6 million, primarily due to higher volumes from the manufacture of nuclear components for certain U.S. Government programs and commercial work, higher margins from management and operating contracts for U.S. Government-owned facilities and other government operations. In addition, we received an insurance settlement relating to environmental restoration costs. However, we experienced lower margins from nuclear component manufacturing for certain U.S. Government programs along with higher facility management oversight costs and lower volumes from commercial nuclear environmental services. We also incurred costs associated with the decentralization of our research and development division and increased spending on fuel cell research and development. Equity in income from investees increased $1.6 million to $24.6 million, primarily due to improved operating results from one of our joint ventures operating in Texas, partially offset by higher general and administrative expenses. Backlog was $1.7 billion and $1.0 billion, respectively, at December 31, 2002 and 2001. At December 31, 2002, this segment's backlog with the U.S. Government was $1.6 billion, of which $266.5 million had not yet been funded. Power Generation Systems Revenues decreased $0.9 million to $46.9 million as a result of lower volumes from after-market services and the sale of Volund to B&W in October 2002. Segment operating loss, which is before equity in income from investees, decreased $0.8 million to $2.8 million, primarily due to lower general and administrative expenses and the sale of Volund to B&W. The loss provision we recorded related to the claims involving Volund and Austrian Energy described in Note 10 partially offset these decreases. Equity in income from investees decreased $2.9 million to a loss of $2.3 million, primarily due to a $3.3 million charge related to the impairment of an investment in a foreign joint venture operating in India. Corporate Corporate expenses increased $18.5 million to $23.6 million, primarily due to the recognition of expense from our pension plans in the current period compared to income from those plans and a nonrecurring favorable insurance recovery in the year ended December 31, 2001. Lower legal and professional services expenses related to the B&W Chapter 11 proceedings, lower insurance expenses and the improved performance of our captive insurance subsidiaries for the year ended December 31, 2002 partially offset these increases. During the year ended December 31, 2002, we recognized expense from certain of our qualified pension plans of approximately $11.1 million. During the year ended December 31, 2001, we recognized income from these plans of approximately $29.0 million. We expect to recognize approximately $72.1 million of expense in 2003 related to these plans. The significant increase expected in 2003 from 2002 levels is due principally to changes in our discount rate and plan asset performance. Other Unallocated Items During the year ended December 31, 2002, we recorded a provision of $1.5 million for environmental costs associated with MECL, which we sold in 2001. Other Income Statement Items Interest income decreased $11.0 million to $8.6 million, primarily due to a decrease in investments and prevailing interest rates. Interest expense decreased $24.5 million to $15.1 million, primarily due to changes in debt obligations and prevailing interest rates. 36 Other-net declined $11.1 million to expense of $4.4 million. For the year ended December 31, 2002, we recorded $2.5 million of minority interest expense associated with a Marine Construction Services segment joint venture. In addition, we had a $2.0 million decrease in gains on the sale of investment securities as well as an increase in miscellaneous other expenses. We recorded the following charges in the year ended December 31, 2002, with little or no associated tax benefit: - the impairment of the remaining $313.0 million of goodwill attributable to the premium we paid on the acquisition of the minority interest in JRM in June 1999; - the write-off of the investment in B&W and other related assets totaling $224.7 million; and - the net pre-tax provision of $86.4 million for the estimated cost of settlement of the B&W Chapter 11 proceedings. The net pre-tax provision for the estimated cost of the B&W Chapter 11 settlement includes approximately $154.0 million of expenses with no associated tax benefits. The remaining items, consisting primarily of estimated benefits we expect to receive as a result of the settlement, constitute income in taxable jurisdictions. See Note 20 to our consolidated financial statements for additional details regarding the settlement provision. In addition, our valuation allowance for the realization of deferred tax assets increased by $202.0 million from $12.8 million at December 31, 2001 to $214.8 million at December 31, 2002. The provision for income taxes for the year ended December 31, 2001 reflects nondeductible amortization of goodwill of $19.5 million, of which $18.0 million was attributable to JRM. Income taxes for the year ended December 31, 2001 also include a tax benefit related to favorable tax settlements in foreign jurisdictions totaling approximately $5.2 million and a provision for proposed U.S. federal income tax deficiencies. The provision for income taxes for the year ended December 31, 2001 also includes a charge of $85.4 million associated with the exercise of the intercompany stock purchase and sale agreement discussed in Note 5 to our consolidated financial statements. We operate in many different tax jurisdictions. Within these jurisdictions, tax provisions vary because of nominal rates, allowability of deductions, credits and other benefits and tax bases (for example, revenue versus income). These variances, along with variances in our mix of income from these jurisdictions, are responsible for shifts in our effective tax rate. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Marine Construction Services Revenues increased $91.0 million to $848.5 million, primarily due to higher volumes in North American activities, including the deepwater markets of the Gulf of Mexico, and in the Eastern Hemisphere fabrication operations. Lower volume in offshore activities in Southeast Asia relating to the West Natuna project partially offset this increase. Segment operating income increased $48.0 million from a loss of $33.5 million to income of $14.5 million, primarily due to higher volumes and margins in North American activities and in the Eastern Hemisphere fabrication operations. Lower volumes on the West Natuna project, increased cost estimates relating to several Gulf of Mexico projects, especially two large first-of-a-kind EPIC contracts, and higher general and administrative expenses partially offset these increases. Loss on asset disposals and impairments - net increased $2.6 million to $3.6 million primarily due to the decision in the fourth quarter of 2001 to scrap the derrick barge Ocean Builder. Equity in income from investees increased $7.6 million to $10.4 million, primarily due to favorable contract closeout adjustments from our U.K. joint venture that was terminated in June 2001. In addition, the year ended December 31, 2000 included higher losses associated with our U.K. joint venture. 37 Government Operations Revenues increased $50.0 million to $494.0 million, primarily due to higher volumes from nuclear components for the U.S. Government and commercial work. Lower volumes from management and operating contracts for U.S. Government-owned facilities and other government operations partially offset these increases. Segment operating income decreased $3.9 million to $29.3 million, primarily due to lower volume and margins from management and operating contracts for U.S. Government-owned facilities and other government operations and higher general and administrative expenses. Higher volume and margins from commercial work, higher volumes from nuclear components for the U.S. Government and higher margins from commercial nuclear environmental services partially offset these decreases. Loss on asset disposals and impairments - net decreased $0.9 million, primarily due to asset impairments at one of our research facilities in the year ended December 31, 2000. Equity in income from investees increased $11.9 million to $23.0 million, primarily due to higher operating results from a joint venture in Idaho and the start-up of the Pantex and Y-12 joint ventures. Lower operating results from a joint venture in Colorado partially offset these increases. Industrial Operations Revenues increased $81.0 million to $507.3 million, primarily due to higher volumes from engineering and construction activities performed by MECL. Lower volumes from plant maintenance activities partially offset these increases. Power Generation Systems Revenues increased $14.0 million to $47.8 million, primarily due to increased volume from Volund, an international power generation operation which we acquired in June 2000. Segment operating loss decreased $4.1 million to $3.7 million, primarily due to contract loss provisions recorded in the year ended December 31, 2000. Equity in income (loss) from investees increased $25.2 million from a loss of $24.6 million to income of $0.6 million, primarily due to charges to exit and impair certain foreign joint ventures in the year ended December 31, 2000. Corporate Corporate expense, net increased $13.1 million from income of $8.0 million to expense of $5.1 million. While we achieved a 30% reduction in our corporate departmental expenses attributable to cost cutting programs, income recognized on our overfunded pension plans was down substantially in 2001 from 2000. During the years ended December 31, 2001 and 2000, we recognized income from certain of our qualified pension plans of approximately $29.0 million and $48.0 million, respectively. We also experienced significantly higher legal and professional service expenses in 2001 related to the B&W Chapter 11 proceedings. Other Income Statement Items Interest income decreased $7.5 million to $19.6 million, primarily due to a decrease in investments and prevailing interest rates. Interest expense decreased $3.9 million to $39.7 million, primarily due to changes in short-term debt obligations and prevailing interest rates. 38 Other-net income increased $3.9 million to $6.6 million, primarily due to the reversal of prior years' rent accruals on a fabrication yard in the Middle East and gains on the sale of investment securities in the year ended December 31, 2001. The provision for income taxes for the years ended December 31, 2001 and 2000 reflected nondeductible amortization of goodwill totaling approximately $19.5 million and $20.1 million, respectively, of which $18.0 million is attributable to the premium we paid on the acquisition of the minority interest in JRM in June 1999. The provision for income taxes in the year ended December 31, 2001 also included a charge of approximately $85.4 million associated with the intended exercise of an intercompany stock purchase and sale agreement. The provision for income taxes for the year ended December 31, 2000 included a provision of $3.8 million for B&W for the prefiling period and a tax benefit of $1.4 million from the use of certain tax attributes in a foreign joint venture. Also included are tax benefits primarily related to favorable tax settlements in foreign jurisdictions totaling approximately $5.2 million and $5.5 million for the years ended December 31, 2001 and 2000, respectively, and a provision for proposed IRS tax deficiencies in the year ended December 31, 2001. In addition, income before the provision for income taxes for the year ended December 31, 2000 included losses and charges of $25.6 million to exit certain foreign joint ventures which had no associated tax benefits. We operate in many different tax jurisdictions. Within these jurisdictions, tax provisions vary because of nominal rates, allowability of deductions, credits and other benefits and tax bases (for example, revenue versus income). These variances, along with variances in our mix of income from these jurisdictions, are responsible for shifts in our effective tax rate. EFFECTS OF INFLATION AND CHANGING PRICES Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, using historical U.S. 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. In order to minimize the negative impact of inflation on our operations, we attempt to cover the increased cost of anticipated changes in labor, material and service costs, either through an estimate of those changes, which we reflect in the original price, or through price escalation clauses in our contracts. LIQUIDITY AND CAPITAL RESOURCES On February 11, 2003, we entered into definitive agreements with a group of lenders for a new credit facility ("New Credit Facility") to replace our previous facilities, which consisted of a $100 million credit facility for MII and BWXT (the "MII Credit Facility") and a $200 million credit facility for JRM and its subsidiaries (the "JRM Credit Facility") that were scheduled to expire on February 21, 2003. The New Credit Facility initially provides for borrowings and issuances of letters of credit in an aggregate amount of up to $180 million, with certain sublimits on the amounts available to JRM and BWXT. On May 13, 2003, the maximum amount available under the New Credit Facility will be reduced to $166.5 million. The obligations under the New Credit Facility are (1) guaranteed by MII and various subsidiaries of JRM and (2) collateralized by all our capital stock in MI, JRM and certain subsidiaries of JRM and substantially all the JRM assets and various intercompany promissory notes. The New Credit Facility requires us to comply with various financial and nonfinancial covenants and reporting requirements. The financial covenants require us to maintain a minimum amount of cumulative earnings before taxes, depreciation and amortization; a minimum fixed charge coverage ratio; a minimum level of tangible net worth (for MII as a whole, as well as for JRM and BWXT separately); and a minimum variance on expected costs to complete the Front Runner EPIC spar project. In addition, we must provide as additional collateral fifty percent of any net after-tax proceeds from significant asset sales. The New Credit Facility is scheduled to expire on April 30, 2004. 39 Proceeds from the New Credit Facility may be used by JRM and BWXT, with sublimits for JRM of $100 million for letters of credit and $10 million for cash advances and for BWXT of $60 million for letters of credit and $50 million for cash advances. At March 24, 2003, we had $10.1 million in cash advances and $111.7 million in letters of credit outstanding under this facility. Pricing for cash advances under the Credit Facility is prime plus 4% or Libor plus 5% for JRM and prime plus 3% or Libor plus 4% for BWXT. Commitment fees are charged at the rate of 0.75 of 1% per annum on the unused working capital commitment, payable quarterly. The MII Credit Facility was canceled resulting in the release of $107.8 million in cash collateral that has been used, together with an additional $10 million of cash, to provide JRM and BWXT with intercompany loans in the amount of $90 million and $25 million, respectively. JRM and BWXT are using the proceeds of those intercompany loans for working capital needs and general corporate purposes. During 2002, JRM experienced material losses on its three EPIC spar projects: Medusa, Devils Tower and Front Runner. These contracts are first-of-a-kind as well as long term in nature. We have experienced schedule delays and cost overruns on these contracts that have adversely impacted our financial results. These projects continue to face significant issues. The remaining challenges to completing Medusa within its revised schedule and budget are finishing the topsides fabrication and the marine installation portion of the project. Our revised schedule requires installation activities during the second quarter of 2003. We believe the major challenge in completing Devils Tower within its revised budget is to remain on track with the revised schedule for topsides fabrication due to significant liquidated damages that are associated with the contract. A substantial portion of the costs and delay impacts on Devils Tower are attributable to remedial activities undertaken with regard to the paint application. On March 21, 2003, we filed an action against the paint vendors for recovery of the remediation costs, delays and other damages. The key issues for the Front Runner contract relate to subcontractors and liquidated damages due to schedule slippage either by JRM or one or more of the subcontractors. At December 31, 2002, we have provided for our estimated losses on these contracts. Although we continually strive to improve our ability to estimate our contract costs associated with these projects, it is reasonably possible that current estimates could change and adjustments to overall contract costs may continue to be significant in future periods. Due primarily to the losses incurred on the three EPIC spar projects, we expect JRM to experience negative cash flows during 2003. Completion of the EPIC spar projects has and will continue to put a strain on JRM's liquidity. JRM intends to fund its cash needs through borrowings on the New Credit Facility, intercompany loans from MII and sales of nonstrategic assets, including certain marine vessels. In addition, under the terms of the New Credit Facility, JRM's letter of credit capacity was reduced from $200 million to $100 million. This reduction does not negatively impact our ability to execute the contracts in our current backlog. However, it will likely limit JRM's ability to pursue projects from certain customers who require letters of credit as a condition of award. We are exploring other opportunities to improve our liquidity position, including better management of working capital through process improvements, negotiations with customers to relieve tight schedule requirements and to accelerate certain portions of cash collections, and alternative financing sources for letters of credit for JRM. In addition, we plan to refinance BWXT on a stand-alone basis, thereby freeing up additional letter of credit capacity for JRM and are currently in the process of evaluating terms and conditions with certain financial institutions. We also intend to seek a replacement credit facility for JRM prior to the scheduled expiration of the New Credit Facility, in order to provide for increased letter of credit capacity. Our ability to obtain such a replacement facility will depend on numerous factors, including JRM's operating performance and overall market conditions. If JRM experiences additional significant contract costs on the EPIC spar projects as a result of unforeseen events, we may be unable to fund all our budgeted capital expenditures and meet all of our funding requirements for our contractual commitments. In this instance, we would be required to defer certain capital expenditures, which in turn could result in curtailment of certain of our operating activities or, alternatively, require us to obtain additional sources of financing which may not be available to us or may be cost prohibitive. MI experienced negative cash flows in 2002, primarily due to payments of taxes resulting from the exercise of MI's rights under the intercompany agreement we discuss below. MI expects to meet its cash needs in 2003 through intercompany borrowings from BWXT, which BWXT may fund through operating cash flows or borrowings under the New Credit Facility. 40 MI is restricted, as a result of covenants in its debt instruments, in its ability to transfer funds to MII and MII's other subsidiaries through cash dividends or through unsecured loans or investments. On a consolidated basis, we expect to incur negative cash flows in the first three quarters of 2003. In addition, in March 2003, Moody's Investor Service lowered MI's credit rating from B2 to B3. These factors may further impact our access to capital and our ability to refinance the New Credit Facility, which is scheduled to expire in April 2004. Our current credit rating and operating performance in 2002 could limit our alternatives and ability to refinance the New Credit Facility. At December 31, 2002 and December 31, 2001, we had available various uncommitted short-term lines of credit from banks totaling $10.2 million and $8.9 million, respectively. We had no borrowings against these lines at December 31, 2002 or December 31, 2001. At December 31, 2002, we had total cash, cash equivalents and investments of $348.4 million. Our investment portfolio consists primarily of investments in government obligations and other highly liquid debt securities. The fair value of our investments at December 31, 2002 was $173.2 million. As of December 31, 2002, we had pledged approximately $46.3 million fair value of these investments to secure a letter of credit in connection with certain reinsurance agreements. In addition, as of December 31, 2002, we had pledged investment portfolio assets having a fair market value of approximately $107.8 million as cash collateral to secure our obligations under the MII Credit Facility. In February 2003, the MII Credit Facility was terminated, resulting in the release of the cash collateral. Our cash requirements as of December 31, 2002 under current contractual obligations are as follows:
Less than 1-3 3-5 After Total 1 Year Years Years 5 Years (In thousands) Long-term debt $ 91,946 $ 9,500 $ 11,500 $ 9,721 $ 61,225 Capital leases $ 4,135 $ 477 $ 1,133 $ 1,265 $ 1,260 Operating leases $ 62,801 $ 6,932 $ 9,712 $ 6,509 $ 39,648 Take-or-pay contract $ 12,600 $ 1,800 $ 3,600 $ 3,600 $ 3,600
Note: Less than 1 Year includes MI's Series "A" Medium Term Notes totaling $9.5 million, the repayment of which we funded on February 11, 2003. Our contingent commitments, excluding amounts guaranteed related to B&W, under letters of credit currently outstanding expire as follows:
Less than 1-3 3-5 Total 1 Year Years Years (In thousands) $ 183,160 $164,655 $3,190 $15,315
At March 24, 2003, our liquidity position was as follows (in millions):
JRM MI Other Consolidated Cash, cash equivalents and investments $ 124 $ - $ 91 $ 215 Less: Pledged securities - - (46) (46) Captive insurer requirements (21) - (30) (51) Restricted foreign cash (8) - (1) (9) - ------------------------------------------------------------------------------------------- Total free cash available 95 - 14 109 Amount available under New Credit Facility(1) 10 40 - 50 - ------------------------------------------------------------------------------------------- Total available liquidity $ 105 $ 40 $ 14 $ 159 ===========================================================================================
(1) Reflects amount available for cash advances. We had an additional $9 million in letter of credit capacity. 41 During the year ended December 31, 2002, MI repurchased or repaid the remaining $208.8 million in aggregate principal amount of its 9.375% Notes due March 15, 2002 for aggregate payments of $208.3 million, resulting in an extraordinary net after-tax gain of $0.3 million. In order to repay the remaining notes, MI exercised its right pursuant to a stock purchase and sale agreement with MII (the "Intercompany Agreement"). Under this agreement, MI had the right to sell to MII and MII had the right to buy from MI, 100,000 units, each of which consisted of one share of MII common stock and one share of MII Series A Participating Preferred Stock. MI held this financial asset since prior to the 1982 reorganization transaction under which MII became the parent of MI. MI received approximately $243 million from the exercise of the Intercompany Agreement. MII funded that payment by (1) receiving dividends of $80 million from JRM and $20 million from one of our captive insurance companies and (2) reducing its short-term investments and cash and cash equivalents. The proceeds paid to MI were subject to U.S. federal, state and other applicable taxes, and we recorded a tax provision totaling approximately $85.4 million at December 31, 2001. Through December 31, 2002, we have made estimated tax payments for the associated tax liability. On February 21, 2000, B&W and certain of its subsidiaries entered into the DIP Credit Facility to satisfy their working capital and letter of credit needs during the pendency of their bankruptcy case. As a condition to borrowing or obtaining letters of credit under the DIP Credit Facility, B&W must comply with certain financial covenants. B&W had no borrowings outstanding under this facility at December 31, 2002 or December 31, 2001. Letters of credit outstanding under the DIP Credit Facility at December 31, 2002 totaled approximately $140.9 million. This facility, which was scheduled to expire on February 22, 2003, has been amended and extended to February 22, 2004, with an additional one-year extension at the option of B&W. The amendment also provides for a reduction of the facility from $300 million to $227.75 million. See Note 20 to our consolidated financial statements for further information on the DIP Credit Facility. At December 31, 2002, MII was a maker or guarantor on $9.4 million of letters of credit issued in connection with B&W's operations prior to B&W's Chapter 11 filing. In addition, MII, MI and BWICO have agreed to indemnify B&W for any customer draw on $51.4 million in letters of credit that have been issued under the DIP Facility to replace or backstop letters of credit on which MII, MI and BWICO were makers or guarantors as of the time of B&W's Chapter 11 filing. We are not aware that B&W has ever had a letter of credit drawn on by a customer. However, MII, MI and BWICO do not currently have sufficient cash or other liquid resources available, either individually or combined, to satisfy their primary, guaranty or indemnity obligations relating to letters of credit issued in connection with B&W's operations should customer draws occur on a significant amount of these letters of credit. In addition, as of December 31, 2002, MII guaranteed surety bonds of approximately $121.0 million, of which $107.7 million related to the business operations of B&W and its subsidiaries. We are not aware that either MII or any of its subsidiaries, including B&W, have ever had a surety bond called. However, MII does not currently have sufficient cash or other liquid resources available if contract defaults require it to fund a significant amount of its surety bond guarantee obligations. As to the guarantee and indemnity obligations involving B&W, the proposed B&W Chapter 11 settlement contemplates indemnification and other protections for MII, MI and BWICO. As a result of its bankruptcy filing, B&W and its filing subsidiaries are precluded from paying dividends to shareholders and making payments on any pre-bankruptcy filing accounts or notes payable that are due and owing to any other entity within the McDermott group of companies (the "Pre-Petition Intercompany Payables") and other creditors during the pendency of the bankruptcy case, without the Bankruptcy Court's approval. As a result of the B&W bankruptcy filing, our access to the cash flows of B&W and its subsidiaries has been restricted. In addition, MI and JRM and their respective subsidiaries are limited, as a result of covenants in debt instruments, in their ability to transfer funds to MII and its other subsidiaries through cash dividends or through unsecured loans or investments. Completion of the EPIC spar projects has and will continue to put a strain on JRM's liquidity. As a result, we have assessed our ability to continue as a viable business and have concluded that we can continue to fund our operating activities and capital requirements. However, our ability to obtain a successful and timely resolution to the B&W Chapter 11 proceedings has impacted our 42 ability to obtain additional financing. Our current credit rating has also impacted our access to, and sources of, capital and has resulted in additional collateral requirements for our debt obligations, as reflected under the New Credit Facility. As discussed in Note 20 to our consolidated financial statements, we are continuing our discussions with the ACC and FCR concerning a potential settlement. As a result of those discussions, we reached an agreement in principle in August 2002 with representatives of the ACC and FCR on several key terms, which served as a basis for continuing negotiations; however, a number of significant issues and numerous details remain to be negotiated and resolved. Should the remaining issues and details not be negotiated and resolved to the mutual satisfaction of the parties, the parties may be unable to resolve the B&W Chapter 11 proceedings through settlement. Additionally, the potential settlement will be subject to various conditions, including the requisite approval of the asbestos claimants, the Bankruptcy Court confirmation of a plan of reorganization reflecting the settlement and the approval by MII's Board of Directors and stockholders. The parties are currently working to address the remaining unresolved issues and details in a joint plan of reorganization and related settlement agreement. On December 19, 2002, B&W and its filing subsidiaries, the ACC, the FCR, and MI filed drafts of a joint plan of reorganization and settlement agreement, together with a draft of a related disclosure statement, which include the following key terms: - MII would effectively assign all its equity in B&W to a trust to be created for the benefit of the asbestos personal injury claimants. - MII and all its subsidiaries would assign, transfer or otherwise make available their rights to all applicable insurance proceeds to the trust. - MII would issue 4.75 million shares of restricted common stock and cause those shares to be transferred to the trust. The resale of the shares would be subject to certain limitations, in order to provide for an orderly means of selling the shares to the public. Certain sales by the trust would also be subject to an MII right of first refusal. If any of the shares issued to the trust are still held by the trust after three years, and to the extent those shares could not have been sold in the market at a price greater than or equal to $19.00 per share (based on quoted market prices), taking into account the restrictions on sale and any waivers of those restrictions that may be granted by MII from time to time, MII would effectively guarantee that those shares would have a value of $19.00 per share on the third anniversary of the date of their issuance. MII would be able to satisfy this guaranty obligation by making a cash payment or through the issuance of additional shares of its common stock. If MII elects to issue shares to satisfy this guaranty obligation, it would not be required to issue more than 12.5 million shares. - MI would issue promissory notes to the trust in an aggregate principal amount of $92 million. The notes would be unsecured obligations and would provide for payments of principal of $8.4 million per year to be payable over 11 years, with interest payable on the outstanding balance at the rate of 7.5% per year. The payment obligations under those notes would be guaranteed by MII. - MII and all its past and present directors, officers and affiliates, including its captive insurers, would receive the full benefit of Section 524(g) of the Bankruptcy Code with respect to personal injury claims attributable to B&W's use of asbestos and would be released and protected from all pending and future asbestos-related claims stemming from B&W's operations, as well as other claims (whether contract claims, tort claims or other claims) of any kind relating to B&W, including but not limited to claims relating to the 1998 corporate reorganization that has been the subject of litigation in the Chapter 11 proceedings. - The settlement would be conditioned on the approval by MII's Board of Directors and stockholders of the terms of the settlement outlined above. As the settlement discussions proceed, we expect that some of the court proceedings in or relating to the B&W Chapter 11 case will continue and that the parties will continue to maintain their previously asserted positions. The Bankruptcy Court has directed the 43 parties to file an amended disclosure statement by March 28, 2003 that, among other things, updates the status of the negotiations, and has set a disclosure statement hearing for April 9, 2003. Following that filing and hearing, the Bankruptcy Court will schedule further proceedings concerning this matter. The process of finalizing and implementing the settlement could take up to a year, depending on, among other things, the nature and extent of any objections or appeals in the bankruptcy case. Based on recent developments in the settlement negotiations, we determined that a liability related to the proposed settlement is probable and that the value is reasonably estimable. Accordingly, at December 31, 2002, we established an estimate for the cost of the settlement of the B&W bankruptcy proceedings of $110.0 million, including tax expense of $23.6 million. This charge is in addition to the $220.9 million after-tax charge we recorded in the quarter ended June 30, 2002 to write off our investment in B&W and other related assets. For details regarding this estimate, see Note 20 to our consolidated financial statements. Despite our recent progress in our settlement discussions, there are continuing risks and uncertainties that will remain with us until the requisite approvals are obtained and the final settlement is reflected in a plan of reorganization that is confirmed by the Bankruptcy Court pursuant to a final, nonappealable order of confirmation. One of the remaining issues to be resolved as negotiations relating to the B&W Chapter 11 proceedings continue relates to the proposed spin-off of the MI/B&W pension plan. In our judgment, it has become probable that we will spin off the portion of MI's qualified pension plan related to the active and retired employees of B&W as part of a final settlement. If we effect such a spin-off, we will be required to recognize any curtailment and settlement gains or losses associated with the spin-off at the time we effect the spin-off. Curtailment and settlement gains or losses are determined based on actuarial calculations as of the date of the spin-off. Based on data provided by our actuary, if this anticipated spin-off had occurred on December 31, 2002, we would have recorded curtailment and settlement losses totaling $117 million, with no associated tax benefits. In addition, based on data provided by our actuary at December 31, 2002, we would have also recorded a reduction in our charge to Other Comprehensive Income for recognition of our minimum pension liability totaling approximately $226 million. If we had recorded these items at December 31, 2002, our Stockholders' Equity (Deficit) would have improved by approximately $109 million. However, under generally accepted accounting principles, we cannot record the effect of the spin-off until the event actually occurs. We anticipate that the spin-off will occur in 2003. We will record the effect of the spin-off based on actuarial calculations as of the date of the spin-off, which could be materially different from the effect that would have been recorded if the spin-off had been completed as of December 31, 2002. NEW ACCOUNTING STANDARDS Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that we no longer amortize goodwill, but instead perform periodic testing for impairment. We completed our transitional goodwill impairment test and did not incur an impairment charge as of January 1, 2002. However, due to the deterioration in JRM's financial performance during the three months ended September 30, 2002 and our revised expectations concerning JRM's future earnings and cash flow, we tested the goodwill of the Marine Construction Services segment for impairment and determined that an impairment charge was warranted. See Note 1 to our consolidated financial statements for disclosure concerning the goodwill impairment charge and our reconciliation of reported net income to adjusted net income, which excludes goodwill amortization expense for all periods presented. Effective January 1, 2002, we also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Pronouncements Bulletin No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. See Note 2 to our consolidated financial statements for information on our discontinued operations. 44 In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss. We must adopt SFAS No. 143 effective January 1, 2003 and expect to record as the cumulative effect of an accounting change income of approximately $3.0 million upon adoption. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." It also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers" and amends SFAS No. 13, "Accounting for Leases." In addition, it amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. We must adopt the provisions of SFAS No. 145 related to the rescission of SFAS No. 4 as of January 1, 2003, and we expect to reclassify the extraordinary gain on extinguishment of debt we recorded in 2001 and 2002, because (as a result of the change in accounting principles) it will no longer meet the criteria for classification as an extraordinary item. In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses significant issues regarding the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities. It is effective for exit or disposal activities that are initiated after December 31, 2002. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. We do not expect the adoption of the recognition and measurement provisions of this Interpretation to have a material effect on our consolidated financial position or results of operations. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Therefore, our financial statements for the year ended December 31, 2002 contain the disclosures required by Interpretation No. 45. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure," which amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for financial statements for fiscal years ending after December 15, 2002 and for interim periods beginning after December 15, 2002. Our financial statements for the year ended December 31, 2002 contain the disclosures required by SFAS No. 148. 45 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk from changes in interest rates relates primarily to our investment portfolio, which is primarily comprised of investments in U.S. Government obligations and other highly liquid debt securities denominated in U.S. dollars. We are averse to principal loss and ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. All our investments in debt securities are classified as available-for-sale. We have no material future earnings or cash flow exposures from changes in interest rates on our long-term debt obligations, as substantially all of these obligations have fixed interest rates. We have exposure to changes in interest rates on our short-term uncommitted lines of credit and the New Credit Facility (see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources). At December 31, 2002 we had $45.6 million of outstanding borrowings under our credit facilities. At December 31, 2001, we had no outstanding borrowings under our credit facilities. We have operations in many foreign locations, and, as a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in those foreign markets. In order to manage the risks associated with foreign currency exchange fluctuations, we regularly hedge those risks with foreign currency forward contracts. We do not enter into speculative forward contracts. Interest Rate Sensitivity The following tables provide information about our financial instruments that are sensitive to changes in interest rates. The tables present principal cash flows and related weighted-average interest rates by expected maturity dates. Principal Amount by Expected Maturity (In thousands) At December 31, 2002:
Fair Value at Years Ending December 31, December 31, 2003 2004 2005 2006 2007 Thereafter Total 2002 Investments(1) $ 143,857 $ 27,830 $ - $ - $ - $ - $ 171,687 $ 173,227 Average Interest Rate 0.54% 3.16% - - - - Long-term Debt- Fixed Rate $ 9,500 $ - $ 11,500 $ 5,484 $ 4,250 $ 61,225 $ 91,959 $ 56,596 Average Interest Rate 9.00% - 7.81% 7.38% 6.80% 8.44% At December 31, 2001:
Fair Value at Years Ending December 31, December 31, 2002 2003 2004 2005 2006 Thereafter Total 2001 Investments $ 81,411 $ 227,270 $ 2,700 $ - $ - $ - $ 311,381 $ 331,003 Average Interest Rate 4.54% 3.20% 5.25% Long-term Debt- Fixed Rate $ 209,018 $ 11,501 $ 209 $11,715 $ 5,706 $ 67,239 $ 305,388 $ 292,849 Average Interest Rate 9.37% 8.14% 5.79% 7.77% 7.32% 8.27%
(1)In February 2003, we liquidated approximately $108 million of our investment portfolio for working capital and general corporate purposes. Exchange Rate Sensitivity The following tables provide information about our foreign currency forward contracts and present such information in U.S. dollar equivalents. The tables present notional amounts and related weighted-average exchange rates by expected (contractual) maturity dates and constitute a forward-looking statement. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract. 46 At December 31, 2002 (all forward contracts are expected to mature in 2003):
Year Ending Fair Value Average Contractual Foreign Currency December 31, 2003 at December 31, 2002 Exchange Rate Forward Contracts to Purchase Foreign Currencies for U.S. Dollars: Indonesian Rupiah $ 3,679 $ 157 9703.900 Euro $ 11,260 $ 245 1.025 Pound Sterling $ 525 $ 3 1.596 Forward Contracts to Sell Foreign Currencies for U.S. Dollars: Swedish Krona $ 675 $ (18) 10.668 Pound Sterling $ 263 $ (1) 1.598
At December 31, 2001 (all forward contracts matured in 2002):
Year Ending Fair Value Average Contractual Foreign Currency December 31, 2002 at December 31, 2001 Exchange Rate Forward Contracts to Purchase Foreign Currencies for U.S. Dollars: Indonesian Rupiah $ 14,249 $ (722) 10667.600 Australian Dollar $ 11,161 $ (844) 0.549 Euro $ 10,017 $ (250) 0.912 Singapore Dollar $ 7,390 $ (127) 1.810 Forward Contracts to Sell Foreign Currencies for U.S. Dollars: Euro $ 385 $ (1) 0.900 Pound Sterling $ 340 $ (11) 1.460
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 47 R E P O R T O F I N D E P E N D E N T A C C O U N T A N T S To the Board of Directors and Stockholders of McDermott International, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of loss, comprehensive loss, stockholders' equity (deficit), and cash flows present fairly, in all material respects, the financial position of McDermott International, Inc. and subsidiaries (the "Company") at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets and the accounting for the impairment or disposal of long lived assets on January 1, 2002. As discussed in Notes 1, 12, 20 and 21 to the consolidated financial statements, on February 22, 2000, The Babcock & Wilcox Company ("B&W"), a wholly owned subsidiary of the Company, filed a voluntary petition with the U.S. Bankruptcy Court to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Subsequent to this Filing, certain parties asserted that assets transferred by B&W to its parent as part of a corporate reorganization during fiscal year 1999 should be returned to B&W. On February 8, 2002, a ruling in favor of the Company was issued by the U.S. Bankruptcy Court on the assets transferred by B&W. This ruling is currently under appeal. The Company has recently entered into a preliminary settlement agreement with certain claimants to resolve the Chapter 11 filing and the transferred asset claims, as well as other matters, and has filed a proposed consensual plan of reorganization with the U.S. Bankruptcy Court. The final resolution and timing of these matters remain uncertain. In addition, during 2002, the Company's wholly owned subsidiary, J. Ray McDermott, S.A., recorded significant losses on certain construction projects. These matters, among others, have negatively impacted the Company's results of operations for the year ended December 31, 2002 and its liquidity. PricewaterhouseCoopers LLP New Orleans, Louisiana March 24, 2003 48 McDERMOTT INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS ASSETS
December 31, 2002 2001 ---- ---- (In thousands) Current Assets: Cash and cash equivalents $ 175,177 $ 196,912 Investments 108,269 158,000 Accounts receivable - trade, net 194,603 139,598 Accounts receivable from The Babcock & Wilcox Company 12,273 3,681 Accounts and notes receivable - unconsolidated affiliates 17,695 69,368 Accounts receivable - other 64,718 34,833 Contracts in progress 149,162 97,326 Inventories 686 1,825 Deferred income taxes 3,350 59,370 Other current assets 36,972 52,490 - ------------------------------------------------------------------------------------------------------ Total Current Assets 762,905 813,403 - ------------------------------------------------------------------------------------------------------ \ Property, Plant and Equipment: Land 12,520 19,897 Buildings 132,538 138,443 Machinery and equipment 1,032,244 1,022,932 Property under construction 62,625 37,378 - ------------------------------------------------------------------------------------------------------ 1,239,927 1,218,650 Less accumulated depreciation 885,827 864,751 - ------------------------------------------------------------------------------------------------------ Net Property, Plant and Equipment 354,100 353,899 - ------------------------------------------------------------------------------------------------------ Investments: Government obligations 48,681 171,702 Other investments 16,277 1,301 - ------------------------------------------------------------------------------------------------------ Total Investments 64,958 173,003 - ------------------------------------------------------------------------------------------------------ Investment in The Babcock & Wilcox Company - 186,966 - ------------------------------------------------------------------------------------------------------ Accounts Receivable from The Babcock & Wilcox Company - 17,489 - ------------------------------------------------------------------------------------------------------ Goodwill 12,926 330,705 - ------------------------------------------------------------------------------------------------------ Prepaid Pension Costs 19,311 152,510 - ------------------------------------------------------------------------------------------------------ Other Assets 63,971 75,865 - ------------------------------------------------------------------------------------------------------ TOTAL $ 1,278,171 $ 2,103,840 ======================================================================================================
See accompanying notes to consolidated financial statements. 49 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 2002 2001 ---- ---- (In thousands) Current Liabilities: Notes payable and current maturities of long-term debt $ 55,577 $ 209,506 Accounts payable 166,251 118,811 Accounts payable to The Babcock & Wilcox Company 32,379 34,098 Accrued employee benefits 62,109 91,596 Accrued liabilities - other 185,320 203,695 Accrued contract cost 53,335 26,367 Advance billings on contracts 329,557 170,329 U.S. and foreign income taxes payable 32,521 123,985 - ----------------------------------------------------------------------------------------------------------------- Total Current Liabilities 917,049 978,387 - ----------------------------------------------------------------------------------------------------------------- Long-Term Debt 86,104 100,393 - ----------------------------------------------------------------------------------------------------------------- Accumulated Postretirement Benefit Obligation 26,898 23,536 - ----------------------------------------------------------------------------------------------------------------- Environmental and Products Liabilities 12,258 15,083 - ----------------------------------------------------------------------------------------------------------------- Self-Insurance 71,918 67,878 - ----------------------------------------------------------------------------------------------------------------- Pension Liability 392,072 42,063 - ----------------------------------------------------------------------------------------------------------------- Accrued Cost of The Babcock & Wilcox Company Bankruptcy Settlement 86,377 - - ----------------------------------------------------------------------------------------------------------------- Other Liabilities 102,252 106,390 - ----------------------------------------------------------------------------------------------------------------- Commitments and Contingencies. (Note 10) - ----------------------------------------------------------------------------------------------------------------- Stockholders' Equity (Deficit): Common stock, par value $1.00 per share, authorized 150,000,000 shares; issued 66,351,478 and 63,733,257 shares at December 31, 2002 and 2001, respectively 66,351 63,733 Capital in excess of par value 1,093,428 1,077,148 Accumulated deficit (1,027,318) (250,924) Treasury stock at cost, 2,061,407 and 2,005,792 shares at December 31, 2002 and 2001, respectively (62,792) (62,736) Accumulated other comprehensive loss (486,426) (57,111) - ----------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity (Deficit) (416,757) 770,110 - ----------------------------------------------------------------------------------------------------------------- TOTAL $ 1,278,171 $ 2,103,840 =================================================================================================================
50 McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF LOSS
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands, except per share amounts) Revenues $ 1,748,681 $1,896,948 $ 1,813,670 - ------------------------------------------------------------------------------------------------------ Costs and Expenses: Cost of operations 1,744,138 1,657,889 1,613,742 Loss on write-off of investment in The Babcock & Wilcox Company 224,664 - - Impairment of J. Ray McDermott, S.A. goodwill 313,008 - - Losses (gains) on asset disposals and impairments - net 7,849 3,739 2,803 Selling, general and administrative expenses 160,474 194,041 182,457 - ------------------------------------------------------------------------------------------------------ 2,450,133 1,855,669 1,799,002 - ------------------------------------------------------------------------------------------------------ Equity in Income (Loss) from Investees 27,692 34,093 (9,795) - ------------------------------------------------------------------------------------------------------ Operating Income (Loss) (673,760) 75,372 4,873 - ------------------------------------------------------------------------------------------------------ Other Income (Expense): Interest income 8,560 19,561 27,108 Interest expense (15,124) (39,663) (43,605) Estimated loss on The Babcock & Wilcox Company bankruptcy settlement (86,377) - - Gain on sale of McDermott Engineers & Constructors (Canada) Ltd. - 27,996 - Curtailments and settlements of employee benefit plans - (4,000) (5,297) Other-net (4,440) 6,641 2,692 - ------------------------------------------------------------------------------------------------------ (97,381) 10,535 (19,102) - ------------------------------------------------------------------------------------------------------ Income (Loss) from Continuing Operations before Provision for Income Taxes and Extraordinary Item (771,141) 85,907 (14,229) Provision for Income Taxes 15,063 110,329 10,635 - ------------------------------------------------------------------------------------------------------ Loss from Continuing Operations before Extraordinary Item (786,204) (24,422) (24,864) Income from Discontinued Operations 9,469 3,565 2,782 - ------------------------------------------------------------------------------------------------------ Loss before Extraordinary Item (776,735) (20,857) (22,082) Extraordinary Gain on Debt Extinguishment 341 835 - - ------------------------------------------------------------------------------------------------------ Net Loss $ (776,394) $ (20,022) $ (22,082) ====================================================================================================== Loss per Common Share: Basic: Loss from Continuing Operations before Extraordinary Item $ (12.71) $ (0.40) $ (0.42) Net Loss $ (12.55) $ (0.33) $ (0.37) Diluted: Loss from Continuing Operations before Extraordinary Item $ (12.71) $ (0.40) $ (0.42) Net Loss $ (12.55) $ (0.33) $ (0.37) =================================================================================================== Cash Dividends: Per Common Share $ - $ - $ 0.10 ===================================================================================================
See accompanying notes to consolidated financial statements. 51 McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) Net Loss $ (776,394) $ (20,022) $ (22,082) - --------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss): Currency translation adjustments: Foreign currency translation adjustments 267 (4,826) (11,615) Reclassification adjustment for impairments of investments 18,435 - - Sales of investments in foreign entities 1,041 1,513 (6,077) Unrealized gains (losses) on derivative financial instruments: Unrealized gains (losses) on derivative financial instruments 3,858 (2,506) - Reclassification adjustment for (gains) losses included in net income (534) 266 - Minimum pension liability adjustment: Net of tax benefits of $0, $1,554,000 and $1,250,000 in the years ended December 31, 2002, 2001 and 2000, respectively (451,756) (2,849) 2,372 Deconsolidation of The Babcock & Wilcox Company - - 2,562 Unrealized gains on investments: Unrealized gains arising during the period, net of taxes of $0, $30,000 and $210,000 in the years ended December 31, 2002, 2001 and 2000, respectively 371 9,286 4,887 Reclassification adjustment for net gains included in net loss, net of tax benefits of $0 and $162,000 in the years ended December 31, 2002 and 2001, respectively (997) (3,143) - - --------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Loss (429,315) (2,259) (7,871) - --------------------------------------------------------------------------------------------------------------------------- Comprehensive Loss $(1,205,709) $ (22,281) $ (29,953) ===========================================================================================================================
See accompanying notes to consolidated financial statements. 52 McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated Total Common Stock Capital Other Stockholders' ------------ in Excess Accumulated Comprehensive Treasury Equity Shares Par Value of Par Value Deficit Loss Stock (Deficit) ------ --------- ------------ ------- ---- ----- -------- (In thousands, except for share amounts) Balance December 31, 1999 61,625,434 61,625 1,048,848 (208,904) (46,980) (62,731) 791,858 - ------------------------------------------------------------------------------------------------------------------------------------ Net Loss - - - (22,082) - - (22,082) Minimum pension liability - - - - 4,933 - 4,933 Unrealized gain on investments - - - - 4,887 - 4,887 Translation adjustments - - - - (11,615) - (11,615) Common stock dividends - - - (5,993) - - (5,993) Exercise of stock options 3,851 4 14 - - - 18 Vesting of deferred stock units 947 1 - - - - 1 Restricted stock purchases - net 40,000 40 (42) - - - (2) Directors stock plan 1,863 2 - - - - 2 Contributions to thrift plan 910,287 910 7,602 - - - 8,512 Sale of investments in foreign entities - - - 6,077 (6,077) - - Purchase of treasury shares - - - - - (5) (5) Stock based compensation charges - - 6,089 - - - 6,089 - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 2000 62,582,382 62,582 1,062,511 (230,902) (54,852) (62,736) 776,603 Net loss - - - (20,022) - - (20,022) Minimum pension liability - - - - (2,849) - (2,849) Unrealized gain on investments - - - - 6,143 - 6,143 Translation adjustments - - - - (3,313) - (3,313) Unrealized loss on derivatives - - - - (2,240) - (2,240) Exercise of stock options 11,674 12 98 - - - 110 Vesting of deferred stock units 100,701 101 (101) - - - - Restricted stock purchases - net 324,007 324 (347) - - - (23) Directors stock plan 2,550 2 - - - - 2 Contributions to thrift plan 711,943 712 7,272 - - - 7,984 Stock based compensation charges - - 7,715 - - - 7,715 - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 2001 63,733,257 $ 63,733 $ 1,077,148 $ (250,924) $ (57,111) $(62,736) $ 770,110 Net loss - - - (776,394) - - (776,394) Minimum pension liability - - - - (451,756) - (451,756) Unrealized loss on investments - - - - (626) - (626) Translation adjustments - - - - 19,743 - 19,743 Unrealized gain on derivatives - - - - 3,324 - 3,324 Exercise of stock options 113,800 113 1,281 - - - 1,394 Vesting of deferred stock units 6,123 6 (6) - - - - Restricted stock issuances - net 403,700 404 (816) - - (56) (468) Performance based stock issuances 699,711 700 4,238 - - - 4,938 Contributions to thrift plan 1,394,887 1,395 8,481 - - - 9,876 Stock based compensation charges - - 3,102 - - - 3,102 - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 2002 66,351,478 $ 66,351 $ 1,093,428 $(1,027,318) $(486,426) $(62,792) $(416,757) ====================================================================================================================================
See accompanying notes to consolidated financial statements. 53 McDERMOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (776,394) $ (20,022) $ (22,082) Depreciation and amortization 40,811 62,371 63,890 Income or loss of investees, less dividends 7,156 2,616 23,850 Loss on asset disposals and impairments - net 7,850 3,733 2,800 Provision for (benefit from) deferred taxes (33,678) 9,269 20,918 Gain on sale of businesses (15,044) (27,996) - Impairment of J. Ray McDermott, S.A. goodwill 313,008 - - Loss on write-off of investment in The Babcock & Wilcox Company 224,664 - - Extraordinary gain on debt extinguishment (341) (835) - Estimated loss on The Babcock & Wilcox bankruptcy settlement 86,377 - - Deconsolidation of The Babcock & Wilcox Company - - (19,424) Other 12,093 1,112 12,880 Changes in assets and liabilities, net of effects from acquisitions and divestitures: Accounts receivable (51,733) (31,066) 29,554 Accounts payable 53,332 28,337 12,148 Inventories 176 4,293 (4,134) Net contracts in progress and advance billings 105,498 82,088 (18,231) Income taxes (18,635) 95,113 (15,845) Accrued liabilities 16,844 (32,107) (40,680) Products and environmental liabilities 3,091 3,085 (10,332) Other, net 15,852 (4,176) (87,023) Proceeds from insurance for products liability claims - - 26,427 Payments of products liability claims - - (23,782) - ------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (9,073) 175,815 (49,066) - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions - (644) (2,707) Purchases of property, plant and equipment (64,852) (45,008) (49,300) Purchases of available-for-sale securities (1,361,752) (1,352,266) (114,449) Maturities of available-for-sale securities 744,538 161,901 108,437 Sales of available-for-sale securities 775,441 1,226,107 26,382 Proceeds from asset disposals 41,095 53,056 4,778 Investments in equity investees - (800) (1,132) Other 49 (162) - - ------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 134,519 42,184 (27,991) - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payment of long-term debt (208,416) (15,110) (2) Increase (decrease) in short-term borrowing 60,056 (96,062) 9,676 Issuance of common stock 1,394 1,000 47 Dividends paid - - (8,972) Purchase of McDermott International, Inc. stock - - (5) Other (334) 4,500 (999) - ------------------------------------------------------------------------------------------------------------ NET CASH USED IN FINANCING ACTIVITIES (147,300) (105,672) (255) - ------------------------------------------------------------------------------------------------------------ EFFECTS OF EXCHANGE RATE CHANGES ON CASH 119 (35) (802) - ------------------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (21,735) 112,292 (78,114) - ------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 196,912 84,620 162,734 - ------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 175,177 $ 196,912 $ 84,620 ============================================================================================================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 20,792 $ 38,166 $ 44,872 Income taxes (net of refunds) $ 119,962 $ (2,057) $ 12,402 ============================================================================================================
See accompanying notes to consolidated financial statements. 54 McDERMOTT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation We have presented our consolidated financial statements in U.S. Dollars in accordance with accounting principles generally accepted in the United States ("GAAP"). These consolidated financial statements include the accounts of McDermott International, Inc. and its subsidiaries and controlled joint ventures. We use the equity method to account for investments in joint ventures and other entities we do not control, but over which we have significant influence. We have eliminated all significant intercompany transactions and accounts. We have reclassified certain amounts previously reported to conform with the presentation at December 31, 2002. We present the notes to our consolidated financial statements on the basis of continuing operations, unless otherwise stated. McDermott International, Inc., a Panamanian corporation ("MII"), is the parent company of the McDermott group of companies, which includes: - J. Ray McDermott, S.A., a Panamanian subsidiary of MII ("JRM"), and its consolidated subsidiaries; - McDermott Incorporated, a Delaware subsidiary of MII ("MI"), and its consolidated subsidiaries; - Babcock & Wilcox Investment Company, a Delaware subsidiary of MI ("BWICO"); - BWX Technologies, Inc., a Delaware subsidiary of BWICO ("BWXT"), and its consolidated subsidiaries; and - The Babcock & Wilcox Company, an unconsolidated Delaware subsidiary of BWICO ("B&W"). On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S. Bankruptcy Code. B&W and these subsidiaries took this action as a means to determine and comprehensively resolve their asbestos liability. As of February 22, 2000, B&W's operations are subject to the jurisdiction of the Bankruptcy Court and, as a result, our access to cash flows of B&W and its subsidiaries is restricted. Due to the bankruptcy filing, beginning on February 22, 2000, we stopped consolidating the results of operations of B&W and its subsidiaries in our consolidated financial statements, and we have been presenting our investment in B&W on the cost method. The Chapter 11 filing, along with subsequent filings and negotiations, led to increased uncertainty with respect to the amounts, means and timing of the ultimate settlement of asbestos claims and the recovery of our investment in B&W. Due to this increased uncertainty, we wrote off our net investment in B&W in the quarter ended June 30, 2002. The total impairment charge of $224.7 million included our investment in B&W of $187.0 million and other related assets totaling $37.7 million, primarily consisting of accounts receivable from B&W, for which we provided an allowance of $18.2 million. On December 19, 2002, drafts of a joint plan of reorganization and settlement agreement, together with a draft of a related disclosure statement, were filed in the Chapter 11 proceedings, and we determined that a liability related to the proposed settlement is probable and that the value is reasonably estimable. Accordingly, as of December 31, 2002, we established an estimate for the cost of the settlement of the B&W bankruptcy proceedings of $110.0 million, including tax expense of $23.6 million. See Note 20 for details regarding this estimate and for further information regarding developments in negotiations relating to the B&W Chapter 11 proceedings. Use of Estimates We use estimates and assumptions to prepare our financial statements in conformity with GAAP. These estimates and assumptions affect the amounts we report in our financial statements and accompanying notes. Our actual results could differ from those estimates. Variances could result in a material effect on our results of operations and financial position in future periods. 55 Earnings Per Share We have computed earnings per common share on the basis of the weighted average number of common shares, and, where dilutive, common share equivalents, outstanding during the indicated periods. Investments Our investments, primarily government obligations and other highly liquid debt securities, are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss. We classify investments available for current operations in the balance sheet as current assets, while we classify investments held for long-term purposes as noncurrent assets. We adjust the amortized cost of debt securities for amortization of premiums and accretion of discounts to maturity. That amortization is included in interest income. We include realized gains and losses on our investments in other income (expense). The cost of securities sold is based on the specific identification method. We include interest on securities in interest income. Foreign Currency Translation We translate assets and liabilities of our foreign operations, other than operations in highly inflationary economies, into U.S. Dollars at current exchange rates, and we translate income statement items at average exchange rates for the periods presented. We record adjustments resulting from the translation of foreign currency financial statements as a component of accumulated other comprehensive loss. We report foreign currency transaction gains and losses in income. We have included in other income (expense) transaction gains (losses) of ($2.8) million, ($1.7) million and $3.5 million for the years ended December 31, 2002, 2001 and 2000, respectively. Contracts and Revenue Recognition We generally recognize contract revenues and related costs on a percentage-of-completion method for individual contracts or combinations of contracts based on work performed, man hours, or a cost-to-cost method, as applicable to the product or activity involved. Certain partnering contracts contain a risk-and-reward element, whereby a portion of total compensation is tied to the overall performance of the alliance partners. We include revenues and related costs so recorded, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts, in contracts in progress. We include in advance billings on contracts billings that exceed accumulated contract costs and revenues and costs recognized under the percentage-of-completion method. Most long-term contracts contain provisions for progress payments. We expect to invoice customers for all unbilled revenues. We review contract price and cost estimates periodically as the work progresses and reflect adjustments proportionate to the percentage-of-completion in income in the period when those estimates are revised. We make provisions for all known or anticipated losses. Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year. We include claims for extra work or changes in scope of work to the extent of costs incurred in contract revenues when we believe collection is probable. At December 31, 2002 and 2001, we have included in accounts receivable approximately $19.5 million relating to commercial contracts claims whose final settlement is subject to future determination through negotiations or other procedures that had not been completed.
December 31, 2002 2001 ---- ---- (In thousands) Included in Contracts in Progress: Costs incurred less costs of revenue recognized $ 46,217 $ 45,032 Revenues recognized less billings to customers 102,945 52,294 - ------------------------------------------------------------------------------------------------- Contracts in Progress $ 149,162 $ 97,326 =================================================================================================
56
December 31, 2002 2001 ---- ---- (In thousands) Included in Advance Billings on Contracts: Billings to customers less revenues recognized $ 477,599 $ 221,209 Costs incurred less costs of revenue recognized (148,042) (50,880) - ------------------------------------------------------------------------------------------------- Advance Billings on Contracts $ 329,557 $ 170,329 =================================================================================================
We have included in accounts receivable - trade the following amounts representing retainages on contracts:
December 31, 2002 2001 ---- ---- (In thousands) Retainages $ 34,137 $ 32,156 ================================================================================================= Retainages expected to be collected after one year $ 14,325 $ 13,082 =================================================================================================
Of the long-term retainages at December 31, 2002, we anticipate collecting $11.9 million in 2004 and $2.4 million in 2005. Inventories We carry our inventories at the lower of cost or market. We determine cost on an average cost basis. Inventories are summarized below:
December 31, 2002 2001 ---- ---- (In thousands) Raw Materials and Supplies $ 393 $ 1,733 Work in Progress 293 92 - ------------------------------------------------------------- Total Inventories $ 686 $ 1,825 =============================================================
Comprehensive Loss The components of accumulated other comprehensive loss included in stockholders' equity (deficit) are as follows:
December 31, 2002 2001 ---- ---- (In thousands) Currency Translation Adjustments $ (30,659) $ (50,402) Net Unrealized Gain on Investments 675 1,301 Net Unrealized Gain (Loss) on Derivative Financial Instruments 1,084 (2,240) Minimum Pension Liability (457,526) (5,770) - ----------------------------------------------------------------------------------------------- Accumulated Other Comprehensive Loss $ (486,426) $ (57,111) ===============================================================================================
Warranty Expense We accrue estimated expense to satisfy contractual warranty requirements, primarily of our Government Operations segment, when we recognize the associated revenue on the related contracts. We include warranty costs associated with our Marine Construction Services segment as a component of our total contract cost estimate to satisfy contractual requirements. In addition, we make specific provisions where we expect the actual costs of a warranty to significantly exceed the accrued estimates. Such provisions could have a material effect on our consolidated financial position, results of operations and cash flows. Environmental Clean-up Costs We accrue for future decommissioning of our nuclear facilities that will permit the release of these facilities to unrestricted use at the end of each facility's life, which is a requirement of our licenses from the Nuclear Regulatory Commission. We reflect the accruals, based on the estimated cost of those activities and net of any cost-sharing arrangements, over the economic useful life of each facility, which we typically estimate at 40 years. The total estimated cost of future decommissioning of our nuclear facilities is estimated to be $30.0 57 million, of which we have recorded $1.5 million in accrued liabilities - other and $9.9 million in other liabilities. We adjust the estimated costs as further information develops or circumstances change. We do not discount costs of future expenditures for environmental cleanup to their present value. An exception to this accounting treatment relates to the work we perform for one facility, for which the U.S. Government is obligated to pay all the decommissioning costs. We recognize recoveries of environmental clean-up costs from other parties as assets when we determine their receipt is probable. Research and Development Research and development activities are related to development and improvement of new and existing products and equipment and conceptual and engineering evaluation for translation into practical applications. We charge to operations the costs of research and development that is not performed on specific contracts as we incur them. These expenses totaled approximately $13.8 million, $11.7 million and $15.4 million in the years ended December 31, 2002, 2001 and 2000, respectively. In addition, our customers paid for expenditures we made on research and development activities of approximately $47.8 million, $46.6 million and $34.8 million in the years ended December 31, 2002, 2001 and 2000, respectively. Property, Plant and Equipment We carry our property, plant and equipment at cost, reduced by provisions to recognize economic impairment when we determine impairment has occurred. Except for major marine vessels, we depreciate our property, plant and equipment using the straight-line method, over estimated economic useful lives of 8 to 40 years for buildings and 2 to 28 years for machinery and equipment. We depreciate major marine vessels using the units-of-production method based on the utilization of each vessel. Our 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. Our depreciation expense was $35.7 million, $38.2 million and $38.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. Effective January 1, 2002, based on a review performed by us and our independent consultants, we changed our estimate of the useful lives of new major marine vessels from 12 years to 25 years to better reflect the service lives of our assets and industry norms. Consistent with this change, we also extended the lives of major upgrades to existing vessels. We continue to depreciate our major marine vessels using the units-of-production method, based on the utilization of each vessel. The change in estimated useful lives reduced our operating loss by approximately $3.2 million for the year ended December 31, 2002. We expense the costs of maintenance, repairs and renewals that do not materially prolong the useful life of an asset as we incur them except for drydocking costs. We accrue estimated drydock costs, including labor, raw materials, equipment and regulatory fees, for our marine fleet over the period of time between drydockings, which is generally 3 to 5 years. We accrue drydock costs in advance of the anticipated future drydocking, commonly known as the "accrue in advance" method. Actual drydock costs are charged against the liability when incurred and any differences between actual costs and accrued costs are recognized over the remaining months of the drydock cycle. Such differences could have a material effect on our consolidated financial position, results of operations and cash flows. Goodwill On January 1, 2002, we adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, we no longer amortize goodwill to earnings, but instead we periodically test for impairment. Due to the deterioration in our Marine Construction Services segment's financial performance during the three months ended September 30, 2002 and our revised expectations concerning this segment's future earnings and cash flow, we tested the goodwill of the Marine 58 Construction Services segment for impairment as of September 30, 2002. With the assistance of an independent consultant, we completed the first step of the goodwill impairment test and determined that the carrying amount including goodwill of the reporting unit, JRM, exceeded its fair value at September 30, 2002. Accordingly, we concluded that it was probable that a goodwill impairment loss had occurred and recorded an estimated impairment charge of $313 million, which was the total amount of JRM's goodwill. The fair value of JRM was estimated using a discounted cash flow approach. We completed the second step of the goodwill impairment test, the measurement of the potential loss, during the quarter ended December 31, 2002 and concluded that no adjustment to the estimated loss was required. Following is our reconciliation of reported net loss to adjusted net loss, which excludes goodwill amortization expense (including related tax effects), for the periods presented:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands, except per share amounts) Loss before extraordinary item $(776,735) $ (20,857) $(22,082) Add back: goodwill amortization - 19,480 20,130 ------------------------------------------- Adjusted loss before extraordinary item $(776,735) $ (1,377) $ (1,952) =========================================== Net loss $(776,394) $ (20,022) $(22,082) Add back: goodwill amortization - 19,480 20,130 ------------------------------------------- Adjusted net loss $(776,394) $ (542) $ (1,952) =========================================== Basic and diluted loss per share before extraordinary item: Loss before extraordinary item $ (12.56) $ (0.34) $ (0.37) Add back: goodwill amortization - 0.32 0.34 ------------------------------------------- Adjusted basic and diluted loss per share before extraordinary item $ (12.56) $ (0.02) $ (0.03) =========================================== Basic and diluted loss per share: Net loss $ (12.55) $ (0.33) $ (0.37) Add back: goodwill amortization - 0.32 0.34 ------------------------------------------- Adjusted basic and diluted loss per share $ (12.55) $ (0.01) $ (0.03) ===========================================
59 Changes in the carrying amount of goodwill by segment are as follows:
Power Power Marine Generation Generation Construction Government Industrial Systems Systems Services Operations Operations - B&W - Other Total (In thousands) Balance as of January 1, 2000 $ 349,023 $ 14,517 $ 1,149 $ 79,531 $ - $ 444,220 Deconsolidation of B&W - - (78,897) - (78,897) Acquisition of various business units of the Ansaldo Volund Group - - - - 5,745 5,745 Amortization expense (18,007) (796) (357) (635) (335) (20,130) Other including currency translation adjustments (1) 1 - 1 - 1 ------------------------------------------------------------------------------- Balance as of December 31, 2000 331,015 13,722 792 - 5,410 350,939 Acquisition of various business units of the Ansaldo Volund Group - - - - (1,109) (1,109) Amortization expense (18,007) (796) (268) - (409) (19,480) Other including currency translation adjustments - - (524) - 879 355 ------------------------------------------------------------------------------- Balance as of December 31, 2001 313,008 12,926 - - 4,771 330,705 Impairment loss (313,008) - - - - (313,008) Sale of Volund - - - - (5,231) (5,231) Other including currency translation adjustments - - - - 460 460 ------------------------------------------------------------------------------- Balance as of December 31, 2002 $ - $ 12,926 $ - $ - $ - $ 12,926 ===============================================================================
Other Intangible Assets Pursuant to our adoption of SFAS No. 142, we evaluated our other intangible assets and determined that all our other intangible assets as of January 1, 2002 have definite useful lives. We continue to amortize these intangible assets. We have included our other intangible assets, consisting primarily of rights to use technology, in other assets, as follows:
December 31, 2002 2001 2000 ---- ---- ---- (In thousands) Gross cost $ 959 $ 9,459 $ 9,477 Accumulated amortization (556) (8,386) (7,826) - ------------------------------------------------------------------------------------- Net $ 403 $ 1,073 $ 1,651 =====================================================================================
The following summarizes the changes in the carrying amount of other intangible assets:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) Balance at beginning of period $ 1,073 $ 1,651 $ 8,083 Additions (reductions) 108 (18) 977 Deconsolidation of B&W - - (4,980) Amortization expense - non-competition agreements - - (267) Amortization expense - technology rights (778) (560) (2,162) - ----------------------------------------------------------------------------------------------- Balance at end of period $ 403 $ 1,073 $ 1,651 ===============================================================================================
During the year ended December 31, 2000, we acquired certain technology rights with a cost of $902,000, an estimated useful life of 5 years and no residual value. Estimated amortization expense for the next five fiscal years is: 2003 - $195,000; 2004 - $195,000; 2005 - $12,000; 2006 - $0; 2007 - $0. 60 Other Non-Current Assets We have included deferred debt issuance costs and investments in oil and gas properties in other assets. We amortize deferred debt issuance cost as interest expense over the life of the related debt. We report depletion expense of investments in oil and gas properties as amortization expense. Following are the changes in the carrying amount of these assets:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) Balance at beginning of period $ 6,878 $ 8,802 $ 6,264 Additions - 1,611 7,467 Deconsolidation of B&W - - (76) Depletion expense - oil and gas investment (691) (797) (543) Interest expense - debt issuance costs (2,580) (2,738) (4,310) - ----------------------------------------------------------------------------------------------- Balance at end of period $ 3,607 $ 6,878 $ 8,802 ===============================================================================================
Capitalization of Interest Cost We capitalize interest in accordance with SFAS No. 34, "Capitalization of Interest Cost." We incurred total interest of $17.9 million, $41.0 million and $46.1 million in the years ended December 31, 2002, 2001 and 2000, respectively, of which we capitalized $2.8 million, $1.4 million and $2.4 million in the years ended December 31, 2002, 2001 and 2000, respectively. Cash Equivalents Our cash equivalents are highly liquid investments, with maturities of three months or less when we purchase them, which we do not hold as part of our investment portfolio. Derivative Financial Instruments Our worldwide operations give rise to exposure to market risks from changes in foreign exchange rates. We use derivative financial instruments, primarily forward contracts, to reduce the impact of changes in foreign exchange rates on our operating results. We use these instruments primarily to hedge our exposure associated with revenues or costs on our long-term contracts that are denominated in currencies other than our operating entities' functional currencies. We record these contracts at fair value on our consolidated balance sheet. Depending on the hedge designation at the inception of the contract, the related gains and losses on these contracts are either deferred in stockholders' equity (as a component of accumulated other comprehensive loss) until the hedged item is recognized in earnings or offset against the change in fair value of the hedged firm commitment through earnings. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. The gain or loss on a derivative financial instrument not designated as a hedging instrument is also immediately recognized in earnings. Gains and losses on forward contracts that require immediate recognition are included as a component of other-net in our consolidated statement of loss. Stock-Based Compensation At December 31, 2002, we have several stock-based employee compensation plans, which are described more fully in Note 9. We account for those plans using the intrinsic value method under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. Under APB 25, if the exercise price of the employee stock option equals or exceeds the fair value of the underlying stock on the measurement date, no compensation expense is recognized. If the measurement date is later than the date of grant, compensation expense is recorded to the measurement date based on the quoted market price of the underlying stock at the end of each reporting period. Stock options granted to employees of B&W during the Chapter 11 filing are accounted for using the fair value method of SFAS No. 123 "Accounting for Stock-Based Compensation," as B&W employees are not considered employees of MII for purposes of APB 25. 61 The following table illustrates the effect on net loss and loss per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands, except per share data) Net loss, as reported $ (776,394) $ (20,022) $ (22,082) Add back: stock-based compensation cost included in net loss, net of related tax effects 5,161 3,651 5,920 Deduct: total stock-based compensation cost determined under fair-value- based method, net of related tax effects (11,720) (6,968) (8,595) ---------------------------------------------- Pro forma net loss $ (782,953) $ (23,339) $ (24,757) ============================================== Loss per share: Basic and diluted, as reported $ (12.55) $ (0.33) $ (0.37) Basic and diluted, pro forma $ (12.66) $ (0.38) $ (0.41)
For the years ended December 31, 2002, 2001 and 2000, charges to income include amounts related to approximately 1,053,000 stock options that require variable accounting as a consequence of the DSU program described in Note 9. New Accounting Standards Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that we no longer amortize goodwill, but instead perform periodic testing for impairment. We have completed our transitional goodwill impairment test and did not incur an impairment charge as of January 1, 2002. However, due to the deterioration in JRM's financial performance during the three months ended September 30, 2002 and our revised expectations concerning JRM's future earnings and cash flow, we tested the goodwill of the Marine Construction Services segment for impairment. See the Goodwill section of this note for disclosure concerning the goodwill impairment charge and our reconciliation of reported net income to adjusted net income, which excludes goodwill amortization expense for all periods presented. Effective January 1, 2002, we also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Pronouncements Bulletin No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. See Note 2 for information on our discontinued operations. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss. We must adopt SFAS No. 143 effective January 1, 2003 and expect to record as the cumulative effect of an accounting change income of approximately $3.0 million upon adoption. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." It also rescinds SFAS No. 44, "Accounting for Intangible 62 Assets of Motor Carriers" and amends SFAS No. 13, "Accounting for Leases." In addition, it amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. We must adopt the provisions of SFAS No. 145 related to the rescission of SFAS No. 4 as of January 1, 2003, and we expect to reclassify the extraordinary gain on extinguishment of debt we recorded in 2001 and 2002, because (as a result of the change in accounting principles) it will no longer meet the criteria for classification as an extraordinary item. In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses significant issues regarding the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities. It is effective for exit or disposal activities that are initiated after December 31, 2002. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. We do not expect the adoption of the recognition and measurement provisions of this Interpretation to have a material effect on our consolidated financial position or results of operations. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Therefore, our financial statements for the year ended December 31, 2002 contain the disclosures required by Interpretation No. 45. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure," which amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for financial statements for fiscal years ending after December 15, 2002 and for interim periods beginning after December 15, 2002. Our financial statements for the year ended December 31, 2002 contain the disclosures required by SFAS No. 148. NOTE 2 - ACQUISITIONS, DISPOSITIONS AND DISCONTINUED OPERATIONS Acquisitions In June 2000, we acquired, through our Babcock & Wilcox Volund ApS ("Volund") subsidiary, various business units of the Ansaldo Volund Group, a group of companies owned by Finmeccanica S.p.A. of Italy. We acquired waste-to-energy, biomass, gasification and stoker-fired boiler businesses and projects, as well as an engineering and manufacturing facility in Esbjerg, Denmark from the Ansaldo Volund Group. We used the purchase method of accounting for this acquisition. The acquisition cost was $2.7 million plus assumed liabilities, which resulted in goodwill of $5.7 million. We reduced goodwill by $1.1 million in 2001 due to the adjustment of certain assumed liabilities. Volund acquired the BS Incineration business from FLS Miljo A/S, in October 2001. This acquisition was a natural complement to Volund's service business. The cost of the acquisition was $1.3 million. Volund paid cash of $0.6 million in October 2001 and paid the remaining acquisition cost in June 2002. Volund recorded goodwill of $1.1 million on this acquisition. This acquisition is not considered significant. 63 Dispositions On October 11, 2002, we sold Volund to B&W. The consideration received by MII from B&W included a $3 million note and funding for the repayment of approximately $14.5 million of principal and interest on a loan owed by Volund to MII. The purchase price is subject to a possible downward adjustment, depending on the final resolution of the customer claims relating to the construction of a biomass facility in Denmark and Volund's related claims against Austrian Energy. See Note 10 for a discussion of those claims. Terms of the sale also included replacement by the debtor-in-possession revolving credit and letter of credit facility of approximately $11.0 million of letters of credit previously issued under MII's credit facility. We have deferred recognition of a gain on the sale of Volund until final resolution of the B&W bankruptcy proceedings. In October 2001, we sold McDermott Engineers & Constructors (Canada) Ltd. ("MECL") to Jacobs Canada Inc. ("Jacobs"), a wholly owned Canadian subsidiary of Jacobs Engineering Group, Inc. Under the terms of the sale, we received cash of $47.5 million and retained certain liabilities, including environmental liabilities, executive termination and pension liabilities and professional fees, of MECL and its subsidiaries. The retained liabilities relate to prior operations of MECL and certain of its subsidiaries and are not debt obligations. We do not consider these liabilities significant. We sold our stock in MECL with a net book value of $11.9 million, including goodwill of $0.5 million. The estimated costs of the sale were $7.6 million. The sale resulted in a gain of $28.0 million and tax expense of $2.4 million. Our consolidated income statement includes the following for MECL up to the date of sale:
Year Ended December 31, 2001 2000 ---- ---- (In thousands) Revenues $ 507,223 $ 425,974 Operating income $ 9,984 $ 9,185 Net income $ 6,639 $ 8,059
Discontinued Operations On July 10, 2002, we completed the sale of one of our subsidiaries, Hudson Products Corporation ("HPC"), formerly a component of our Industrial Operations segment. The sale price of $39.5 million consisted of $37.5 million in cash and a $2 million subordinated promissory note. In the year ended December 31, 2002, we recorded a gain on the sale of HPC of $9.4 million, net of a provision for income taxes of $5.7 million. We have reported the gain on sale and results of operations for HPC in discontinued operations, and HPC is classified at December 31, 2001 as an asset held for sale in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which we adopted on January 1, 2002. We have reclassified our consolidated statements of loss for the years ended December 31, 2001 and 2000 for consistency to reflect the current year treatment of HPC as a discontinued operation. At December 31, 2001, we have reported HPC's assets totaling $31.4 million in other current assets and HPC's liabilities totaling $8.9 million in other current liabilities in our consolidated balance sheet. Condensed financial information for our operations reported in discontinued operations follows:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) Revenues $ 31,534 $ 72,858 $ 64,083 Income before provision for income taxes $ 164 $ 5,371 $ 4,252
64 NOTE 3 - EQUITY METHOD INVESTMENTS We have included in other assets investments in our worldwide joint ventures and other entities that we account for using the equity method of $11.5 million and $21.0 million at December 31, 2002 and 2001, respectively. The undistributed earnings of our equity method investees were $2.6 million and $11.1 million at December 31, 2002 and 2001, respectively. Summarized below is combined balance sheet and income statement information, based on the most recent financial information, for investments in entities we accounted for using the equity method (unaudited):
December 31, 2002 2001 ---- ---- (In thousands) Current Assets $ 64,607 $ 403,148 Noncurrent Assets 11,734 54,032 - ------------------------------------------------------------------------------------ Total Assets (1) $ 76,341 $ 457,180 ==================================================================================== Current Liabilities $ 23,069 $ 305,249 Noncurrent Liabilities 1,231 40,124 Owners' Equity 52,041 111,807 - ------------------------------------------------------------------------------------ Total Liabilities and Owners' Equity (1) $ 76,341 $ 457,180 ====================================================================================
(1) The reduction in 2002 is attributable to our joint ventures in Mexico and Beijing being placed on the cost method of accounting.
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) Revenues $ 1,800,727 $ 2,376,931 $ 1,424,127 Gross Profit $ 78,272 $ 139,300 $ 83,198 Income before Provision for Income Taxes $ 73,618 $ 89,530 $ 47,725 Provision for Income Taxes 5,789 14,783 1,449 - --------------------------------------------------------------------------------------------------- Net Income $ 67,829 $ 74,747 $ 46,276 ===================================================================================================
Revenues of equity method investees include $1,653.8 million, $1,614.1 million and $766.4 million of reimbursable costs recorded by limited liability companies in our Government Operations segment at December 31, 2002, 2001 and 2000, respectively. Our investment in equity method investees was less than our underlying equity in net assets of those investees based on stated ownership percentages by $11.0 million at December 31, 2002. These differences are primarily related to the timing of distribution of dividends and various adjustments under generally accepted accounting principles. The provision for income taxes is based on the tax laws and rates in the countries in which our investees operate. There is no expected relationship between the provision for income taxes and income before taxes. The taxation regimes vary not only with respect to nominal rate, but also with respect to the allowability of deductions, credits and other benefits. For certain of our U.S. investees, U.S. income taxes are the responsibility of the owner. 65 Reconciliation of net income per combined income statement information to equity in income (loss) from investees per our consolidated statement of loss is as follows:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) Equity income based on stated ownership percentages $ 30,119 $ 33,427 $ 17,460 Impairment of investments in foreign joint venture (7,174) - (5,996) Costs to exit certain foreign joint ventures - - (17,453) Sale of shares in foreign joint venture 3,971 2,353 - All other adjustments due to amortization of basis differences, timing of GAAP adjustments, dividend distributions and other adjustments 776 (1,687) (3,806) - ----------------------------------------------------------------------------------------------------------------------- Equity in income (loss) from investees $ 27,692 $ 34,093 $ (9,795) =======================================================================================================================
On June 30, 2001, JRM, through one of its subsidiaries, entered into an agreement to sell its share in a foreign joint venture, Brown & Root McDermott Fabricators Limited. JRM received initial consideration in cash of approximately $7.4 million for the sale in the year ended December 31, 2001 and an additional $2.3 million in the year ended December 31, 2002. Final purchase price adjustments and related cost issues are still being negotiated. We expect these negotiations to be finalized in 2003. Our transactions with unconsolidated affiliates included the following:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) Sales to $ 81,833 $ 240,935 $ 73,961 Leasing activities (included in Sales to) $ 41,881 $ 81,194 $ 36,863 Purchases from $ - $ 11,885 $ 3,751 Dividends received $ 34,848 $ 36,920 $ 14,109
Our accounts payable includes payables to unconsolidated affiliates of $3.2 million at December 31, 2001. Our property, plant and equipment includes cost of $75.2 million and $131.0 million and accumulated depreciation of $49.0 million and $57.3 million, respectively, at December 31, 2002 and 2001 of marine equipment that was leased to an unconsolidated affiliate. At December 31, 2002, our other current assets include $14.4 million of marine equipment that was leased to an unconsolidated affiliate. During the year ended December 31, 2000, we recorded charges of $23.4 million to exit certain foreign joint ventures. NOTE 4 - INCOME TAXES We have provided for income taxes based on the tax laws and rates in the countries in which we conduct our operations. We have earned all of our income outside of Panama, and we are not subject to income tax in Panama on income earned outside of Panama. Therefore, there is no expected relationship between the provision for, or benefit from, income taxes and income, or loss, before income taxes. The major reason for the variations in these amounts is that income is earned within and subject to the taxation laws of various countries, each of which has a regime of taxation that varies from the others. The taxation regimes vary not only with respect to nominal rate, but also with respect to the allowability of deductions, credits and other benefits. Variations also exist because the proportional extent to which income is earned in, and subject to tax by, any particular country or countries varies from year to year. MII and certain of its subsidiaries keep books and file tax returns on the completed contract method of accounting. Deferred income taxes reflect the net tax effects of temporary differences between the financial and tax bases of assets and liabilities. Significant components of deferred tax assets and liabilities as of December 31, 2002 and 2001 were as follows: 66
December 31, 2002 2001 ---- ---- (In thousands) Deferred tax assets: Pension liability $ 122,564 $ - Prior year minimum tax credit carryforward 5,600 - Accrued warranty expense 66 149 Accrued vacation pay 6,191 5,788 Accrued liabilities for self-insurance (including postretirement health care benefits) 15,679 11,944 Accrued liabilities for executive and employee incentive compensation 25,287 25,823 Investments in joint ventures and affiliated companies 941 3,755 Operating loss carryforwards 17,916 8,587 Environmental and products liabilities 6,004 6,087 Long-term contracts 36,627 17,392 Drydock reserves 7,460 9,429 Accrued interest 6,395 6,395 Deferred foreign tax credits 5,298 7,235 Other 15,779 18,422 - --------------------------------------------------------------------------------------------------------------- Total deferred tax assets 271,807 121,006 Valuation allowance for deferred tax assets (214,827) (12,840) - --------------------------------------------------------------------------------------------------------------- Deferred tax assets 56,980 108,166 - --------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment 30,914 19,494 Estimated provision for B&W Chapter 11 settlement 17,342 - Prepaid pension costs - 39,501 Investments in joint ventures and affiliated companies 2,578 2,710 Insurance and other recoverables 69 1,230 Other 3,166 3,270 - --------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 54,069 66,205 - --------------------------------------------------------------------------------------------------------------- Net deferred tax assets $ 2,911 $ 41,961 ===============================================================================================================
Income (loss) from continuing operations before provision for (benefit from) income taxes and extraordinary item was as follows:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) U.S. $ (384,475) $ 39,220 $ 11,447 Other than U.S. (386,666) 46,687 (25,676) - -------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before provision for income taxes and extraordinary item $ (771,141) $ 85,907 $ (14,229) ====================================================================================================================
The provision for (benefit from) income taxes consisted of: Current: U.S. - Federal $ (40,567) $ 88,273 $ (14,611) U.S. - State and local 252 4,729 2,034 Other than U.S. 17,337 8,058 2,294 - -------------------------------------------------------------------------------------------------------------------- Total current (22,978) 101,060 (10,283) - -------------------------------------------------------------------------------------------------------------------- Deferred: U.S. - Federal 36,284 12,410 21,860 U.S. - State and local 1,757 (368) (1,098) Other than U.S. - (2,773) 156 - -------------------------------------------------------------------------------------------------------------------- Total deferred 38,041 9,269 20,918 - -------------------------------------------------------------------------------------------------------------------- Provision for income taxes $ 15,063 $ 110,329 $ 10,635 ====================================================================================================================
We recorded the following charges in the year ended December 31, 2002, with little or no associated tax benefit: - the impairment of the remaining $313.0 million of goodwill attributable to the premium we paid on the acquisition of the minority interest of JRM in June 1999; - the write-off of the investment in B&W and other related assets totaling $224.7 million; and - the net pre-tax provision of $86.4 million for the estimated cost of settlement of the B&W Chapter 11 proceedings. 67 The net pre-tax provision for the estimated cost of the B&W Chapter 11 settlement includes approximately $154.0 million of expenses with no associated tax benefits. The remaining items, consisting primarily of estimated benefits we expect to receive as a result of the settlement, constitute income in taxable jurisdictions. See Note 20 for additional details regarding the settlement provision. For the year ended December 31, 2001, our current provision for U.S. income taxes includes a charge of approximately $85.4 million associated with the intended exercise of the intercompany stock purchase and sale agreement referred to in Notes 5 and 8. Our current provision for other than U.S. income taxes in the years ended December 31, 2001 and 2000 includes a reduction of $4.1 million and $0.6 million, respectively, for the benefit of net operating loss carryforwards. Losses from foreign joint ventures that generated no corresponding tax benefit totaled $25.6 million in the year ended December 31, 2000 and amortization of goodwill associated with the acquisition of the minority interest in JRM was $18.0 million in the years ended December 31, 2001 and 2000. In addition, the years ended December 31, 2001 and 2000 include a tax benefit of $5.2 million and $5.5 million from favorable tax settlements in foreign jurisdictions, and a provision for proposed Internal Revenue Service ("IRS") tax deficiencies was recorded in the year ended December 31, 2001. The provision for income taxes for the year ended December 31, 2000 also includes a provision of $3.8 million for B&W for the pre-filing period and a benefit of $1.4 million from the use of certain tax attributes in a foreign joint venture. MII and JRM would be subject to withholding taxes on distributions of earnings from their U.S. subsidiaries and certain foreign subsidiaries. For the year ended December 31, 2002, the undistributed earnings of U.S. subsidiaries of MII and JRM were approximately $564.0 million. U.S. withholding taxes of approximately $169.0 million would be payable upon distribution of these earnings. For the same period, the undistributed earnings of the foreign subsidiaries of such U.S. companies amounted to approximately $79.4 million. The unrecognized deferred U.S. income tax liability on these earnings is approximately $31.0 million. Withholding taxes of approximately $4.0 million would be payable to the applicable foreign jurisdictions upon remittance of these earnings. We have not provided for any taxes, as we treat these earnings as indefinitely reinvested. The undistributed taxable earnings of foreign subsidiaries of MII and JRM were $27.9 million and applicable withholding taxes of $3.9 million would be due upon remittance of these earnings. We have provided withholding tax of $2.4 million on the intended distribution of approximately $20.5 million. The remaining $7.4 million in undistributed earnings is considered indefinitely reinvested, and we have made no provision for taxes on these earnings. We reached settlements with the IRS concerning MI's U.S. income tax liability through the fiscal year ended March 31, 1992, disposing of all U.S. federal income tax issues. The IRS has issued notices for MI for the fiscal years ended March 31, 1993 through March 31, 1998 and for JRM for the fiscal years ended March 31, 1995 through March 31, 1998 asserting deficiencies in the amount of taxes reported. We believe that any income taxes ultimately assessed against MI and JRM will not exceed amounts for which we have already provided. At December 31, 2002, we had a valuation allowance of $214.8 million for deferred tax assets, which cannot be realized through carrybacks and future reversals of existing taxable temporary differences. We believe that our remaining deferred tax assets are realizable through carrybacks and future reversals of existing taxable temporary differences. We will continue to assess the adequacy of our valuation allowance on a quarterly basis. Any changes to our estimated valuation allowance could be material to the financial statements. We have foreign net operating loss carryforwards of approximately $33.1 million available to offset future taxable income in foreign jurisdictions. Approximately $6.6 million of the foreign net operating loss carryforwards is scheduled to expire in 2003 to 2009. We have domestic net operating loss carryforwards of approximately $19.2 million available to offset future taxable income in domestic jurisdictions. The domestic net operating loss carryforwards are scheduled to expire in years 2009 to 2022. 68 NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
December 31, 2002 2001 ---- ---- (In thousands) Long-term debt consists of: Unsecured Debt: Series A Medium Term Notes (maturing in 2003; interest at various rates ranging from 8.99% to 9.00%)(1) $ 9,500 $ 9,500 Series B Medium Term Notes (maturities ranging from 4 to 23 years; interest at various rates ranging from 7.57% to 8.75%) 64,000 64,000 9.375% Notes due March 15, 2002 ($208,808,000 principal amount) - 208,789 9.375% Senior Subordinated Notes due 2006 ($1,234,000 principal amount) 1,221 1,218 Other notes payable through 2030 (interest at various rates ranging to 10%) 17,225 21,845 Secured Debt: Capitalized lease obligations 4,135 4,521 - --------------------------------------------------------------------------------------------------------- 96,081 309,873 Less: Amounts due within one year 9,977 209,480 - --------------------------------------------------------------------------------------------------------- Long-term debt $ 86,104 $ 100,393 =========================================================================================================
(1) We funded the repayment of these notes on February 11, 2003.
December 31, 2002 2001 ---- ---- (In thousands) Notes payable and current maturities of long-term debt consist of: Short-term lines of credit - unsecured $ 3,725 $ - Short-term lines of credit - secured 41,875 - Other notes payable - 26 Current maturities of long-term debt 9,977 209,480 - --------------------------------------------------------------------------------------------------------- Total $ 55,577 $ 209,506 ========================================================================================================= Weighted average interest rate on short-term borrowings 5.17% 9.37% =========================================================================================================
During the year ended December 31, 2002, MI repurchased or repaid the remaining $208.8 million in aggregate principal amount of its 9.375% Notes due March 15, 2002 for aggregate payments of $208.3 million, resulting in an extraordinary net after-tax gain of $0.3 million. In order to repay the remaining notes, MI exercised its right pursuant to a stock purchase and sale agreement with MII (the "Intercompany Agreement"). Under this agreement, MI had the right to sell to MII and MII had the right to buy from MI, 100,000 units, each of which consisted of one share of MII common stock and one share of MII Series A Participating Preferred Stock. MI held this financial asset since prior to the 1982 reorganization transaction under which MII became the parent of MI. The price was based on (1) MII's stockholders' equity at the close of the fiscal year preceding the date on which the right to sell or buy, as the case may be, was exercised and (2) the price-to-book value of the Dow Jones Industrial Average. At January 1, 2002, the aggregate unit value of MI's right to sell all of its 100,000 units to MII was approximately $243 million. MI received this amount from the exercise of the Intercompany Agreement. MII funded that payment by (1) receiving dividends of $80 million from JRM and $20 million from one of our captive insurance companies and (2) reducing its short-term investments and cash and cash equivalents. Maturities of long-term debt during the five years subsequent to December 31, 2002 are as follows: 2003 - $10.0 million; 2004 - $0.6 million; 2005 -$12.0 million; 2006 - $6.1 million; 2007 - $4.9 million. At December 31, 2002 and 2001, we had available various uncommitted short-term lines of credit from banks totaling $10.2 million and $8.9 million, respectively. We had no borrowings outstanding under these lines of credit as of December 31, 2002 or 2001. On February 11, 2003, we entered into definitive agreements with a group of lenders for a new credit facility ("New Credit Facility") to replace our previous facilities, which consisted of a $100 million credit facility for MII and BWXT (the "MII Credit Facility") and a $200 million credit facility for JRM and its subsidiaries (the "JRM Credit Facility") that were scheduled to expire on February 21, 2003. The 69 New Credit Facility initially provides for borrowings and issuances of letters of credit in an aggregate amount of up to $180 million, with certain sublimits on the amounts available to JRM and BWXT. On May 13, 2003, the maximum amount available under the Credit Facility will be reduced to $166.5 million. The obligations under the New Credit Facility are (1) guaranteed by MII and various subsidiaries of JRM and (2) collateralized by all our capital stock in MI, JRM and certain subsidiaries of JRM and substantially all the JRM assets and various intercompany promissory notes. The New Credit Facility requires us to comply with various financial and nonfinancial covenants and reporting requirements. The financial covenants require us to maintain a minimum amount of cumulative earnings before taxes, depreciation and amortization; a minimum fixed charge coverage ratio; a minimum level of tangible net worth (for MII as a whole, as well as for JRM and BWXT separately); and a minimum variance on expected costs to complete the Front Runner EPIC spar project. In addition, we must provide as additional collateral fifty percent of any net after-tax proceeds from significant asset sales. The New Credit Facility is scheduled to expire on April 30, 2004. Proceeds from the New Credit Facility may be used by JRM and BWXT, with sublimits for JRM of $100 million for letters of credit and $10 million for cash advances and for BWXT of $60 million for letters of credit and $50 million for cash advances. At March 24, 2003, we had $10.1 million in cash advances and $111.7 million in letters of credit outstanding under this facility. Pricing for cash advances under the Credit Facility is prime plus 4% or Libor plus 5% for JRM and prime plus 3% or Libor plus 4% for BWXT. Commitment fees are charged at the rate of 0.75 of 1% per annum on the unused working capital commitment, payable quarterly. The MII Credit Facility served as a revolving credit and letter of credit facility. Borrowings under this facility could be used for working capital and general corporate purposes. The aggregate amount of loans and amounts available for drawing under letters of credit outstanding under the MII Credit Facility could not exceed $100 million. This facility was secured by a collateral account funded with various U.S. Government securities with a minimum marked-to-market value equal to 105% of the aggregate amount available for drawing under letters of credit and revolving credit borrowings outstanding. We had borrowings of $41.9 million outstanding under the MII Credit Facility at December 31, 2002 and no borrowings against this facility at December 31, 2001. Letters of credit outstanding at December 31, 2002 were approximately $53.0 million. The interest rate was Libor plus 0.425%, or prime depending upon notification to borrow. The interest rate at December 31, 2002 was 4.25%. Commitment fees under this facility totaled approximately $0.3 million for the year ended December 31, 2002. The JRM Credit Facility consisted of two tranches. One was a revolving credit facility that provided for up to $100 million for advances that could be used for working capital and general corporate purposes. The second tranche provided for up to $200 million of letters of credit. The aggregate amount of loans and amounts available for drawing under letters of credit outstanding under the JRM Credit Facility could not exceed $200 million. We had borrowings of $3.7 million outstanding under the JRM Credit Facility at December 31, 2002 and no borrowings against this facility at December 31, 2001. Letters of credit outstanding under the JRM Credit Facility at December 31, 2002 totaled approximately $73.2 million. The interest rate was Libor plus 2%, or prime plus 1% depending upon notification to borrow. The interest rate at December 31, 2002 was 5.25%. Commitment fees under this facility totaled approximately $1.1 million for the year ended December 31, 2002. MI and JRM and their respective subsidiaries are restricted, as a result of covenants in debt instruments, in their ability to transfer funds to MII and its other subsidiaries through cash dividends or through unsecured loans or investments. MI and its subsidiaries are unable to incur any additional long-term debt obligations under one of MI's public debt indentures, other than in connection with certain extension, renewal or refunding transactions. 70 NOTE 6 - PENSION PLANS AND POSTRETIREMENT BENEFITS We provide retirement benefits, primarily through noncontributory pension plans, for substantially all our regular full-time employees. We do not provide retirement benefits to certain nonresident alien employees of foreign subsidiaries who are not citizens of a European Community country or who do not earn income in the United States, Canada or the United Kingdom. We base our salaried plan benefits on final average compensation and years of service, while we base our hourly plan benefits on a flat benefit rate and years of service. Our funding policy is to fund applicable pension plans to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 ("ERISA") and, generally, to fund other pension plans as recommended by the respective plan actuaries and in accordance with applicable law. We make available postretirement health care and life insurance benefits to certain retired union employees based on their union contracts. In the year ended December 31, 2000, we curtailed retirement benefits on one of our union contracts and amended the pension plan to increase benefits for the employees affected by the curtailment, resulting in a curtailment loss of $1.4 million. At December 31, 2002, in accordance with SFAS No. 87, "Employers' Accounting for Pensions," we were required to recognize a minimum pension liability of approximately $452 million. This recognition resulted in a decrease in our prepaid pension asset of $122 million, an increase in our pension liability of $345 million and an increase in other intangible assets of $15 million. The increase in the minimum pension liability is a direct result of the combination of the downturn in financial markets in 2002 and the low interest rates in effect at December 31, 2002. Effective March 31, 2003, benefit accruals under JRM's qualified pension plan will cease. Any pension benefits earned to that date will remain payable pursuant to the plan upon retirement, but no future benefits will accrue. All employees participating in the JRM qualified pension plan on March 31, 2003 will fully vest at that time. In the nine-month period ended December 31, 1999, we curtailed a pension plan in the United Kingdom and increased the benefits payable to the employees affected by the curtailment. We recognized additional curtailment losses on this plan of $10.2 million and $3.9 million in the years ended December 31, 2001 and 2000 due to revisions in our expected share of the pension surplus. We are continuing to negotiate a settlement. 71
Pension Benefits Other Benefits Year Ended Year Ended December 31, December 31, 2002 2001 2002 2001 ---- ---- ---- ---- (In thousands) Change in benefit obligation: Benefit obligation at beginning of period $ 1,833,428 $ 1,734,527 35,395 $ 35,151 Service cost 28,137 25,579 - - Interest cost 119,360 115,195 2,406 2,499 Curtailments - 10,219 - - Amendments 148 5,414 - - Transfers - 1,321 - - Change in assumptions 139,280 37,019 1,237 1,392 Actuarial (gain) loss 28,224 14,823 499 280 Foreign currency exchange rate changes - (4,132) - - Benefits paid (105,569) (106,537) (3,709) (3,927) - ----------------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of period 2,043,008 1,833,428 35,828 35,395 - ----------------------------------------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of period 1,821,530 1,943,562 - - Actual return on plan assets (159,730) (23,520) - - Company contributions 24,073 12,899 3,709 3,927 Foreign currency exchange rate changes - (4,908) - - Benefits paid (105,569) (106,503) (3,709) (3,927) - ----------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at the end of period 1,580,304 1,821,530 - - - ----------------------------------------------------------------------------------------------------------------------------- Funded status (462,704) (11,898) (35,828) (35,395) Unrecognized net obligation 541,275 (242) - - Unrecognized prior service cost 15,599 14,550 - - Unrecognized actuarial (gain) loss (153) 93,920 8,929 7,930 - ----------------------------------------------------------------------------------------------------------------------------- Net amount recognized $ 94,017 $ 96,330 $ (26,899) $ (27,465) ============================================================================================================================= Amounts recognized in the balance sheet: Prepaid benefit cost $ 19,311 $ 152,510 $ - $ - Accrued benefit liability (401,167) (65,848) (26,899) (27,465) Intangible asset 15,026 578 - - Accumulated other comprehensive income 460,847 9,090 - - - ----------------------------------------------------------------------------------------------------------------------------- Net amount recognized $ 94,017 $ 96,330 $ (26,899) $ (27,465) ============================================================================================================================= Weighted average assumptions: Discount rate 6.50% 7.25% 6.50% 7.42% Expected return on plan assets 8.28% 8.33% - - Rate of compensation increase 4.00% 4.44% - -
For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease gradually to 5.0% in 2009 and remain at that level thereafter.
Pension Benefits Other Benefits Year Ended December 31, Year Ended December 31, 2002 2001 2000 2002 2001 2000 ---- ---- ---- ---- ---- ---- (In thousands) Components of net periodic benefit cost (income): Service cost $ 28,137 $ 25,579 $ 25,277 $ - $ - $ - Interest cost 119,360 115,195 111,947 2,406 2,499 2,514 Expected return on plan assets (136,227) (145,738) (145,066) - - - Amortization of prior service cost 3,207 2,600 2,589 - - - Recognized net actuarial loss (gain) 11,912 (15,800) (34,449) 834 718 542 - ---------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost (income) $ 26,389 $ (18,164) $ (39,702) $ 3,240 $ 3,217 $ 3,056 ======================================================================================================================
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $1,883.0 million, $1,805.8 million and $1,402.4 million, respectively at December 31, 2002 and $187.2 million, $140.2 million and $103.2 million, respectively, at December 31, 2001. 72 Assumed health-care cost trend rates have a significant effect on the amounts we report for our health-care plan. A one-percentage-point change in our assumed health-care cost trend rates would have the following effects:
One-Percentage- One-Percentage- Point Increase Point Decrease -------------- -------------- (In thousands) Effect on total of service and interest cost components $ 150 $ (145) Effect on postretirement benefit obligation $ 2,088 $ (2,019)
Multiemployer Plans One of B&W's subsidiaries contributes to various multiemployer plans. The plans generally provide defined benefits to substantially all unionized workers in this subsidiary. The amount charged to pension cost and contributed to the plans was $2.4 million in the year ended December 31, 2000. NOTE 7 - IMPAIRMENT OF LONG-LIVED ASSETS Impairment losses to write down property, plant and equipment to estimated fair values are summarized by segment as follows:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) Property, plant and equipment and other assets: Assets to be held and used: Marine Construction Services $ 6,800 $ - $ - Assets to be disposed of: Marine Construction Services 1,943 6,318 3,346 Government Operations - - 833 - -------------------------------------------------------------------------------------------------------------- Total $ 8,743 $ 6,318 $ 4,179 ==============================================================================================================
Property, plant and equipment and other assets - assets to be held and used During the year ended December 31, 2002, our Marine Construction Services segment recorded an impairment loss of $6.8 million on land at one of our facilities that is no longer expected to recover its carrying value through future cash flows. We determined fair value based on an appraisal of the land. Prior to impairment, the land had a book value of approximately $13.5 million. Property, plant and equipment and other assets-assets to be disposed of During the year ended December 31, 2002, our Marine Construction Services segment recorded impairment losses totaling $1.9 million to reduce four material barges and certain other marine equipment to net realizable value. Prior to the impairment charges, this marine equipment had a total net book value of approximately $2.1 million. We expect to sell this equipment in 2003. During the year ended December 31, 2001, our Marine Construction Services segment recorded an impairment loss totaling $6.3 million to reduce an idled derrick barge to scrap value. Prior to impairment, the vessel had a net book value of approximately $6.9 million. During the year ended December 31, 2002, we sold the vessel for net proceeds of $0.6 million and recorded an additional impairment loss of $43,000. During the year ended December 31, 2000, our Marine Construction Services segment recorded impairment losses totaling $3.3 million. These provisions included $2.0 million for salvaged structures that were written down to net realizable value, a $0.3 million adjustment to a building for sale near London that we sold in 2001, and $1.1 million writedown of fixed assets in our Inverness facility. 73 During the year ended December 31, 2000, our Government Operations segment recorded an impairment loss totaling $0.8 million at our research facility in Alliance, Ohio for fixed assets that will no longer be used. NOTE 8 - CAPITAL STOCK The Panamanian regulations that relate to acquisitions of securities of companies registered with the National Securities Commission, such as MII, have certain requirements. They require, among other matters, that detailed disclosure concerning an offeror be finalized before that person acquires beneficial ownership of more than five percent of the outstanding shares of any class of our stock pursuant to a tender offer. The detailed disclosure is subject to review by either the Panamanian National Securities Commission or our Board of Directors. Transfers of shares of common stock in violation of these regulations are invalid and cannot be registered for transfer. We issue shares of our common stock in connection with our 2001 Directors and Officers Long-Term Incentive Plan, our 1996 Officer Long-Term Incentive Plan (and its predecessor programs), our 1992 Senior Management Stock Plan and contributions to our Thrift Plan. At December 31, 2002 and 2001, 15,180,999 and 9,026,795 shares of common stock, respectively, were reserved for issuance in connection with those plans. MII Preferred Stock At December 31, 2001, 100,000 shares of our nonvoting Series A Participating Preferred Stock (the "Participating Preferred Stock") were issued and owned by MI. During the year ended December 31, 2002, we purchased the 100,000 shares of Participating Preferred Stock pursuant to the exercise of the Intercompany Agreement and cancelled them. Under the Intercompany Agreement, MI had the right to sell to MII and MII had the right to buy from MI, 100,000 units, each of which consisted of one share of MII common stock and one share of MII Series A Participating Preferred Stock. MI held this financial asset since prior to the 1982 reorganization under which MII became the parent of MI. During the quarter ended March 31, 2002, MI exercised its right pursuant to this agreement and received approximately $243 million. During the year ended December 31, 2001, we redeemed the last 10,000 shares of the Series B nonvoting Preferred Stock, which were owned by MI, at $250 per share under the applicable mandatory redemption provisions. We designated a series of our authorized but unissued preferred stock as Series D Participating Preferred Stock in connection with our Stockholder Rights Plan. As of December 31, 2002, no shares of Series D Participating Preferred Stock were outstanding. Our issuance of additional shares of preferred stock in the future and the specific terms thereof, such as the dividend rights, conversion rights, voting rights, redemption prices and similar matters, may be authorized by our Board of Directors without stockholder approval. MII Rights On October 17, 2001, our Board of Directors adopted a Stockholder Rights Plan and declared a dividend of one right to purchase preferred stock for each outstanding share of our common stock to stockholders of record at the close of business on November 1, 2001. Each right initially entitles the registered holder to purchase from us a fractional share consisting of one one-thousandth of a share of our Series D Participating Preferred Stock, par value $1.00 per share, at a purchase price of $35.00 per fractional share, subject to adjustment. The rights generally will not become exercisable until ten days after a public announcement that a person or group has acquired 15% or more of our common stock (thereby becoming an "Acquiring Person") or the tenth business day after the commencement of a tender or exchange offer that would result in a person or group becoming an Acquiring Person (we refer to the earlier of those dates as the "Distribution Date"). The rights are attached to all certificates representing our currently outstanding common stock and will attach to all common stock certificates we issue prior to the Distribution Date. Until the Distribution Date, the rights will be evidenced by the certificates representing our common stock and will be transferable only with our common stock. Generally, if any person or group becomes an Acquiring Person, each right, other than rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter entitle its holder to purchase, at the rights' then current exercise price, shares of our 74 common stock having a market value of two times the exercise price of the right. If, after there is an Acquiring Person, and we or a majority of our assets is acquired in certain transactions, each right not owned by an Acquiring Person will entitle its holder to purchase, at a discount, shares of common stock of the acquiring entity (or its parent) in the transaction. At any time until ten days after a public announcement that the rights have been triggered, we will generally be entitled to redeem the rights for $.01 per right and to amend the rights in any manner other than to reduce the redemption price. Certain subsequent amendments are also permitted. Until a right is exercised, the holder thereof, as such, will have no rights to vote or receive dividends or any other rights of a stockholder. The plan was approved at our 2002 annual meeting of stockholders and is scheduled to expire on the fifth anniversary of the date of its adoption. NOTE 9 - STOCK PLANS 2001 Directors and Officers Long-Term Incentive Plan In May 2002, our shareholders approved the 2001 Directors and Officers Long-Term Incentive Plan. Members of the Board of Directors, executive officers, key employees and consultants are eligible to participate in the plan. The Compensation Committee of the Board of Directors selects the participants for the plan. The plan provides for a number of forms of stock-based compensation, including nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, deferred stock units, performance shares and performance units, subject to satisfaction of specific performance goals. Up to 3,000,000 shares of our common stock were authorized for issuance through the plan, of which a maximum of 30 percent may be awarded pursuant to grants in the form of restricted stock, deferred stock units and performance shares. Options to purchase shares are granted at not less than 100% of the fair market value on the date of grant, become exercisable at such time or times as determined when granted, and expire not more than ten years after the date of the grant. 1996 Officer Long-Term Incentive Plan Our 1996 Officer Long-Term Incentive Plan permits grants of nonqualified stock options, incentive stock options and restricted stock to officers and key employees. Under this plan, we granted performance-based restricted stock awards to certain officers and key employees. Under the provisions of the performance-based awards, no shares were issued at the time of the initial award, and the number of shares ultimately issued was determined based on the change in the market value of our common stock over a specified performance period. 1997 Director Stock Program Under our 1997 Director Stock Program, we grant options to purchase 900 shares in the first year of a director's term and 300 shares in subsequent years at a purchase price that is not less than 100% of the fair market value on the date of grant. These options become exercisable, in full, six months after the date of grant and expire ten years and one day after the date of grant. Under this program, we also grant rights to purchase 450 shares in the first year of a director's term and 150 shares in subsequent years at par value ($1.00 per share). Those shares are subject to restrictions on transfer that lapse at the end of such term. At December 31, 2002, we had a total of 2,101,567 shares of our common stock available for award under the 2001 Directors and Officers Plan, the 1996 Officer Long-Term Incentive Plan and the 1997 Director Stock Program. 75 The following table summarizes activity for the restricted stock and performance-based restricted stock awards under these plans (share data in thousands):
Year Ended December 31, 2002 2001 2000 - ----------------------------------------------------------------------------- Outstanding, beginning of period 961 837 571 Restricted shares granted 404 299 42 Notional shares granted pursuant to performance-based awards - - 516 Restricted shares issued pursuant to performance-based awards 700 27 - Notional shares lapsed (516) (22) (215) Restricted shares released (162) (180) (55) Cancelled/forfeited (33) - (22) - ----------------------------------------------------------------------------- Outstanding, end of period 1,354 961 837 =============================================================================
The weighted average fair values of the restricted shares granted during the years ended December 31, 2002, 2001 and 2000 were $11.62, $14.54 and $7.66 per share, respectively. The weighted average fair values of the restricted shares issued pursuant to performance-based awards during the years ended December 31, 2002 and 2001 were $16.05 and $9.66, respectively. The weighted average fair value of the performance-based awards granted in the year ended December 31, 2000 was $8.30. 1992 Senior Management Stock Plan Under our 1992 Senior Management Stock Plan, options to purchase shares are granted at a purchase price that is not less than 100% of the fair market value on the date of grant, become exercisable at such time or times as determined when granted and expire not more than ten years after the date of grant. Our Board of Directors determines the total number of shares available for grant from time to time. At December 31, 2002, we had a total of 694,849 shares of common stock available for stock option grants under this plan. In the event of a change in control of our company, all these programs have provisions that may cause restrictions to lapse and accelerate the exercisability of outstanding options. As of March 20, 2000, individuals were provided the opportunity to elect to cancel, on a grant-by-grant basis, outstanding stock options granted prior to February 22, 2000, and in exchange, receive Deferred Stock Units ("DSUs"). A DSU is a contractual right to receive a share of MII common stock at a point in the future, provided applicable vesting requirements have been satisfied. DSUs granted as a result of this election will vest 50% upon judicial confirmation of a plan of reorganization in connection with the Chapter 11 proceedings related to B&W and 50% one year later, or 100% on the fifth anniversary of the date of grant, whichever is earlier. Under this program, 2,208,319 stock options were cancelled and 347,488 DSUs were granted with a weighted average fair value of $9.41 at the date of grant. The following table summarizes activity for our stock options (share data in thousands):
Year Ended December 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- Weighted- Weighted- Weighted- Number Average Number Average Number Average of Exercise of Exercise of Exercise Options Price Options Price Options Price - --------------------------------------------------------------------------------------------------------------------- Outstanding, beginning of period 6,557 $ 15.58 4,865 $ 16.12 4,812 $ 24.38 Granted 1,597 14.03 1,921 14.53 2,479 9.19 Exercised (113) 9.12 (12) 9.37 (4) 4.67 Cancelled/forfeited (508) 15.13 (217) 18.78 (2,422) 25.45 - --------------------------------------------------------------------------------------------------------------------- Outstanding, end of period 7,533 $ 15.38 6,557 $ 15.58 4,865 $ 16.12 ===================================================================================================================== Exercisable, end of period 4,246 $ 16.92 3,304 $ 18.84 2,435 $ 23.04 =====================================================================================================================
76 Included in the table above are 365,000 options granted to B&W employees during 2001. These options are accounted for using the fair value method of SFAS No. 123, as B&W employees are not considered employees of MII for purposes of APB 25. The following tables summarize the range of exercise prices and the weighted-average remaining contractual life of the options outstanding and the range of exercise prices for the options exercisable at December 31, 2002 (share data in thousands):
Options Outstanding Options Exercisable --------------------------------------------- ------------------------------ Weighted- Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life in Years Price Exercisable Price - ------------------ --------------------------------------------- ------------------------------ $ 3.83 - 7.65 32 9.7 $ 6.82 - $ - 7.66 - 11.48 2,172 7.2 9.21 1,589 9.23 11.48 - 15.30 3,409 8.4 14.36 737 14.30 15.30 - 19.13 25 3.4 17.29 25 17.29 19.13 - 22.95 483 3.7 20.15 483 20.15 22.95 - 26.78 1,133 1.3 24.65 1,133 24.65 26.78 - 30.60 188 0.8 29.13 188 29.13 30.60 - 34.00 91 0.3 33.86 91 33.86 ----- ----- $ 3.83 - 34.00 7,533 6.4 $ 15.38 4,246 $ 16.92 ===== =====
The fair value of each option grant was estimated at the date of grant using a Black-Scholes option-pricing model, with the following weighted-average assumptions:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- Risk-free interest rate 4.69% 4.80% 6.41% Volatility factor of the expected market price of MII's common stock 0.51 0.51 0.48 Expected life of the option in years 6.10 5.00 5.00 Expected dividend yield of MII's common stock 0.0% 0.0% 0.0%
The weighted average fair values of the stock options granted in the years ended December 31, 2002, 2001 and 2000 were $8.23, $7.26 and $4.61, respectively. Thrift Plan On both November 12, 1991 and June 5, 1995, 5,000,000 of the authorized and unissued shares of MII common stock were reserved for issuance for the employer match to the Thrift Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies (the "Thrift Plan"). On October 11, 2002, an additional 5,000,000 of the authorized and unissued shares of MII common stock were reserved for issuance for the employer match to the Thrift Plan. Those matching employer contributions equal 50% of the first 6% of compensation, as defined in the Thrift Plan, contributed by participants, and fully vest and are non-forfeitable after three years of service or upon retirement, death, lay-off or approved disability. The Thrift Plan allows employees to sell their interest in MII's common stock fund at any time, except as limited by applicable securities laws and regulations. During the years ended December 31, 2002, 2001 and 2000, we issued 1,394,887, 711,943 and 910,287 shares, respectively, of MII's common stock as employer contributions pursuant to the Thrift Plan. At December 31, 2002, 4,579,919 shares of MII's common stock remained available for issuance under the Thrift Plan. NOTE 10 - CONTINGENCIES AND COMMITMENTS Investigations and Litigation In March 1997, we, with the help of outside counsel, began an investigation into allegations of wrongdoing by a limited number of former employees of MII and JRM and others. The allegations concerned the heavy-lift business of JRM's HeereMac joint venture ("HeereMac") with Heerema Offshore Construction Group, Inc. ("Heerema") and the heavy-lift business of JRM. Upon becoming aware of these allegations, we notified authorities, including the Antitrust Division of the DOJ, the SEC and the European Commission. As a result of 77 our prompt disclosure of the allegations, JRM, certain other affiliates and their officers, directors and employees at the time of the disclosure were granted immunity from criminal prosecution by the DOJ for any anticompetitive acts involving worldwide heavy-lift activities. In June 1999, the DOJ agreed to our request to expand the scope of the immunity to include a broader range of our marine construction activities and affiliates. The DOJ had also requested additional information from us relating to possible anticompetitive activity in the marine construction business of McDermott-ETPM East, Inc., one of the operating companies within JRM's former McDermott-ETPM joint venture with ETPM S.A., a French company. On becoming aware of the allegations involving HeereMac, we initiated action to terminate JRM's interest in HeereMac, and, on December 19, 1997, Heerema acquired JRM's interest in exchange for cash and title to several pieces of equipment. We also terminated the McDermott-ETPM joint venture, and on April 3, 1998, JRM assumed 100% ownership of McDermott-ETPM East, Inc., which was renamed J. Ray McDermott Middle East, Inc. On December 22, 1997, HeereMac and one of its employees pled guilty to criminal charges by the DOJ that they and others had participated in a conspiracy to rig bids in connection with the heavy-lift business of HeereMac in the Gulf of Mexico, the North Sea and the Far East. HeereMac and the HeereMac employee were fined $49.0 million and $0.1 million, respectively. As part of the plea, both HeereMac and certain employees of HeereMac agreed to cooperate fully with the DOJ investigation. Neither MII, JRM nor any of their officers, directors or employees were a party to those proceedings. In July 1999, a former JRM officer pled guilty to charges brought by the DOJ that he participated in an international bid-rigging conspiracy for the sale of marine construction services. In May 2000, another former JRM officer was indicted by the DOJ for participating in a bid-rigging conspiracy for the sale of marine construction services in the Gulf of Mexico. His trial was held in February 2001 and, at the conclusion of the Government's case, the presiding judge directed a judgment of acquittal. We cooperated fully with the investigations of the DOJ and the SEC into these matters. In February 2001, we were advised that the SEC had terminated its investigation and no enforcement action was recommended. The DOJ has also terminated its investigation. In June 1998, Phillips Petroleum Company (individually and on behalf of certain co-venturers) and several related entities (the "Phillips Plaintiffs") filed a lawsuit in the U.S District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema, certain Heerema affiliates and others, alleging that the defendants engaged in anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act and Sections 15.05 (a) and (b) of the Texas Business and Commerce Code, engaged in fraudulent activity and tortiously interfered with the plaintiffs' businesses in connection with certain offshore transportation and installation projects in the Gulf of Mexico, the North Sea and the Far East (the "Phillips Litigation"). In December 1998, Den norske stats oljeselskap a.s., individually and on behalf of certain of its ventures and its participants (collectively, "Statoil"), filed a similar lawsuit in the same court (the "Statoil Litigation"). In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Phillips Litigation and Statoil Litigation requested punitive as well as treble damages. In January 1999, the court dismissed without prejudice, due to the court's lack of subject matter jurisdiction, the claims of the Phillips Plaintiffs relating to alleged injuries sustained on any foreign projects. In July 1999, the court also dismissed the Statoil Litigation for lack of subject matter jurisdiction. Statoil appealed this dismissal to the U.S. Court of Appeals for the Fifth Circuit (the "Fifth Circuit"). The Fifth Circuit affirmed the district court decision in February 2000 and Statoil filed a motion for rehearing en banc. In September 1999, the Phillips Plaintiffs filed notice of their request to dismiss their remaining domestic claims in the lawsuit in order to seek an appeal of the dismissal of their claims on foreign projects, which request was subsequently denied. On March 12, 2001, the plaintiffs' motion for rehearing en banc was denied by the Fifth Circuit in the Statoil Litigation. The plaintiffs filed a petition for writ of certiorari to the U.S. Supreme Court. On February 20, 2002, the U.S. Supreme Court denied the petition for certiorari. The plaintiffs filed a motion for rehearing by the U.S. Supreme Court. On April 15, 2002, the U.S. Supreme Court denied the motion for rehearing. During the year ended December 31, 2002, 78 Heerema and MII executed agreements to settle the heavy-lift antitrust claims against Heerema and MII with British Gas and Phillips, and the Court has entered an order of dismissal. In June 1998, Shell Offshore, Inc. and several related entities also filed a lawsuit in the U.S. District Court for the Southern District of Texas against MII, JRM, MI, McDermott-ETPM, Inc., certain JRM subsidiaries, HeereMac, Heerema and others, alleging that the defendants engaged in anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act (the "Shell Litigation"). Subsequently, the following parties (acting for themselves and, in certain cases, on behalf of their respective co-venturers and for whom they operate) intervened as plaintiffs in the Shell Litigation: Amoco Production Company and B.P. Exploration & Oil, Inc.; Amerada Hess Corporation; Conoco Inc. and certain of its affiliates; Texaco Exploration and Production Inc. and certain of its affiliates; Elf Exploration UK PLC and Elf Norge a.s.; Burlington Resources Offshore, Inc.; The Louisiana Land & Exploration Company; Marathon Oil Company and certain of its affiliates; VK-Main Pass Gathering Company, L.L.C.; Green Canyon Pipeline Company, L.L.C.; Delos Gathering Company, L.L.C.; Chevron U.S.A. Inc. and Chevron Overseas Petroleum Inc.; Shell U.K. Limited and certain of its affiliates; Woodside Energy, Ltd; and Saga Petroleum, S.A.. Also, in December 1998, Total Oil Marine p.l.c. and Norsk Hydro Produksjon a.s., individually and on behalf of their respective co-venturers, filed similar lawsuits in the same court, which lawsuits were consolidated with the Shell Litigation. In addition to seeking injunctive relief, actual damages and attorneys' fees, the plaintiffs in the Shell Litigation request treble damages. In February 1999, we filed a motion to dismiss the foreign project claims of the plaintiffs in the Shell Litigation due to the Texas district court's lack of subject matter jurisdiction, which motion is pending before the court. Subsequently, the Shell Litigation plaintiffs were allowed to amend their complaint to include non heavy-lift marine construction activity claims against the defendants. Currently, we are awaiting the court's decision on our motion to dismiss the foreign claims. During the year ended December 31, 2002, Heerema and MII executed agreements to settle heavy-lift antitrust claims against Heerema and MII with Exxon, Amoco Production Company, B.P. Exploration & Oil , Inc., Elf Exploration UK PLC and Elf Norge a.s., Total Oil Marine p.l.c., Burlington Resources Offshore, Inc., The Louisiana Land & Exploration Company, VK-Main Pass Gathering Company, LLC, Green Canyon Pipeline Company, L.L.C., Delos Gathering Company L.L.C., and the Court has entered an order of dismissal. In addition, Woodside Energy, Ltd. filed a motion of dismissal with prejudice, which was granted. Recently, we entered into a settlement agreement with Conoco, Inc. and the Court entered an order of dismissal. On December 15, 2000, a number of Norwegian oil companies filed lawsuits against MII, Heeremac, Heerema and Saipem S.p.A. for violations of the Norwegian Pricing Act of 1953 in connection with projects in Norway. Plaintiffs include Norwegian affiliates of various of the plaintiffs in the Shell Litigation pending in Houston. Most of the projects were performed by Saipem S.p.A. or its affiliates, with some by Heerema/HeereMac and none by JRM. We understand that the conduct alleged by plaintiffs is the same conduct that plaintiffs allege in the U.S. civil cases. The cases were heard by the Conciliation Boards in Norway during the first week of October 2001. The Conciliation Boards referred the cases to the court of first instance for further proceedings. The plaintiffs have one year from the date of referral to proceed with the cases. Several of the plaintiffs who filed cases before the Conciliation Boards have filed writs with the courts of first instance in order to commence the court proceedings. Settlement discussions are underway with these plaintiffs. As a result of the initial allegations of wrongdoing in March 1997, we formed a special committee of our Board of Directors to monitor and oversee our investigation into all of these matters. Our Board of Directors concluded that the special committee was no longer necessary, and it was dissolved in 2002. Because we have reached settlement agreements with the vast majority of the oil company claimants, we have adjusted our reserve to more appropriately reflect the risks and exposures of the remaining claims. 79 B&W and Atlantic Richfield Company ("ARCO") are defendants in a lawsuit filed on June 7, 1994 by Donald F. Hall, Mary Ann Hall and others in the U. S. District Court for the Western District of Pennsylvania. The suit involves approximately 500 separate claims for compensatory and punitive damages relating to the operation of two former nuclear fuel processing facilities located in Pennsylvania (the "Hall Litigation"). The plaintiffs in the Hall Litigation allege, among other things, that they suffered personal injury, property damage and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to trial, awarding $36.7 million in compensatory damages. In June 1999, the district court set aside the $36.7 million judgment and ordered a new trial on all issues. In November 1999, the district court allowed an interlocutory appeal by the plaintiffs of certain issues, including the granting of the new trial and the court's rulings on certain evidentiary matters, which, following B&W's bankruptcy filing, the Third Circuit Court of Appeals declined to accept for review. In 1998, B&W settled all pending and future punitive damage claims in the Hall Litigation for $8.0 million for which B&W seeks reimbursement from other parties. There is a controversy between B&W and its insurers as to the amount of coverage available under the liability insurance policies covering the facilities. B&W filed a declaratory judgment action in a Pennsylvania State Court seeking a judicial determination as to the amount of coverage available under the policies. On April 28, 2001, in response to cross-motions for partial summary judgment, the Pennsylvania State Court issued its ruling regarding: (1) the applicable trigger of coverage under the Nuclear Energy Liability Policies issued by B&W's insurers; and (2) the scope of the insurers' defense obligations to B&W under these policies. With respect to the trigger of coverage, the Pennsylvania State Court held that "manifestation" is an applicable trigger with respect to the underlying claims at issue. Although the Court did not make any determination of coverage with respect to any of the underlying claims, we believe the effect of its ruling is to increase the amount of coverage potentially available to B&W under the policies at issue to $320.0 million. With respect to the insurers' duty to defend B&W, the Court held that B&W is entitled to separate and independent counsel funded by the insurers. On May 21, 2001, the Court granted the insurers' motion for reconsideration of the April 25, 2001 order. On October 1, 2001, the Court entered its order reaffirming its original substantive insurance coverage rulings and further certified the order for immediate appeal by any party. B&W's insurers filed an appeal in November 2001. On November 25, 2002, the Pennsylvania Superior Court affirmed the rulings in favor of B&W on the trigger of coverage and duty to defend issues. On December 24, 2002, B&W's insurers filed a petition for the allowance of an appeal in the Pennsylvania Supreme Court. The Pennsylvania Supreme Court has not yet made any determination regarding whether to accept discretionary review of the insurers' appeal. The plaintiffs' remaining claims against B&W in the Hall Litigation have been automatically stayed as a result of the B&W bankruptcy filing. B&W filed a complaint for declaratory and injunctive relief with the Bankruptcy Court seeking to stay the pursuit of the Hall Litigation against ARCO during the pendency of B&W's bankruptcy proceeding due to common insurance coverage and the risk to B&W of issue or claim preclusion, which stay the Bankruptcy Court denied in October 2000. B&W appealed the Bankruptcy Court's Order and on May 18, 2001, the U.S. District Court for the Eastern District of Louisiana, which has jurisdiction over portions of the B&W Chapter 11 proceeding, affirmed the Bankruptcy Court's Order. We believe that all claims under the Hall Litigation will be resolved within the limits of coverage of our insurance policies; moreover, the proposed settlement agreement and plan of reorganization in the B&W Chapter 11 proceedings include an overall settlement of this dispute. However, should the B&W Chapter 11 settlement fail, or should the settlement particular to the Hall Litigation and the Apollo-Parks issue not be consummated, there may be an issue as to whether our insurance coverage is adequate and we may be materially adversely impacted if our liabilities exceed our coverage. B&W transferred the two facilities subject to the Hall Litigation to BWXT in June 1997 in connection with BWXT's formation and an overall corporate restructuring. In December 1998, a subsidiary of JRM (the "Operator Subsidiary") was in the process of installing the south deck module on a compliant tower in the Gulf of Mexico for Texaco Exploration and Production, Inc. ("Texaco") when the main hoist load line failed, resulting in the loss of the module. In December 1999, Texaco filed a lawsuit seeking consequential damages for delays resulting from the incident, as well as costs incurred to complete the project with another contractor and uninsured losses. This lawsuit was filed in the U. S. District Court for the Eastern District of Louisiana against a number of parties, some of which brought third-party claims against the Operator Subsidiary and another subsidiary of JRM, the owner of the vessel that attempted the lift of the deck module (the "Owner Subsidiary"). Both the Owner Subsidiary and the Operator Subsidiary were subsequently tendered as direct defendants to Texaco. In 80 addition to Texaco's claims in the federal court action, damages for the loss of the south deck module have been sought by Texaco's builder's risk insurers in claims against the Owner Subsidiary and the other defendants, excluding the Operator Subsidiary, which was an additional insured under the policy. Total damages sought by Texaco and its builder's risk insurers in the federal court proceeding approximate $280 million. Texaco's federal court claims against the Operator Subsidiary were stayed in favor of a pending binding arbitration proceeding between them required by contract, which the Operator Subsidiary initiated to collect $23 million due for work performed under the contract, and in which Texaco also sought the same consequential damages and uninsured losses as it seeks in the federal court action, and also seeks approximately $2 million in other damages not sought in the federal court action. The federal court trial, on the issue of liability only, commenced in October 2001. On March 27, 2002, the Court orally found that the Owner Subsidiary was liable to Texaco, specifically finding that Texaco had failed to sustain its burden of proof against all named defendants except the Owner Subsidiary relative to liability issues, and, alternatively, that the Operator Subsidiary's highly extraordinary negligence served as a superceding cause of the loss. The finding was subsequently set forth in a written order dated April 5, 2002, which found against the Owner Subsidiary on the claims of Texaco's builder risk insurers in addition to the claims of Texaco. On May 6, 2002, the Owner Subsidiary filed a notice of appeal of the April 5, 2002 order, which appeal it subsequently withdrew without prejudice for technical reasons. On January 13, 2003, the district court granted the Owner Subsidiary's motions for summary judgment with respect to Texaco's claims against the Owner Subsidiary, and vacated its previous findings to the contrary. The Court has not yet ruled on the Owner Subsidiary's similar motion against Texaco's builder's risk insurers. The case had been transferred to a new district court judge, but was subsequently transferred back to the original district court judge. The scheduled trial date of February 10, 2003 on damages and certain insurance issues has been continued without date. The trial in the binding arbitration proceeding commenced on January 13, 2003 and has proceeded on various dates through March 14, and will recommence on May 26, 2003 for one week and at various times thereafter. Although the Owner Subsidiary is not a party to the arbitration, we believe that the claims against the Owner Subsidiary, like those against the Operator Subsidiary, are governed by the contractual provisions which waive the recovery of consequential damages against the Operator Subsidiary and its affiliates. We plan to vigorously pursue the arbitration proceeding and any appeals process, if necessary, in the federal court action, and we do not believe that a material loss with respect to these matters is likely. In addition, we believe our insurance will provide coverage for the builder's risk and consequential damage claims in the event of liability. However, the ultimate outcome of the proceedings and any challenge by our insurers to coverage is uncertain, and an adverse ruling in either the arbitration or court proceeding or any potential proceeding with respect to insurance coverage for any losses, or any bonding requirements applicable to any appeal from an adverse ruling, could have a material adverse impact on our consolidated financial position, results of operations and cash flow. In early April 2001, a group of insurers that includes certain underwriters at Lloyd's and Turegum Insurance Company (the "Plaintiff Insurers") who have previously provided insurance to B&W under our excess liability policies filed (1) a complaint for declaratory judgment and damages against MII in the B&W Chapter 11 proceedings in the U.S. District Court for the Eastern District of Louisiana and (2) a declaratory judgment complaint against B&W in the Bankruptcy Court, which actions have been consolidated before the U.S. District Court for the Eastern District of Louisiana, which has jurisdiction over portions of the B&W Chapter 11 proceeding. The insurance policies at issue in this litigation provide a significant portion of B&W's excess liability coverage available for the resolution of the asbestos-related claims that are the subject of the B&W Chapter 11 proceeding. The consolidated complaints contain substantially identical factual allegations. These include allegations that, in the course of settlement discussions with the representatives of the asbestos claimants in the B&W bankruptcy proceeding, MII and B&W breached the confidentiality provisions of an agreement they entered into with these Plaintiff Insurers relating to insurance payments by the Plaintiff Insurers as a result of asbestos claims. They also allege that MII and B&W have wrongfully attempted to expand the underwriters' obligations under that settlement agreement and the applicable policies through the filing of a plan of reorganization in the B&W bankruptcy proceeding that contemplates the transfer of rights under that agreement and those policies to a trust that will manage the pending and future asbestos-related claims against B&W and certain of its affiliates. The complaints seek declarations that, among other things, the defendants are in material breach of the 81 settlement agreement with the Plaintiff Insurers and that the Plaintiff Insurers owe no further obligations to MII and B&W under that agreement. With respect to the insurance policies, if the Plaintiff Insurers should succeed in terminating the settlement agreement, they seek to litigate issues under the policies in order to reduce their coverage obligations. The complaint against MII also seeks a recovery of unspecified compensatory damages. B&W filed a counterclaim against the Plaintiff Insurers, which asserts a claim for breach of contract for amounts owed and unpaid under the settlement agreement, as well as a claim for anticipatory breach for amounts that will be owed in the future under the settlement agreement. B&W seeks a declaratory judgment as to B&W's rights and the obligations of the Plaintiff Insurers and other insurers under the settlement agreement and under their respective insurance policies with respect to asbestos claims. On October 2, 2001, MII and B&W filed dispositive motions with the District Court seeking dismissal of the Plaintiff Insurers' claim that MII and B&W had materially breached the settlement agreement at issue. In a ruling issued January 4, 2002, the District Court granted MII's and B&W's motion for summary judgment and dismissed the declaratory judgment action filed by the Plaintiff Insurers. The ruling concluded that the Plaintiff Insurers' claims lacked a factual or legal basis. Our agreement with the underwriters went into effect in April 1990 and has served as the allocation and payment mechanism to resolve many of the asbestos claims against B&W. We believe this ruling reflects the extent of the underwriter's contractual obligations and underscores that this coverage is available to settle B&W's asbestos claims. As a result of the January 4, 2002 ruling, the only claims that remained in the litigation were B&W's counterclaims against the Plaintiff Insurers and against other insurers. The parties agreed to dismiss without prejudice those of B&W's counterclaims seeking a declaratory judgment regarding the parties' respective rights and obligations under the settlement agreement. B&W's counterclaim seeking a money judgment for approximately $6.5 million due and owing by insurers under the settlement agreement remains pending. A trial of this counterclaim is scheduled for April 24, 2003. The parties have reached a preliminary agreement in principle to settle B&W's counterclaim for in excess of the claimed amounts, and approximately $4.3 million has been received to date from the insurers, subject to reimbursement in the event a final settlement agreement is not reached. Following the resolution of this remaining counterclaim, the Plaintiff Insurers will have an opportunity to appeal the January 4, 2002 ruling. At this point, the Plaintiff Insurers have not indicated whether they intend to pursue an appeal. On or about November 5, 2001, The Travelers Indemnity Company and Travelers Casualty and Surety Company (collectively, "Travelers") filed an adversary proceeding against B&W and related entities in the U.S. Bankruptcy Court for the Eastern District of Louisiana seeking a declaratory judgment that Travelers is not obligated to provide any coverage to B&W with respect to so-called "non-products" asbestos bodily injury liabilities on account of previous agreements entered into by the parties. On or about the same date, Travelers filed a similar declaratory judgment against MI and MII in the U.S. District Court for the Eastern District of Louisiana. The cases filed against MI and MII have been consolidated before the District Court and the ACC and the FCR have intervened in the action. On February 4, 2002, B&W and MII filed answers to Travelers' complaints, denying that previous agreements operate to release Travelers from coverage responsibility for asbestos "non-products" liabilities and asserting counterclaims requesting a declaratory judgment specifying Travelers' duties and obligations with respect to coverage for B&W's asbestos liabilities. The Court has bifurcated the case into two phases, with Phase I addressing the issue of whether previous agreements between the parties serve to release Travelers from any coverage responsibility for asbestos "non-products" claims. On August 14, 2002, the Court granted B&W's and MII's motion for leave to file an amended answer and counterclaims, adding additional counterclaims against Travelers. Discovery was completed in September 2002 and the parties filed cross-motions for summary judgment, which were heard on February 26, 2003. We are awaiting the Court's ruling on these motions. No trial date has been scheduled. On April 30, 2001, B&W filed a declaratory judgment action in its Chapter 11 proceeding in the U.S. Bankruptcy Court for the Eastern District of Louisiana against MI, BWICO, BWXT, Hudson Products Corporation and McDermott Technology, Inc. seeking a judgment, among other things, that (1) B&W was not insolvent at the time of, or rendered insolvent as a result of, a corporate reorganization that we completed in the fiscal year ended March 31, 1999, which included, among other things, B&W's cancellation of a $313 million note 82 receivable and B&W's transfer of all the capital stock of Hudson Products Corporation, Tracy Power, BWXT and McDermott Technology, Inc. to BWICO, and (2) the transfers are not voidable. As an alternative, and only in the event that the Bankruptcy Court finds B&W was insolvent at a pertinent time and the transactions are voidable under applicable law, the action preserved B&W's claims against the defendants. The Bankruptcy Court permitted the ACC and the FCR in the Chapter 11 proceeding to intervene and proceed as plaintiff-intervenors and realigned B&W as a defendant in this action. The ACC and the FCR are asserting in this action, among other things, that B&W was insolvent at the time of the transfers and that the transfers should be voided. The Bankruptcy Court ruled that Louisiana law applied to the solvency issue in this action. Trial commenced on October 22, 2001 to determine B&W's solvency at the time of the corporate reorganization and concluded on November 2, 2001. In a ruling filed on February 8, 2002, the Bankruptcy Court found B&W solvent at the time of the corporate reorganization. On February 19, 2002, the ACC and FCR filed a motion with the District Court seeking leave to appeal the February 8, 2002 ruling. On February 20, 2002, MI, BWICO, BWXT, Hudson Products Corporation and McDermott Technology, Inc. filed a motion for summary judgment asking that judgment be entered on a variety of additional pending counts presented by the ACC and FCR that we believe are resolved by the February 8, 2002 ruling. On March 20, 2002, at a hearing in the Bankruptcy Court, the judge granted this motion and dismissed all claims asserted in complaints filed by the ACC and the FCR regarding the 1998 transfer of certain assets from B&W to its parent, which ruling was memorialized in an Order and Judgment dated April 17, 2002 that dismissed the proceeding with prejudice. On April 26, 2002, the ACC and FCR filed a notice of appeal of the April 17, 2002 Order and Judgment and on June 20, 2002 filed their appeal brief. On July 22, 2002, MI, BWICO, BWXT, Hudson Products Corporation and McDermott Technology, Inc. filed their brief in opposition. The ACC and FCR have not yet filed their reply brief pending discussions regarding settlement and a consensual joint plan of reorganization. In addition, an injunction preventing asbestos suits from being brought against nonfiling affiliates of B&W, including MI, JRM and MII, and B&W subsidiaries not involved in the Chapter 11 extends through April 14, 2003. See Note 20 to our consolidated financial statements for information regarding B&W's potential liability for nonemployee asbestos claims and additional information concerning the B&W Chapter 11 proceedings. On July 12, 2002, AE Energietechnic GmbH ("Austrian Energy") applied for the appointment of a receiver in the Bankruptcy Court of Graz, Austria. Austrian Energy is a subsidiary of Babcock-Borsig AG, which filed for bankruptcy on July 4, 2002 in Germany. Babcock and Wilcox Volund ApS ("Volund"), which we sold to B&W in October 2002, is jointly and severally liable with Austrian Energy pursuant to both their consortium agreement as well as their contract with the ultimate customer, SK Energi, for construction of a biomass boiler facility in Denmark. As a result of performance delays attributable to Austrian Energy and other factors, SK Energi has asserted claims for damages associated with the failure to complete the construction and commissioning of the facility on schedule. On August 30, 2002, Volund filed a claim against Austrian Energy in the Austrian Bankruptcy Court to establish Austrian Energy's liability for SK Energi's claims, which was subsequently rejected in its entirety by Austrian Energy. On October 8, 2002, Austrian Energy notified Volund that it had terminated its consortium agreement with Volund in accordance with Austrian bankruptcy laws. Volund is pursuing its claims in the Austrian Bankruptcy Court as well as other potential remedies available under applicable law. Assuming no recovery from Austrian Energy, the cost to Volund is currently estimated at $2.5 million, which we accrued during the three months ended September 30, 2002. See Note 2 to our consolidated financial statements for information concerning the sale of Volund to B&W. In September 2002, we were advised that the Securities and Exchange Commission and the New York Stock Exchange were conducting inquiries into the trading of MII securities occurring prior to our public announcement of August 7, 2002 with respect to our second quarter 2002 results, our revised 2002 guidance and developments in negotiations relating to the B&W Chapter 11 proceedings. We have recently become aware of a formal order of investigation issued by the SEC in connection with its inquiry, pursuant to which the Staff of the SEC has requested additional information from us and several of our current and former officers and directors. We continue to cooperate fully with both inquiries and have provided all information that has been requested. Several of our current and former officers and directors have voluntarily given interviews and have responded, or are in the process of responding, to SEC subpoenas requesting additional information. 83 Additionally, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including performance- or warranty-related matters under our customer and supplier contracts and other business arrangements. In our management's opinion, none of this litigation or disputes and claims will have a material adverse effect on our consolidated financial position, results of operations or cash flows. See Note 20 for information regarding B&W's potential liability for nonemployee asbestos claims and the settlement negotiations and other activities related to the B&W Chapter 11 reorganization proceedings commenced by B&W and certain of its subsidiaries on February 22, 2000. Environmental Matters We have been identified as a potentially responsible party at various cleanup sites under the Comprehensive Environmental Response, Compensation, and Liability Act, as amended ("CERCLA"). CERCLA and other environmental laws can impose liability for the entire cost of cleanup on any of the potentially responsible parties, regardless of fault or the lawfulness of the original conduct. Generally, however, where there are multiple responsible parties, a final allocation of costs is made based on the amount and type of wastes disposed of by each party and the number of financially viable parties, although this may not be the case with respect to any particular site. We have not been determined to be a major contributor of wastes to any of these sites. On the basis of our relative contribution of waste to each site, we expect our share of the ultimate liability for the various sites will not have a material adverse effect on our consolidated financial position, results of operations or liquidity in any given year. Environmental remediation projects have been and continue to be undertaken at certain of our current and former plant sites. During the fiscal year ended March 31, 1995, we decided to close B&W's nuclear manufacturing facilities in Parks Township, Armstrong County, Pennsylvania (the "Parks Facilities"), and B&W proceeded to decommission the facilities in accordance with its existing Nuclear Regulatory Commission ("NRC") license. B&W subsequently transferred the facilities to BWXT in the fiscal year ended March 31, 1998. During the fiscal year ended March 31, 1999, BWXT reached an agreement with the NRC on a plan that provides for the completion of facilities dismantlement and soil restoration by 2001 and license termination in 2003. BWXT expects to request approval from the NRC to release the site for unrestricted use at that time. At December 31, 2002, the remaining provision for the decontamination, decommissioning and closing of these facilities was $0.4 million. By December 31, 2002, only a portion of the operation and maintenance aspect of the decommissioning and decontamination work at the Parks facility remained to be completed in order to receive NRC approval to terminate the NRC license. The Department of Environmental Protection of the Commonwealth of Pennsylvania ("PADEP") advised B&W in March 1994 that it would seek monetary sanctions and remedial and monitoring relief related to the Parks Facilities. The relief sought related to potential groundwater contamination resulting from previous operations at the facilities. BWXT now owns these facilities. PADEP has advised BWXT that it does not intend to assess any monetary sanctions, provided that BWXT continues its remediation program for the Parks Facilities. Whether additional nonradiation contamination remediation will be required at the Parks facility remains unclear. Results from recent sampling completed by PADEP have indicated that such remediation may not be necessary. We perform significant amounts of work for the U.S. Government under both prime contracts and subcontracts and operate certain facilities that are licensed to possess and process special nuclear materials. As a result of these activities, we are subject to continuing reviews by governmental agencies, including the Environmental Protection Agency and the NRC. The NRC's decommissioning regulations require BWXT and McDermott Technology, Inc. ("MTI") to provide financial assurance that they will be able to pay the expected cost of decommissioning their facilities at the end of their service lives. BWXT and MTI will continue to provide financial assurance aggregating $29.9 million during the year ending December 31, 2003 by issuing letters of credit for the 84 ultimate decommissioning of all their licensed facilities, except one. This facility, which represents the largest portion of BWXT's eventual decommissioning costs, has provisions in its government contracts pursuant to which all of its decommissioning costs and financial assurance obligations are covered by the DOE. An agreement between the NRC and the State of Ohio to transfer regulatory authority for MTI's NRC licenses for byproduct and source nuclear material was finalized in December 1999. In conjunction with the transfer of this regulatory authority and upon notification by the NRC, MTI issued decommissioning financial assurance instruments naming the State of Ohio as the beneficiary. At December 31, 2002 and 2001, we had total environmental reserves (including provisions for the facilities discussed above) of $20.6 million and $21.2 million, respectively. Of our total environmental reserves at December 31, 2002 and 2001, $8.3 million and $6.1 million, respectively, were included in current liabilities. Our estimated recoveries of these costs totaling $0.2 million and $3.2 million, respectively, are included in accounts receivable - other in our consolidated balance sheet at December 31, 2002 and 2001. Inherent in the estimates of those reserves and recoveries are our expectations regarding the levels of contamination, decommissioning costs and recoverability from other parties, which may vary significantly as decommissioning activities progress. Accordingly, changes in estimates could result in material adjustments to our operating results, and the ultimate loss may differ materially from the amounts we have provided for in our consolidated financial statements. Operating Leases Future minimum payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year at December 31, 2002 are as follows:
Fiscal Year Ending December 31, Amount - ------------------------------- ------ 2003 $ 6,932,000 2004 $ 5,584,000 2005 $ 4,128,000 2006 $ 3,246,000 2007 $ 3,263,000 thereafter $ 39,948,000
Total rental expense for the years ended December 31, 2002, 2001 and 2000 was $45.0 million, $43.3 million and $44.1 million, respectively. These expense amounts include contingent rentals and are net of sublease income, neither of which is material. Other We have a take-or-pay contract with the primary provider of our long distance telecommunications service. Under the terms of this agreement, we are obligated to pay a minimum of $1.8 million per year through 2009. We perform significant amounts of work for the U.S. Government under both prime contracts and subcontracts. As a result, various aspects of our operations are subject to continuing reviews by governmental agencies. We maintain liability and property insurance against such risk and in such amounts as we consider adequate. However, certain risks are either not insurable or insurance is available only at rates we consider uneconomical. We have several wholly owned insurance subsidiaries that provide general and automotive liability insurance and, from time-to-time, builder's risk within certain limits, marine hull and workers' compensation insurance to our companies. These insurance subsidiaries have not provided significant amounts of insurance to unrelated parties. These captive insurers provide certain coverages for our subsidiary entities and related coverages. Claims as a result of our operations, or arising in the B&W Chapter 11 proceedings, could adversely impact the ability of these captive insurers to respond to all claims presented, although we believe such a result is unlikely. 85 We are contingently liable under standby letters of credit totaling $183.2 million at December 31, 2002, all of which were issued in the normal course of business. We have guaranteed a $2.5 million line of credit, of which $5,000 was outstanding at December 31, 2002, to an unconsolidated foreign joint venture. At December 31, 2002, we had pledged approximately $154.1 million fair value of our investment portfolio of $173.2 million: $107.8 million to secure the MII Credit Facility and $46.3 million to secure payments under and in connection with certain reinsurance agreements. In February 2003, we entered into the New Credit Facility described in Note 5 and the MII Credit Facility was terminated, resulting in the release of the $107.8 million of pledged investments. At the time of the B&W bankruptcy filing, MII was a maker or a guarantor of outstanding letters of credit aggregating approximately $146.5 million ($9.4 million at December 31, 2002) which were issued in connection with the business operations of B&W and its subsidiaries. At that time, MI and BWICO were similarly obligated with respect to additional letters of credit aggregating approximately $24.9 million which were issued in connection with the business operations of B&W and its subsidiaries. Although a permitted use of the debtor-in-possession revolving credit and letter of credit facility (the "DIP Credit Facility") is the issuance of new letters of credit to backstop or replace these preexisting letters of credit, each of MII, MI and BWICO has agreed to indemnify and reimburse B&W and its filing subsidiaries for any customer draw on any letter of credit issued under the DIP Credit Facility to backstop or replace any such preexisting letter of credit for which it has exposure and for the associated letter of credit fees paid under the facility. As of December 31, 2002, approximately $51.4 million in letters of credit have been issued under the DIP Credit Facility to replace or backstop these preexisting letters of credit. MII has agreed to indemnify our two surety companies for obligations of various subsidiaries of MII, including B&W and several of its subsidiaries, under surety bonds issued to meet bid bond and performance bond requirements imposed by their customers. As of December 31, 2002, the aggregate outstanding amount of surety bonds that were guaranteed by MII and issued in connection with the business operations of its subsidiaries was approximately $121.0 million, of which $107.7 million related to the business operations of B&W and its subsidiaries. NOTE 11 - RELATED PARTY TRANSACTIONS A company affiliated with two of our directors manages and operates an offshore producing oil and gas property for JRM. The management and operation agreement requires JRM to pay an operations management fee of approximately $11,000 per month, a marketing service fee based on production, a minimum accounting and property supervision fee of approximately $5,500 per month, and certain other costs incurred in connection with the agreement. JRM paid approximately $0.9 million annually in fees and costs under the agreement during the years ended December 31, 2002, 2001 and 2000. JRM subsidiaries also sold natural gas at established market prices to the related party. JRM has periodically entered into agreements to design, fabricate and install offshore pipelines for the same company. In addition, JRM received approximately $2.2 million, $2.1 million and $5.0 million for work performed on those agreements in the years ended December 31, 2002, 2001 and 2000, respectively. See Note 3 for transactions with unconsolidated affiliates and Note 20 for transactions with B&W. NOTE 12 - RISKS AND UNCERTAINTIES During 2002, our Marine Construction Services segment experienced material losses on its three EPIC spar projects totaling $149.3 million: Medusa, Devils Tower and Front Runner. These contracts are first-of-a-kind as well as long term in nature. We have experienced schedule delays and cost overruns on these contracts that have adversely impacted our financial results. These projects continue to face significant issues. The remaining challenges to completing Medusa within its revised schedule and budget are finishing the topsides fabrication and the marine installation portion of the project. Our revised schedule requires installation activities during the second quarter of 2003. We believe the major challenge in completing Devils Tower within its revised budget is to remain on track with the revised schedule for 86 topsides fabrication due to significant liquidated damages that are associated with the contract. A substantial portion of the costs and delay impacts on Devils Tower are attributable to remedial activities undertaken with regard to the paint application. On March 21, 2003, we filed an action against the paint vendors for recovery of the remediation costs, delays and other damages. The key issues for the Front Runner contract relate to subcontractors and liquidated damages due to schedule slippage either by JRM or one or more of the subcontractors. At December 31, 2002, we have provided for our estimated losses on these contracts. It is reasonably possible that current estimates could change due to unforeseen events which could result in adjustments to overall contract costs and these may continue to be significant in future periods. NOTE 13 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK Our Marine Construction Services segment's principal customers are businesses in the offshore oil, natural gas and hydrocarbon processing industries and other marine construction companies. The primary customer of our Government Operations segment is the U.S. Government (including its contractors). These concentrations of customers may impact our overall exposure to credit risk, either positively or negatively, in that our customers may be similarly affected by changes in economic or other conditions. In addition, we and many of our customers operate worldwide and are therefore exposed to risks associated with the economic and political forces of various countries and geographic areas. Approximately 54% of our trade receivables are due from foreign customers. (See Note 17 for additional information about our operations in different geographic areas.) We generally do not obtain any collateral for our receivables. We believe that our provision for possible losses on uncollectible accounts receivable is adequate for our credit loss exposure. At December 31, 2002 and 2001, the allowance for possible losses we deducted from accounts receivable-trade on the accompanying balance sheet was $1.6 million and $1.1 million, respectively. NOTE 14 - INVESTMENTS The following is a summary of our available-for-sale securities at December 31, 2002:
Amortized Gross Gross Estimated Cost Unrealized Gains Unrealized Losses Fair Value ---- ---------------- ----------------- ---------- (In thousands) Debt securities: U.S. Treasury securities and obligations of U.S. Government agencies $ 156,365 $ 585 $ - $ 156,950 Corporate notes and bonds 10,366 95 1 10,460 Other debt securities 5,821 - 4 5,817 - ----------------------------------------------------------------------------------------------------------------- Total $ 172,552 $ 680 $ 5 $ 173,227 =================================================================================================================
In February 2003, we liquidated approximately $108 million of our investment portfolio for working capital and general corporate purposes. The following is a summary of our available-for-sale securities at December 31, 2001:
Amortized Gross Gross Estimated Cost Unrealized Gains Unrealized Losses Fair Value ---- ---------------- ----------------- ---------- (In thousands) Debt securities: U.S. Treasury securities and obligations of U.S. Government agencies $ 295,753 $ 1,015 $ 9 $ 296,759 Corporate notes and bonds 18,672 256 21 18,907 Other debt securities 15,277 60 - 15,337 - ----------------------------------------------------------------------------------------------------------------- Total $ 329,702 $ 1,331 $ 30 $ 331,003 =================================================================================================================
87 Proceeds, gross realized gains and gross realized losses on sales of available-for-sale securities were as follows:
Gross Gross Proceeds Realized Gains Realized Losses -------- -------------- --------------- (In thousands) Year Ended December 31, 2002 $ 775,441 $ 997 $ - Year Ended December 31, 2001 $1,229,087 $ 7,614 $ 4,634 Year Ended December 31, 2000 $ 26,375 $ 23 $ 22
The amortized cost and estimated fair value of available-for-sale debt securities at December 31, 2002, by contractual maturity, are as follows:
Amortized Estimated Cost Fair Value ---- ---------- (In thousands) Due in one year or less $ 144,688 $ 144,846 Due after one through three years 27,864 28,381 - ----------------------------------------------------------------------------------- Total $ 172,552 $ 173,227 - -----------------------------------------------------------------------------------
NOTE 15 - DERIVATIVE FINANCIAL INSTRUMENTS Our worldwide operations give rise to exposure to market risks from changes in foreign exchange rates. We use derivative financial instruments, primarily forward contracts, to reduce the impact of changes in foreign exchange rates on our operating results. We use these instruments primarily to hedge our exposure associated with revenues or costs on our long-term contracts that are denominated in currencies other than our operating entities' functional currencies. We do not hold or issue financial instruments for trading or other speculative purposes. We enter into forward contracts primarily as hedges of certain firm purchase and sale commitments denominated in foreign currencies. We record these contracts at fair value on our consolidated balance sheet. Depending on the hedge designation at the inception of the contract, the related gains and losses on these contracts are either deferred in stockholders' equity (as a component of accumulated other comprehensive loss) until the hedged item is recognized in earnings or offset against the change in fair value of the hedged firm commitment through earnings. The ineffective portion of a derivative's change in fair value and any portion excluded from the assessment of effectiveness are immediately recognized in earnings. The gain or loss on a derivative instrument not designated as a hedging instrument is also immediately recognized in earnings. Gains and losses on forward contracts that require immediate recognition are included as a component of other-net in our consolidated statement of loss. At December 31, 2002 and 2001, we had forward contracts to purchase $15.5 million and $42.8 million, respectively, in foreign currencies (primarily Indonesian Rupiah and Euro) and to sell $0.9 million and $0.7 million, respectively, in foreign currencies at varying maturities through August 2003. We have designated substantially all of these contracts as cash flow hedging instruments. The hedged risk is the risk of changes in our functional-currency-equivalent cash flows attributable to changes in spot exchange rates of forecasted transactions related to our long-term contracts. We exclude from our assessment of effectiveness the portion of the fair value of the forward contracts attributable to the difference between spot exchange rates and forward exchange rates. At December 31, 2002, we had deferred approximately $1.1 million of net gains on these forward contracts, 82% of which we expect to recognize in income over the next 12 months primarily in accordance with the percentage-of-completion method of accounting. At December 31, 2001, we had deferred approximately $2.2 million of net losses on forward contracts. For the years ended December 31, 2002 and 2001, we recognized net gains on forward contracts of approximately $1.5 million and $0.1 million, respectively. Substantially all of these net gains represent changes in the fair value of forward contracts excluded from hedge effectiveness. We are exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. We mitigate this risk by using major financial institutions with high credit ratings. 88 NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS We used the following methods and assumptions in estimating our fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts we have reported in the accompanying balance sheet for cash and cash equivalents approximate their fair values. Investments: We estimate the fair values of investments based on quoted market prices. For investments for which there are no quoted market prices, we derive fair values from available yield curves for investments of similar quality and terms. Long- and short-term debt: We base the fair values of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair values on the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms. Foreign currency forward contracts: We estimate the fair values of foreign currency forward contracts by obtaining quotes from brokers. At December 31, 2002 and 2001, we had net forward contracts outstanding to purchase foreign currencies with notional values of $14.5 million and $42.1 million, respectively, and fair values of $0.4 million and ($2.0) million, respectively. The estimated fair values of our financial instruments are as follows:
December 31, 2002 December 31, 2001 ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- (In thousands) Balance Sheet Instruments - ------------------------- Cash and cash equivalents $ 175,177 $ 175,177 $ 196,912 $ 196,912 Investments $ 173,227 $ 173,227 $ 331,003 $ 331,003 Debt excluding capital leases $ 137,546 $ 102,196 $ 305,379 $ 292,875
NOTE 17 - SEGMENT REPORTING Our reportable segments are Marine Construction Services, Government Operations, Industrial Operations and Power Generation Systems. These segments are managed separately and are unique in technology, services and customer class. We have restated our segment information for the years ended December 31, 2001 and 2000 to reflect changes in our reportable segments. The results of operations of McDermott Technology, Inc. ("MTI") are now included in our Government Operations segment. The results of operations of HPC, which we sold in July 2002, are reported in discontinued operations. MTI and HPC were previously included in our Industrial Operations segment. Our Industrial Operations segment now includes only the results of MECL, which we sold to a unit of Jacobs Engineering Group Inc. on October 29, 2001. MECL had revenues of approximately $507.2 million and segment income of approximately $10.0 million through October 29, 2001, the date of the sale. We recognized a gain of approximately $28.0 million on the sale. See Note 2 for further information. Marine Construction Services, which includes the results of JRM, supplies worldwide services for the offshore oil and gas exploration, production and hydrocarbon processing industries and to other marine construction companies. Principal activities include the design, engineering, fabrication and installation of offshore drilling and production platforms, specialized structures, modular facilities, marine pipelines and subsea production systems. JRM also provides project management services, engineering services, procurement activities, and removal, salvage and refurbishment services of offshore fixed platforms. 89 Government Operations supplies nuclear components to the U.S. Navy, manages and operates government-owned facilities and supplies commercial nuclear environmental services and other government and commercial nuclear services. Government Operations also includes contract research activities. Power Generation Systems supplies engineered-to-order services, products and systems for energy conversion, and fabricates replacement nuclear steam generators and environmental control systems. In addition, this segment provides aftermarket services including replacement parts, engineered upgrades, construction, maintenance and field technical services to electric power plants and industrial facilities. This segment also provides power through cogeneration, refuse-fueled power plants and other independent power producing facilities. Included in the year ended December 31, 2000 are charges of $23.4 million to exit certain foreign joint ventures. The Power Generation Systems segment's operations are conducted primarily through B&W. Due to B&W's Chapter 11 filing, effective February 22, 2000, we stopped consolidating B&W's and its subsidiaries' results of operations in our consolidated financial statements. Through February 21, 2000, B&W's and its subsidiaries' results are reported as Power Generation Systems - B&W in the segment information that follows. See Note 20 for the condensed consolidated results of B&W and its subsidiaries. We account for intersegment sales at prices that we generally establish by reference to similar transactions with unaffiliated customers. Reportable segments are measured based on operating income exclusive of general corporate expenses, contract and insurance claims provisions, legal expenses and gains (losses) on sales of corporate assets. Other reconciling items to income before provision for income taxes are interest income, interest expense, minority interest and other-net. Certain amounts previously reported as other unallocated items are allocated to the reportable segments. In addition, income from over-funded pension plans of discontinued businesses previously reported in other-net is included in corporate. We have restated segment income and corporate for prior periods to conform to the current presentation. We exclude the following assets from segment assets: investments in debt securities, prepaid pension costs and our investment in B&W. Previously, we also excluded insurance recoverables for products liability claims and certain goodwill from segment assets. We have restated segment assets for prior periods to conform to the current presentation of segment assets. SEGMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000. 1. Information about Operations in our Different Industry Segments:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) REVENUES: (1) Marine Construction Services $ 1,148,041 $ 848,528 $ 757,508 Government Operations 553,827 494,018 444,042 Industrial Operations - 507,262 426,262 Power Generation Systems - B&W - - 155,774 Power Generation Systems 46,881 47,778 33,794 Adjustments and Eliminations (68) (638) (3,710) - ---------------------------------------------------------------------------------------------------- $ 1,748,681 $ 1,896,948 $ 1,813,670 ====================================================================================================
(1) Segment revenues are net of the following intersegment transfers and other adjustments: Marine Construction Services Transfers $ 68 $ 282 $ 896 Government Operations Transfers - 318 300 Industrial Operations Transfers - 38 283 Power Generation Systems Transfers - B&W - - 59 Eliminations - - 2,172 - ---------------------------------------------------------------------------------------------------- $ 68 $ 638 $ 3,710 ====================================================================================================
90
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) OPERATING INCOME (LOSS): Segment Operating Income (Loss): Marine Construction Services $ (162,626) $ 14,506 $ (33,534) Government Operations 34,600 29,320 33,224 Industrial Operations - 9,928 9,767 Power Generation Systems - B&W - - 7,172 Power Generation Systems (2,825) (3,656) (7,783) - ---------------------------------------------------------------------------------------------------- $ (130,851) $ 50,098 $ 8,846 - ---------------------------------------------------------------------------------------------------- Gain (Loss) on Asset Disposal and Impairments - Net: Marine Construction Services $ (320,945) $ (3,624) $ (1,012) Government Operations 88 (128) (1,047) Industrial Operations - 13 (141) Power Generation Systems - B&W - - (33) - ---------------------------------------------------------------------------------------------------- $ (320,857) $ (3,739) $ (2,233) - ---------------------------------------------------------------------------------------------------- Equity in Income (Loss) from Investees: Marine Construction Services $ 5,311 $ 10,442 $ 2,866 Government Operations 24,645 23,004 11,107 Industrial Operations - 43 50 Power Generation Systems - B&W - - 812 Power Generation Systems (2,264) 604 (24,630) - ---------------------------------------------------------------------------------------------------- $ 27,692 $ 34,093 $ (9,795) - ---------------------------------------------------------------------------------------------------- SEGMENT INCOME (LOSS): Marine Construction Services $ (478,260) $ 21,324 $ (31,680) Government Operations 59,333 52,196 43,284 Industrial Operations - 9,984 9,676 Power Generation Systems - B&W - - 7,951 Power Generation Systems (5,089) (3,052) (32,413) - ---------------------------------------------------------------------------------------------------- (424,016) 80,452 (3,182) - ---------------------------------------------------------------------------------------------------- Write-off of investment in B&W (224,664) - - Other unallocated (1,452) - - Corporate(1) (23,628) (5,080) 8,055 - ---------------------------------------------------------------------------------------------------- $ (673,760) $ 75,372 $ 4,873 ====================================================================================================
(1) Corporate Departmental Expenses $ (45,104) $ (42,502) $ (60,594) Legal/Professional Services related to Chapter 11 Proceedings (1,612) (15,471) (2,860) Other Corporate Expenses (2,698) (13,693) (19,534) Income (Expense) from Qualified Pension Plans (11,087) 28,553 47,983 Insurance-related Items 9,447 6,690 7,156 - ------------------------------------------------------------------------------------------------------------- Gross Corporate General & Administrative Expenses (51,054) (36,423) (27,849) General & Administrative Expenses Allocated to Segments 27,426 31,343 35,904 - ------------------------------------------------------------------------------------------------------------- Total $ (23,628) $ (5,080) $ 8,055 =============================================================================================================
91
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) SEGMENT ASSETS: Marine Construction Services $ 707,021 $ 1,010,300 $ 896,815 Government Operations 308,301 260,812 246,601 Industrial Operations - - 79,306 Power Generation Systems 8,739 38,162 39,780 - -------------------------------------------------------------------------------------------------------------------- Total Segment Assets 1,024,061 1,309,274 1,262,502 Corporate Assets 254,110 763,139 756,625 Discontinued Operations - 31,427 36,500 - -------------------------------------------------------------------------------------------------------------------- Total Assets $ 1,278,171 $ 2,103,840 $ 2,055,627 ==================================================================================================================== CAPITAL EXPENDITURES: Marine Construction Services (1) $ 45,046 $ 25,670 $ 31,341 Government Operations 23,761 19,648 15,992 Industrial Operations - 1,466 33 Power Generation Systems - B&W - - 496 Power Generation Systems (2) 356 719 6,990 - -------------------------------------------------------------------------------------------------------------------- Segment Capital Expenditures 69,163 47,503 54,852 Corporate Capital Expenditures 106 1,092 101 Discontinued Operations - 963 1,291 - -------------------------------------------------------------------------------------------------------------------- Total Capital Expenditures $ 69,269 $ 49,558 $ 56,244 ==================================================================================================================== DEPRECIATION AND AMORTIZATION: Marine Construction Services $ 24,984 $ 46,634 $ 45,819 Government Operations 11,388 10,567 11,260 Industrial Operations - 559 673 Power Generation Systems - B&W - - 2,489 Power Generation Systems 550 1,106 763 - -------------------------------------------------------------------------------------------------------------------- Segment Depreciation and Amortization 36,922 58,866 61,004 Corporate Depreciation and Amortization 3,889 2,122 1,616 Discontinued Operations - 1,383 1,270 - -------------------------------------------------------------------------------------------------------------------- Total Depreciation and Amortization $ 40,811 $ 62,371 $ 63,890 ==================================================================================================================== INVESTMENT IN UNCONSOLIDATED AFFILIATES: Marine Construction Services $ 4,863 $ 6,524 $ 11,086 Government Operations 4,300 5,434 2,527 Industrial Operations - - 274 Power Generation Systems 2,380 9,037 9,565 - -------------------------------------------------------------------------------------------------------------------- Segment Investment in Unconsolidated Affiliates 11,543 20,995 23,452 Discontinued Operations - 3,164 1,953 - -------------------------------------------------------------------------------------------------------------------- Total Investment in Unconsolidated Affiliates $ 11,543 $ 24,159 $ 25,405 ====================================================================================================================
(1) Includes new capital leases in the Eastern Hemisphere of $4,417,000 and $4,550,000 at December 31, 2002 and 2001, respectively. (2) Includes property, plant and equipment of $6,944,000 acquired in the acquisition of B&W Volund in the year ended December 31, 2000. 92 2. Information about our Product and Service Lines:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) REVENUES: Marine Construction Services: Offshore Operations $ 283,308 $ 331,724 $ 294,399 Fabrication Operations 258,545 176,908 170,883 Engineering Operations 119,570 69,987 76,819 Procurement Activities 845,955 407,855 255,512 Eliminations (359,337) (137,946) (40,105) - -------------------------------------------------------------------------------------------------------------------- 1,148,041 848,528 757,508 - -------------------------------------------------------------------------------------------------------------------- Government Operations: Nuclear Component Program 370,734 327,938 288,890 Management & Operation Contracts of U.S. Government Facilities 110,696 93,204 102,080 Other Commercial Operations 31,489 26,706 16,369 Nuclear Environmental Services 14,171 24,046 22,296 Contract Research 16,298 16,640 11,893 Other Government Operations 12,297 9,036 16,132 Other Industrial Operations 667 5,249 1,919 Eliminations (2,525) (8,801) (15,537) - -------------------------------------------------------------------------------------------------------------------- 553,827 494,018 444,042 - -------------------------------------------------------------------------------------------------------------------- Industrial Operations: Engineering & Construction - 312,028 190,199 Plant Outage Maintenance - 200,148 237,796 Eliminations - (4,914) (1,733) - -------------------------------------------------------------------------------------------------------------------- - 507,262 426,262 - -------------------------------------------------------------------------------------------------------------------- Power Generation Systems - B&W: Original Equipment Manufacturers' Operations - - 42,674 Nuclear Equipment Operations - - 9,051 Aftermarket Goods and Services - - 95,717 Operations and Maintenance - - 6,304 Boiler Auxiliary Equipment - - 8,258 Eliminations - - (6,230) - -------------------------------------------------------------------------------------------------------------------- - - 155,774 - -------------------------------------------------------------------------------------------------------------------- Power Generation Systems: Original Equipment Manufacturers' Operations 30,791 27,848 16,837 Plant Enhancements 15,868 21,004 15,958 New Equipment - - 145 Other 222 (1,074) 854 - -------------------------------------------------------------------------------------------------------------------- 46,881 47,778 33,794 - -------------------------------------------------------------------------------------------------------------------- Eliminations (68) (638) (3,710) - -------------------------------------------------------------------------------------------------------------------- $ 1,748,681 $ 1,896,948 $ 1,813,670 ====================================================================================================================
93 3. Information about our Operations in Different Geographic Areas:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) REVENUES: (1) United States $ 1,045,245 $ 892,558 $ 867,337 Azerbaijan 121,603 4,851 - Indonesia 88,520 19,645 348,656 Australia 86,594 26,194 166 Trinidad 65,304 59,934 21,016 Qatar 57,110 46,404 3,698 Mexico 54,999 108,038 56,559 Nigeria 51,408 23,989 - Vietnam 33,161 10,160 158 Denmark 26,599 24,686 18,750 Argentina 23,198 3,129 - Thailand 22,572 35,702 3,212 Malaysia 20,022 55,869 3,585 India 11,215 15,135 41,188 Canada 6,512 474,372 320,583 United Kingdom 998 30,592 59,300 Saudi Arabia 982 26,249 23,324 Other Countries 32,639 39,441 46,138 - -------------------------------------------------------------------------------------------------------------------- $ 1,748,681 $ 1,896,948 $ 1,813,670 ==================================================================================================================== PROPERTY, PLANT AND EQUIPMENT, NET: United States $ 226,824 $ 190,592 $ 190,517 Indonesia 61,281 61,167 64,513 United Arab Emirates 32,298 34,035 18,149 Mexico 14,497 51,678 56,712 Singapore 8,147 3,706 9,406 Denmark - 6,276 6,518 Other Countries 11,053 6,445 8,378 - -------------------------------------------------------------------------------------------------------------------- $ 354,100 $ 353,899 $ 354,193 ====================================================================================================================
(1) We allocate geographic revenues based on the location of the customer. 4. Information about our Major Customers: In the years ended December 31, 2002, 2001 and 2000, the U.S. Government accounted for approximately 29%, 24% and 23%, respectively, of our total revenues. We have included these revenues in our Government Operations segment. In the year ended December 31, 2002, revenues from one of our Marine Construction Services segment customers were $174.5 million or approximately 10% of our total revenues. 94 NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED) The following tables set forth selected unaudited quarterly financial information for the years ended December 31, 2002 and 2001:
Year Ended December 31, 2002 Quarter Ended ---------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, 2002 2002 2002 2002 ---------------------------------------------------------------------- (In thousands, except per share amounts) Revenues $ 399,192 $ 465,709 $ 435,632 $ 448,148 Operating loss (1) $ (2,022) $ (237,480) $ (365,163) $ (69,095) Equity in income from investees $ 7,534 $ 2,418 $ 4,469 $ 13,271 Loss from continuing operations before extraordinary item $ (1,760) $ (234,972) $ (364,943) $ (184,529) Net loss $ (593) $ (234,216) $ (357,056) $ (184,529) Loss per common share: Basic and Diluted: From continuing operations before extraordinary item $ (0.03) $ (3.81) $ (5.88) $ (2.94) Net Loss $ (0.01) $ (3.80) $ (5.76) $ (2.94)
(1) Includes equity in income from investees. Results for the quarter ended March 31, 2002 include an extraordinary gain of $0.3 million, net of taxes of $0.2 million, related to the early retirement of debt. Results for the quarter ended June 30, 2002 include an impairment charge of $224.7 million to write off our net investment in B&W of $187.0 million and other related assets totaling $37.7 million. Results for the quarter ended September 30, 2002 include an impairment charge of $313.0 million related to JRM's goodwill and a gain on the sale of HPC of $9.4 million, net of taxes of $5.7 million, which is reported in discontinued operations. Results for the quarter ended December 31, 2002 include a provision for the estimated costs of the settlement of the B&W Chapter 11 proceedings of $110.0 million, including tax expense of $23.6 million.
Year Ended December 31, 2001 Quarter Ended ---------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, 2001 2001 2001 2001 ---------------------------------------------------------------------- (In thousands, except per share amounts) Revenues $ 410,524 $ 477,816 $ 572,631 $ 435,977 Operating income (1) $ 4,883 $ 20,133 $ 32,291 $ 18,065 Equity in income from investees $ 4,921 $ 7,871 $ 11,247 $ 10,054 Income (loss) from continuing operations before extraordinary item $ (5,169) $ 7,257 $ 18,416 $ (44,926) Net income (loss) $ (4,433) $ 7,958 $ 19,345 $ (42,892) Earnings (loss) per common share: Basic: From continuing operations before extraordinary item $ (0.09) $ 0.12 $ 0.30 $ (0.73) Net income (loss) $ (0.07) $ 0.13 $ 0.32 $ (0.70) Diluted: From continuing operations before extraordinary item $ (0.09) $ 0.12 $ 0.29 $ (0.73) Net income (loss) $ (0.07) $ 0.13 $ 0.31 $ (0.70)
(1) Includes equity in income from investees. 95 Results for the quarter ended December 31, 2001 include a pre-tax gain on our sale of MECL totaling $28.0 million, tax of approximately $85.4 million associated with the intended exercise of an intercompany stock purchase and sale agreement and an extraordinary item of $0.8 million, net of taxes of $0.5 million, related to the early retirement of debt. NOTE 19 - EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share:
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands, except shares and per share amounts) Basic: Loss from continuing operations $ (786,204) $ (24,422) $ (24,864) Income from discontinued operations 9,469 3,565 2,782 Extraordinary item 341 835 - --------------------------------------------------------------------------------------------------------- Net loss for basic computation $ (776,394) $ (20,022) $ (22,082) ========================================================================================================= Weighted average common shares 61,860,585 60,663,565 59,769,662 ========================================================================================================= Basic earnings (loss) per common share: Loss from continuing operations $ (12.71) $ (0.40) $ (0.42) Income from discontinued operations $ 0.15 $ 0.06 $ 0.05 Extraordinary item $ 0.01 $ 0.01 $ - Net loss $ (12.55) $ (0.33) $ (0.37) Diluted: Loss from continuing operations $ (786,204) $ (24,422) $ (24,864) Income from discontinued operations 9,469 3,565 2,782 Extraordinary item 341 835 - --------------------------------------------------------------------------------------------------------- Net loss for diluted computation $ (776,394) $ (20,022) $ (22,082) ========================================================================================================= Weighted average common shares (basic) 61,860,585 60,663,565 59,769,662 Effect of dilutive securities: Stock options and restricted stock - - - --------------------------------------------------------------------------------------------------------- Adjusted weighted average common shares and assumed conversions 61,860,585 60,663,565 59,769,662 ========================================================================================================= Diluted earnings (loss) per common share: Loss from continuing operations $ (12.71) $ (0.40) $ (0.42) Income from discontinued operations $ 0.15 $ 0.06 $ 0.05 Extraordinary item $ 0.01 $ 0.01 $ - Net loss $ (12.55) $ (0.33) $ (0.37)
At December 31, 2002, 2001 and 2000, we excluded from the diluted share calculation incremental shares of 1,940,511, 1,983,314 and 1,050,242, respectively, related to stock options and restricted stock, as their effect would have been antidilutive. NOTE 20 - THE BABCOCK & WILCOX COMPANY General As a result of asbestos-containing commercial boilers and other products B&W and certain of its subsidiaries sold, installed or serviced in prior decades, B&W is subject to a substantial volume of nonemployee liability claims asserting asbestos-related injuries. All of the personal injury claims are similar in nature, the primary difference being the type of alleged injury or illness suffered by the plaintiff as a result of the exposure to asbestos fibers (e.g., mesothelioma, lung cancer, other types of cancer, asbestosis or pleural changes). On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in New Orleans (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Included in the filing are B&W and its subsidiaries Americon, Inc., Babcock & Wilcox Construction Co., Inc. and Diamond Power International, Inc. (collectively, the 96 "Debtors"). The Debtors took this action as a means to determine and comprehensively resolve all pending and future asbestos liability claims against them. Following the filing, the Bankruptcy Court issued a preliminary injunction prohibiting asbestos liability lawsuits and other actions for which there is shared insurance from being brought against nonfiling affiliates of the Debtors, including MI, JRM and MII. The preliminary injunction is subject to periodic hearings before the Bankruptcy Court for extension. Currently, the preliminary injunction extends through April 14, 2003. As discussed in Note 1, we wrote off our net investment in B&W in the quarter ended June 30, 2002. The total impairment charge of $224.7 million included our investment in B&W of $187.0 million and other related assets totaling $37.7 million, primarily consisting of accounts receivable from B&W, for which we provided an allowance of $18.2 million. Settlement Negotiations We are continuing our discussions with the ACC and FCR concerning a potential settlement. As a result of those discussions, we reached an agreement in principle in August 2002 with representatives of the ACC and FCR on several key terms, which served as a basis for continuing negotiations; however, a number of significant issues and numerous details remain to be negotiated and resolved. Should the remaining issues and details not be negotiated and resolved to the mutual satisfaction of the parties, the parties may be unable to resolve the B&W Chapter 11 proceedings through settlement. Additionally, the potential settlement will be subject to various conditions, including the requisite approval of the asbestos claimants, the Bankruptcy Court confirmation of a plan of reorganization reflecting the settlement and the approval by MII's Board of Directors and stockholders. The parties are currently working to address the remaining unresolved issues and details in a joint plan of reorganization and related settlement agreement. On December 19, 2002, B&W and its filing subsidiaries, the ACC, the FCR and MI filed drafts of those documents, together with a draft of a related disclosure statement, which include the following key terms: - MII would effectively assign all its equity in B&W to a trust to be created for the benefit of the asbestos personal injury claimants. - MII and all its subsidiaries would assign, transfer or otherwise make available their rights to all applicable insurance proceeds to the trust. - MII would issue 4.75 million shares of restricted common stock and cause those shares to be transferred to the trust. The resale of the shares would be subject to certain limitations, in order to provide for an orderly means of selling the shares to the public. Certain sales by the trust would also be subject to an MII right of first refusal. If any of the shares issued to the trust are still held by the trust after three years, and to the extent those shares could not have been sold in the market at a price greater than or equal to $19.00 per share (based on quoted market prices), taking into account the restrictions on sale and any waivers of those restrictions that may be granted by MII from time to time, MII would effectively guarantee that those shares would have a value of $19.00 per share on the third anniversary of the date of their issuance. MII would be able to satisfy this guaranty obligation by making a cash payment or through the issuance of additional shares of its common stock. If MII elects to issue shares to satisfy this guaranty obligation, it would not be required to issue more than 12.5 million shares. - MI would issue promissory notes to the trust in an aggregate principal amount of $92 million. The notes would be unsecured obligations and would provide for payments of principal of $8.4 million per year to be payable over 11 years, with interest payable on the outstanding balance at the rate of 7.5% per year. The payment obligations under those notes would be guaranteed by MII. - MII and all its past and present directors, officers and affiliates, including its captive insurers, would receive the full benefit of Section 524(g) of the Bankruptcy Code with respect to personal injury claims attributable to B&W's use of asbestos and would be released and protected from all pending and future asbestos-related claims stemming from B&W's operations, as well as other claims (whether contract claims, tort claims or other claims) of any kind relating to B&W, including but not limited to claims relating to the 1998 corporate reorganization that has been the subject of litigation in the Chapter 11 proceedings. - The settlement would be conditioned on the approval by MII's Board of Directors and stockholders of the terms of the settlement outlined above. 97 As the settlement discussions proceed, we expect that some of the court proceedings in or relating to the B&W Chapter 11 case will continue and that the parties will continue to maintain their previously asserted positions. The Bankruptcy Court has directed the parties to file an amended disclosure statement by March 28, 2003, that, among other things, updates the status of the negotiations, and has set a disclosure statement hearing for April 9, 2003. Following that filing and hearing, the Bankruptcy Court will schedule further proceedings concerning this matter. The process of finalizing and implementing the settlement could take up to a year, depending on, among other things, the nature and extent of any objections or appeals in the bankruptcy case. Despite our recent progress in our settlement discussions, there are continuing risks and uncertainties that will remain with us until the requisite approvals are obtained and the final settlement is reflected in a plan of reorganization that is confirmed by the Bankruptcy Court pursuant to a final, nonappealable order of confirmation. As of December 31, 2002, we determined that a final settlement is probable and established an estimate for the cost of the settlement of $110.0 million, including tax expense of $23.6 million, reflecting the present value of our contributions and contemplated payments to the trusts as outlined above. The provision for the estimated cost of the B&W settlement is comprised of the following (in thousands): Promissory notes to be issued $ 83,081 MII common shares to be issued 20,805 Share price guaranty obligation 42,026 Other 3,435 Future tax reimbursements (29,000) Forgiveness of certain intercompany balances (33,970) ----------- Total $ 86,377 Plus: tax expense 23,593 ----------- Net provision for estimated cost of settlement $ 109,970 ===========
The fair value of the promissory notes to be issued was based on the present value of future cash flows discounted at borrowing rates currently assumed to be available for debt with similar terms and maturities. The MII common shares to be issued were valued at our closing stock price on December 31, 2002 of $4.38. The fair value of the share price guaranty obligation was based on a present value calculation using our closing stock price on December 31, 2002, assuming the number of shares to be issued is 12.5 million. The value of the future tax reimbursements was based on the present value of projected future tax reimbursements to be received from B&W. The final value of the overall settlement and each of its components may differ significantly from the estimates currently recorded depending on a variety of factors, including changes in market conditions and the market value of our common shares when issued. Accordingly, we will revalue the estimate of the settlement on a quarterly basis and at the time the securities are issued. Upon issuance of the debt and equity securities, we will record such amounts as liabilities or stockholders' equity based on the nature of the individual securities. Remaining Issues to be Resolved While the Chapter 11 reorganization proceedings continue to progress, there are a number of issues and matters related to the Debtors' asbestos liability to be resolved prior to their emergence from the proceedings. Remaining issues and matters to be resolved include, among other things, the following: - the ultimate asbestos liability of the Debtors; - the outcome of negotiations with the ACC, the FCR and other participants in the Chapter 11 proceedings, concerning, among other things, the size and structure of the settlement trusts to satisfy the asbestos liability and the means for funding those trusts; - the outcome of negotiations with our insurers as to additional amounts of coverage of the Debtors and their participation in a plan to fund the settlement trusts; - the Bankruptcy Court's decisions relating to numerous substantive and procedural aspects of the Chapter 11 proceedings, including the Bankruptcy Court's periodic determinations as to whether to extend the existing preliminary injunction that 98 prohibits asbestos liability lawsuits and other actions for which there is shared insurance from being brought against nonfiling affiliates of B&W, including MI, JRM and MII; - the continued ability of our insurers to reimburse B&W and its subsidiaries for payments made to asbestos claimants and the resolution of claims filed by insurers for recovery of insurance amounts previously paid for asbestos personal injury claims; - the ultimate resolution of the appeals from the ruling issued by the Bankruptcy Court on February 8, 2002, which found B&W solvent at the time of a corporate reorganization completed in the fiscal year ended March 31, 1999, and the related ruling issued on April 17, 2002 (collectively, the "Transfer Case"). See Note 10 for further information; - the outcome of objections and potential appeals involving approval of the disclosure statement and confirmation of the plan of reorganization; - final agreement regarding the proposed spin-off of the MI/B&W pension plan, which could significantly impact amounts recorded at December 31, 2002; and - final agreement on a tax sharing and tax separation arrangement between MI and B&W. Insurance Coverage and Pending Claims Prior to their bankruptcy filing, the Debtors had engaged in a strategy of negotiating and settling asbestos personal injury claims brought against them and billing the settled amounts to insurers for reimbursement. At December 31, 2002, receivables of $23.1 million were due from insurers for reimbursement of settled claims paid by the Debtors prior to the Chapter 11 filing. Currently, certain insurers are refusing to reimburse the Debtors for these receivables until the Debtors' assumption, in bankruptcy, of their pre-bankruptcy filing contractual reimbursement arrangements with such insurers. Pursuant to the Bankruptcy Court's order, a March 29, 2001 bar date was set for the submission of allegedly unpaid pre-Chapter 11 settled asbestos claims and a July 30, 2001 bar date for all other asbestos personal injury claims, asbestos property damage claims, derivative asbestos claims and claims relating to alleged nuclear liabilities arising from the operation of the Apollo/Parks Township facilities against the Debtors. As of the March 29, 2001 bar date, over 49,000 allegedly settled claims had been filed. The Debtors have accepted approximately 9,200 as pre-Chapter 11 binding settled claims at this time, with an aggregate liability of approximately $77 million. The Bankruptcy Court has disallowed approximately 33,000 claims as settled claims, and the Debtors are in the process of challenging virtually all the remaining claims. If the Bankruptcy Court determines these claims were not settled prior to the filing of the Chapter 11 petition, these claims may be refiled as unsettled personal injury claims. As of July 30, 2001, approximately 223,000 additional asbestos personal injury claims, 60,000 related party claims, 168 property damage claims, 212 derivative asbestos claims and 524 claims relating to the Apollo/Parks Township facilities had been filed. Since the July 30, 2001 bar date, approximately 13,000 additional personal injury claims were filed, including at least 2,000 claims originally filed as allegedly settled claims that were disallowed by the Bankruptcy Court as settled claims and subsequently refiled as unsettled personal injury claims. A bar date of January 15, 2003 was set for the filing of certain general unsecured claims. As of January 15, 2003, in excess of 2,700 general unsecured claims were filed, and the Debtors have commenced an analysis of these claims. Although the analysis is incomplete, the Debtors have identified a number of claims that they intend to contest, including approximately $183 million in claims filed by various insurance companies seeking recovery from the Debtors under various theories. Additionally, approximately $788 million in priority tax claims were filed, which appear to be estimates of liability by taxing authorities for ongoing audits of MI. As to both categories of claims, the Debtors believe that the claims are without merit and intend to contest them. The Debtors will continue to analyze the remaining claims. The estimated total alleged liability, as asserted by the claimants in the Chapter 11 proceeding and in filed proofs of claim, of the asbestos-related claims, including the alleged settled claims, exceeds the combined value of the Debtors and certain assets transferred by B&W to its parent in a corporate reorganization completed in fiscal year 1999 and the known available products liability and property damage insurance coverages. The Debtors filed a proposed Litigation Protocol with the U. S. District Court on October 18, 2001, setting forth the intention of the Debtors to challenge all unsupported claims and taking the position that a significant number of those claims may be disallowed by the Bankruptcy Court. The ACC and FCR filed briefs opposing the Litigation Protocol and requesting an estimation of pending and future claims. 99 Debtor-In-Possession Financing In connection with the bankruptcy filing, the Debtors entered into the DIP Credit Facility with a group of lenders providing for a three-year term. The Bankruptcy Court approved the full amount of this facility, giving all amounts owed under the facility a super-priority administrative expense status in bankruptcy. The Debtors' obligations under the facility are (1) guaranteed by substantially all of B&W's other domestic subsidiaries and B&W Canada Ltd. and (2) secured by a security interest on B&W Canada Ltd.'s assets. Additionally, B&W and substantially all of its domestic subsidiaries granted a security interest in their assets to the lenders under the DIP Credit Facility, effective upon the defeasance or repayment of MI's public debt. The DIP Credit Facility generally provides for borrowings by the Debtors for working capital and other general corporate purposes and the issuance of letters of credit, except that the total of all borrowings and nonperformance letters of credit issued under the facility cannot exceed $100 million in the aggregate. The DIP Credit Facility also imposes certain financial and nonfinancial covenants on B&W and its subsidiaries. There were no borrowings under this facility at December 31, 2002 or 2001. A permitted use of the DIP Credit Facility is the issuance of new letters of credit to backstop or replace pre-existing letters of credit issued in connection with B&W's and its subsidiaries' business operations, but for which MII, MI or BWICO was a maker or guarantor. As of February 22, 2000, the aggregate amount of all such pre-existing letters of credit totaled approximately $172 million (the "Pre-existing LCs"), $9.4 million of which remains outstanding at December 31, 2002. MII, MI and BWICO have agreed to indemnify and reimburse the Debtors for any customer draw on any letter of credit issued under the DIP Credit Facility to backstop or replace any Pre-existing LC for which they already have exposure and for the associated letter of credit fees paid under the facility. As of December 31, 2002, approximately $140.9 million in letters of credit has been issued under the DIP Credit Facility of which approximately $51.4 million was to replace or backstop Pre-existing LCs. The DIP Credit Facility, which was scheduled to expire on February 22, 2003, has been amended and extended to February 22, 2004, with an additional one-year extension at the option of B&W. The amendment also provides for a reduction of the facility from $300 million to $227.75 million. Financial Results and Reorganization Items Summarized financial data for B&W is as follows: INCOME STATEMENT INFORMATION
Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In thousands) Revenues $ 1,497,401 $ 1,431,908 $ 1,162,458 Income (Loss) before Provision for Income Taxes $ (232,435)(1) $ 35,377 $ (3,572) Net Income (Loss) $ (213,723) $ 17,499 $ (4,308)
(1) Includes a provision totaling $287.0 million for an increase in B&W's asbestos liability. BALANCE SHEET INFORMATION
December 31, 2002 2001 ---- ---- (In thousands) Assets: Current Assets $ 709,730 $ 592,968 Noncurrent Assets 1,547,342 1,476,171 - -------------------------------------------------------------------------------------------- Total Assets $ 2,257,072 $ 2,069,139 ============================================================================================ Liabilities: Current Liabilities $ 551,228 $ 431,702 Noncurrent Liabilities(1) 1,743,737 1,457,459 Stockholder's Equity (Deficit) (37,893) 179,978 - -------------------------------------------------------------------------------------------- Total Liabilities and Stockholder's Equity (Deficit) $ 2,257,072 $ 2,069,139 ============================================================================================
(1) Includes liabilities subject to compromise of approximately $1.7 billion, which primarily result from asbestos-related issues. 100 In the course of the conduct of B&W's and its subsidiaries' business, MII and MI have agreed to indemnify two surety companies for B&W's and its subsidiaries' obligations under surety bonds issued in connection with their customer contracts. At December 31, 2002, the total value of B&W's and its subsidiaries' customer contracts yet to be completed covered by such indemnity arrangements was approximately $107.7 million, of which approximately $31.9 million relates to bonds issued after February 21, 2000. As to the guarantee and indemnity obligations related to B&W's letters of credit and surety bonds, the proposed B&W Chapter 11 settlement contemplates indemnification and other protections for MII, MI and BWICO. B&W's ability to continue as a going concern depends on its ability to settle its ultimate asbestos liability from its net assets, future profits and cash flow and available insurance proceeds, whether through the confirmation of a plan of reorganization or otherwise. The B&W summarized financial information set forth above has been prepared on a going-concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. As a result of the bankruptcy filing and related events, we can provide no assurance that the carrying amounts of B&W's assets will be realized or that B&W's liabilities will be liquidated or settled for the amounts recorded. The independent accountant's report on the separate consolidated financial statements of B&W for the years ended December 31, 2002, 2001 and 2000 includes an explanatory paragraph indicating that these issues raise substantial doubt about B&W's ability to continue as a going concern. Following are our condensed Pro Forma Consolidated Statements of Income (Loss) data, assuming the deconsolidation of B&W for all periods presented. Assumes deconsolidation as of the beginning of the period presented, all data unaudited:
Year Ended December 31, 2000 ---- (In thousands) Revenues $ 1,722,038 Operating Loss $ (9,699) Loss before Provision for Income Taxes $ (19,271) Net Loss $ (27,587) Loss per Common Share: Basic $ (0.46) Diluted $ (0.46)
NOTE 21 - LIQUIDITY As a result of the B&W bankruptcy filing in February 2000, our access to the cash flows of B&W and its subsidiaries has been restricted. In addition and as discussed in Note 12, JRM has incurred substantial overruns on its three EPIC Spar projects. We also have recently received a credit downgrade. Accordingly, our access to additional financing beyond what we currently have available may be limited, particularly at JRM. Further, MI is restricted, as a result of covenants in its debt instruments, in its ability to transfer funds to MII and MII's other subsidiaries, including JRM, through cash dividends or through unsecured loans or investments. Given these issues, we have assessed our ability to continue as a viable business and have concluded that we can fund our operating activities and capital requirements. Management's plans with regards to these issues are as follows: - B&W Chapter 11 Filing. Our ability to obtain a successful and timely resolution to the B&W Chapter 11 proceedings has impacted our access to, and sources of, capital. We believe the completion of the overall settlement outlined in Note 20 will alleviate the impact of this uncertainty. - JRM's Negative Cash Flows Resulting from EPIC Spar Projects. Due primarily to the losses anticipated to be incurred on the three EPIC spar projects recorded during the year ended December 31, 2002 (see Note 12), we expect JRM to experience negative cash flows during 2003. Completion of the EPIC spar projects has, and will continue to, put a strain on JRM's liquidity. JRM intends to fund its cash needs through borrowings on the New Credit Facility (see Note 5), intercompany loans from MII and sales of nonstrategic assets, including certain marine 101 vessels. In addition, under the terms of the New Credit Facility, JRM's letter of credit capacity was reduced from $200 million to $100 million. This reduction does not negatively impact our ability to execute the contracts in our current backlog. However, it will likely limit JRM's ability to pursue projects from certain customers who require letters of credit as a condition of award. We are exploring other opportunities to improve our liquidity position, including better management of working capital through process improvements, negotiations with customers to relieve tight schedule requirements and to accelerate certain portions of cash collections, and alternative financing sources for letters of credit for JRM. In addition, we plan to refinance BWXT on a stand-alone basis, thereby freeing up additional letter of credit capacity for JRM and are currently in the process of evaluating terms and conditions with certain financial institutions. We also intend to seek a replacement credit facility for JRM prior to the scheduled expiration of the New Credit Facility, in order to provide for increased letter of credit capacity. Our ability to obtain such a replacement facility will depend on numerous factors, including JRM's operating performance and overall market conditions. If JRM experiences additional significant contract costs on its EPIC Spar projects as a result of unforeseen events, we may be unable to fund all of our budgeted capital expenditures and meet all of our funding requirements for our contractual commitments. In this instance, we would be required to defer certain capital expenditures, which in turn could result in curtailment of certain of our operating activities or, alternatively, require us to obtain additional sources of financing which may not be available to us or may be cost prohibitive. - MI's Liquidity Issues. MI experienced negative cash flows in 2002, primarily due to payments of taxes resulting from the exercise of MI's rights under the Intercompany Agreement. MI expects to meet its cash needs in 2003 through intercompany borrowings from BWXT, which BWXT may fund through operating cash flows or borrowings under the New Credit Facility. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE For the years ended December 31, 2002, 2001 and 2000, we had no disagreements with PricewaterhouseCoopers LLP on any accounting or financial disclosure issues. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item with respect to directors and executive officers is incorporated by reference to the material appearing under the headings "Election of Directors" and "Executive Officers" in The Proxy Statement for our 2003 Annual Meeting of Stockholders. Item 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference to the material appearing under the heading "Compensation of Executive Officers" in The Proxy Statement for our 2003 Annual Meeting of Stockholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information required by this item is incorporated by reference to the material appearing under the headings "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in The Proxy Statement for our 2003 Annual Meeting of Stockholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information in Note 11 to our consolidated financial statements included in this report is incorporated by reference. 102 Item 14. CONTROLS AND PROCEDURES Within the 90-day period immediately preceding the filing of this report, our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of the date of that evaluation. However, as we have disclosed in this report, for first-of-a-kind projects undertaken by our Marine Construction Services segment in recent periods, we have been unable to forecast accurately total costs to complete until we have performed all major phases of the project. This has been primarily due to unexpected design and production inefficiencies and execution difficulties. We have addressed these problems by improving controls throughout the bidding, contracting and project management process, as well as making changes in operating management personnel at JRM. Except for those changes, there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of the evaluation referred to in the first sentence of this Item 14. P A R T I V Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report or incorporated by reference: 1. CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Accountants Consolidated Balance Sheets as of December 31, 2002 and 2001 Consolidated Statements of Loss for the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements for the Years Ended December 31, 2002, 2001 and 2000 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES All required financial statement schedules will be filed by amendment to this Form 10-K on Form 10-K/A. 3. EXHIBITS
Exhibit Number Description 3.1 McDermott International, Inc.'s Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of McDermott International, Inc.'s Annual Report on Form 10-K for the fiscal year ended March 31, 1996 (File No. 1-08430)). 3.2 McDermott International, Inc.'s Amended and Restated By-Laws. 3.3 Amended and Restated Certificate of Designation of Series D Participating Preferred Stock (incorporated by reference herein to Exhibit 3.1 to McDermott International, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No. 1-08430)). 4.1 Rights Agreement dated as of October 17, 2001 between McDermott International, Inc. and EquiServe Trust Company, N.A., as Rights Agent (incorporated by reference herein to Exhibit 1 to McDermott International, Inc.'s Current Report on Form 8-K dated October 17, 2001 (File No. 1-08430)). 4.2 Omnibus Credit Agreement dated as of February 10, 2003 among J. Ray McDermott, S.A., J. Ray McDermott Holdings, Inc., J. Ray McDermott, Inc. and BWX Technologies, Inc., as borrowers, McDermott International, Inc., as parent guarantor, the initial lenders and initial
103 issuing banks named therein, Citicorp USA, Inc., as administrative agent and collateral agent, Salomon Smith Barney Inc., as lead arranger and book runner, The Bank of Nova Scotia, as documentation agent, and Credit Lyonnais New York Branch, as syndication agent. 4.3 Security Agreement dated February 10, 2003 from the grantors referred to therein to Citicorp USA, Inc., as collateral agent. 4.4 Form of Subsidiary Guarantee related to the Omnibus Credit Agreement.
We and certain of our consolidated subsidiaries are parties to other debt instruments under which the total amount of securities authorized does not exceed 10% of our total consolidated assets. Pursuant to paragraph 4(iii)(A) of Item 601 (b) of Regulation S-K, we agree to furnish a copy of those instruments to the Commission on request. 10.1* McDermott International, Inc.'s Supplemental Executive Retirement Plan, as amended (incorporated by reference to Exhibit 10 of McDermott International, Inc.'s Annual Report on Form 10-K/A for fiscal year ended March 31, 1994 filed with the Commission on June 27, 1994 (File No. 1-08430)). 10.2 Intercompany Agreement (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 1983 (File No. 1-08430)). 10.3* Trust for Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 1990 (File No. 1-08430)). 10.4* McDermott International, Inc.'s 1994 Variable Supplemental Compensation Plan (incorporated by reference to Exhibit A to McDermott International, Inc.'s Proxy Statement for its Annual Meeting of Stockholders held on August 9, 1994, as filed with the Commission under a Schedule 14A (File No. 1-08430)). 10.5* McDermott International, Inc.'s 1987 Long-Term Performance Incentive Compensation Program (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 1988 (File No. 1-08430)). 10.6* McDermott International, Inc.'s 1992 Senior Management Stock Option Plan (incorporated by reference to Exhibit 10 of McDermott International, Inc.'s Annual Report on Form10-K/A for fiscal year ended March 31, 1994 filed with the Commission on June 27, 1994 (File No. 1-08430)). 10.7* McDermott International, Inc.'s 1992 Officer Stock Incentive Program (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s Annual Report on Form 10-K, as amended for the fiscal year ended March 31, 1992 (File No. 1-08430)). 10.8* McDermott International, Inc.'s 1992 Directors Stock Program (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 1992 (File No. 1-08430)). 10.9* McDermott International, Inc.'s Restated 1996 Officer Long-Term Incentive Plan, as amended (incorporated by reference to Appendix B to McDermott International, Inc.'s Proxy Statement for its Annual Meeting of Stockholders held on September 2, 1997, as filed with the Commission under a Schedule 14A (File No. 1-08430)). 10.10* McDermott International, Inc.'s 1997 Director Stock Program (incorporated by reference to Appendix A to McDermott International, Inc.'s Proxy Statement for its Annual Meeting of Stockholders held on September 2, 1997, as filed with the Commission under a Schedule 14A (File No. 1-08430)). 10.12 Support Agreement between McDermott International, Inc. and McDermott Incorporated (incorporated by reference to Exhibit 10.11 of McDermott International, Inc.'s Annual Report
104 on Form 10-K for the nine-month transition period ended December 31, 1999 (File No. 1-08430)). 10.13 McDermott International, Inc.'s 2001 Directors & Officers Long-Term Incentive Plan (incorporated by reference to Appendix A to McDermott International, Inc.'s Proxy Statement for its Annual Meeting of Stockholders held on May 1, 2002, as filed with the Commission under a Schedule 14A (File No. 1-08430)). 12.1 Ratio of Earnings to Fixed Charges. 21.1 Significant Subsidiaries of the Registrant. 23.1 Consent of Independent Accountants. * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the requirements of Item 15(c) of Form 10-K.
(b) Reports on Form 8-K: On October 4, 2002, we filed a current report on Form 8-K dated October 3, 2002, reporting under Item 5 - Other Events that we had issued a press release in which we announced our revised 2002 earnings outlook and set the date for our third quarter earnings release. On October 15, 2002, we filed a current report on Form 8-K dated October 15, 2002, reporting under Item 5 - Other Events that one of our subsidiaries had signed fabrication contracts with the Azerbaijan International Operating Company. On November 7, 2002, we filed a current report on Form 8-K dated November 7, 2002, reporting under Item 5 - Other Events that we had announced our results for the third quarter of 2002 and guidance for 2003. On December 20, 2002, we filed a current report on Form 8-K dated December 20, 2002, reporting under Item 5 - Other Events that we had issued a press release in which we announced that we, together with the ACC and the FCR, had filed a joint plan of reorganization and a draft settlement agreement with the Bankruptcy Court in the B&W Chapter 11 proceedings. 105 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. McDERMOTT INTERNATIONAL, INC. /s/ Bruce W. Wilkinson ---------------------------- March 21, 2003 By: Bruce W. Wilkinson Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated. Signature Title /s/ Bruce W. Wilkinson Chairman of the Board, Chief Executive Officer - ------------------------ and Director (Principal Executive Officer) Bruce W. Wilkinson /s/ Francis S. Kalman Executive Vice President and Chief Financial Officer - ------------------------ (Principal Financial and Accounting Officer) Francis S. Kalman /s/ Philip J. Burguieres Director - ------------------------ Philip J. Burguieres /s/ Ronald C. Cambre Director - ------------------------ Ronald C. Cambre /s/ Bruce DeMars Director - ------------------------ Bruce DeMars /s/ Joe B. Foster Director - ------------------------ Joe B. Foster /s/ Robert L. Howard Director - ------------------------ Robert L. Howard /s/ John W. Johnstone, Jr. Director - -------------------------- John W. Johnstone, Jr. /s/ Richard E. Woolbert Director - -------------------------- Richard E. Woolbert March 21, 2003 106 CERTIFICATIONS I, Bruce W. Wilkinson, Chief Executive Officer of McDermott International, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of McDermott International, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 24, 2003 /s/ Bruce W. Wilkinson ----------------------- Bruce W. Wilkinson Chief Executive Officer 107 I, Francis S. Kalman, Chief Financial Officer of McDermott International, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of McDermott International, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 24, 2003 /s/ Francis S. Kalman ----------------------- Francis S. Kalman Chief Financial Officer 108 INDEX TO EXHIBITS
Sequentially Exhibit Numbered Number Description Pages - ------ ----------- ----- 2.1 Agreement and Plan of Merger dated as of May 7, 1999 between McDermott International, Inc. and J. Ray McDermott, S.A. (incorporated by reference to Annex A of Exhibit (a)(1) to the Schedule 14D-1 filed by McDermott International, Inc. with the Commission on May 13, 1999). 3.2 McDermott International, Inc.'s Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of McDermott International, Inc.'s Annual Report on Form 10-K for the fiscal year ended March 31, 1996 (File No. 1-08430)). 3.2 McDermott International, Inc.'s Amended and Restated By-Laws. 3.3 Amended and Restated Certificate of Designation of Series D Participating Preferred Stock (incorporated by reference herein to Exhibit 3.1 to McDermott International, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No. 1-08430)). 4.1 Rights Agreement dated as of October 17, 2001 between McDermott International, Inc. and EquiServe Trust Company, N.A., as Rights Agent (incorporated by reference herein to Exhibit 1 to McDermott International, Inc.'s Current Report on Form 8-K dated October 17, 2001 (File No. 1-08430)). 4.2 Omnibus Credit Agreement dated as of February 10, 2003 among J. Ray McDermott, S.A., J. Ray McDermott Holdings, Inc., J. Ray McDermott, Inc. and BWX Technologies, Inc., as borrowers, McDermott International, Inc., as parent guarantor, the initial lenders and initial issuing banks named therein, Citicorp USA, Inc., as administrative agent and collateral agent, Salomon Smith Barney Inc., as lead arranger and book runner, The Bank of Nova Scotia, as documentation agent, and Credit Lyonnais New York Branch, as syndication agent. 4.3 Security Agreement dated February 10, 2003 from the grantors referred to therein to Citicorp USA, Inc., as collateral agent. 4.4 Form of Subsidiary Guarantee related to the Omnibus Credit Agreement. 10.1* McDermott International, Inc.'s Supplemental Executive Retirement Plan, as amended (incorporated by reference to Exhibit 10 of McDermott International, Inc.'s Annual Report on Form 10-K/A for fiscal year ended March 31, 1994 filed with the Commission on June 27, 1994 (File No. 1-08430)). 10.2 Intercompany Agreement (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 1983 (File No. 1-08430)). 10.3* Trust for Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 1990 (File No. 1-08430)). 10.4* McDermott International, Inc.'s 1994 Variable Supplemental Compensation Plan (incorporated by reference to Exhibit A to McDermott International, Inc.'s Proxy Statement for its Annual Meeting of Stockholders held on August 9, 1994, as filed with the Commission under a Schedule 14A (File No. 1-08430)). 10.5* McDermott International, Inc.'s 1987 Long-Term Performance Incentive Compensation Program (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 1988 (File No. 1-08430)). 10.6* McDermott International, Inc.'s 1992 Senior Management Stock Option Plan (incorporated by reference to Exhibit 10 of McDermott International, Inc.'s Annual Report on Form10-K/A for fiscal year ended March 31, 1994 filed with the Commission on June 27, 1994 (File No. 1-08430)). 10.7* McDermott International, Inc.'s 1992 Officer Stock Incentive Program (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s Annual Report on Form 10-K, as amended for the fiscal year ended March 31, 1992 (File No. 1-08430)). 10.8* McDermott International, Inc.'s 1992 Directors Stock Program (incorporated by reference to Exhibit 10 to McDermott International, Inc.'s Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 1992 (File No. 1-08430)).
Sequentially Exhibit Numbered Number Description Pages - ------ ----------- ----- 10.9* McDermott International, Inc.'s Restated 1996 Officer Long-Term Incentive Plan, as amended (incorporated by reference to Appendix B to McDermott International, Inc.'s Proxy Statement for its Annual Meeting of Stockholders held on September 2, 1997, as filed with the Commission under a Schedule 14A (File No. 1-08430)). 10.10* McDermott International, Inc.'s 1997 Director Stock Program (incorporated by reference to Appendix A to McDermott International, Inc.'s Proxy Statement for its Annual Meeting of Stockholders held on September 2, 1997, as filed with the Commission under a Schedule 14A (File No. 1-08430)). 10.12 Support Agreement between McDermott International, Inc. and McDermott Incorporated (incorporated by reference to Exhibit 10.11 of McDermott International, Inc.'s Annual Report on Form 10-K for the nine-month transition period ended December 31, 1999 (File No. 1-08430)). 10.13 McDermott International, Inc.'s 2001 Directors & Officers Long-Term Incentive Plan (incorporated by reference to Appendix A to McDermott International, Inc.'s Proxy Statement for its Annual Meeting of Stockholders held on May 1, 2002, as filed with the Commission under a Schedule 14A (File No. 1-08430)). 12.1 Ratio of Earnings to Fixed Charges. 21.1 Significant Subsidiaries of the Registrant. 23.1 Consent of Independent Accountants.
EX-3.2 3 d04254exv3w2.txt ARTICLES OF INCORPORATION EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF McDERMOTT INTERNATIONAL, INC. (as amended to February 27, 2003) ARTICLE I Meetings of Stockholders Section 1. The annual and any special meetings of the stockholders shall be held on the date and at the time and place designated in the notice of such meetings or in a duly executed waiver of notice thereof. Section 2. A special meeting of the stockholders may be held at any time upon the call of the Chief Executive Officer or by order of the Board of Directors. Section 3. Whether or not a quorum is present at any stockholders' meeting, the meeting may be adjourned from time to time by the vote of the holders of a majority of the voting power of the shares of the outstanding capital stock of the Company present in person or represented by proxy at the meeting, as they shall determine. Section 4. Holders of a majority of the voting power of the shares of the outstanding capital stock of the Company entitled to vote, present in person or represented by proxy, shall constitute a quorum for the transaction of all business at any meeting of the stockholders. Section 5. With respect to the proposal to be made by the Board of Directors for approval by the stockholders of the Company at the Company's 2002 annual meeting of stockholders of a proposal to continue the Rights Agreement dated as of October 17, 2001 2 between the Company and EquiServe Trust Company, N.A., as Rights Agent, the affirmative vote of a majority of the voting power of the shares of outstanding capital stock of the Company present in person or represented by proxy and entitled to vote and actually voting on the proposal at that annual meeting shall be required for approval. In all other matters arising at stockholders' meetings, a majority of the voting power of the shares of outstanding capital stock of the Company present in person or represented by proxy at the meeting shall be necessary and sufficient for the transaction of any business, except where some larger percentage is affirmatively required by law or by the Company's certificate of incorporation. Section 6. At any meeting of stockholders, the chairman of the meeting may appoint two inspectors who shall subscribe an oath or affirmation to execute faithfully the duties of inspectors with strict impartiality and according to the best of their ability, to canvass the votes on any matter and make and sign a certificate of the result thereof. No candidate for the office of director shall be appointed as such inspector with respect to the election of directors. Such inspectors shall be appointed upon the request of the holders of ten percent (10%) or more of the voting power of the shares of the outstanding capital stock of the Company present and entitled to vote on such matter. Section 7. All elections of directors shall be by ballot. The chairman of the meeting may cause a vote by ballot to be taken upon any other matter, and such vote by ballot shall be taken upon the request of the holders of ten percent (10%) or more of the voting power of the shares of the outstanding capital stock of the Company present and entitled to vote on such matter. Section 8. The meetings of the stockholders shall be presided over by the Chief Executive Officer, or if he is absent or unable to preside, by the Chairman and if neither the Chief Executive Officer nor the Chairman is present or able to preside, then by a Vice 3 Chairman; if more than one Vice Chairman is present and able to preside the Vice Chairman who shall have held such office for the longest period of time shall preside; if neither the Chief Executive Officer nor the Chairman nor a Vice Chairman is present and able to preside, then the President shall preside; if none of the above is present and able to preside, then a person shall be elected at the meeting to preside over same. The Secretary of the Company, if present, shall act as secretary of such meetings or, if he is not present, an Assistant Secretary shall so act; if neither the Secretary nor an Assistant Secretary is present, then a secretary shall be appointed by the person presiding over the meeting. The order of business shall be as follows: (a) Calling of meeting to order (b) Election of chairman and the appointment of a secretary, if necessary (c) Presentation of proof of the due calling of the meeting (d) Presentation and examination of proxies (e) Settlement of the minutes of the previous meeting (f) Reports of officers and committees (g) The election of directors, if an annual meeting, or a meeting called for that purpose (h) Unfinished business (i) New business (j) Adjournment. Section 9. At every meeting of the stockholders, all proxies shall be received and taken in charge of and all ballots shall be received and canvassed by the secretary of the meeting who shall decide all questions touching the qualification of voters, the validity of the proxies, and the acceptance or rejection of votes, unless inspectors shall have been appointed, in which event such inspectors shall perform such duties and decide such 4 questions with respect to the matter for which they have been appointed. Section 10. At any meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors, or (b) by any stockholder of the Company of record at the time of giving of the notice provided for in this Section, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section. For business to be properly brought before a stockholder meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely, a stockholder's notice must be addressed to the attention of the Secretary and delivered to or mailed and received at the principal executive offices of the Company not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed by more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Company. The stockholder's notice shall set forth (i) the name and address of the stockholder proposing such business and of the beneficial owner, if any, on whose behalf the proposal or nomination is made; (ii) a representation that the stockholder is entitled to vote at such meeting and a statement of the number of shares of the Company which are owned by the stockholder and the number of shares which are beneficially owned by the beneficial owner, if any; (iii) a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons or to propose the business specified in the notice; and (iv) as to each person the stockholder proposes to nominate for election or re-election as a director, the 5 name and address of such person and such other information regarding such nominee as would be required in a proxy statement filed pursuant to the rules of the Securities and Exchange Commission had such nominee been nominated by the Board of Directors, and a description of any arrangements or understandings between the stockholder and such nominee and any other persons (including their names), pursuant to which the nomination is to be made, and the written consent of each such nominee to being named in the proxy statement as a nominee and to serve as a director if elected; or, as to each matter the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, and any material interest of the stockholder in such business. The chairman of the meeting may refuse to permit any business to be brought before an annual meeting by a stockholder not in compliance with the provisions of this Section. Notwithstanding the foregoing provisions of this Section, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, and with all other applicable laws, rules and regulations, with respect to the matters set forth in this Section. ARTICLE II Directors Section 1. The business and affairs of the Company shall be managed by its Board of Directors in accordance with the provisions of the Articles of Incorporation. The number of Directors shall be as provided in the Articles of Incorporation. Section 2. Meetings of the Board of Directors may be called by the Chairman or by the Chief Executive Officer or by a majority of the directors by giving notice to each director. Section 3. Meetings of the Board of Directors shall be presided over by the Chairman, or if the Chairman so requests or is absent or unable to preside, by the Chief 6 Executive Officer; if neither the Chairman nor the Chief Executive Officer is present and able to preside, then by a Vice Chairman; if more than one Vice Chairman is present and able to preside, the Vice Chairman who shall have held such office for the longest period of time shall preside; if neither the Chairman nor the Chief Executive Officer nor a Vice Chairman is present and able to preside, then the President shall preside; if none of the above is present and able to preside, then one of the Directors shall be elected at the meeting to preside over same. Section 4. Whether or not a quorum is present at any meeting of the Board of Directors, a majority of the directors present may adjourn the meeting from time to time as they may determine. Notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. Any business may be transacted at the adjourned meeting which might have been transacted at the original meeting. Section 5. Any committee of the Board of Directors shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Company to the extent provided in the resolution by which such committee is designated, except that no such committee shall have authority to alter or amend the By-Laws, or to fill vacancies in either the Board of Directors or its own membership. In the absence or disqualification of any member of such a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Each such committee shall meet at stated times or on notice to all by any of its own number. It shall fix its own rules of procedure. A majority shall constitute a quorum and the affirmative vote of a majority of those present at a meeting at which a quorum is present shall be the act of 7 such committee. Each such committee shall keep minutes of its proceedings. Section 6. Directors shall receive as compensation for their services an amount in addition to actual expenses incident to the attending of meetings to be fixed by resolution of the Board of Directors. Nothing in this section shall be construed to preclude a Director from serving the Company in any other capacity and receiving compensation therefore. Section 7. Beginning with the Company's 2001 annual meeting of the stockholders, no person shall be nominated to stand for election or re-election to the Company's Board of Directors if such person will have attained the age of 70 prior to the date of election or re-election. Any Director elected or re-elected at or after the Company's 2001 annual meeting of stockholders who attains the age of 70 during a term to which he or she was elected or re-elected shall continue to serve as a Director until the first annual meeting of stockholders immediately following his or her attainment of the age of 70, at which time said Director shall be deemed to have resigned and retired from the Board of Directors, except that the Board, in its sole discretion, may waive the mandatory resignation and retirement requirement for one year only. Section 8. A Director of this Corporation who is, under Section 411(a) of the Employee Retirement Income Security Act of 1974 of the United States of America, under a disability to serve as a fiduciary of an employee benefit plan, as that term is defined in Section 3(3) of said Act shall not serve as a fiduciary of any such employee benefit plan with respect to which the Company or any of its subsidiaries is an employer as defined in Section 3(5) of said Act; and, during the period of such disability, such Director shall be precluded from acting in any manner with respect to any such plan. Any Director who is disabled from serving as a fiduciary of an employee benefit plan under Section 411(a) of said Act shall be requested to consent, in writing, to the applicability of this By-Law to him. 8 ARTICLE III Officers Section 1. The officers of this Company shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders or from time to time and shall hold office until their successors are elected and qualify, or until their earlier death, resignation or removal. Such officers shall consist of a Chairman of the Board of Directors, a Chief Executive Officer, one or more Vice Chairmen of the Board of Directors, a President, one or more Vice Presidents, a Secretary, a Treasurer and one or more Controllers. In these By-Laws, the Chairman of the Board of Directors is sometimes referred to as "Chairman", and the Vice Chairman or Vice Chairmen of the Board of Directors are sometimes referred to as "Vice Chairman" or "Vice Chairmen", respectively. The Board of Directors may in addition elect at such meeting or from time to time one or more Assistant Secretaries and one or more Assistant Treasurers and one or more Assistant Controllers. Any number of offices may be held by the same person. Section 2. The officers shall have such powers and duties as may be provided in these By-Laws and as may be conferred upon or assigned to them by the Board of Directors from time to time. Section 3. The Chairman shall preside over meetings of the Board of Directors, as stated elsewhere in these By-Laws. Section 4. The Chief Executive Officer shall preside over meetings of the shareholders, as stated elsewhere in these By-Laws; subject to the direction of the Board of Directors, he shall have and exercise direct charge of and general supervision over all business and affairs of the Company and shall perform all duties incident to the office of the Chief Executive Officer of a corporation, and such other duties as may be assigned to him by 9 the Board of Directors. Section 5. Each Vice Chairman of the Board of Directors shall have and exercise such powers and perform such duties as may be conferred upon or assigned to him by the Board of Directors or by the Chief Executive Officer. Section 6. The President shall be the Chief Operating Officer of the Company and shall have and exercise such powers and perform such duties as may be conferred upon or assigned to him by the Board of Directors or by the Chief Executive Officer. Section 7. Each Vice President shall have and exercise such powers and perform such duties as may be conferred upon or assigned to him by the Board of Directors or by the Chief Executive Officer. Section 8. Each Controller shall have and exercise such powers and perform such duties as may be conferred upon or assigned to him by the Board of Directors or by the Chief Executive Officer. Section 9. The Secretary shall give proper notice of meetings of stockholders and directors, shall be custodian of the book in which the minutes of such meetings are kept, and shall perform such other duties as shall be assigned to him by the Board of Directors or by the Chief Executive Officer. Section 10. The Treasurer shall keep or cause to be kept accounts of all monies of the company received or disbursed, shall deposit or cause to be deposited all monies and other valuables in the name of and to the credit of the Company in such banks and depositories as the Board of Directors shall designate, and shall perform such other duties as shall be assigned to him by the Board of Directors or by the Chief Executive Officer. All checks or other instruments for the payment of money shall be signed in such a manner as the Board of Directors may from time to time determine. Section 11. Any officers of the Company may be removed, with or without cause, by 10 resolution adopted by the Board of Directors at a meeting called for that purpose. ARTICLE IV Seals The corporate seal of this Company shall be a circular seal with the name of the Company around the border and the word "SEAL" in the center. ARTICLE V Any of these By-Laws may be amended, altered or repealed and additional By-Laws may be adopted by the Board of Directors by the affirmative vote of a majority of the whole Board cast at a meeting duly held, except that the vote of two-thirds of the outstanding shares of the Company entitled to vote shall be required to amend, alter or repeal Section 1 or Section 8 of Article II or this Article V (as it applies to said Section 1 and 8 of Article II) of these By-Laws. ARTICLE VI Indemnification Section 1. Each person (and the heirs, executors and administrators of such person) who is or was a director or officer of the Company shall in accordance with Section 2 of this Article VI be indemnified by the Company against any and all liability and reasonable expense that may be paid or incurred by him in connection with or resulting from any actual or threatened claim, action, suit or proceeding (whether brought by or in the right of the Company or otherwise), civil, criminal, administrative or investigative, or in connection with an appeal relating thereto, in which he may become involved, as a party or otherwise, by reason of his being or having been a director or officer of the Company or, if he shall be serving or shall have served in such capacity at the request of the Company, a director, officer, employee or agent of another corporation or any partnership, joint venture, trust or 11 other entity whether or not he continues to be such at the time such liability or expense shall have been paid or incurred, provided such person acted, in good faith, in a manner he reasonably believed to be in or not opposed to the best interest of the Company and in addition, in criminal actions or proceedings, had no reasonable cause to believe that his conduct was unlawful. As used in this ARTICLE VI, the terms, "liability" and "expense" shall include, but shall not be limited to, counsel fees and disbursements and amounts of judgments, fines or penalties against, and amounts paid in settlement by, such director or officer. The termination of any actual or threatened claim, action, suit or proceeding, civil, criminal, administrative, or investigative, by judgment, settlement (whether with or without court approval), conviction or upon a plea of guilty or nolo contendere, or its equivalent, shall not create a presumption that such director or officer did not meet the standards of conduct set forth in this Section 1. Section 2. Every such director and officer shall be entitled to indemnification under Section 1 of this ARTICLE VI with respect to any claim, action, suit or proceeding of the character described in such Section 1 in which he may become in any way involved as set forth in such Section 1, if (i) he has been wholly successful on the merits or otherwise in respect thereof, or (ii) the Board of Directors acting by a majority vote of a quorum consisting of directors who are not parties to (or who have been wholly successful with respect to) such claim, action, suit or proceeding, finds that such director or officer has met the standards of conduct set forth in such Section 1 with respect thereto, or (iii) a court determines that he has met such standards with respect thereto, or (iv) independent legal counsel (who may be the regular counsel of the Company) deliver to the Company their written advice that, in their opinion, he has met such standards with respect thereto. Section 3. If and whenever any person who is or becomes, on or after March 1, 2002, a director or officer of the Company, has become or been threatened to become, as of 12 that date or at any time thereafter, a party to any actual or threatened claim, action, suit or proceeding of any kind that might give right to that person to indemnification under Section 1 of this Article VI (each, a "Matter"), the Company will advance all expenses reasonably incurred by or on behalf of that person in connection with that Matter, provided that that person shall have delivered an undertaking by or on behalf of that person to repay to the Company any expenses so advanced if it is ultimately determined that that person is not entitled to be indemnified by the Company under that Section 1 in respect of those expenses. The Company will accept any such undertaking of any such person without regard to the financial ability of such person to make such payment. Notwithstanding the foregoing, this Section 3 will not require the Company to advance expenses with respect to any Matter initiated by or on behalf of any such person against the Company or any of its subsidiaries, whether as an initial action or by counter or similar claim, without the prior approval of the Board of Directors. The provisions of this Section 3 shall inure to the benefit of the heirs, executors and administrators of any person entitled to the benefits of this Section 3. No amendment to this Section 3, directly or by amendment to any other provision of these By-laws, shall have any retroactive effect with respect to any Matter arising from or based on any act or omission to act by any person which occurs prior to the effectiveness of that amendment. Section 4. The rights of indemnification under this ARTICLE VI shall be in addition to any rights to which any such director or officer or any other person may otherwise be entitled by contract or as a matter of law. EX-4.2 4 d04254exv4w2.txt OMNIBUS CREDIT AGREEMENT EXHIBIT 4.2 $180,000,000 OMNIBUS CREDIT AGREEMENT DATED AS OF FEBRUARY 10, 2003 AMONG J. RAY MCDERMOTT, S.A. J. RAY MCDERMOTT HOLDINGS, INC. J. RAY MCDERMOTT, INC. BWX TECHNOLOGIES, INC. AS BORROWERS MCDERMOTT INTERNATIONAL, INC. AS PARENT GUARANTOR AND THE INITIAL LENDERS AND INITIAL ISSUING BANKS NAMED HEREIN AS INITIAL LENDERS AND INITIAL ISSUING BANKS AND CITICORP USA, INC. AS ADMINISTRATIVE AGENT AND COLLATERAL AGENT AND SALOMON SMITH BARNEY INC. AS LEAD ARRANGER AND BOOK RUNNER AND THE BANK OF NOVA SCOTIA AS DOCUMENTATION AGENT AND CREDIT LYONNAIS NEW YORK BRANCH AS SYNDICATION AGENT
TABLE OF CONTENTS SECTION PAGE ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms........................................ 2 SECTION 1.02. Computation of Time Periods; Other Definitional Provisions... 25 SECTION 1.03. Accounting Terms............................................. 25 ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES AND THE LETTERS OF CREDIT SECTION 2.01. The Advances and the Letters of Credit....................... 26 SECTION 2.02. Making the Advances.......................................... 27 SECTION 2.03. Issuance of and Drawings and Reimbursement Under Letters of Credit....................................................... 28 SECTION 2.04. Repayment of Advances........................................ 30 SECTION 2.05. Termination or Reduction of the Commitments.................. 31 SECTION 2.06. Prepayments; Cash Collateralization.......................... 32 SECTION 2.07. Interest..................................................... 33 SECTION 2.08. Fees......................................................... 33 SECTION 2.09. Conversion of Advances....................................... 34 SECTION 2.10. Increased Costs, Etc......................................... 35 SECTION 2.11. Payments and Computations.................................... 36 SECTION 2.12. Taxes........................................................ 38 SECTION 2.13. Sharing of Payments, Etc..................................... 41 SECTION 2.14. Use of Proceeds.............................................. 41 SECTION 2.15. Defaulting Lenders........................................... 42 SECTION 2.16. Evidence of Debt............................................. 44 SECTION 2.17. Existing Letters of Credit. ................................ 45 ARTICLE III CONDITIONS OF LENDING AND ISSUANCES OF LETTERS OF CREDIT SECTION 3.01. Conditions Precedent to Initial Extension of Credit.......... 45 SECTION 3.02. Conditions Precedent to Each Borrowing and Issuance and Renewal...................................................... 48 SECTION 3.03. Determinations Under Section 3.01............................ 48 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower............... 49 ARTICLE V COVENANTS OF THE LOAN PARTIES SECTION 5.01. Affirmative Covenants........................................ 56 SECTION 5.02. Negative Covenants........................................... 62 SECTION 5.03. Reporting Requirements....................................... 73 SECTION 5.04. Financial Covenants.......................................... 78
ii
ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default............................................ 79 SECTION 6.02. Actions in Respect of the Letters of Credit upon Default..... 83 ARTICLE VII THE AGENTS SECTION 7.01. Authorization and Action..................................... 83 SECTION 7.02. Agents' Reliance, Etc........................................ 83 SECTION 7.03. CUSA and Affiliates.......................................... 84 SECTION 7.04. Lender Party Credit Decision................................. 84 SECTION 7.05. Indemnification.............................................. 84 SECTION 7.06. Successor Agents............................................. 86 ARTICLE VIII PARENT GUARANTY SECTION 8.01. Guaranty..................................................... 86 SECTION 8.02. Guaranty Absolute............................................ 87 SECTION 8.03. Waiver....................................................... 88 SECTION 8.04. Payments Free and Clear of Taxes, Etc........................ 89 SECTION 8.05. Continuing Guaranty; Assignments............................. 90 SECTION 8.06. Subrogation.................................................. 90 SECTION 8.07. Subordination................................................ 91 ARTICLE IX MISCELLANEOUS SECTION 9.01. Amendments, Etc.............................................. 92 SECTION 9.02. Notices, Etc................................................. 93 SECTION 9.03. No Waiver; Remedies.......................................... 93 SECTION 9.04. Costs and Expenses........................................... 93 SECTION 9.05. Right of Set-off............................................. 95 SECTION 9.06. Binding Effect............................................... 95 SECTION 9.07. Assignments and Participations............................... 95 SECTION 9.08. Execution in Counterparts.................................... 99 SECTION 9.09. No Liability of the Issuing Banks............................ 99 SECTION 9.10. Confidentiality.............................................. 100 SECTION 9.11. Release of Collateral........................................ 101 SECTION 9.12. Nature of Obligations........................................ 101 SECTION 9.13. Jurisdiction, Etc............................................ 102 SECTION 9.14. Governing Law................................................ 102 SECTION 9.15. Waiver of Jury Trial......................................... 102
iii SCHEDULES Schedule I - Commitments and Applicable Lending Offices Schedule II - Excluded Assets Schedule III - Middle Eastern Subsidiaries Schedule IV - Bilateral Obligations Schedule V - Remaining L/Cs Schedule 4.01(b) - Subsidiaries Schedule 4.01(f) - Litigation Disclosure Schedule 4.01(g) - Financial Disclosure Schedule 4.01(n) - Plans, Multiemployer Plans and Welfare Plans Schedule 4.01(o) - Environmental Disclosure Schedule 4.01(p) - Open Years Schedule 4.01(q) - Surviving Debt Schedule 4.01(r) - Liens Schedule 4.01(s) - Owned Real Property Schedule 4.01(t) - Leased Real Property Schedule 4.01(u) - Investments Schedule 4.01(v) - Intellectual Property Schedule 4.01(w) - Material Contracts Schedule 4.01(x) - Vessels EXHIBITS Exhibit A - Form of Note Exhibit B - Form of Notice of Borrowing Exhibit C - Form of Assignment and Acceptance Exhibit D - Form of Security Agreement Exhibit E - Form of Subsidiary Guaranty Exhibit F - Form of Solvency Certificate Exhibit G-1 - Form of Opinion of Outside Counsel to MII Exhibit G-2 - Form of Opinion of General Counsel of MII Exhibit H - Form of Opinion of Panamanian Counsel to MII Exhibit I - Four-Week Forecast Exhibit J - Backlog Report CREDIT AGREEMENT CREDIT AGREEMENT dated as of February 10, 2003 among McDERMOTT INTERNATIONAL, INC., a Panamanian corporation ("MII"), as parent guarantor (the "PARENT GUARANTOR"), J. RAY McDERMOTT, S.A., a Panamanian corporation ("JRMSA"), J. RAY McDERMOTT HOLDINGS, INC. ("JRMHI"), a Delaware corporation, J. RAY McDERMOTT, INC., a Delaware corporation ("JRMI"), and BWX TECHNOLOGIES, INC., a Delaware corporation ("BWXT", and together with JRMSA, JRMHI and JRMI, the "BORROWERS" and each, a "BORROWER"), the banks, financial institutions and other institutional lenders listed on the signature pages hereof as the Initial Lenders (the "INITIAL LENDERS"), the banks listed on the signature pages hereof as the Initial Issuing Banks (the "INITIAL ISSUING BANKS" and, together with the Initial Lenders, the "INITIAL LENDER PARTIES"), CITICORP USA, INC. ("CUSA"), as collateral agent (together with any successor collateral agent appointed pursuant to Article VII, the "COLLATERAL AGENT"), CUSA, as administrative agent (together with any successor administrative agent appointed pursuant to Article VII, the "ADMINISTRATIVE AGENT" and, together with the Collateral Agent, the "AGENTS") for the Lender Parties (as hereinafter defined), SALOMON SMITH BARNEY INC. ("SSB"), as lead arranger and book runner, THE BANK OF NOVA SCOTIA, as documentation agent, and CREDIT LYONNAIS NEW YORK BRANCH, as syndication agent. PRELIMINARY STATEMENTS: (1) Each of JRMSA, JRMHI and JRMI is a borrower under that certain Amended and Restated Credit Agreement dated as of April 24, 2000 (as amended, restated, supplemented or otherwise modified, the "J. RAY CREDIT AGREEMENT") with the Lenders party thereto, Citibank, N.A. ("CITIBANK"), as administrative agent, SSB, as arranger and book manager, Credit Lyonnais New York Branch, as syndication agent and The Bank of Nova Scotia, as documentation agent. (2) Each of MII and BWXT is a borrower under that certain Amended and Restated Credit Agreement dated as of April 24, 2000 (as amended, restated, supplemented or otherwise modified, the "MCDERMOTT CREDIT AGREEMENT"; and together with the J. Ray Credit Agreement, the "EXISTING CREDIT FACILITIES") with the Lenders party thereto, Citibank, as administrative agent, SSB, as arranger and book manager, Credit Lyonnais New York Branch, as syndication agent, The Bank of Nova Scotia, as documentation agent and Wells Fargo Bank (Texas), National Association, as co-underwriter. (3) The Borrowers have requested that the Lender Parties lend to the Borrowers and issue Letters of Credit for the account of the Borrowers to (a) refinance in full outstanding indebtedness under the Existing Credit Facilities (it being understood that to the extent that letters of credit issued for the account of MII (or any of its subsidiaries) under the McDermott Credit Agreement are not re-issued for the account of one or more Borrowers under this Agreement, such letters of credit shall be fully cash-collateralized) and (b) provide for the working capital needs and general corporate purposes of the Borrowers and their Subsidiaries, affiliates and joint ventures. The Lender Parties have indicated their willingness to agree to lend 2 such amounts and to issue such Letters of Credit on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "ADDITIONAL AMOUNT" has the meaning specified in Section 2.12(a). "ADMINISTRATIVE AGENT" has the meaning specified in the recital of parties to this Agreement. "ADMINISTRATIVE AGENT'S ACCOUNT" means the account of the Administrative Agent maintained by the Administrative Agent with Citibank at its office in New York, New York, at such address as the Administrative Agent shall specify in writing to the Lender Parties. "ADVANCE" means a Working Capital Advance or a Letter of Credit Advance. "AFFILIATE" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person; provided, that, when used in reference to any of the Loan Parties or any of the Subsidiaries of any of the Loan Parties, the term "Affiliate" shall exclude B&W and each of its Subsidiaries. For purposes of this definition, the term "control" (including the terms "controlling", "controlled by" and "under common control with") of a Person means the possession, direct or indirect, of the power to vote 30% or more of the Voting Interests of such Person or to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Interests, by contract or otherwise. "AGENTS" has the meaning specified in the recital of parties to this Agreement. "AGREEMENT VALUE" means, for each Hedge Agreement, on any date of determination, an amount equal to: (a) in the case of a Hedge Agreement documented pursuant to the Master Agreement (Multicurrency-Cross Border) published by the International Swap and Derivatives Association, Inc. (the "MASTER AGREEMENT"), the amount, if any, that would be payable by any Borrower or any of its Subsidiaries to its counterparty to such Hedge Agreement, as if (i) such Hedge Agreement was being terminated early on such date of determination and (ii) such Borrower or Subsidiary was the sole "Affected Party"; or (b) in the case of a Hedge Agreement traded on an 3 exchange, the mark-to-market value of such Hedge Agreement, which will be the unrealized loss on such Hedge Agreement to any Borrower or Subsidiary of a Borrower party to such Hedge Agreement based on the settlement price of such Hedge Agreement on such date of determination, or (c) in all other cases, the mark-to-market value of such Hedge Agreement, which will be the unrealized loss on such Hedge Agreement to any Borrower or Subsidiary of a Borrower party to such Hedge Agreement as the amount, if any, by which (i) the present value of the future cash flows to be paid by such Borrower or Subsidiary exceeds (ii) the present value of the future cash flows to be received by such Borrower or Subsidiary pursuant to such Hedge Agreement; capitalized terms used and not otherwise defined in this definition shall have the respective meanings set forth in the above described Master Agreement. "APPLICABLE BORROWER(S)" means the Borrower or Borrowers, as applicable, under any Applicable Working Capital Sublimit. "APPLICABLE L/C SUBLIMIT" means (a) in the case of the JRM Borrowers, collectively, $100,000,000, as such amount may be reduced from time to time pursuant to Section 5.02(a)(x), and (b) in the case of BWXT, $60,000,000. "APPLICABLE LENDING OFFICE" means, with respect to each Lender Party, such Lender Party's Domestic Lending Office in the case of a Base Rate Advance and such Lender Party's Eurodollar Lending Office in the case of a Eurodollar Rate Advance. "APPLICABLE MARGIN" means, (i) in the case of Base Rate Advances, (A) 4.0% per annum, in the case of the JRM Borrowers and (B) 3.0% per annum, in the case of BWXT and (ii) in the case of Eurodollar Rate Advances, (A) 5.0% per annum, in the case of the JRM Borrowers and (B) 4.0% per annum, in the case of BWXT. "APPLICABLE SUBLIMIT" means (a) as to the JRM Borrowers, the sum of the Applicable Working Capital Sublimit and the Applicable L/C Sublimit of the JRM Borrowers and (b) in the case of BWXT, the sum of the Applicable Working Capital Sublimit and the Applicable L/C Sublimit of BWXT. "APPLICABLE WORKING CAPITAL SUBLIMIT" means (a) in the case of the JRM Borrowers, collectively, $10,000,000 and (b) in the case of BWXT, $50,000,000. "ASBESTOS PI TRUST" has the meaning set forth in the Settlement Agreement. "ASBESTOS SETTLEMENT NOTE" means the note to be issued by MII (or by MI and guaranteed solely by MII) in favor of the Asbestos PI Trust on the terms described in the Settlement Agreement. "ASSET TRANSFER CASE" means the adversary action captioned Asbestos Claimants' Committee and Eric D. Green, Esq., Legal Representative for Future Asbestos Claimants on behalf of the Bankruptcy Estate of the Babcock & Wilcox Company v. Babcock & Wilcox Investment Company, et al., Adversary Proceeding No. 01-1155, filed in the United States Bankruptcy Court for the Eastern District of Louisiana, and the related 4 appeal currently pending before the United States District Court for the Eastern District of Louisiana. "ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance entered into by a Lender Party and an Eligible Assignee, and accepted by the Administrative Agent, in accordance with Section 9.07 and in substantially the form of Exhibit C hereto. "AVAILABLE AMOUNT" of any Letter of Credit means, at any time, the maximum amount available to be drawn under such Letter of Credit at such time (assuming compliance at such time with all conditions to drawing). "AVAILABLE L/C SUBLIMIT" means (a) in the case of the JRM Borrowers, collectively, the Applicable L/C Sublimit of the JRM Borrowers minus the sum of the aggregate Available Amount of all Letters of Credit issued for the account of the JRM Borrowers and outstanding at such time plus the aggregate principal amount of all outstanding Letter of Credit Advances made for the account of the JRM Borrowers and (b) in the case of BWXT, the Applicable L/C Sublimit of BWXT minus the sum of the aggregate Available Amount of all outstanding Letters of Credit issued for the account of BWXT and outstanding at such time plus the aggregate principal amount of all outstanding Letter of Credit Advances made for the account of BWXT. "BASE RATE" means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the higher of: (a) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's base rate; and (b) 1/2 of 1% per annum above the Federal Funds Rate. "BASE RATE ADVANCE" means an Advance that bears interest as provided in Section 2.07(a)(i). "BILATERAL OBLIGATIONS" means (a) the Obligations of the Loan Parties and their respective Subsidiaries under foreign exchange spot contracts entered into with Lender Parties or their Affiliates and (b) the Obligations of the Loan Parties and their respective Subsidiaries under the letters of credit and other arrangements referred to on Schedule IV hereto. "BORROWER" has the meaning specified in the recital of parties to this Agreement. "BORROWER'S ACCOUNT" means, as to each Borrower, the account of such Borrower maintained by such Borrower with Citibank at its office at 399 Park Avenue, New York, New York 10043, having such account number as such Borrower shall have notified the Administrative Agent in writing, or such other account as the Borrower shall specify in writing to the Administrative Agent. "BORROWING" means a borrowing consisting of simultaneous Working Capital Advances of the same Type made by the Lenders. 5 "BUSINESS DAY" means a day of the year on which banks are not required or authorized by law to close in New York City and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "B&W" means The Babcock & Wilcox Company, a Delaware corporation. "BWICO" means Babcock & Wilcox Investment Company, a Delaware corporation. "BWXT" has the meaning specified in the recital of parties to this Agreement. "CAPITAL EXPENDITURES" means, for any Person for any period, the sum of, without duplication, all expenditures made, directly or indirectly, by such Person or any of its Subsidiaries during such period for equipment, fixed assets, real property or improvements, or for replacements or substitutions therefor or additions thereto, that have been or should be, in accordance with GAAP, reflected as additions to property, plant or equipment on a Consolidated balance sheet of such Person or have a useful life of more than one year; PROVIDED, HOWEVER, that the amount of Capital Expenditures for such period attributable to Capitalized Leases shall be limited to the amount actually paid on such Capitalized Leases during such period. For purposes of this definition, the purchase price of property or equipment that is purchased simultaneously with the trade-in of existing property or equipment or with insurance proceeds shall be included in Capital Expenditures only to the extent of the gross amount of such purchase price less the credit granted by the seller of such equipment for the equipment being traded in at such time or the amount of such proceeds, as the case may be. CAPITALIZED LEASES" means all leases that have been or should be, in accordance with GAAP, recorded as capitalized leases. "CASH EQUIVALENTS" means (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or any agency thereof) and repurchase agreements in respect of any such obligations in each case maturing within 360 days from the date of acquisition thereof; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, a rating of at least "Prime-1" (or the then equivalent grade) by Moody's Investors Service, Inc. or "A-1" (or the then equivalent grade) by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.; (c) investments in (i) certificates of deposit, bankers' acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of (A) any commercial bank organized under the laws of the United States of America or any State thereof and comparable in credit quality to the investments permitted under the preceding clause (b), or (B) any Lender, provided that beginning 45 days after the Effective Date (and except in the cash of the Mizuho Cash Collateral Account), such certificates of deposit, bankers' acceptances, time deposits and money market accounts shall only be with commercial banks which have a combined capital and surplus and undivided profits 6 of not less than $250,000,000 or (ii) Eurocurrency time deposits maturing within 180 days from the date of acquisition thereof with any branch or office of (A) any commercial bank organized under the laws of a country that is a member of the Organization for Economic Cooperation and Development, and comparable in credit quality to the investments permitted under the preceding clause (b), or (B) any Lender; (d) in the case of any Loan Party, any Subsidiary or branch of any Loan Party located in a jurisdiction outside the United States of America, or to the extent reasonably required in the judgment of the Borrowers in connection with any business conducted in any such jurisdiction, investments comparable in credit quality and tenor to those referred to above and customarily used by corporations for cash management purposes in such jurisdiction; (e) other investment instruments approved in writing by the Required Lenders and offered by financial institutions which have a combined capital and surplus and undivided profits of not less than $250,000,000; and (f) investments in money market or similar funds the assets of which consist only of the types referred to any of the preceding clauses (a) through (e) or otherwise rated AAA by any of Standard & Poor's, a division of The McGraw-Hill Companies, Inc., Moody's Investors Service, Inc. or Fitch Ratings. "CASH TAXES" means net income taxes paid to any taxation authority by MII and its Subsidiaries less those amounts reimbursed to MI by B&W or any of its Subsidiaries for taxes of B&W or any its Subsidiaries paid under the Tax Allocation Agreement dated as of January 1, 2000 or the tax separation agreement contemplated by the Settlement Agreement. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time. "CERCLIS" means the Comprehensive Environmental Response, Compensation and Liability Information System maintained by the U.S. Environmental Protection Agency. "CHANGE OF CONTROL" means the occurrence of any of the following: (a) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of Voting Interests of MII (or other securities convertible into such Voting Interests) representing 30% or more of the combined voting power of all Voting Interests of MII; or (b) the board of directors of the Borrower shall cease to consist of a majority of Continuing Directors of the Borrower ("CONTINUING DIRECTORS" shall mean the directors of MII on the Effective Date and each other director, if, in each case, such other director's nomination for election or appointment to the board of directors of MII is recommended or approved by at least a majority of the then Continuing Directors); or (c) any Person or two or more Persons acting in concert shall have acquired by contract (to which MII is a party), or shall have entered into a contract or arrangement (in each case, to which MII is a party) that, upon consummation, will result in its or their acquisition of control over Voting Interests of MII (or other securities convertible into such Voting Interests) representing 30% or more of the combined voting power of all Voting Interests of MII; or (d) MII shall cease to own, directly or indirectly, 100% of the Equity Interests in each other Borrower. 7 "CITIBANK" has the meaning specified in the Preliminary Statements. "COLLATERAL" means all "Collateral" referred to in the Collateral Documents and all other property that is or, as specifically contemplated by this Agreement or any Collateral Document, is intended to be subject to any Lien in favor of the Collateral Agent for the benefit of the Secured Parties. "COLLATERAL ACCOUNT" has the meaning specified in the Security Agreement. "COLLATERAL AGENT" has the meaning specified in the recital of parties to this Agreement. "COLLATERAL DOCUMENTS" means the Security Agreement, the Mortgages, the Ship Mortgages and any other agreement entered into pursuant to this Agreement that creates or purports to create a Lien in favor of the Collateral Agent for the benefit of the Secured Parties. "COLLATERAL GRANTOR" means any Subsidiary of MII (other than MI and its Subsidiaries) that is or becomes party to any Collateral Document. "COMMITMENT" means a Working Capital Commitment or a Letter of Credit Commitment. "CONFIDENTIAL INFORMATION" means information furnished by or on behalf of any Loan Party to any Agent or any Lender Party in a writing designated as confidential, but does not include any such information that is or becomes generally available to the public (other than as a result of a disclosure by any Agent or Lender Party or any officer, director, employee, consultant, Affiliate, agent or other representative of any Agent or Lender Party) or that is or becomes available to such Agent or such Lender Party on a nonconfidential basis from a Person (other than the Loan Parties or any of their respective Subsidiaries, officers, directors, employees, consultants, Affiliates, agents or other representatives) who is not prohibited from disclosing such information to such Agent or Party by a contractual, legal or fiduciary obligation to any of the Loan Parties or any of their respective Subsidiaries, officers, directors, employees, consultants, Affiliates, agents or other representatives. "CONSOLIDATED" refers to the consolidation of accounts of MII and its Subsidiaries in accordance with GAAP. "CONTINGENT OBLIGATION" means, with respect to any Person, any Obligation or arrangement of such Person to guarantee or having the effect of guaranteeing any Debt, Capitalized Leases, dividends or other payment Obligations (other than performance guaranties that are required by the terms of a contract) ("PRIMARY OBLIGATIONS") of any other Person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, including, without limitation, (a) the direct or indirect guarantee, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the Obligation of a primary obligor, (b) the Obligation to make take-or-pay or similar payments, if required, regardless of 8 nonperformance by any other party or parties to an agreement or (c) any Obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (A) for the purchase or payment of any such primary obligation or (B) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, assets, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made (or, if less, the maximum amount of such primary obligation for which such Person may be liable pursuant to the terms of the instrument evidencing such Contingent Obligation) or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder), as determined by such Person in good faith. "CONVERSION", "CONVERT" and "CONVERTED" each refer to a conversion of Advances of one Type into Advances of the other Type pursuant to Section 2.09 or 2.10. "CUSA" has the meaning specified in the recital of parties to this Agreement. "DEBT" of any Person means (a) all indebtedness of such Person for borrowed money, (b) all Obligations of such Person for the deferred purchase price of property or services (excluding trade accounts payable not overdue by more than 90 days (unless the same are (1) being contested in good faith, (2) subject to a good faith request by such Person for supporting documentation from the applicable trade creditor, (3) subject to an agreement between such Person and the applicable trade creditor pursuant to which such trade creditor has agreed to postpone receipt of payment or (4) being considered in any determination of Debt prior to February 28, 2003), accrued expenses, deferred compensation and expenses under any Plan, Welfare Plan or other employee benefit plan incurred in the ordinary course of business of such Person), (c) all Obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (d) all Obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), but excluding Obligations of such Person under operating leases, (e) all Obligations of such Person as lessee under Capitalized Leases, (f) all Obligations of such Person under acceptance, letter of credit or similar facilities, (g) all Obligations of such Person to purchase, redeem, retire, defease or otherwise make any return of investment capital in respect of any Equity Interests in such Person or any other Person or any warrants, rights or options to acquire such capital stock, valued, in the case of Redeemable Preferred Interests, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (h) all Obligations of such Person in respect of Hedge Agreements, valued at the Agreement Value thereof, (i) all Contingent Obligations of such Person and (j) all indebtedness and other payment Obligations referred to in clauses (a) through (i) above of another Person secured by (or 9 for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) any Lien on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness or other payment Obligations. "DEBT FOR BORROWED MONEY" of any Person means all items that, in accordance with GAAP, would be classified as indebtedness on a Consolidated balance sheet of such Person and its Subsidiaries. "DEFAULT" means any Event of Default or any event that would constitute an Event of Default but for the requirement that notice be given or time elapse or both. "DEFAULTED ADVANCE" means, with respect to any Lender Party at any time, the portion of any Advance required to be made by such Lender Party to the Borrower pursuant to Section 2.01 or 2.02 at or prior to such time that has not been made by such Lender Party or by the Administrative Agent for the account of such Lender Party pursuant to Section 2.02(d) as of such time. In the event that a portion of a Defaulted Advance shall be deemed made pursuant to Section 2.15(a), the remaining portion of such Defaulted Advance shall be considered a Defaulted Advance originally required to be made pursuant to Section 2.01 on the same date as the Defaulted Advance so deemed made in part. "DEFAULTED AMOUNT" means, with respect to any Lender Party at any time, any amount required to be paid by such Lender Party to any Agent or any other Lender Party hereunder or under any other Loan Document at or prior to such time that has not been so paid as of such time, including, without limitation, any amount required to be paid by such Lender Party to (a) any Issuing Bank pursuant to Section 2.03(c) to purchase a portion of a Letter of Credit Advance made by such Issuing Bank, (b) the Administrative Agent pursuant to Section 2.02(d) to reimburse the Administrative Agent for the amount of any Advance made by the Administrative Agent for the account of such Lender Party, (c) any other Lender Party pursuant to Section 2.13 to purchase any participation in Advances owing to such other Lender Party and (d) any Agent or any Issuing Bank pursuant to Section 7.05 to reimburse such Agent or such Issuing Bank for such Lender Party's ratable share of any amount required to be paid by the Lender Parties to such Agent or such Issuing Bank as provided therein. In the event that a portion of a Defaulted Amount shall be deemed paid pursuant to Section 2.15(b), the remaining portion of such Defaulted Amount shall be considered a Defaulted Amount originally required to be paid hereunder or under any other Loan Document on the same date as the Defaulted Amount so deemed paid in part. "DEFAULTING LENDER" means, at any time, any Lender Party that, at such time, (a) owes a Defaulted Advance or a Defaulted Amount or (b) shall take any action or be the subject of any action or proceeding of a type described in Section 6.01(f). "DOMESTIC LENDING OFFICE" means, with respect to any Lender Party, the office of such Lender Party specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a 10 Lender Party, as the case may be, or such other office of such Lender Party as such Lender Party may from time to time specify in writing to the Borrower and the Administrative Agent. "EBITDA" means, for any Person for any period, GAAP net income (or loss), determined on a Consolidated basis, plus to the extent included in determining net income and without duplication, the sum of (a) non-cash pension plan losses (less non-cash pension plan gains) and expenses (except to the extent such expenses are funded in cash or other property of such Person), (b) any aggregate net gain or any aggregate net loss from the sale, exchange or other disposition of capital assets of such Person, (c) extraordinary items, (d) income attributable to minority interests in such Person, net of cash distributed to the holders of such minority interests, (e) interest expense, (f) taxes, (g) depreciation, (h) amortization, (i) other non-cash charges (including impairment loss on long-lived assets), (j) fees and expenses related to the negotiation and documentation of the Transaction (including, without limitation, fees in connection with the Fee Letter), (k) settlement charges arising out of the Settlement Agreement and (l) restructuring charges with respect to operational changes in the Western Hemisphere marine business of JRMSA and its Subsidiaries. "EFFECTIVE DATE" means the date of the Initial Extension of Credit. "ELIGIBLE ASSIGNEE" means (a) a Lender; (b) an Affiliate of a Lender; and (c) any other Person (other than a natural person) approved by the Administrative Agent, each Issuing Bank and, so long as no Event of Default has occurred and is continuing (other than in the case of any Person that is a competitor of any Borrower), MII (in each case, such approvals not to be unreasonably withheld); provided that notwithstanding the foregoing, "Eligible Assignee" shall not include MII or any of MII's Affiliates or Subsidiaries. "ENVIRONMENTAL ACTION" means any action, suit, demand, demand letter, claim, notice of non-compliance or violation, notice of liability or potential liability, investigation, proceeding, consent order or consent agreement relating in any way to any Environmental Law, any Environmental Permit or Hazardous Material or arising from alleged injury or threat to health, safety or the environment, including, without limitation, (a) by any governmental or regulatory authority for enforcement, cleanup, removal, response, remedial or other actions or damages and (b) by any governmental or regulatory authority or third party for damages, contribution, indemnification, cost recovery, compensation or injunctive relief. "ENVIRONMENTAL LAW" means any Federal, state, local or foreign statute, law, ordinance, rule, regulation, code, order, writ, judgment, injunction, decree or published judicial or agency interpretation, policy or guidance relating to pollution or protection of the environment, health, safety or natural resources, including, without limitation, those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials. 11 "ENVIRONMENTAL PERMIT" means, with respect to any Person, any permit, approval, identification number, license or other authorization required to be held by such Person under any Environmental Law applicable to such Person. "EQUIPMENT" means all Equipment referred to in Section 1(a) of the Security Agreement. "EQUITY INTERESTS" means, with respect to any Person, shares of capital stock of (or other ownership or net profit interests in) such Person, warrants, options or other rights for the purchase or other acquisition from such Person of shares of capital stock of (or other ownership or net profit interests in) such Person, securities convertible into or exchangeable for shares of capital stock of (or other ownership or net profit interests in) such Person or warrants, rights or options for the purchase or other acquisition from such Person of such shares (or such other interests), and other ownership or net profit interests in such Person (including, without limitation, partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are authorized or otherwise existing on any date of determination. "ERISA" means the Employee Retirement Income Security Act of 1974, as emended from time to time, and the regulations promulgated thereunder. "ERISA AFFILIATE" means any Person (other than B&W and its Subsidiaries) that for purposes of Title IV of ERISA is a member of the controlled group of any Loan Party, or under common control with any Borrower, within the meaning of Section 414(b) or (c) or, solely for purposes of Section 412 of the Internal Revenue Code, Section 414(m) or (o) of the Internal Revenue Code. "ERISA EVENT" means (a)(i) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, with respect to any Plan unless the 30-day notice requirement with respect to such event has been waived by the PBGC or (ii) the requirements of Section 4043(b) of ERISA apply with respect to a contributing sponsor, as defined in Section 4001(a)(13) of ERISA, of a Plan, and an event described in paragraph (9), (10), (11), (12) or (13) of Section 4043(c) of ERISA is reasonably expected to occur with respect to such Plan within the following 30 days; (b) the application for a minimum funding waiver with respect to a Plan; (c) the provision by the administrator of any Plan of a notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (d) the cessation of operations at a facility of any Loan Party or any ERISA Affiliate in the circumstances described in Section 4062(e) of ERISA; (e) the withdrawal by any Loan Party or any ERISA Affiliate from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (f) the conditions for imposition of a lien under Section 302(f) of ERISA shall have been met with respect to any Plan; (g) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA; or (h) the institution by the PBGC of proceedings to terminate a Plan pursuant to Section 4042 of ERISA. 12 "EUROCURRENCY LIABILITIES" has the meaning specified in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "EURODOLLAR LENDING OFFICE" means, with respect to any Lender Party, the office of such Lender Party specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender Party (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender Party as such Lender Party may from time to time specify in writing to the Borrower and the Administrative Agent. "EURODOLLAR RATE" means, for any Interest Period for all Eurodollar Rate Advances comprising part of the same Borrowing, an interest rate per annum equal to the rate per annum obtained by dividing (a) the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in U.S. dollars at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period for a period equal to such Interest Period (provided that, if for any reason such rate is not available, the term "Eurodollar Rate" shall mean, for any Interest Period for all Eurodollar Rate Advances comprising part of the same Borrowing, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates) by (b) a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage for such Interest Period. "EURODOLLAR RATE ADVANCE" means an Advance that bears interest as provided in Section 2.07(a)(ii). "EURODOLLAR RATE RESERVE PERCENTAGE" for any Interest Period for all Eurodollar Rate Advances comprising part of the same Borrowing means the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Rate Advances is determined) having a term equal to such Interest Period. "EVENTS OF DEFAULT" has the meaning specified in Section 6.01. "EXCLUDED ASSETS" means the assets of the Loan Parties set forth on Schedule II hereto. 13 "EXISTING CREDIT FACILITIES" has the meaning specified in the Preliminary Statements. "EXTRAORDINARY RECEIPT" means any cash received by or paid to or for the account of any Person not in the ordinary course of business, including, without limitation, tax refunds, pension plan reversions that are not received in the ordinary course of business, proceeds of insurance (including, without limitation, any key man life insurance but excluding proceeds of business interruption insurance to the extent such proceeds constitute compensation for lost earnings), condemnation awards (and payments in lieu thereof) and indemnity payments; provided, however, that an Extraordinary Receipt shall not include cash receipts received from proceeds of insurance, condemnation awards (or payments in lieu thereof) or indemnity payments to the extent that such proceeds, awards or payments (A) in respect of loss or damage to equipment, fixed assets or real property are applied (or in respect of which expenditures were previously incurred) to replace or repair the equipment, fixed assets or real property in respect of which such proceeds were received in accordance with the terms of the Loan Documents, so long as such application is made no later than 6 months after receipt of payment with respect to the occurrence of such damage or loss or (B) are received by any Person in respect of any third party claim against such Person and applied to pay (or to reimburse such Person for its prior payment of) such claim and the costs and expenses of such Person with respect thereto. "FACILITY" means the Working Capital Facility or the Letter of Credit Facility. "FEDERAL FUNDS RATE" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "FEE LETTER" means the fee letter dated February 10, 2003 between MII and the Administrative Agent, as amended. "FISCAL YEAR" means a fiscal year of MII and its Consolidated Subsidiaries ending on December 31 in any calendar year. "FIXED CHARGE COVERAGE RATIO" means, for any Person for any period, the ratio of (a) Consolidated EBITDA minus the sum of Capital Expenditures to (b) the sum of (i) Consolidated cash interest required to be paid on all Debt for Borrowed Money plus (ii) Cash Taxes, in each case, of or by such Person and its Subsidiaries during such period. "FRONTRUNNER VARIANCE" has the meaning specified in Section 5.03(g). 14 "FRONTRUNNER VARIANCE REPORT" has the meaning specified in Section 5.03(g). "GAAP" has the meaning specified in Section 1.03. "GUARANTIES" means the Parent Guaranty and the Subsidiary Guaranty. "GUARANTORS" means the Parent Guarantor and the Subsidiary Guarantors. "HAZARDOUS MATERIALS" means (a) petroleum or petroleum products, by-products or breakdown products, radioactive materials, asbestos-containing materials, polychlorinated biphenyls and radon gas and (b) any other chemicals, materials or substances designated, classified or regulated as hazardous or toxic or as a pollutant or contaminant under any Environmental Law. "HEDGE AGREEMENTS" means interest rate swap, cap or collar agreements, interest rate future or option contracts, currency swap agreements, currency future or option contracts and other hedging agreements. "HEDGE BANK" means any Lender Party or an Affiliate of a Lender Party in its capacity as a party to a Secured Hedge Agreement. "INDEMNIFIED PARTY" has the meaning specified in Section 9.04(b). "INITIAL EXTENSION OF CREDIT" means the earlier to occur of the initial Borrowing and the initial issuance of a Letter of Credit hereunder. "INITIAL ISSUING BANKS", "INITIAL LENDER PARTIES" and "INITIAL LENDERS" each has the meaning specified in the recital of parties to this Agreement. "INSUFFICIENCY" means, with respect to any Plan, the amount, if any, of its unfunded benefit liabilities, as defined in Section 4001(a)(18) of ERISA. "INSURANCE SUBSIDIARIES" means Creole Insurance Company, Ltd., a Bermuda corporation, Honore Insurance Company, Ltd., a Bermuda corporation, Lagniappe Insurance Company, Ltd., a Bermuda corporation, Pirogue Insurance Company, Ltd., a Bermuda corporation, and Brick Insurance Company, Ltd., a Bermuda corporation. "INTEREST PERIOD" means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Eurodollar Rate Advance or the date of the Conversion of any Base Rate Advance into such Eurodollar Rate Advance, and ending on the last day of the period selected by any Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by such Borrower pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months, as any Borrower may, upon notice received by the Administrative Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the first day of such Interest Period, select; provided, however, that: 15 (a) no Borrower may select any Interest Period with respect to any Eurodollar Rate Advance under a Facility that ends after any principal repayment installment date for such Facility unless, after giving effect to such selection, the aggregate principal amount of Base Rate Advances and of Eurodollar Rate Advances having Interest Periods that end on or prior to such principal repayment installment date for such Facility shall be at least equal to the aggregate principal amount of Advances under such Facility due and payable on or prior to such date; (b) Interest Periods commencing on the same date for Eurodollar Rate Advances comprising part of the same Borrowing shall be of the same duration; (c) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, however, that, if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and (d) whenever the first day of any Interest Period occurs on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "INVENTORY" means all Inventory referred to in Section 1(b) of the Security Agreement. "INVESTMENT" in any Person means any loan or advance to such Person, any purchase or other acquisition of any Equity Interests or Debt or the assets comprising a division or business unit or a substantial part or all of the business of such Person, any capital contribution to such Person or any other direct or indirect investment in such Person, including, without limitation, any acquisition by way of a merger or consolidation and any arrangement pursuant to which the investor incurs Debt of the types referred to in clause (i) or (j) of the definition of "DEBT" in respect of such Person. "ISSUING BANKS" means each Initial Issuing Bank and any other Lender approved as an Issuing Bank by the Administrative Agent and any Eligible Assignee to which a Letter of Credit Commitment hereunder has been assigned pursuant to Section 9.07 so long as each such Lender or each such Eligible Assignee expressly agrees to perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as an Issuing Bank and notifies the Administrative Agent of its Applicable Lending Office and the amount of its Letter of Credit Commitment (which information shall be recorded by the Administrative Agent in the Register), for so 16 long as such Initial Issuing Bank, Lender or Eligible Assignee, as the case may be, shall have a Letter of Credit Commitment. "JRM BORROWERS" means JRMSA, JRMHI and JRMI. "JRMHI" has the meaning specified in the recital of parties to this Agreement. "JRMI" has the meaning specified in the recital of parties to this Agreement. "JRMSA" has the meaning specified in the recital of parties to this Agreement. "L/C CASH COLLATERAL ACCOUNT" has the meaning specified in the Security Agreement. "L/C RELATED DOCUMENTS" has the meaning specified in Section 2.04(b)(ii). "LENDER PARTY" means any Lender or any Issuing Bank. "LENDERS" means the Initial Lenders and each Person that shall become a Lender hereunder pursuant to Section 9.07 for so long as such Initial Lender or Person, as the case may be, shall be a party to this Agreement. "LETTER OF CREDIT ADVANCE" means an advance made by any Issuing Bank or any Lender pursuant to Section 2.03(c). "LETTER OF CREDIT AGREEMENT" has the meaning specified in Section 2.03(a). "LETTER OF CREDIT COMMITMENT" means, with respect to any Issuing Bank at any time, the amount set forth opposite such Issuing Bank's name on Schedule I hereto under the caption "Letter of Credit Commitment" or, if such Issuing Bank has entered into one or more Assignment and Acceptances, set forth for such Issuing Bank in the Register maintained by the Administrative Agent pursuant to Section 9.07(d) as such Issuing Bank's "Letter of Credit Commitment", as such amount may be reduced at or prior to such time pursuant to Section 2.05. "LETTER OF CREDIT FACILITY" means, at any time, an amount equal to the aggregate amount of the Issuing Banks' Letter of Credit Commitments at such time, as such amount may be reduced at or prior to such time pursuant to Section 2.05. "LETTERS OF CREDIT" has the meaning specified in Section 2.01(b). "LIEN" means any lien, security interest or other charge or encumbrance of any kind, or any other type of preferential arrangement, including, without limitation, the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property; provided, however that for the avoidance of doubt, the interest of a Person as owner or lessor under charters or leases of property shall not constitute "Liens" on or in respect of such property. 17 "LOAN DOCUMENTS" means (a) for purposes of this Agreement and the Notes and any amendment, supplement or modification hereof or thereof, (i) this Agreement, (ii) the Notes, (iii) the Collateral Documents, (iv) the Fee Letter, (v) each Letter of Credit Agreement and (b) for purposes the Collateral Documents and for all other purposes other than for purposes of this Agreement and the Notes, (i) this Agreement, (ii) the Notes, (iii) the Collateral Documents, (iv) the Fee Letter, (v) each Letter of Credit Agreement, and (vi) each Secured Hedge Agreement. "LOAN PARTIES" means MII, the Borrowers and the Guarantors. "MARGIN STOCK" has the meaning specified in Regulation U. "MATERIAL ADVERSE CHANGE" means any material adverse change in the business, condition (financial or otherwise), operations, performance, properties or prospects of MII and its Subsidiaries, taken as a whole, excluding, solely with respect to prospects, in any case, any fact or circumstance (including the occurrence or nonoccurrence of any event) relating to the economy or financial markets generally. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the business, condition (financial or otherwise), operations, performance, properties or prospects of MII and its Subsidiaries, taken as a whole, (b) the rights and remedies of any Agent or any Lender Party under any Loan Document or (c) the ability of any Loan Party to perform its Obligations under any Loan Document to which it is or is to be a party, excluding, solely with respect to prospects, in any case under clause (a), any fact or circumstance (including the occurrence or nonoccurrence of any event) relating to the economy or financial markets generally. "MATERIAL CONTRACT" means, with respect to any Borrower, each contract to which such Person is a party involving aggregate consideration remaining to be paid to or by such Person of $10,000,000 or more and which remains executory in whole or in part, but excluding any agreements relating to Surviving Debt or to compensation or employee benefits. "MAXIMUM AMOUNT" means (a) at any time prior to the Mizuho Termination Date, $180,000,000, and (b) thereafter, $166,500,000. "MIDDLE EASTERN RECEIVABLES" means receivables owing to Middle Eastern Subsidiaries and all proceeds and supporting obligations of such receivables that are subject to a Lien permitted under Section 5.02(a)(x). "MIDDLE EASTERN SUBSIDIARIES" means the Subsidiaries of MII listed on Schedule III hereto. "MIDDLE EASTERN L/CS" means letters of credit issued for the account of Middle Eastern Subsidiaries "MI" means McDermott Incorporated, a Delaware corporation. 18 "MIICO" means McDermott International Investments Co., Inc., a Panamanian corporation. "MII" has the meaning specified in the recital of parties to this Agreement. "MII LOANS" means revolving intercompany loans made to (a) JRMSA, in an aggregate principal amount of up to $90 million and (b) BWXT, in an aggregate principal amount of up to $25 million, in each case to be used for working capital purposes, which loans shall (x) solely in the case of such intercompany loans to JRMSA, accrue interest solely on a paid-in-kind basis during the term of the Facilities, (y) be subordinated to the Obligations under the Facilities in a manner reasonably acceptable to the Required Lenders and (z) shall otherwise be consistent with the existing cash management system of MII and its Subsidiaries. "MIZUHO" means Mizuho Corporate Bank, Ltd. "MIZUHO CASH COLLATERAL ACCOUNT" means a segregated cash collateral account maintained with Mizuho, the amounts in which (a) shall be invested in Cash Equivalents of the type described in clause (a) of the definition therefor, or in such other Cash Equivalents as MII shall agree, and (b) shall be used, solely for the period from the Effective Date through the Mizuho Termination Date, to (i) cash collateralize the Mizuho Obligations and (ii) repay Mizuho Obligations outstanding on the Mizuho Termination Date (which shall not include any Obligations in respect of undrawn Letters of Credit). "MIZUHO OBLIGATIONS" means the Obligations of the Borrowers owing to Mizuho under this Agreement. "MIZUHO TERMINATION DATE" means the date that is 91 days following the Effective Date; provided that Mizuho shall have released to MII any amounts required to be released under Section 2.06(c)(i)(B). "MORTGAGES" has the meaning specified in Section 5.01(p). "MULTIEMPLOYER PLAN" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which any Borrower or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "MULTIPLE EMPLOYER PLAN" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of any Borrower or any ERISA Affiliate and at least one Person other than the Borrowers and the ERISA Affiliates or (b) was so maintained and in respect of which any Borrower or any ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. 19 "NET CASH PROCEEDS" means, with respect to any sale, lease, transfer or other disposition of any asset or the incurrence or issuance of any Debt or the sale or issuance of any Equity Interests (including, without limitation, any capital contribution) by any Person, or any Extraordinary Receipt received by or paid to or for the account of any Person, the aggregate amount of cash received from time to time (whether as initial consideration or through payment or disposition of deferred consideration) by or on behalf of such Person in connection with such transaction after deducting therefrom only (without duplication) (a) reasonable and customary brokerage commissions, underwriting fees and discounts, legal fees, finder's fees and other similar fees and commissions, and (b) the amount of taxes payable in connection with or as a result of such transaction and (c) the amount of any Debt secured by a Lien on such asset that, by the terms of the agreement or instrument governing such Debt, is required to be repaid upon such disposition, in each case to the extent, but only to the extent, that the amounts so deducted are, at the time of receipt of such cash, actually paid to a Person that is not an Affiliate of such Person or any Borrower or any Affiliate of any Borrower and are properly attributable to such transaction or to the asset that is the subject thereof; provided, however, that in the case of taxes that are deductible under clause (b) above but for the fact that, at the time of receipt of such cash, such taxes have not been actually paid or are not then payable, such Borrower or such Subsidiary may deduct an amount (the "RESERVED AMOUNT") equal to the amount reserved in accordance with GAAP for such Borrower's or such Subsidiary's reasonable estimate of such taxes, other than taxes for which such Borrower or such Subsidiary is indemnified, provided further, however, that, at the time such taxes are paid, an amount equal to the amount, if any, by which the Reserved Amount for such taxes exceeds the amount of such taxes actually paid shall constitute "Net Cash Proceeds" of the type for which such taxes were reserved for all purposes hereunder. "NOTE" means a promissory note of any Borrower payable to the order of any Lender, in substantially the form of Exhibit A hereto, evidencing the aggregate indebtedness of the Borrowers to such Lender resulting from the Working Capital Advances and Letter of Credit Advances made by such Lender, as amended. "NOTICE OF BORROWING" has the meaning specified in Section 2.02(a). "NOTICE OF ISSUANCE" has the meaning specified in Section 2.03(a). "NOTICE OF NON-RENEWAL" has the meaning specified in Section 2.01(b). "NPL" means the National Priorities List under CERCLA. "OBLIGATION" means, with respect to any Person, any payment, performance or other obligation of such Person of any kind, excluding any obligations in respect of compensation or employee benefits but including, without limitation, any liability of such Person on any claim, whether or not the right of any creditor to payment in respect of such claim is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, disputed, undisputed, legal, equitable, secured or unsecured, and whether or not such claim is discharged, stayed or otherwise affected by any proceeding referred to in 20 Section 6.01(f). Without limiting the generality of the foregoing, the Obligations of any Borrower under the Loan Documents include (a) the obligation to pay principal, interest, Letter of Credit commissions, charges, expenses, fees, attorneys' fees and disbursements, indemnities and other amounts payable by such Borrower under any Loan Document and (b) the obligation of such Borrower to reimburse any amount in respect of any of the foregoing that any Lender Party, in its sole discretion, may elect to pay or advance on behalf of such Borrower. "OECD" means the Organization for Economic Cooperation and Development. "OPEN YEAR" has the meaning specified in Section 4.01(p)(iii). "OTHER TAXES" has the meaning specified in Section 2.12(b). "PARENT GUARANTOR" has the meaning specified in the recital of parties to this Agreement. "PARENT GUARANTY" means the guaranty of MII set forth in Article VIII of this Agreement. "PBGC" means the Pension Benefit Guaranty Corporation (or any successor). "PERMITTED ENCUMBRANCES" has the meaning specified in the Collateral Documents. "PERMITTED L/C LIEN ASSETS" means (a) Middle Eastern Receivables and (b) cash in the amount of Net Cash Proceeds described in clauses (A) and (D) of Section 2.06(b), solely to the extent that such Net Cash Proceeds are not required to be used to cash collateralize the Facilities as provided in Section 2.06(b). "PERMITTED LIENS" means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced or, if commenced, have been stayed: (a) Liens for taxes, assessments and governmental charges or levies to the extent not required to be paid under Section 5.01(b); (b) Liens imposed by law, such as landlord's, materialmen's, mechanics', carriers', workmen's and repairmen's Liens, maritime Liens and other similar Liens arising in the ordinary course of business securing obligations that, individually or together with all other Permitted Liens outstanding on any date of determination do not materially adversely affect the use of the property to which they relate; (c) pledges or deposits to secure obligations under workers' compensation unemployment insurance or social security laws or similar legislation or to secure public or statutory obligations; (d) easements, rights of way and other encumbrances on title to real property that do not render title to the property encumbered thereby unmarketable or materially adversely affect the use of such property for its present purposes; (e) Permitted Encumbrances; (f) Liens to secure the performance of bids, trade contracts (other than for Debt), leases (other than Capitalized Leases), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (g) Liens with respect to cash collateral deposited as security for letters of credit issued under the 21 Existing Credit Facilities and not replaced with Letters of Credit issued under this Agreement and (h) Liens with respect to joint ventures or other similar arrangements to secure the Obligations of one joint venture party to another, provided that such Liens do not secure Debt. "PERMITTED UNBLOCKED ACCOUNT" means (a) solely in respect of MII and/or MIICO, securities accounts and bank accounts holding an aggregate amount not to exceed $25,000,000 of unrestricted cash and (b) as to any Loan Party and its Subsidiaries, bank accounts (i) maintained for payroll, employee benefits and disbursements, (ii) maintained outside the United States in respect of overseas operations or (iii) of Insurance Subsidiaries, in each case for clauses (i) through (iii) above, maintained in the ordinary course of business consistent with past practices. "PERSON" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "PLAN" means a Single Employer Plan or a Multiple Employer Plan. "PLEDGED DEBT" has the meaning specified in the Security Agreement. "PLEDGED EQUITY" has the meaning specified in the Security Agreement. "PREFERRED INTERESTS" means, with respect to any Person, Equity Interests issued by such Person that are entitled to a preference or priority over any other Equity Interests issued by such Person upon any distribution of such Person's property and assets, whether by dividend or upon liquidation. "PRO RATA SHARE" of any amount means, with respect to any Lender at any time, the product of such amount times a fraction the numerator of which is the amount of such Lender's Working Capital Commitment at such time (or, if the Commitments shall have been terminated pursuant to Section 2.05 or 6.01, such Lender's Working Capital Commitment as in effect immediately prior to such termination) and the denominator of which is the Working Capital Facility at such time (or, if the Commitments shall have been terminated pursuant to Section 2.05 or 6.01, the Working Capital Facility as in effect immediately prior to such termination). "RECEIVABLES" means all Receivables referred to in Section 1(c) of the Security Agreement. "REDEEMABLE" means, with respect to any Equity Interest, any Debt or any other right or Obligation, any such Equity Interest, Debt, right or Obligation that (a) the issuer has undertaken to redeem at a fixed or determinable date or dates, whether by operation of a sinking fund or otherwise, or upon the occurrence of a condition not solely within the control of the issuer or (b) is redeemable at the option of the holder. "REGISTER" has the meaning specified in Section 9.07(d). 22 "REGULATION U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REMAINING L/CS" means the letters of credit listed on Schedule V hereto. "REQUIRED LENDERS" means, at any time, Lenders owed or holding at least 66 2/3% in interest of the sum of (a) the aggregate principal amount of the Advances outstanding at such time, (b) the aggregate Available Amount of all Letters of Credit outstanding at such time and (c) the aggregate Unused Working Capital Commitments at such time; provided, however, that if any Lender shall be a Defaulting Lender at such time, there shall be excluded from the determination of Required Lenders at such time (A) the aggregate principal amount of the Advances owing to such Lender (in its capacity as a Lender) and outstanding at such time, (B) such Lender's Pro Rata Share of the aggregate Available Amount of all Letters of Credit outstanding at such time and (C) the Unused Working Capital Commitment of such Lender at such time. For purposes of this definition, the aggregate principal amount of Letter of Credit Advances owing to Issuing Banks and the Available Amount of each Letter of Credit shall be considered to be owed to the Lenders ratably in accordance with their respective Working Capital Commitments. "RESPONSIBLE OFFICER" means any of the chief executive officer, chief financial officer, treasurer or general counsel of any of MII, JRMSA or BWXT. "SECURED HEDGE AGREEMENT" means any Hedge Agreement required or permitted under Article V that is entered into by and between any Borrower and any Hedge Bank. "SECURED OBLIGATIONS" has the meaning specified in the Collateral Documents. "SECURED PARTIES" means the Agents, the Lender Parties, the Hedge Banks and, solely with respect to Bilateral Obligations, Affiliates of the Lender Parties. "SECURITY AGREEMENT" has the meaning specified in Section 3.01(a)(ii). "SERIES A NOTES" means the Series "A" Medium Term Notes issued by MI under the Indenture dated as of March 1, 1992 to which MI is a party. "SETTLEMENT AGREEMENT" means the Settlement Agreement to be entered into by and among MII, MI, BWICO, B&W, Diamond Power International, Inc., Americon, Inc., Babcock & Wilcox Construction Co., Inc., the Asbestos Claimants Committee (as defined therein) and the Legal Representative for Future Asbestos-Related Claimants in the Chapter 11 Proceedings (as defined therein), a copy of the December 18, 2002 draft of which has been delivered to the Administrative Agent. "SHIP MORTGAGES" has the meaning specified in Section 5.01(q). "SINGLE EMPLOYER PLAN" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of any Borrower or any ERISA Affiliate and no Person other than the Borrowers and the ERISA Affiliates or 23 (b) was so maintained and in respect of which any Borrower or any ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated. "SOLVENT" and "SOLVENCY" mean, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay such debts and liabilities as they mature and (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute an unreasonably small capital. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "SUBLIMIT AVAILABILITY" means, with respect to the Applicable Borrower(s) under any Applicable Working Capital Sublimit at any time, (a) such Applicable Working Capital Sublimit at such time minus (b) the sum of the aggregate principal amount of all Working Capital Advances and Letter of Credit Advances made for the account of such Applicable Borrower(s) and outstanding at such time. "SUBORDINATED DEBT" means Debt of any Borrower that is subordinated to the Obligations of such Borrower under the Loan Documents on, and that otherwise contains, terms and conditions satisfactory to the Required Lenders. "SUBSIDIARY" of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of (a) the issued and outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such partnership, joint venture or limited liability company or (c) the beneficial interest in such trust or estate is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries; provided, that, B&W and each of its subsidiaries shall not be deemed to be Subsidiaries of MII or any of MII's other subsidiaries. "SUBSIDIARY GUARANTOR" means each Subsidiary of JRMSA (other than the Borrowers) that is a Collateral Grantor and each other Subsidiary of JRMSA that shall be required to execute and delivery a guaranty pursuant to Section 5.02(p). "SUBSIDIARY GUARANTY" has the meaning specified in Section 3.01(a)(iii). 24 "SURVIVING DEBT" means Debt of each Loan Party and each Subsidiary of a Loan Party outstanding immediately before and after giving effect to the Transaction. "TAXES" has the meaning specified in Section 2.12(a). "TERMINATION DATE" means the earlier of (a) April 30, 2004, and (b) the date of termination in whole of the Working Capital Commitments and the Letter of Credit Commitments pursuant to Section 2.05 or 6.01. "TOTAL L/C EXPOSURE" means the sum of (a) the aggregate Available Amount of all Letters of Credit issued for the account of the Borrowers and outstanding at such time plus (b) the aggregate principal amount of all Letter of Credit Advances made for the account of the Borrowers. "TRANSACTION" means the transactions contemplated by the Loan Documents. "TYPE" refers to the distinction between Advances bearing interest at the Base Rate and Advances bearing interest at the Eurodollar Rate. "UNUSED WORKING CAPITAL COMMITMENT" means, with respect to any Lender at any time, (a) such Lender's Working Capital Commitment at such time minus (b) the sum of (i) the aggregate principal amount of all Working Capital Advances and Letter of Credit Advances made by such Lender (in its capacity as a Lender) and outstanding at such time plus (ii) such Lender's Pro Rata Share of (A) the aggregate Available Amount of all Letters of Credit outstanding at such time and (B) the aggregate principal amount of all Letter of Credit Advances made by the Issuing Banks pursuant to Section 2.03(c) and outstanding at such time. "VOTING INTERESTS" means shares of capital stock issued by a corporation, or equivalent Equity Interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency. "WELFARE PLAN" means a welfare plan, as defined in Section 3(1) of ERISA, that is maintained for employees of any Borrower or in respect of which any Borrower could have liability. "WITHDRAWAL LIABILITY" has the meaning specified in Part I of Subtitle E of Title IV of ERISA. "WORKING CAPITAL ADVANCE" has the meaning specified in Section 2.01(a). "WORKING CAPITAL COMMITMENT" means, with respect to any Lender at any time, the amount set forth opposite such Lender's name on Schedule I hereto under the caption "Working Capital Commitment" or, if such Lender has entered into one or more Assignment and Acceptances, set forth for such Lender in the Register maintained by the Administrative Agent pursuant to Section 9.07(d) as such Lender's "Working Capital 25 Commitment", as such amount may be reduced at or prior to such time pursuant to Section 2.05. "WORKING CAPITAL FACILITY" means, at any time, the aggregate amount of the Lenders' Working Capital Commitments at such time. "YARD AGREEMENT" means the Yard Utilization Contract dated as of January 23, 2001, between BP America, Inc., and JRMI, as amended by Amendment No. 1 to Yard Utilization Contract BPA-00-0198 and by Amendment No. 2 to Yard Utilization Contract BPA-00-01918. SECTION 1.02. Computation of Time Periods; Other Definitional Provisions. In this Agreement and the other Loan Documents in the computation of periods of time from a specified date to a later specified date, the word "FROM" means "from and including" and the words "TO" and "UNTIL" each mean "to but excluding". References in the Loan Documents to any agreement or contract "AS AMENDED" shall mean and be a reference to such agreement or contract as amended, amended and restated, supplemented or otherwise modified from time to time in accordance with its terms. SECTION 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(g), but giving effect to Statement of Financial Accounting Standards No. 143 ("GAAP"). 26 ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES AND THE LETTERS OF CREDIT SECTION 2.01. The Advances and the Letters of Credit. (a) The Working Capital Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make advances (each a "WORKING CAPITAL ADVANCE") to each Borrower from time to time on any Business Day during the period from the date hereof until the Termination Date in an amount for each such Advance not to exceed the lesser of (a) such Lender's Unused Working Capital Commitment at such time and (b) such Lender's Pro Rata Share of the Sublimit Availability under the Applicable Working Capital Sublimit of such Borrower; provided, that, the sum of the aggregate amount of all outstanding Working Capital Advances plus Total L/C Exposure shall not exceed the Maximum Amount at any time. Each Borrowing shall be in an aggregate amount of $1,000,000 or an integral multiple thereof, in the case of a Borrowing consisting of Eurodollar Rate Advances, or $200,000 or an integral multiple of $100,000 in excess thereof, in the case of Base Rate Advances (in each case, other than a Borrowing the proceeds of which shall be used solely to repay or prepay in full outstanding Letter of Credit Advances) and shall consist of Working Capital Advances made simultaneously by the Lenders ratably according to their Working Capital Commitments. Within the limits of each Lender's Unused Working Capital Commitment in effect from time to time, and subject to the limits set forth above, each Borrower may borrow under this Section 2.01(a), prepay pursuant to Section 2.06(a) and reborrow under this Section 2.01(a). (b) The Letters of Credit. Each Issuing Bank severally agrees, on the terms and conditions hereinafter set forth, to issue letters of credit (the "LETTERS OF CREDIT") for the account of each Borrower and for the account of their respective Subsidiaries, Affiliates and joint ventures from time to time on any Business Day during the period from the date hereof until 10 days before the Termination Date in an aggregate Available Amount (i) for all Letters of Credit issued by such Issuing Bank not to exceed at any time the lesser of (x) the Letter of Credit Facility at such time and (y) such Issuing Bank's Letter of Credit Commitment at such time and (ii) for each such Letter of Credit not to exceed the Available L/C Sublimit; provided, that, the sum of Total L/C Exposure plus the aggregate amount of all outstanding Working Capital Advances shall not exceed the Maximum Amount at any time. No Letter of Credit shall have an expiration date (including all rights of the Borrower or the beneficiary to require renewal) later than 10 days before the Termination Date, but may by its terms be renewable annually, or otherwise, automatically unless such Issuing Bank has notified the applicable Borrower (with a copy to the Administrative Agent) and the beneficiary of such Letter of Credit on or prior to the final date for notice of non-renewal set forth in such Letter of Credit but in any event at least 30 days prior to the date of automatic renewal of its election not to renew such Letter of Credit (a "NOTICE OF NON-RENEWAL"); provided that the terms of each Letter of Credit that is automatically renewable shall (x) require the Issuing Bank that issued such Letter of Credit to give the beneficiary named in such Letter of Credit Notice of Non-Renewal and (y) permit, according to the terms thereunder, such beneficiary, upon receipt of such notice, to draw under such Letter of Credit prior to the date such Letter of Credit otherwise would 27 have been automatically renewed. If a Notice of Non-Renewal is given by the relevant Issuing Bank pursuant to the immediately preceding sentence, such Letter of Credit shall expire on the date on which it otherwise would have been automatically renewed; provided, further, that any Letter of Credit may expire after the tenth day prior to the Termination Date if, at the time of issuance or renewal, as the case may be, of such Letter of Credit, such Letter of Credit is cash collateralized in an amount equal to 105% of the amount of such Letter of Credit plus any additional amounts owing under such Letter of Credit; provided, further, that each of Bank One NA and The Bank of Nova Scotia, in its capacity as an Issuing Bank, shall have no obligation hereunder to issue any new Letter of Credit or to extend or renew any existing Letter of Credit under this Agreement, and all Letters of Credit (or related arrangements) issued by either Bank One NA or The Bank of Nova Scotia or any of its respective Affiliates for the account of the Borrowers hereunder shall be replaced with Letters of Credit issued hereunder no later than ninety (90) days following the Effective Date. Within the limits of the Letter of Credit Facility, and subject to the limits referred to above, each Borrower may request the issuance of Letters of Credit under this Section 2.01(b), repay any Letter of Credit Advances resulting from drawings thereunder pursuant to Section 2.03(c) and request the issuance of additional Letters of Credit under this Section 2.01(b). SECTION 2.02. Making the Advances. (a) Except as otherwise provided in Section 2.02(b) or 2.03, each Borrowing shall be made on notice, given not later than 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Borrowing in the case of a Borrowing consisting of Eurodollar Rate Advances, or the first Business Day prior to the date of the proposed Borrowing in the case of a Borrowing consisting of Base Rate Advances, by any Borrower to the Administrative Agent, which shall give to each Lender prompt notice thereof by telex or telecopier. Each such notice of a Borrowing (a "NOTICE OF BORROWING") shall be by telephone, confirmed immediately in writing, or telex or telecopier, in substantially the form of Exhibit B hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing and (iv) in the case of a Borrowing consisting of Eurodollar Rate Advances, initial Interest Period for each such Advance. Each Lender shall, before 11:00 A.M. (New York City time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at the Administrative Agent's Account, in same day funds, such Lender's ratable portion of such Borrowing in accordance with the respective Commitments of such Lender and the other Lenders. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the applicable Borrower by crediting such Borrower's Account; provided, however, that the Administrative Agent shall first make a portion of such funds equal to the aggregate principal amount of any Letter of Credit Advances made by any Issuing Bank, as the case may be, and by any other Lender and outstanding on the date of such Borrowing, plus interest accrued and unpaid thereon to and as of such date, available to such Issuing Bank and such other Lenders for repayment of such Letter of Credit Advances. (b) Anything in subsection (a) above to the contrary notwithstanding, no Borrower may select Eurodollar Rate Advances for the initial Borrowing hereunder or for any Borrowing if the aggregate amount of such Borrowing is less than $5,000,000 or if the obligation of the Lenders to make Eurodollar Rate Advances shall then be suspended pursuant to Section 2.09 or 2.10. 28 (c) Each Notice of Borrowing shall be irrevocable and binding on the applicable Borrower. In the case of any Borrowing that the related Notice of Borrowing specifies is to be comprised of Eurodollar Rate Advances, each Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of Borrowing for such Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Advance to be made by such Lender as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. (d) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's ratable portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.02 and the Administrative Agent may, in reliance upon such assumption, make available to the applicable Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such ratable portion available to the Administrative Agent, such Lender and the applicable Borrower severally agree to repay or pay to the Administrative Agent forthwith on demand such corresponding amount and to pay interest thereon, for each day from the date such amount is made available to the applicable Borrower until the date such amount is repaid or paid to the Administrative Agent, at (i) in the case of such Borrower, the interest rate applicable at such time under Section 2.07 to Advances comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall pay to the Administrative Agent such corresponding amount, such amount so paid shall constitute such Lender's Advance as part of such Borrowing for all purposes. (e) The failure of any Lender to make the Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the date of any Borrowing. SECTION 2.03. Issuance of and Drawings and Reimbursement Under Letters of Credit. (a) Request for Issuance. Each Letter of Credit shall be issued upon notice, given not later than 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed issuance of such Letter of Credit, by the applicable Borrower to the Administrative Agent and the applicable Issuing Bank. Each such notice of issuance of a Letter of Credit (a "NOTICE OF ISSUANCE") shall be by telephone, confirmed immediately in writing, or telex or telecopier, specifying therein the requested (A) date of such issuance (which shall be a Business Day), (B) Available Amount of such Letter of Credit, (C) expiration date of such Letter of Credit, (D) name and address of the beneficiary of such Letter of Credit and (E) form of such Letter of Credit, with such variations as such Issuing Bank reasonably may specify to the Borrower for use in connection with such requested Letter of Credit (a "LETTER OF CREDIT AGREEMENT"). If the requested form of such Letter of Credit is acceptable to such Issuing Bank in its sole discretion, such Issuing Bank will, upon fulfillment of the applicable conditions set forth in Article III, make such Letter of Credit available to the applicable Borrower at its office 29 referred to in Section 9.02 or as otherwise agreed with the such Borrower in connection with such issuance. In the event and to the extent that the provisions of any Letter of Credit Agreement shall conflict with this Agreement, the provisions of this Agreement shall govern. (b) Letter of Credit Reports. Each Issuing Bank shall furnish (A) to the Administrative Agent on the first Business Day of each week a written report summarizing issuance and expiration dates of Letters of Credit issued by such Issuing Bank during the previous week and drawings during such week under all Letters of Credit issued by such Issuing Bank, (B) to each Lender on the first Business Day of each month a written report summarizing issuance and expiration dates of Letters of Credit issued by such Issuing Bank during the preceding month and drawings during such month under all Letters of Credit issued by such Issuing Bank and (C) to the Administrative Agent and each Lender on the first Business Day of each calendar quarter a written report setting forth the average daily aggregate Available Amount during the preceding calendar quarter of all Letters of Credit issued by such Issuing Bank. (c) Drawing and Reimbursement. The payment by any Issuing Bank of a draft drawn under any Letter of Credit shall constitute for all purposes of this Agreement the making by such Issuing Bank of a Letter of Credit Advance, which shall be a Base Rate Advance, in the amount of such draft. Upon written demand by any Issuing Bank with an outstanding Letter of Credit Advance, with a copy of such demand to the Administrative Agent, each Lender shall purchase from such Issuing Bank, and such Issuing Bank shall sell and assign to each such Lender, such Lender's Pro Rata Share of such outstanding Letter of Credit Advance as of the date of such purchase, by making available for the account of its Applicable Lending Office to the Administrative Agent for the account of such Issuing Bank, by deposit to the Administrative Agent's Account, in same day funds, an amount equal to the portion of the outstanding principal amount of such Letter of Credit Advance to be purchased by such Lender. Promptly after receipt thereof, the Administrative Agent shall transfer such funds to such Issuing Bank. Each Borrower hereby agrees to each such sale and assignment. Each Lender agrees to purchase its Pro Rata Share of an outstanding Letter of Credit Advance on (i) the Business Day on which demand therefor is made by the Issuing Bank which made such Advance, provided that notice of such demand is given not later than 11:00 A.M. (New York City time) on such Business Day, or (ii) the first Business Day next succeeding such demand if notice of such demand is given after such time. Upon any such assignment by an Issuing Bank to any Lender of a portion of a Letter of Credit Advance, such Issuing Bank represents and warrants to such other Lender that such Issuing Bank is the legal and beneficial owner of such interest being assigned by it, free and clear of any liens, but makes no other representation or warranty and assumes no responsibility with respect to such Letter of Credit Advance, the Loan Documents or any Borrower. If and to the extent that any Lender shall not have so made the amount of such Letter of Credit Advance available to the Administrative Agent, such Lender agrees to pay to the Administrative Agent forthwith on demand such amount together with interest thereon, for each day from the date of demand by such Issuing Bank until the date such amount is paid to the Administrative Agent, at the Federal Funds Rate for its account or the account of such Issuing Bank, as applicable. If such Lender shall pay to the Administrative Agent such amount for the account of such Issuing Bank on any Business Day, such amount so paid in respect of principal shall constitute a Letter of Credit Advance made by such Lender on such Business Day for purposes of this Agreement, and the outstanding principal amount of the Letter of Credit Advance made by such Issuing Bank shall be reduced by such amount on such Business Day. 30 (d) Failure to Make Letter of Credit Advances. The failure of any Lender to make the Letter of Credit Advance to be made by it on the date specified in Section 2.03(c) shall not relieve any other Lender of its obligation hereunder to make its Letter of Credit Advance on such date, but no Lender shall be responsible for the failure of any other Lender to make the Letter of Credit Advance to be made by such other Lender on such date. SECTION 2.04. Repayment of Advances. (a) Working Capital Advances. The Borrowers shall repay to the Administrative Agent for the ratable account of the Lenders on the Termination Date the aggregate principal amount of the Working Capital Advances then outstanding. (b) Letter of Credit Advances. (i) The Borrowers shall repay to the Administrative Agent for the account of each Issuing Bank and each other Lender that has made a Letter of Credit Advance no later than the third Business Day following the date on which such Advance is made the outstanding principal amount of each Letter of Credit Advance made by each of them. (ii) The Obligations of each Borrower under this Agreement, any Letter of Credit Agreement and any other agreement or instrument relating to any Letter of Credit shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, such Letter of Credit Agreement and such other agreement or instrument under all circumstances, including, without limitation, the following circumstances (it being understood that any such payment by any Borrower is without prejudice to, and does not constitute a waiver of, any rights the Borrower might have or might acquire as a result of the payment by any Issuing Bank of any draft or the reimbursement by the Borrower thereof): (A) any lack of validity or enforceability of any Loan Document, any Letter of Credit Agreement, any Letter of Credit or any other agreement or instrument relating thereto (all of the foregoing being, collectively, the "L/C RELATED DOCUMENTS"); (B) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations of any Borrower in respect of any L/C Related Document or any other amendment or waiver of or any consent to departure from all or any of the L/C Related Documents; (C) the existence of any claim, set-off, defense or other right that any Borrower may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Persons for which any such beneficiary or any such transferee may be acting), any Issuing Bank or any other Person, whether in connection with the transactions contemplated by the L/C Related Documents or any unrelated transaction; (D) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (E) payment by any Issuing Bank under a Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit; 31 (F) any exchange, release or non-perfection of any Collateral or other collateral, or any release or amendment or waiver of or consent to departure from any guarantee, for all or any of the Obligations of any Borrower in respect of the L/C Related Documents; or (G) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including, without limitation, any other circumstance that might otherwise constitute a defense available to, or a discharge of, any Borrower or a guarantor. SECTION 2.05. Termination or Reduction of the Commitments. (a) Optional. The Borrowers may, upon at least three Business Days' notice to the Administrative Agent, terminate in whole or reduce in part the unused portions of the Letter of Credit Facility and the Unused Working Capital Commitments; provided, however, that each partial reduction of a Facility (i) shall be in an aggregate amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof, (ii) shall be made ratably among the Lenders in accordance with their Commitments with respect to such Facility and (iii) shall reduce one or more Applicable Sublimits, as applicable, as notified to the Administrative by the Borrowers in connection with such reduction and in an amount equal to the amount of such reduction, provided that if the Borrowers shall fail to so notify the Administrative Agent, each Applicable Sublimit, as applicable, shall be ratably reduced in an aggregate amount equal to the amount of such reduction. (b) BWXT Optional Termination. Subject to compliance by MII with Section 5.02(b)(v), both prior to and after giving effect to such termination, BWXT shall be permitted to terminate its Obligations (other than Contingent Obligations) and the Commitments of each Lender Party in respect of BWXT, and (except as required under clause (ii) below) be entitled to the release of any amounts held to cash collateralize its Obligations under the Loan Documents pursuant to Section 2.06(b), at any time upon (i) the repayment in full of all its Obligations (other than Contingent Obligations) under the Loan Documents and in cash and (ii) the cash collateralization of 105% of the face amount of, or replacement of, all then outstanding Letters of Credit issued for the account of BWXT or any of its Subsidiaries. (c) Termination of Mizuho Commitment. On the Mizuho Termination Date, the Working Capital Facility shall be automatically reduced by an amount equal to Mizuho's Working Capital Commitment as set forth on Schedule I hereto, and Mizuho shall cease to have any Commitment hereunder. 32 SECTION 2.06. Prepayments; Cash Collateralization. (a) Optional. Each Borrower may, upon at least one Business Day's notice in the case of Base Rate Advances and three Business Days' notice in the case of Eurodollar Rate Advances, in each case to the Administrative Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given such Borrower shall, prepay the outstanding aggregate principal amount of the Advances comprising part of the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the aggregate principal amount prepaid; provided, however, that (x) each partial prepayment shall be in an aggregate principal amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof and (y) if any prepayment of a Eurodollar Rate Advance is made on a date other than the last day of an Interest Period for such Advance, the Borrower shall also pay any amounts owing pursuant to Section 9.04(c). (b) Mandatory Cash Collateralization. Each Loan Party (or, in the case of BWXT, either MII or BWXT) shall, not later than the third Business Day after the date of receipt of the Net Cash Proceeds by such Loan Party or any of its Subsidiaries from (A) the sale, lease, transfer or other disposition of any assets of such Loan Party or any of its Subsidiaries (other than assets described in clause (C) of this sentence or any sale, lease, transfer or other disposition of assets pursuant to clause (i), (v), (vi), (vii), (viii) or (x) of Section 5.02(e)), (B) the incurrence or issuance by any Loan Party or any of its Subsidiaries of any Debt (other than Debt incurred or issued pursuant to Section 5.02(b)), (C) the sale or issuance by any Loan Party or any of its wholly-owned Subsidiaries of any Equity Interests (including, without limitation, receipt of any capital contribution, but excluding any sale or issuance of any Equity Interest in any Person (1) which is an Investment specifically permitted under Section 5.02(f)(iii), (2) as required under the terms of the Settlement Agreement) or (3) pursuant to any incentive compensation or other benefit plan or arrangement) and (D) any Extraordinary Receipt received by or paid to or for the account of any Loan Party or any of its Subsidiaries and not otherwise included in clause (A), (B) or (C) above, deposit an amount in a segregated cash collateral account maintained with the Administrative Agent to collateralize the Facilities equal to (x) the amount of such Net Cash Proceeds, in the case of Net Cash Proceeds arising from clause (B) above, and (y) 50% of the amount of such Net Cash Proceeds in the case of any Net Cash Proceeds arising from any of clauses (A), (C) or (D) above; provided that net cash proceeds of BWXT that are required to be used to cash collateralize the Facilities shall be applied solely to cash collateralize the obligations of BWXT under the Facilities; provided, further that no cash collateralization shall be required under clauses (A) or (D) above (1) in respect of the first $30,000,000 of such Net Cash Proceeds or (2) in connection with any transaction or series of related transactions from which the aggregate Net Cash Proceeds do not exceed $500,000. (c) Prepayment of Mizuho Obligations. (i) On the Mizuho Termination Date, all outstanding Mizuho Obligations (other than Obligations in respect of undrawn Letters of Credit) shall be repaid solely from amounts on deposit in the Mizuho Cash Collateral Account, whereupon (A) Mizuho shall cease to be a Lender under this Agreement and (B) any amount remaining in such account, after giving effect to such repayment, shall be released to MII. (ii) If, after giving effect to the repayment of outstanding Mizuho Obligations on the Mizuho Termination Date, the sum of the aggregate amount of all outstanding Working Capital Advances plus Total L/C Exposure exceeds the Maximum Amount, the Borrowers shall 33 be required to prepay outstanding Working Capital Advances in an amount equal to such excess amount. SECTION 2.07. Interest. (a) Scheduled Interest. Each Borrower shall pay interest on the unpaid principal amount of each Advance owing to each Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (i) Base Rate Advances. During such periods as such Advance is a Base Rate Advance, a rate per annum equal at all times to the sum of (A) the Base Rate in effect from time to time plus (B) the Applicable Margin in effect from time to time, payable in arrears monthly on the last day of each month during such periods and on the date such Base Rate Advance shall be Converted or paid in full. (ii) Eurodollar Rate Advances. During such periods as such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Advance to the sum of (A) the Eurodollar Rate for such Interest Period for such Advance plus (B) the Applicable Margin in effect from time to time, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than one month, on each day that occurs during such Interest Period every one month from the first day of such Interest Period and on the date such Eurodollar Rate Advance shall be Converted or paid in full. (b) Default Interest. Upon the occurrence and during the continuance of an Event of Default under Section 6.01(a) or (f), or upon receipt by the Loan Parties of notice from the Administrative Agent as to any other Event of Default, each Borrower shall pay interest on (i) the unpaid principal amount of each Advance owing to each Lender, payable in arrears on the dates referred to in clause (a)(i) or (a)(ii) above at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on such Advance pursuant to clause (a)(i) or (a)(ii) above and (ii) to the fullest extent permitted by law, the amount of any interest, fee or other amount payable under the Loan Documents that is not paid when due, from the date such amount shall be due until such amount shall be paid in full, payable in arrears on the date such amount shall be paid in full and on demand, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid, in the case of interest, on the Type of Advance on which such interest has accrued pursuant to clause (a)(i) or (a)(ii) above and, in all other cases, on Base Rate Advances pursuant to clause (a)(i) above. (c) Notice of Interest Period and Interest Rate. Promptly after receipt of a Notice of Borrowing pursuant to Section 2.02(a), a notice of Conversion pursuant to Section 2.09 or a notice of selection of an Interest Period pursuant to the terms of the definition of "Interest Period", the Administrative Agent shall give notice to the applicable Borrower and each Lender of the applicable Interest Period and the applicable interest rate determined by the Administrative Agent for purposes of clause (a)(i) or (a)(ii) above. SECTION 2.08. Fees. (a) Commitment Fee. Each Borrower shall pay to the Administrative Agent for the account of the Lenders a commitment fee, from the date hereof in the case of each Initial Lender and from the effective date specified in the Assignment and Acceptance pursuant to which it became a Lender in the case of each other Lender until the 34 Termination Date, payable in arrears on the date of the initial Borrowing hereunder, thereafter quarterly within 5 Business Days after receipt of an invoice with supporting documentation from the Administrative Agent, commencing with the invoice received for the quarter ending March 31, 2003, and on the Termination Date, at the rate of 0.75 of 1% per annum on the average daily Unused Working Capital Commitment of such Lender during such quarter; provided, however, that no commitment fee shall accrue on any of the Commitments of a Defaulting Lender so long as such Lender shall be a Defaulting Lender. (b) Letter of Credit Fees, Etc. (i) Each Borrower shall pay to the Administrative Agent for the account of each Lender a commission, payable quarterly in arrears within 5 Business Days after receipt of an invoice with supporting documentation from the Administrative Agent, commencing with the invoice received for the quarter ending March 31, 2003, and on the earliest to occur of the full drawing, expiration, termination or cancellation of any Letter of Credit and on the Termination Date, on such Lender's Pro Rata Share of the average daily aggregate Available Amount during such quarter of all Letters of Credit outstanding from time to time at the rate of (A) 4.50% per annum, in the case of the JRM Borrowers, and (B) 3.50% per annum, in the case of BWXT. (ii) Each Borrower shall pay to each Issuing Bank, for its own account, within 5 Business Days after receipt of an invoice with supporting documentation from such Issuing Bank: (A) a commission, payable in arrears quarterly on the last day of each March, June, September and December, commencing March 31, 2003, and on the Termination Date, on the average daily Available Amount of its Letters of Credit during such, from the date hereof until the Termination Date, at the rate of 0.50% per annum and (B) such other commissions, fronting fees, transfer fees and other charges in connection with the issuance or administration of each Letter of Credit as the Borrower and such Issuing Bank shall agree. (c) Agents' Fees. The Borrowers shall pay to each Agent for its own account such fees as may from time to time be agreed between the Borrowers and such Agent. SECTION 2.09. Conversion of Advances. (a) Optional. Each Borrower may on any Business Day, upon notice given to the Administrative Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Conversion and subject to the provisions of Sections 2.07 and 2.10, Convert all or any portion of the Advances of one Type comprising the same Borrowing into Advances of the other Type; provided, however, that any Conversion of Eurodollar Rate Advances into Base Rate Advances shall be made only on the last day of an Interest Period for such Eurodollar Rate Advances, any Conversion of Base Rate Advances into Eurodollar Rate Advances shall be in an amount not less than the minimum amount specified in Section 2.02(b), and each Conversion of Advances comprising part of the same Borrowing shall be made ratably among the Lenders in accordance with their Commitments. Each such notice of Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Advances to be Converted and (iii) if such Conversion is into Eurodollar Rate Advances, the duration of the initial Interest Period for such Advances. Each notice of Conversion shall be irrevocable and binding on the Borrower. (b) Mandatory. (i) On the date on which the aggregate unpaid principal amount of Eurodollar Rate Advances comprising any Borrowing shall be reduced, by payment or 35 prepayment or otherwise, to less than $1,000,000, such Advances shall automatically Convert into Base Rate Advances. (ii) If any Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01, the Administrative Agent will forthwith so notify such Borrower and the Lenders, whereupon each such Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance. (iii) Upon the occurrence and during the continuance of any Event of Default, (x) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (y) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended. SECTION 2.10. Increased Costs, Etc. (a) If, due to either (i) the introduction of or any change in any applicable law or regulation or in the interpretation thereof by any governmental authority charged with the interpretation or administration thereof or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Lender Party of agreeing to make or of making, funding or maintaining Eurodollar Rate Advances or of agreeing to issue or of issuing or maintaining or participating in Letters of Credit or of agreeing to make or of making or maintaining Letter of Credit Advances (excluding, for purposes of this Section 2.10, any such increased costs resulting from (x) Taxes or Other Taxes (as to which Section 2.12 shall govern) and (y) changes in the basis of taxation of overall net income or overall gross income by the United States or by the foreign jurisdiction or state under the laws of which such Lender Party is organized or has its Applicable Lending Office or any political subdivision thereof), then the Borrowers shall from time to time, upon demand by such Lender Party (with a copy of such demand to the Administrative Agent) pay to the Administrative Agent for the account of such Lender Party additional amounts necessary to compensate such Lender Party for such increased cost; provided, however, that a Lender Party claiming additional amounts under this Section 2.10(a) agrees to use reasonable efforts (consistent with its internal policy and applicable legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such a designation would avoid the need for, or reduce the amount of, such increased cost that may thereafter accrue and would not, in the reasonable judgment of such Lender Party, be otherwise materially disadvantageous to such Lender Party. A certificate setting forth in reasonable detail the amount of such increased cost, submitted to the Borrowers by such Lender Party (within 90 days after obtaining knowledge of such increased costs), shall be conclusive and binding for all purposes, absent manifest error. (b) If, following the introduction of or any change in any applicable law or regulation or in the interpretation thereof by any governmental authority charged with the interpretation or administration thereof, the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Lender Party or any corporation controlling such Lender Party and that the amount of such capital is increased by or based upon the existence of such Lender Party's commitment to lend or to issue or participate in Letters of Credit hereunder and other commitments of such type or the issuance or 36 maintenance of or participation in the Letters of Credit (or similar contingent obligations), then, upon demand by such Lender Party or such corporation (with a copy of such demand to the Administrative Agent), the Borrowers shall pay to the Administrative Agent for the account of such Lender Party, from time to time as specified by such Lender Party, additional amounts necessary to compensate such Lender Party in the light of such circumstances, to the extent that such Lender Party reasonably determines such increase in capital to be allocable to the existence of such Lender Party's commitment to lend or to issue or participate in Letters of Credit hereunder or to the issuance or maintenance of or participation in any Letters of Credit. A certificate setting forth in reasonable detail such amounts submitted to the Borrowers (within 90 days after obtaining knowledge of such increased costs) by such Lender Party shall be conclusive and binding for all purposes, absent manifest error. No Lender Party shall demand compensation under this Section 2.10(b) if it shall not at the time be the general practice of such Lender Party to demand compensation in similar circumstances under comparable provisions of other credit agreements, if any. (c) If, with respect to any Eurodollar Rate Advances, the Required Lenders notify the Administrative Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Lenders of making, funding or maintaining their Eurodollar Rate Advances for such Interest Period, the Administrative Agent shall forthwith so notify the Borrowers and the Lenders, whereupon (i) each such Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrowers that such Lenders have determined that the circumstances causing such suspension no longer exist. (d) Notwithstanding any other provision of this Agreement, if the introduction of or any change in any law or regulation or in the interpretation thereof by any governmental authority charged with the interpretation or administration thereof shall make it unlawful, or any central bank or other governmental authority shall assert that it is unlawful, for any Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to continue to fund or maintain Eurodollar Rate Advances hereunder, then, on notice thereof and demand therefor by such Lender to the Borrowers through the Administrative Agent, (i) each Eurodollar Rate Advance will automatically, upon such demand, Convert into a Base Rate Advance and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrowers that such Lender has determined that the circumstances causing such suspension no longer exist; provided, however, that, before making any such demand, such Lender agrees to use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Eurodollar Lending Office if the making of such a designation would allow such Lender or its Eurodollar Lending Office to continue to perform its obligations to make Eurodollar Rate Advances or to continue to fund or maintain Eurodollar Rate Advances and would not, in the judgment of such Lender, be otherwise materially disadvantageous to such Lender. SECTION 2.11. Payments and Computations. (a) The Borrowers shall make each payment hereunder and under the Notes, irrespective of any right of counterclaim or set-off 37 (except as otherwise provided in Section 2.15), not later than 11:00 A.M. (New York City time) on the day when due in U.S. dollars to the Administrative Agent at the Administrative Agent's Account in same day funds, with payments being received by the Administrative Agent after such time being deemed to have been received on the next succeeding Business Day. The Administrative Agent will promptly thereafter cause like funds to be distributed (i) if such payment by the Borrowers is in respect of principal, interest, commitment fees or any other Obligation then payable hereunder and under the Notes to more than one Lender Party, to such Lender Parties for the account of their respective Applicable Lending Offices ratably in accordance with the amounts of such respective Obligations then payable to such Lender Parties and (ii) if such payment by the Borrowers is in respect of any Obligation then payable hereunder to one Lender Party, to such Lender Party for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 9.07(d), from and after the effective date of such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender Party assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) Each Borrower hereby authorizes each Lender Party and each of its Affiliates, if and to the extent payment owed to such Lender Party is not made when due hereunder or, in the case of a Lender, under the Note held by such Lender, to charge from time to time, to the fullest extent permitted by law, against any or all of such Borrower's accounts with such Lender Party or such Affiliate any amount so due. (c) All computations of interest based on the Base Rate shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or the Federal Funds Rate and of fees and Letter of Credit commissions shall be made by the Administrative Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest, fees or commissions are payable. Each determination by the Administrative Agent of an interest rate, fee or commission hereunder shall be conclusive and binding for all purposes, absent manifest error. (d) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or commitment fee, as the case may be; provided, however, that, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (e) Unless the Administrative Agent shall have received notice from the Borrowers prior to the date on which any payment is due to any Lender Party hereunder that the Borrowers will not make such payment in full, the Administrative Agent may assume that the Borrowers have made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each 38 such Lender Party on such due date an amount equal to the amount then due such Lender Party. If and to the extent the Borrowers shall not have so made such payment in full to the Administrative Agent, each such Lender Party shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender Party together with interest thereon, for each day from the date such amount is distributed to such Lender Party until the date such Lender Party repays such amount to the Administrative Agent, at the Federal Funds Rate. (f) If the Administrative Agent receives funds for application to the Obligations under the Loan Documents under circumstances for which the Loan Documents do not specify the Advances or the Facility to which, or the manner in which, such funds are to be applied, the Administrative Agent may, but shall not be obligated to, elect to distribute such funds to each Lender Party ratably in accordance with such Lender Party's proportionate share of the principal amount of all outstanding Advances and the Available Amount of all Letters of Credit then outstanding, in repayment or prepayment of such of the outstanding Advances or other Obligations owed to such Lender Party, and for application to such principal installments, as the Administrative Agent shall direct. SECTION 2.12. Taxes. (a) Any and all payments by the Borrowers hereunder or under the Notes shall be made, in accordance with Section 2.11, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender Party and each Agent, taxes that are imposed on its net income by the United States and taxes that are imposed on its net income (and franchise taxes imposed on or measured by net income) by the jurisdiction under the laws of which such Lender Party or such Agent, as the case may be, is organized or in which its principal executive office is located or any political subdivision thereof, and, in the case of each Lender Party, taxes that are imposed on its net income (and franchise taxes imposed on or measured by net income) by the jurisdiction of such Lender Party's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder or under the Notes being hereinafter referred to as "TAXES"). If the Borrowers shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Lender Party or any Agent, (i) the sum payable by the Borrowers shall be increased by the amount (an "ADDITIONAL AMOUNT") necessary so that after the Borrowers and the Administrative Agent have made all required deductions (including deductions applicable to additional sums payable under this Section 2.12) such Lender Party or such Agent, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrowers shall make all such deductions and (iii) the Borrowers shall pay the full amount deducted to the relevant taxation authority in accordance with applicable law. (b) In addition, the Borrowers shall pay any present or future stamp, documentary, excise, property or similar taxes, charges or levies that arise from any payment made hereunder or under the Notes or from the execution, delivery or registration of performance under, or otherwise with respect to, this Agreement or the Notes (hereinafter referred to as "OTHER TAXES"). (c) The Borrowers shall indemnify each Lender Party and each Agent for and hold them harmless against the full amount of Taxes and Other Taxes, and for the full amount of 39 taxes of any kind imposed by any jurisdiction on amounts payable under this Section 2.12, imposed on or paid by such Lender Party or such Agent (as the case may be) and any liability (including penalties, additions to tax, interest and reasonable expenses) arising therefrom or with respect thereto. This indemnification shall be made within 30 days from the date such Lender Party or such Agent (as the case may be) makes reasonable written demand (which demand shall be made within a reasonable time), specifying in reasonable detail (with supporting documentation reasonably requested by the Borrowers) the reasons therefor. (d) If an Agent or Lender Party shall become aware that it is entitled to claim a refund from a taxation authority in respect of Taxes or Other Taxes as to which it has been indemnified by the Borrowers, or with respect to which the Borrowers have paid Additional Amounts, pursuant to this Section 2.12, it shall promptly notify the Borrowers of the availability of such refund claim and shall, within 30 days after receipt of a request by the Borrowers, make a claim to such taxation authority for such refund at the Borrowers' expense. If an Agent or a Lender Party receives a refund (including pursuant to a claim for refund made pursuant to the preceding sentence) in respect of any Taxes or Other Taxes as to which it has been indemnified by the Borrowers, or with respect to which the Borrowers have paid Additional Amounts, pursuant to this Section 2.12, it shall within 30 days from the date of such receipt pay over such refund to the Borrowers (but only to the extent of indemnity payments made, or Additional Amounts paid, by the Borrowers under this Section 2.12 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of such Agent or Lender Party and without interest (other than interest paid by the relevant taxation authority with respect to such refund); provided, however, that the Borrowers, upon the request of such Agent or Lender Party, agree to repay the amount paid over to the Borrowers (plus penalties, interest or other charges, if any, imposed by the relevant taxation authority in respect of such repayment) to such Agent or Lender Party in the event such Agent or Lender Party is required to repay such refund to such taxation authority. (e) Within 30 days after the date of any payment of Taxes by the Borrowers, the Borrowers shall use commercially reasonable efforts to furnish to the Administrative Agent, at its address referred to in Section 9.02, the original or a certified copy of a receipt evidencing such payment. In the case of any payment hereunder or under the Notes by or on behalf of any Borrower through an account or branch outside of the United States or Panama or by or on behalf of such Borrower by a payor that is not a United States or Panamanian person, if such Borrower determines that no Taxes are payable in respect thereof and if requested by the Administrative Agent, such Borrower shall furnish, or shall cause such payor to furnish, to the Administrative Agent, at such address, an opinion of counsel (which may be, if acceptable to the Administrative Agent, from in-house counsel) stating that such payment is exempt from Taxes. For purpose of subsections (e) and (f) of this Section 2.12, the terms "UNITED STATES" and "UNITED STATES PERSON" shall have the meanings specified in Section 7701 of the Internal Revenue Code. (f) Each Lender Party organized under the laws of a jurisdiction outside the United States shall, on or prior to the date of its execution and delivery of this Agreement in the case of each Initial Lender Party, on the date of the Assignment and Acceptance pursuant to which it becomes a Lender Party in the case of each other Lender Party and on or before the date, if any, it changes its Applicable Lending Office, and from time to time thereafter as requested in 40 writing by the Borrowers (but only so long thereafter as such Lender Party remains lawfully able to do so), provide each of the Administrative Agent and the Borrowers with two original Internal Revenue Service Forms W-8BEN or W-8ECI (in the case of a Lender Party that provides a Form W-8BEN other than by reason of the applicability of a tax treaty, the Lender Party shall also provide a certificate representing that such Lender Party is not a "bank" for purposes of Section 881(c) of the Internal Revenue Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code) of the Borrowers and is not a controlled foreign corporation related to the Borrowers (within the meaning of Section 864(d)(4) of the Internal Revenue Code)), as appropriate, or any successor or other form prescribed by the Internal Revenue Service, properly completed and duly executed by such Lender Party, certifying that such Lender Party is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or the Notes and, in the case of a Lender Party providing a Form W-8BEN, certifying that such Lender Party is a foreign corporation, partnership, estate or trust. In addition, each such Lender Party shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Lender Party. If the forms provided by a Lender Party at the time such Lender Party first becomes a party to this Agreement indicate or require a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Taxes for purposes of this Section 2.12 unless and until such Lender Party provides the appropriate forms certifying that a lesser rate applies, whereupon withholding tax at such lesser rate only shall be considered excluded from Taxes for periods governed by such forms; provided, however, that if, at the effective date of the Assignment and Acceptance pursuant to which a Lender Party becomes a party to this Agreement (or the date, if any, a Lender Party changes its Applicable Lending Office), the Lender Party assignor (or such Lender Party) was entitled to payments under subsection (a) of this Section 2.12 in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes, subject to the provisions of this subsection (f)) United States withholding tax, if any, applicable with respect to the Lender Party assignee (or such Lender Party) on such date. (g) For any period with respect to which a Lender Party has failed to provide any Borrower with the appropriate form described in subsection (f) above (other than if such failure is due to a change in law occurring after the date on which a form originally was required to be provided or if such form otherwise is not required under subsection (f) above), such Lender Party shall not be entitled to indemnification under subsection (a) or (c) of this Section 2.12, Section 8.04 hereof or Section 5(c) of the Subsidiary Guaranty with respect to Taxes imposed by the United States by reason of such failure; provided, however, that should a Lender Party become subject to Taxes because of its failure to deliver a form required hereunder, any Borrower shall take such steps as such Lender Party shall reasonably request to assist such Lender Party to recover such Taxes. (h) Any Lender Party claiming any indemnity payment or Additional Amounts payable pursuant to this Section 2.12, Section 8.04 hereof or Section 5(c) of the Subsidiary Guaranty shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document reasonably requested in writing by the Borrowers or to change the jurisdiction of its Applicable Lending Office following the reasonable request in writing of the Borrower if the making of such a filing or change would avoid the need for or reduce the amount 41 of any such indemnity payment or Additional Amounts that may thereafter accrue and would not, in the sole determination of such Lender Party, require the disclosure of information that the Lender Party reasonably considers confidential, or be otherwise disadvantageous to such Lender Party. SECTION 2.13. Sharing of Payments, Etc. If any Lender Party shall obtain at any time any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise, other than as a result of an assignment pursuant to Section 9.07) (a) on account of Obligations due and payable to such Lender Party hereunder and under the Notes at such time in excess of its ratable share (according to the proportion of (i) the amount of such Obligations due and payable to such Lender Party at such time to (ii) the aggregate amount of the Obligations due and payable to all Lender Parties hereunder and under the Notes at such time) of payments on account of the Obligations due and payable to all Lender Parties hereunder and under the Notes at such time obtained by all the Lender Parties at such time or (b) on account of Obligations owing (but not due and payable) to such Lender Party hereunder and under the Notes at such time in excess of its ratable share (according to the proportion of (i) the amount of such Obligations owing to such Lender Party at such time to (ii) the aggregate amount of the Obligations owing (but not due and payable) to all Lender Parties hereunder and under the Notes at such time) of payments on account of the Obligations owing (but not due and payable) to all Lender Parties hereunder and under the Notes at such time obtained by all of the Lender Parties at such time, such Lender Party shall forthwith purchase from the other Lender Parties such interests or participating interests in the Obligations due and payable or owing to them, as the case may be, as shall be necessary to cause such purchasing Lender Party to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender Party, such purchase from each other Lender Party shall be rescinded and such other Lender Party shall repay to the purchasing Lender Party the purchase price to the extent of such Lender Party's ratable share (according to the proportion of (i) the purchase price paid to such Lender Party to (ii) the aggregate purchase price paid to all Lender Parties) of such recovery together with an amount equal to such Lender Party's ratable share (according to the proportion of (i) the amount of such other Lender Party's required repayment to (ii) the total amount so recovered from the purchasing Lender Party) of any interest or other amount paid or payable by the purchasing Lender Party in respect of the total amount so recovered. The Borrower agrees that any Lender Party so purchasing an interest or participating interest from another Lender Party pursuant to this Section 2.13 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such interest or participating interest, as the case may be, as fully as if such Lender Party were the direct creditor of such Borrower in the amount of such interest or participating interest, as the case may be; provided, further, that, notwithstanding anything to the contrary contained in this Section 2.13, this Section 2.13 shall not apply to (x) the cash collateralization of the Mizuho Obligations pursuant to Section 3.01(d) and Section 5.01(s) and (y) the repayment of outstanding Mizuho Obligations and the termination of Mizuho's Commitment on the Mizuho Termination Date. SECTION 2.14. Use of Proceeds. The proceeds of the Advances and issuances of Letters of Credit shall be available (and the Borrower agrees that it shall use such proceeds and Letters of Credit) solely (i) to refinance in full the Existing Credit Facilities and (ii) provide 42 for working capital and general corporate purposes of the Borrowers and their respective Subsidiaries, Affiliates and joint ventures. SECTION 2.15. Defaulting Lenders. (a) In the event that, at any one time, (i) any Lender Party shall be a Defaulting Lender, (ii) such Defaulting Lender shall owe a Defaulted Advance to any Borrower and (iii) such Borrower shall be required to make any payment hereunder or under any other Loan Document to or for the account of such Defaulting Lender, then such Borrower may, so long as no Default shall occur or be continuing at such time and to the fullest extent permitted by applicable law, set off and otherwise apply the Obligation of such Borrower to make such payment to or for the account of such Defaulting Lender against the obligation of such Defaulting Lender to make such Defaulted Advance. In the event that, on any date, any Borrower shall so set off and otherwise apply its obligation to make any such payment against the obligation of such Defaulting Lender to make any such Defaulted Advance on or prior to such date, the amount so set off and otherwise applied by such Borrower shall constitute for all purposes of this Agreement and the other Loan Documents an Advance by such Defaulting Lender made on the date of such setoff under the Facility pursuant to which such Defaulted Advance was originally required to have been made pursuant to Section 2.01. Such Advance shall be considered, for all purposes of this Agreement, to comprise part of the Borrowing in connection with which such Defaulted Advance was originally required to have been made pursuant to Section 2.01, even if the other Advances comprising such Borrowing shall be Eurodollar Rate Advances on the date such Advance is deemed to be made pursuant to this subsection (a). The Borrower shall notify the Administrative Agent at any time any Borrower exercises its right of set-off pursuant to this subsection (a) and shall set forth in such notice (A) the name of the Defaulting Lender and the Defaulted Advance required to be made by such Defaulting Lender and (B) the amount set off and otherwise applied in respect of such Defaulted Advance pursuant to this subsection (a). Any portion of such payment otherwise required to be made by any Borrower to or for the account of such Defaulting Lender which is paid by such Borrower, after giving effect to the amount set off and otherwise applied by the Borrower pursuant to this subsection (a), shall be applied by the Administrative Agent as specified in subsection (b) or (c) of this Section 2.15. (b) In the event that, at any one time, (i) any Lender Party shall be a Defaulting Lender, (ii) such Defaulting Lender shall owe a Defaulted Amount to any Agent or any of the other Lender Parties and (iii) any Borrower shall make any payment hereunder or under any other Loan Document to the Administrative Agent for the account of such Defaulting Lender, then the Administrative Agent may, on its behalf or on behalf of such other Agents or such other Lender Parties and to the fullest extent permitted by applicable law, apply at such time the amount so paid by such Borrower to or for the account of such Defaulting Lender to the payment of each such Defaulted Amount to the extent required to pay such Defaulted Amount. In the event that the Administrative Agent shall so apply any such amount to the payment of any such Defaulted Amount on any date, the amount so applied by the Administrative Agent shall constitute for all purposes of this Agreement and the other Loan Documents payment, to such extent, of such Defaulted Amount on such date. Any such amount so applied by the Administrative Agent shall be retained by the Administrative Agent or distributed by the Administrative Agent to such other Agents or such other Lender Parties, ratably in accordance with the respective portions of such Defaulted Amounts payable at such time to the Administrative Agent, such other Agents and such other Lender Parties and, if the amount of 43 such payment made by such Borrower shall at such time be insufficient to pay all Defaulted Amounts owing at such time to the Administrative Agent, such other Agents and such other Lender Parties, in the following order of priority: (i) first, to the Agents for any Defaulted Amounts then owing to them, in their capacities as such, ratably in accordance with such respective Defaulted Amounts then owing to the Agents; (ii) second, to the Issuing Banks for any Defaulted Amounts then owing to them, in their capacities as such, ratably in accordance with such respective Defaulted Amounts then owing to the Issuing Banks; and (iii) third, to any other Lender Parties for any Defaulted Amounts then owing to such other Lender Parties, ratably in accordance with such respective Defaulted Amounts then owing to such other Lender Parties. Any portion of such amount paid by any Borrower for the account of such Defaulting Lender remaining, after giving effect to the amount applied by the Administrative Agent pursuant to this subsection (b), shall be applied by the Administrative Agent as specified in subsection (c) of this Section 2.15. (c) In the event that, at any one time, (i) any Lender Party shall be a Defaulting Lender, (ii) such Defaulting Lender shall not owe a Defaulted Advance or a Defaulted Amount and (iii) any Borrower, any Agent or any other Lender Party shall be required to pay or distribute any amount hereunder or under any other Loan Document to or for the account of such Defaulting Lender, then such Borrower or such Agent or such other Lender Party shall pay such amount to the Administrative Agent to be held by the Administrative Agent, to the fullest extent permitted by applicable law, in escrow or the Administrative Agent shall, to the fullest extent permitted by applicable law, hold in escrow such amount otherwise held by it. Any funds held by the Administrative Agent in escrow under this subsection (c) shall be deposited by the Administrative Agent in an account with Citibank, in the name and under the control of the Administrative Agent, but subject to the provisions of this subsection (c). The terms applicable to such account, including the rate of interest payable with respect to the credit balance of such account from time to time, shall be Citibank's standard terms applicable to escrow accounts maintained with it. Any interest credited to such account from time to time shall be held by the Administrative Agent in escrow under, and applied by the Administrative Agent from time to time in accordance with the provisions of, this subsection (c). The Administrative Agent shall, to the fullest extent permitted by applicable law, apply all funds so held in escrow from time to time to the extent necessary to make any Advances required to be made by such Defaulting Lender and to pay any amount payable by such Defaulting Lender hereunder and under the other Loan Documents to the Administrative Agent or any other Lender Party, as and when such Advances or amounts are required to be made or paid and, if the amount so held in escrow shall at any time be insufficient to make and pay all such Advances and amounts required to be made or paid at such time, in the following order of priority: 44 (i) first, to the Agents for any amounts then due and payable by such Defaulting Lender to them hereunder, in their capacities as such, ratably in accordance with such respective amounts then due and payable to the Agents; (ii) second, to the Issuing Banks for any amounts then due and payable to them hereunder, in their capacities as such, by such Defaulting Lender, ratably in accordance with such respective amounts then due and payable to the Issuing Banks; (iii) third, to any other Lender Parties for any amount then due and payable by such Defaulting Lender to such other Lender Parties hereunder, ratably in accordance with such respective amounts then due and payable to such other Lender Parties; and (iv) fourth, to the applicable Borrower for any Advance then required to be made by such Defaulting Lender pursuant to a Commitment of such Defaulting Lender. In the event that any Lender Party that is a Defaulting Lender shall, at any time, cease to be a Defaulting Lender, any funds held by the Administrative Agent in escrow at such time with respect to such Lender Party shall be distributed by the Administrative Agent to such Lender Party and applied by such Lender Party to the Obligations owing to such Lender Party at such time under this Agreement and the other Loan Documents ratably in accordance with the respective amounts of such Obligations outstanding at such time. (d) The rights and remedies against a Defaulting Lender under this Section 2.15 are in addition to other rights and remedies that any Borrower may have against such Defaulting Lender with respect to any Defaulted Advance and that any Agent or any Lender Party may have against such Defaulting Lender with respect to any Defaulted Amount. SECTION 2.16. Evidence of Debt. (a) Each Lender Party shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of each Borrower to such Lender resulting from each Advance owing to such Lender Party from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. Each Borrower agrees that upon notice by any Lender Party to such Borrower (with a copy of such notice to the Administrative Agent) to the effect that a promissory note or other evidence of indebtedness is required or appropriate in order for such Lender Party to evidence (whether for purposes of pledge, enforcement or otherwise) the Advances owing to, or to be made by, such Lender Party, such Borrower shall promptly execute and deliver to such Lender Party, with a copy to the Administrative Agent, a Note in substantially the form of Exhibit A hereto payable to the order of such Lender Party in a principal amount equal to the Working Capital Commitment of such Lender Party. All references to Notes in the Loan Documents shall mean Notes, if any, to the extent issued hereunder. (b) The Register maintained by the Administrative Agent pursuant to Section 9.07(d) shall include a control account, and a subsidiary account for each Lender Party, in which accounts (taken together) shall be recorded (i) the date and amount of each Borrowing made hereunder, the Type of Advances comprising such Borrowing and, if appropriate, the Interest Period applicable thereto, (ii) the terms of each Assignment and Acceptance delivered to and accepted by it, (iii) the amount of any principal or interest due and 45 payable or to become due and payable from each Borrower to each Lender Party hereunder, and (iv) the amount of any sum received by the Administrative Agent from any Borrower hereunder and each Lender Party's share thereof. (c) Entries made in good faith by the Administrative Agent in the Register pursuant to subsection (b) above, and by each Lender Party in its account or accounts pursuant to subsection (a) above, shall be prima facie evidence of the amount of principal and interest due and payable or to become due and payable from any Borrower to, in the case of the Register, each Lender Party and, in the case of such account or accounts, such Lender Party, under this Agreement, absent manifest error; provided, however, that the failure of the Administrative Agent or such Lender Party to make an entry, or any finding that an entry is incorrect, in the Register or such account or accounts shall not limit or otherwise affect the obligations of the Borrowers under this Agreement. SECTION 2.17. Existing Letters of Credit. Effective as of the Effective Date, (i) all "Letters of Credit" issued and outstanding under (A) the J. Ray Credit Agreement for the account of any JRM Borrower shall be deemed to be Letters of Credit and (B) the McDermott Credit Agreement (except as set forth on Schedule V hereto) shall be deemed to be Letters of Credit issued for the account of BWXT, in each case, under this Agreement and (ii) the applications and agreements for such Letters of Credit shall be deemed to be Letter of Credit Agreements hereunder. ARTICLE III CONDITIONS OF LENDING AND ISSUANCES OF LETTERS OF CREDIT SECTION 3.01. Conditions Precedent to Initial Extension of Credit. The obligation of each Lender to make an Advance or of each Issuing Bank to issue a Letter of Credit on the occasion of the Initial Extension of Credit hereunder is subject to the satisfaction of the following conditions precedent before or concurrently with the Initial Extension of Credit: (a) The Administrative Agent shall have received on or before the day of the Initial Extension of Credit the following, each dated such day (unless otherwise specified), in form and substance satisfactory to the Lender Parties (unless otherwise specified) and (except for the Notes) in sufficient copies for each Lender Party: (i) The Notes, if any, payable to the order of the Lenders. (ii) A security agreement in substantially the form of Exhibit D hereto (together with each other security agreement and security agreement supplement delivered pursuant to Section 5.01(j), in each case as amended, the "SECURITY AGREEMENT"), duly executed by each Grantor (as defined therein), together with: (A) certificates representing the Pledged Equity accompanied, where applicable, by undated stock powers executed in blank and instruments evidencing the Pledged Debt indorsed in blank, 46 (B) proper financing statements, in form sufficient for filing under the Uniform Commercial Code of all jurisdictions that the Administrative Agent may deem necessary or desirable in order to perfect and protect the priority of the liens and security interests created under the Security Agreement, covering the Collateral described in the Security Agreement, (C) completed requests for information, dated on or before the date of the Initial Extension of Credit, listing all effective financing statements filed in the jurisdictions referred to in clause (B) above that name any Borrower as debtor, together with copies of such other financing statements, (D) evidence of the insurance required by the terms of the Security Agreement, and (E) receipt of duly executed payoff letters and UCC-3 termination statements. (iii) A guaranty in substantially the form of Exhibit E hereto (together with each other guaranty and guaranty supplement delivered pursuant to Section 5.01(j), in each case as amended, the "SUBSIDIARY GUARANTY"), duly executed by each Subsidiary Guarantor. (iv) Certified copies of the resolutions of the Board of Directors of each initial Loan Party approving the Transaction and each Loan Document to which it is or is to be a party, and of all documents evidencing other necessary corporate action and governmental and other third party approvals and consents, if any, with respect to the Transaction and each Loan Document to which it is or is to be a party. (v) Except as provided in Section 5.01(t), a copy of a certificate of the Secretary of State or similar governmental authority of the jurisdiction of incorporation or organization of each initial Loan Party, dated reasonably near the date of the Initial Extension of Credit, certifying (A) as to a true and correct copy of the charter of such Loan Party, as amended through the date of such certificate, on file in such Secretary's or similar office and, in the case of each initial Loan Party that is organized under the laws of a jurisdiction located within the United States, (B) that (1) such Loan Party has paid all franchise taxes to the date of such certificate and (2) such Loan Party is duly incorporated or organized and in good standing or presently subsisting under the laws of the jurisdiction of its incorporation or organization. (vi) A certificate of each initial Loan Party, signed on behalf of such Loan Party by its President or a Vice President and its Secretary or any Assistant Secretary, dated the date of the Initial Extension of Credit (the statements made in which certificate shall be true on and as of the date of the Initial Extension of Credit), certifying as to (A) the absence of any amendments to the charter of such Loan Party since the date of the certificate referred to in Section 3.01(a)(v), (B) a 47 true and correct copy of the bylaws or other governing documents of such Loan Party as in effect on the date on which the resolutions referred to in Section 3.01(a)(iv) were adopted and on the date of the Initial Extension of Credit, (C) the due incorporation and good standing or valid existence of such Loan Party as a corporation organized under the laws of the jurisdiction of its incorporation or organization, and the absence of any proceeding for the dissolution or liquidation of such Loan Party, (D) the truth of the representations and warranties contained in the Loan Documents as though made on and as of the date of the Initial Extension of Credit, other than any such representations or warranties that, by their terms, refer to a specific date other than the date of the Initial Extension of Credit, in which case as of such specific date, and (E) the absence of any event occurring and continuing, or resulting from the Initial Extension of Credit, that constitutes a Default. (vii) A certificate of the Secretary or an Assistant Secretary of each initial Loan Party certifying the names and true signatures of the officers of such Loan Party authorized to sign each Loan Document to which it is or is to be a party and the other documents to be delivered hereunder and thereunder. (viii) A certificate from the Chief Financial Officer of MII, in substantially the form of Exhibit F hereto, respectively, attesting to the Solvency of MII and its Subsidiaries, taken as a whole, before and after giving effect to the Transaction. (ix) Evidence of insurance naming the Collateral Agent as additional insured and loss payee with respect to the Collateral with such responsible and reputable insurance companies or associations, and in such amounts and covering such risks as are agreed to by the parties hereto, including, without limitation, business interruption insurance. (x) A Notice of Borrowing or Notice of Issuance, as applicable, relating to the Initial Extension of Credit. (xi) A favorable opinion of (A) Baker Botts, L.L.P., counsel for MII, in substantially the form of Exhibit G-1 hereto and (B) John T. Nesser, General Counsel of MII, in substantially the form of Exhibit G-2 hereto. (xii) A favorable opinion of Durling & Durling, Panamanian counsel to the Loan Parties, in substantially the form of Exhibit H hereto. (b) MII shall have made the MII Loans available to each of BWXT and JRMSA, and each of BWXT and JRMSA shall have borrowed, or shall borrow contemporaneously with the Initial Extension of Credit, the full amount of MII Loans made available to it. (c) On or prior to the Effective Date, all outstanding letters of credit issued for the account of MII or its Subsidiaries under the McDermott Credit Agreement will be required to either be transferred to the account of one or more Borrowers under the 58 Facilities or to be fully cash collateralized on terms reasonably satisfactory to the Lender Parties. (d) MII shall have deposited $6,000,000 into the Mizuho Cash Collateral Account. (e) The Borrowers shall have paid all accrued fees of the Agents and the Lender Parties and all accrued expenses of the Agents (including the accrued fees and expenses of counsel to the Administrative Agent and local counsel to the Lender Parties). SECTION 3.02. Conditions Precedent to Each Borrowing and Issuance and Renewal. The obligation of each Lender to make an Advance (other than a Letter of Credit Advance made by an Issuing Bank or a Lender pursuant to Section 2.03(c)) on the occasion of each Borrowing (including the initial Borrowing), and the obligation of each Issuing Bank to issue a Letter of Credit (including the initial issuance) or renew a Letter of Credit, shall be subject to the conditions precedent that on the date of such Borrowing or issuance or renewal (a) the following statements shall be true (and each of the giving of the applicable Notice of Borrowing or Notice of Issuance or Notice of Renewal and the acceptance by any Borrower of the proceeds of such Borrowing or of such Letter of Credit or the renewal of such Letter of Credit shall constitute a representation and warranty by such Borrower that both on the date of such notice and on the date of such Borrowing or issuance or renewal such statements are true): (i) the representations and warranties contained in this Agreement are correct and the representations and warranties in each of the other Loan Documents are correct in all material respects, in each case on and as of such date, before and after giving effect to such Borrowing or issuance or renewal and to the application of the proceeds therefrom, as though made on and as of such date, other than any such representations or warranties that, by their terms, refer to a specific date other than the date of such Borrowing or issuance or renewal, in which case as of such specific date; (ii) no Default has occurred and is continuing, or would result from such Borrowing or issuance or renewal or from the application of the proceeds therefrom; and (iii) (A) in the case of the JRM Borrowers, the full amount of the MII Loan made to JRMSA is outstanding and (B) in the case of BWXT, the full amount of the MII Loan made to BWXT is outstanding; provided, however, that this clause (iii) shall only apply to an Advance (other than a Letter of Credit Advance made by an Issuing Bank or a Lender pursuant to Section 2.03(c)); and (b) the Administrative Agent shall have received such other approvals, opinions or documents as any Lender Party through the Administrative Agent may reasonably request. SECTION 3.03. Determinations Under Section 3.01. For purposes of determining compliance with the conditions specified in Section 3.01, each Lender Party shall be deemed to have consented to, approved or accepted or to be satisfied with each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Lender Parties unless an officer of the Administrative Agent responsible for the transactions contemplated by the Loan Documents shall have received notice from such Lender 49 Party prior to the Initial Extension of Credit specifying its objection thereto and, if the Initial Extension of Credit consists of a Borrowing, such Lender Party shall not have made available to the Administrative Agent such Lender Party's ratable portion of such Borrowing. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower. Each Loan Party represents and warrants as follows: (a) Each Loan Party and each of its Subsidiaries (i) is a duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, (ii) is duly qualified to do business and in good standing in each other jurisdiction in which it owns or leases property or in which the conduct of its business requires it to so qualify or be licensed and (iii) has all requisite corporate power and authority (including, without limitation, all governmental licenses, permits and other approvals) to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted, except for any failures to be so organized, existing, qualified to do business or in good standing or to have such power and authority as would not, individually or in the aggregate, have a Material Adverse Effect. (b) Set forth on Schedule 4.01(b) hereto is a complete and accurate list of all Subsidiaries of each Loan Party as of the Effective Date showing as of the Effective Date (as to each such Subsidiary) the jurisdiction of its incorporation, the number of shares of each class of its Equity Interests authorized, and the number outstanding, on the date hereof and the percentage of each such class of its Equity Interests owned (directly or indirectly) by such Loan Party and the number of shares covered by all outstanding options, warrants, rights of conversion or purchase and similar rights at the date hereof. Except as specified on Schedule 4.01(b), all of the outstanding Equity Interests in each Loan Party's Subsidiaries organized under the laws of any state of the United States have been validly issued, are fully paid and non-assessable and are owned by such Loan Party or one or more of its Subsidiaries free and clear of all Liens, except those created under the Collateral Documents and Permitted Liens. (c) The execution, delivery and performance by each Loan Party of each Loan Document to which it is or is to be a party, and the consummation of the Transaction, are within such Loan Party's corporate powers, have been duly authorized by all necessary corporate action, and do not (i) contravene such Loan Party's charter or bylaws or other constitutive documents, (ii) violate, in any material respect, any law, rule, regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award, (iii) result in the breach of, or constitute a default or require any payment to be made under, any contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument binding on or affecting any Loan Party, any of its Subsidiaries or any of their properties, except for such breaches, defaults or required payments as, would not 50 reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect, or (iv) except for the Liens created under the Loan Documents, result in or require the creation or imposition of any Lien upon or with respect to any of the properties of any Loan Party or any of its Subsidiaries. No Loan Party or any of its Subsidiaries is in violation of any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or in breach of any such contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument, the violation or breach of which would be reasonably expected to have a Material Adverse Effect. (d) Except as contemplated by the Loan Documents and except for filings required to be made by MII with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for (i) the due execution, delivery, recordation, filing or performance by any Loan Party of any Loan Document to which it is or is to be a party, or for the consummation of the Transaction, (ii) the grant by any Loan Party or by any of its Subsidiaries of the Liens granted by it pursuant to the Collateral Documents or (iii) the perfection or maintenance of the Liens created under the Collateral Documents (including the required priority). (e) This Agreement has been, and each other Loan Document when delivered hereunder will have been, duly executed and delivered by each Loan Party party thereto. This Agreement is, and each other Loan Document when delivered hereunder will be, the legal, valid and binding obligation of each Loan Party or Subsidiary of such Loan Party party thereto, enforceable against such Loan Party of such Subsidiary in accordance with its terms, except as that enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. (f) There is no action, suit, investigation, litigation or proceeding affecting any Loan Party or any of its Subsidiaries, including any Environmental Action, pending or threatened before any court, governmental agency or arbitrator that (i) purports to affect the legality, validity or enforceability of any Loan Document or the consummation of the Transaction or (ii) as to which there is a reasonable possibility of an adverse determination and which, if adversely determined, would reasonably be expected to, individually or in the aggregate, result in a Material Adverse Effect, except as disclosed on Schedule 4.01(f) hereto or in MII's annual report on Form 10-K for the year ended December 31, 2001 or MII's quarterly report on Form 10-Q for the quarter ended September 30, 2002. (g) The Consolidated balance sheets of MII and its Subsidiaries as at December 31, 2001, and the related Consolidated statements of income and cash flows of MII and its Subsidiaries for the fiscal year then ended, accompanied by an unqualified opinion of Pricewaterhouse Coopers LLP, independent public accountants, and the Consolidated balance sheets of MII and its Subsidiaries as at September 30, 2002, and the related Consolidated statements of income and cash flows of MII and its Subsidiaries for the nine months then ended, duly certified by the Chief Financial Officer of MII, copies of which 51 have been furnished to each Lender Party, fairly present the Consolidated financial condition of MII and its Subsidiaries as at such dates and the Consolidated results of operations of MII and its Subsidiaries for the periods ended on such dates, all in accordance with generally accepted accounting principles applied on a consistent basis, and since December 31, 2001, there has been no Material Adverse Change (except as identified in MII's report on Form 10-Q for the quarter ended September 30, 2002, in Schedule 4.01(g) hereto, in any of the other Schedules delivered pursuant to this Section 4.01 or in any other writing delivered to each of the Lender Parties). (h) No information, exhibit or report furnished by or on behalf of any Borrower in writing to any Agent or any Lender Party in connection with the negotiation and syndication of the Loan Documents or pursuant to the terms of the Loan Documents (taken together with all other information furnished by or on behalf of the Loan Parties) contained as of the date such information is dated or certified (or, if not dated or certified, as of the date such information is provided) any untrue statement of a material fact or omitted to state a material fact necessary to make the statements made therein, in light of the circumstances under which they were or are made, not misleading; provided, however, that, with respect to any such information, exhibit or report consisting of statements, estimates and projections regarding the future performance of MII or any of its Subsidiaries ("PROJECTIONS"), no representation or warranty is made other than that such Projections have been prepared in good faith utilizing due and careful consideration and the best information available to MII at the time of preparation thereof. (i) No Loan Party is engaged in the business of extending credit for the purpose of purchasing or carrying Margin Stock, and no proceeds of any Advance or drawings under any Letter of Credit will be used to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock. (j) Neither any Loan Party nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended. Neither any Loan Party nor any of its Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. Neither the making of any Advances, nor the issuance of any Letters of Credit, nor the application of the proceeds or repayment thereof by the Loan Parties, nor the consummation of the other transactions contemplated by the Loan Documents, will constitute a violation by any Loan Party of any applicable provision of any such Act or any rule, regulation or order of the Securities and Exchange Commission thereunder. (k) Neither any Loan Party nor any Subsidiary of any Loan Party is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter or corporate restriction that would be reasonably expected to have a Material Adverse Effect. 52 (l) After making all of the filings and taking all other actions required to be made by any of the Loan Parties and the other Collateral Grantors which are necessary to perfect the security interest in the Collateral created under the Collateral Documents , the Collateral Documents will create in favor of the Collateral Agent for the benefit of the Secured Parties a valid and, together with such filings and other applicable actions, perfected first priority security interest in the Collateral, subject only to the Liens permitted by the Loan Documents, securing the payment of the Secured Obligations. The Loan Parties and the other Collateral Grantors are the legal and beneficial owners of the Collateral free and clear of any Lien, except for the liens and security interests created or permitted under the Loan Documents. (m) MII and its Subsidiaries are, taken as a whole, Solvent. (n) (i) Except as specified in Schedule 4.01(n) hereto, since December 31, 2001, no ERISA Event has occurred or is reasonably expected to occur with respect to any Plan that has resulted in or is reasonably expected to result in a material liability of any Loan Party or any ERISA Affiliate. (ii) Schedule B (Actuarial Information) to the most recent annual report (Form 5500 Series) for each Plan, copies of which have been filed with the Internal Revenue Service and furnished to the Administrative Agent, was complete and accurate and fairly presented the funding status of such Plan as of the date thereof, and, except as specified in Schedule 4.01(n) hereto, since the date of such Schedule B there has been no material adverse change in such funding status. (iii) Since December 31, 2001, neither any Loan Party nor any ERISA Affiliate has incurred or is reasonably expected to incur any Withdrawal Liability to any Multiemployer Plan in an amount in excess of $20,000,000. (iv) Since December 31, 2001, neither any Loan Party nor any ERISA Affiliate has been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and none of the Loan Parties reasonably expects such Multiemployer Plan to be in reorganization or to be terminated, within the meaning of Title IV of ERISA, except for any such reorganizations or terminations as would not, individually or in the aggregate, result in a liability of any Loan Party or any ERISA Affiliate in excess of $20,000,000. (v) With respect to each scheme or arrangement mandated by a government other than the United States (a "FOREIGN GOVERNMENT SCHEME OR ARRANGEMENT") and with respect to each employee benefit plan maintained or contributed to by any Loan Party or any Subsidiary of any Loan Party that is not subject to United States law (a "FOREIGN PLAN"): (i) Any employer and employee contributions required by law or by the terms of any Foreign Government Scheme or Arrangement or any Foreign Plan have been made, or, if applicable, accrued, in accordance with normal accounting practices, except for such failure to make contributions as would not 53 individually or in the aggregate, result in a material liability of any Loan Party or any Subsidiary of any Loan Party. (ii) The fair market value of the assets of each funded Foreign Plan, the liability of each insurer for any Foreign Plan funded through insurance or the book reserve established for any Foreign Plan, together with any accrued contributions, is sufficient to procure or provide for the accrued benefit obligations, as of the Effective Date, with respect to all current and former participants in such Foreign Plan according to the actuarial assumptions and valuations most recently used to account for such obligations in accordance with applicable generally accepted accounting principles, except for deficiencies that would not individually or in the aggregate, result in a material liability. (iii) Each Foreign Plan required to be registered has been registered and has been maintained in good standing with applicable regulatory authorities, except for failures to register that would not individually or in the aggregate, result in a material liability of any Loan Party or any Subsidiary of any Loan Party. (o) In each case, except as set forth in Schedule 4.01(o) hereto: (i) (A) The operations and properties of each Loan Party and each of its Subsidiaries comply with all applicable Environmental Laws and Environmental Permits, except where the failure to so comply would not, individually or in the aggregate, have a Material Adverse Effect; (B) all past non-compliance with such Environmental Laws and Environmental Permits has been resolved without material ongoing obligations or costs, except where the failure to resolve any such non-compliance would not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect; and (C) no circumstances exist that would be reasonably expected to (1) form the basis of an Environmental Action against any Loan Party or any of its Subsidiaries or any of their properties that would be reasonably expected to have a Material Adverse Effect or (2) cause any such property to be subject to any restrictions on ownership, occupancy, use or transferability under any Environmental Law that would be reasonably expected to have a Material Adverse Effect. (ii) None of the properties currently or formerly owned or operated by any Loan Party or any of its Subsidiaries is listed or, to the knowledge of any of the Loan Parties as of the Effective Date, currently proposed for listing on the NPL or on the CERCLIS or any analogous foreign, state or local list or is adjacent to any such property; except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, there are no and never have been any underground or aboveground storage tanks or any surface impoundments, septic tanks, pits, sumps or lagoons in which Hazardous Materials are being or have been treated, stored or disposed on any property currently owned or operated by any Loan Party or any of its Subsidiaries or, to the best of its knowledge, on any property formerly owned or operated by any Loan Party or any of its Subsidiaries; except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, there is no asbestos or asbestos-containing 54 material on any property currently owned or operated by any Loan Party or any of its Subsidiaries; and, except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, Hazardous Materials have not been released, discharged or disposed of on any property currently or formerly owned or operated by any Loan Party or any of its Subsidiaries. (iii) Except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, neither any Loan Party nor any of its Subsidiaries is undertaking, and has not completed, either individually or together with other potentially responsible parties, any investigation or assessment or remedial or response action relating to any actual or threatened release, discharge or disposal of Hazardous Materials at any site, location or operation currently or formerly owned or operated by any Loan Party or any of its Subsidiaries, either voluntarily or pursuant to the order of any governmental or regulatory authority or the requirements of any Environmental Law; and all Hazardous Materials generated, used, treated, handled or stored at, or transported to or from, any property currently or formerly owned or operated by any Loan Party or any of its Subsidiaries have been disposed of in a manner not reasonably expected to result in a Material Adverse Effect. (p) (i) Neither any Loan Party nor any of its Subsidiaries is party to any Affiliated group tax sharing agreement other than (A) the Tax Allocation Agreement dated January 1, 2000 and (B) the tax separation agreement contemplated by the Settlement Agreement. (ii) Each Loan Party and each of its Subsidiaries and Affiliates has filed, has caused to be filed or has been included in all Federal and state and material local and foreign tax returns required to be filed (after giving effect to any applicable extension in the time for filing) with respect to such Loan Party and each of its Subsidiaries. All Taxes with respect to such Loan Party and each of its Subsidiaries shown to be due on such tax returns, together with applicable interest and penalties, have been paid. (iii) Set forth on Schedule 4.01(p) hereto is a complete and accurate list, as of the Effective Date, of each taxable year of each Loan Party and each of its Subsidiaries for which U.S. Federal income tax returns have been filed and for which the expiration of the applicable statute of limitations for assessment or collection has not occurred by reason of extension or otherwise (an "OPEN YEAR"). (iv) The Internal Revenue Service has issued notices for the MI consolidated group for the fiscal years ended March 31, 1993, 1994, 1995, 1996, 1997 and 1998 and for the JRMHI consolidated group for the fiscal years ended March 31, 1995, 1996 and 1998 asserting deficiencies in the amount of taxes reported. Each Loan Party and its Subsidiaries and Affiliates believe that any additional income taxes ultimately assessed against the MI and JRMHI consolidated groups in respect of those fiscal years will not exceed $23,100,000. (v) The aggregate unpaid amount, as of the Effective Date, of adjustments to the state, local and foreign tax liability of each Loan Party and its Subsidiaries and Affiliates 55 proposed in writing by all state, local and foreign taxing authorities (other than amounts arising from adjustments to Federal income tax returns) does not exceed $7,000,000. No issues have been raised in writing by such taxing authorities that, in the aggregate, could be reasonably likely to have a Material Adverse Effect. (vi) No "ownership change" as defined in Section 382(g) of the Internal Revenue Code, and no event that would result in the application of the "separate return limitation year" limitations under the Federal income tax consolidated return regulations, has occurred with respect to any Loan Party since December 31, 2001. (q) Set forth on Schedule 4.01(q) hereto is a complete and accurate list, as of the date therein specified, of each item of Surviving Debt that, in each case, consists of Debt in excess of $1,000,000 in principal amount and is described in clauses (a), (c), (f) and (h) of the definition of "Debt" contained of Section 1.01 (but, in each case, excluding Debt of any Loan Party or any Subsidiary of any Loan Party owed to any other Loan Party or any Subsidiary of any other Loan Party), showing as of the Effective Date the obligor and the principal amount outstanding thereunder, the maturity date thereof and the amortization schedule therefor. (r) Set forth on Schedule 4.01(r) hereto is a complete and accurate list, as of the dates therein specified, of all Liens (other than Permitted Liens) relating to Debt listed on Schedule 4.01(q) on the property or assets that consist of Collateral of any Loan Party, showing as of the Effective Date the lienholder thereof, the principal amount of the obligations secured thereby and the property or assets of such Loan Party or such Subsidiary subject thereto. (s) Set forth on Schedule 4.01(s) hereto is a complete and accurate list, as of the Effective Date, of each item of real property located in the United States owned by any Loan Party or any of its Subsidiaries having an individual market value in excess of $5,000,000, showing as of the Effective Date the street address, county or other relevant jurisdiction, state, record owner and book value thereof. (t) Set forth on Schedule 4.01(t) hereto is a complete and accurate list, as of the Effective Date, of each lease of real property located in the United States under which any Loan Party or any of its Subsidiaries is the lessee and where the leasehold interest has an individual market value in excess of $5,000,000, showing as of the Effective Date the street address, county or other relevant jurisdiction, state, lessor, lessee, and current annual rental cost thereof. (u) Set forth on Schedule 4.01(u) hereto is a complete and accurate list of all material Investments (in each case, having a value, as of the Effective Date, of not less than $1,000,000) held by any Loan Party as of (i) December 31, 2002, in the case of Investments in unconsolidated Subsidiaries, showing as of such date the amount, obligor or issuer and maturity, if any, thereof, and (ii) the date hereof, in the case of all other Investments (excluding any Investments in any Subsidiaries of the Loan Parties), showing as of the Effective Date the amount, obligor or issuer and maturity, if any, thereof. 56 (v) Set forth on Schedule 4.01(v) hereto is a complete and accurate list of all patents, trademarks, trade names, service marks and copyrights that are material to MII and its Subsidiaries taken as a whole, and all applications therefor and licenses thereof, in each case, that constitute Collateral as of the Effective Date, showing as of the Effective Date the jurisdiction in which registered, the registration number, the date of registration and the expiration date. (w) Set forth on Schedule 4.01(w) hereto is a complete and accurate list of all Material Contracts of each Loan Party and its Subsidiaries as of the Effective Date, showing as of the Effective Date the parties, subject matter and (where determinable) term thereof (except, in each case, where such information is classified or otherwise restricted by contract or by law, regulation or governmental guidelines). Each such Material Contract has been duly authorized, executed and delivered by all Loan Parties or Subsidiaries party thereto, and, to the knowledge of such Loan Parties or Subsidiaries, is in full force and effect as of the Effective Date. (x) Set forth on Schedule 4.01(x) hereto is a complete and accurate list of all vessels owned by each Loan Party having a book value in excess of $1,000,000 as of the Effective Date. ARTICLE V COVENANTS OF THE LOAN PARTIES SECTION 5.01. Affirmative Covenants. So long as any Advance or any other Obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Lender Party shall have any Commitment hereunder, each Loan Party will: (a) Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries to comply, with all applicable laws, rules, regulations and orders (such compliance to include, without limitation, compliance with ERISA and the Racketeer Influenced and Corrupt Organizations Chapter of the Organized Crime Control Act of 1970 (or any similar foreign statute)), except where the failure to so comply would not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. (b) Payment of Taxes, Etc. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its property and (ii) all material lawful claims against it that, if unpaid, might by law become a Lien upon its property; provided, however, that neither such Loan Party nor any of its Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or claim that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained, unless and until any Lien resulting therefrom attaches to its property and becomes presently enforceable against its other creditors. 57 (c) Compliance with Environmental Laws. Comply, and cause each of its Subsidiaries and, as far as reasonable practicable, all lessees and other Persons operating or occupying its properties to comply, with all applicable Environmental Laws and Environmental Permits, except where the failure to do so would not be reasonably expected to have a Material Adverse Effect; obtain and renew and cause each of its Subsidiaries to obtain and renew all Environmental Permits necessary for its operations and properties; and conduct, and cause each of its Subsidiaries to conduct, any investigation, study, sampling and testing, and undertake any cleanup, removal, remedial or other action necessary to remove and clean up all Hazardous Materials from any of its properties, in accordance with the requirements of all Environmental Laws, except where the failure to do so would not be reasonably expected to have a Material Adverse Effect; provided, however, that neither such Loan Party nor any of its Subsidiaries shall be required to undertake any such cleanup, removal, remedial or other action to the extent that its obligation to do so is being contested in good faith and by proper proceedings and appropriate reserves are being maintained with respect to such circumstances (if and to the extent required by GAAP). (d) Maintenance of Insurance. Maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations or, through self-insurance, in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which such Loan Party or such Subsidiary operates. (e) Preservation of Corporate Existence, Etc. Preserve and maintain, and cause each of its Subsidiaries to preserve and maintain (unless, in the case of any Subsidiary other than MI or any such Subsidiary that is also a Loan Party, (i) the Board of Directors of such Loan Party determines that such preservation and maintenance is no longer necessary in the conduct of the business of such Loan Party and its Subsidiaries, taken as a whole, and (ii) the failure to so preserve and maintain would not impair the Collateral in any material respect), its existence, legal structure, legal name, rights (charter and statutory), permits, licenses, approvals, privileges and franchises; provided, however, that such Loan Party and its Subsidiaries may consummate any merger or consolidation permitted under Section 5.02(d) and provided further that neither such Loan Party nor any of its Subsidiaries shall be required to preserve any right, permit, license, approval, privilege or franchise if the Board of Directors of such Loan Party or such Subsidiary shall determine that the preservation thereof is no longer necessary in the conduct of the business of such Loan Party or such Subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to such Loan Party, such Subsidiary. (f) Visitation Rights. At any reasonable time and from time to time, following reasonable notice and subject to any applicable restrictions or limitations on access to any facility or information that is classified or restricted by contract or by law, regulation or governmental guidelines, permit any of the Agents or any of the Lender Parties, or any agents or representatives thereof, to visit the properties of, such Loan Party and any of its Subsidiaries, and to discuss the affairs, finances and accounts of such Loan Party and any of its Subsidiaries with any of their officers and with their independent certified public 58 accountants; provided, however, that advance notice of any discussion with such independent public accountants shall be given to the Loan Parties, and the Loan Parties shall have the opportunity to be present at any such discussion. (g) Keeping of Books. Keep, and cause each of its Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Loan Party and each such Subsidiary in accordance with generally accepted accounting principles in effect from time to time. (h) Maintenance of Properties, Etc. Maintain and preserve and cause each of its Subsidiaries to maintain and preserve, at all times, all property material to the conduct of the business of MII and its Subsidiaries, taken as a whole, and keep such property in good repair, working order and condition (ordinary wear and tear excepted) and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted. (i) Transactions with Affiliates. Conduct, and cause each of its Subsidiaries to conduct, all transactions otherwise permitted under the Loan Documents with any of its Affiliates (other than transactions among any of MI, any one or more of the Loan Parties and any one or more Subsidiaries of any Loan Party) with any of their Affiliates on terms that are fair and reasonable and no less favorable to such Loan Party or such Subsidiary than it would obtain in a comparable arm's-length transaction with a Person not an Affiliate. (j) Covenant to Give Security. Upon the request of the Collateral Agent following the acquisition of any property having a value of not less than $1,000,000 by any Collateral Grantor, and such property (i) is not already subject to an agreement (otherwise acceptable under the terms of this Agreement) that prevents the encumbering of such property or that would treat such encumbering as a default thereunder and (ii) in the reasonable judgment of the Collateral Agent, shall not already be subject to a perfected first priority security interest, subject only to the Liens permitted by the Loan Documents, in favor of the Collateral Agent for the benefit of the Secured Parties, then such Collateral Grantor shall, in each case at the expense of the JRM Borrowers: (A) within 15 days after such request, furnish to the Collateral Agent a description of such property in detail reasonably satisfactory to the Collateral Agent, (B) within 25 days after such request and the receipt from the Collateral Agent of drafts of proposed documentation that conforms to the Collateral Documents then in effect, duly execute and deliver to the Collateral Agent mortgages, pledges, assignments, security agreement supplements and other security agreements, as specified by and in form and substance reasonably satisfactory to the Collateral Agent, securing payment of all the Obligations of the 59 Loan Parties under the Loan Documents and constituting Liens on all such property, (C) within 35 days after such request, take whatever action (including, without limitation, the recording of mortgages, the filing of Uniform Commercial Code financing statements, the giving of notices and the endorsement of notices on title documents) may be reasonably necessary or advisable in the opinion of the Collateral Agent to vest in the Collateral Agent (or in any representative of the Collateral Agent designated by it) valid and subsisting Liens on the properties purported to be subject to the mortgages, pledges, assignments, security agreement supplements and security agreements delivered pursuant to this Section 5.01(j), (D) within 60 days after such request, deliver to the Collateral Agent, upon the reasonable request of the Collateral Agent, a signed copy of a favorable opinion (subject to customary qualifications, assumptions, exceptions and limitations), addressed to the Collateral Agent and the other Secured Parties, of counsel for the Loan Parties reasonably acceptable to the Collateral Agent as to the matters contained in clauses (B) and (C) above, as to such mortgages, pledges, assignments, security agreement supplements and security agreements being legal, valid and binding obligations of the applicable Collateral Grantor, enforceable in accordance with their terms, and as to the matters contained in clause (C) above, (E) as promptly as practicable after such request, deliver, upon the reasonable request of the Collateral Agent, to the Collateral Agent with respect to each parcel of real property owned by the entity that is the subject of such request all applicable deliveries that would have been required under Section 5.01(p) in respect of such property as though it had been subject thereto, (F) promptly following its receipt of notice from the Collateral Agent of the existence of an Event of Default, (A) cause to be deposited any and all cash dividends paid or payable to it or any of its Subsidiaries from any of its Subsidiaries from time to time into the Collateral Account so long as such Event of Default shall exist, and (B) with respect to all other dividends paid or payable to it or any of its Subsidiaries from time to time so long as such Event of Default shall exist, promptly execute and deliver, or cause such Subsidiary to promptly execute and deliver, as the case may be, any and all further instruments and take or cause such Subsidiary to take, as the case may be, all such other action as the Collateral Agent may reasonably deem necessary or desirable in order to obtain and maintain from and after the time such dividend is paid or payable a perfected, first priority lien on and security interest in such dividends, and (G) at any time and from time to time, promptly execute and deliver any and all further instruments and documents and take all such other action as the Collateral Agent may reasonably deem necessary or desirable in perfecting and 60 preserving the Liens of the mortgages, pledges, assignments, security agreements and security agreement supplements described in the foregoing clauses. (k) Further Assurances. (i) Promptly upon request by any Agent, or any Lender Party through the Administrative Agent, correct, and cause each of its Subsidiaries promptly to correct, any material defect or error that may be discovered in any Loan Document or in the execution, acknowledgment, filing or recordation thereof. (ii) Promptly upon request by any Agent, or any Lender Party through the Administrative Agent, do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register any and all such further acts, deeds, conveyances, pledge agreements, mortgages, deeds of trust, trust deeds, assignments, financing statements and continuations thereof, termination statements, notices of assignment, transfers, certificates, assurances and other instruments as any Agent, or any Lender Party through the Administrative Agent, may reasonably require from time to time in order to (A) carry out more effectively the purposes of the Loan Documents, (B) to the fullest extent permitted by applicable law, subject such Loan Party's (other than BWXT) or any of its Subsidiaries' (other than MI or any of its Subsidiaries, including BWXT) properties, assets, rights or interests to the Liens now or hereafter intended to be covered by any of the Collateral Documents, (C) perfect and maintain the validity, effectiveness and priority of any of the Collateral Documents and any of the Liens intended to be created thereunder and (D) assure, convey, grant, assign, transfer, preserve, protect and confirm more effectively unto the Secured Parties the rights granted or now or hereafter intended to be granted to the Secured Parties under any Loan Document or under any other instrument executed in connection with any Loan Document to which such Loan Party or any of its Subsidiaries is or is to be a party, and cause each of its Subsidiaries to do so. (l) Preparation of Environmental Reports. At the reasonable request of the Required Lenders from time to time, which request shall specify the reason therefor, provide to the Lender Parties within 90 days after such request, at the expense of such Loan Party, a Phase I environmental site assessment report for any of its or its Subsidiaries' properties described in such request that constitute or are intended to constitute Collateral, prepared by an environmental consulting firm acceptable to the Required Lenders, indicating the presence or absence of Hazardous Materials and the estimated cost of any compliance, removal or remedial action in connection with any Hazardous Materials on such properties. (m) Compliance with Terms of Leaseholds. Make all payments and otherwise perform all obligations in respect of all leases of real property to which such Loan Party or any of its Subsidiaries is a party, keep such leases in full force and effect and not allow such leases to lapse or be terminated or any rights to renew such leases to be forfeited or cancelled, notify the Administrative Agent of any default by any party with respect to such leases and cooperate with the Administrative Agent in all respects to cure any such default, and cause each of its Subsidiaries to do so, except, in any case, where the failure to do so, either individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. 61 (n) Cash Concentration Accounts; Existing Cash Management System. (i) Maintain, and cause each of its Subsidiaries to maintain main cash concentration accounts (other than Permitted Unblocked Accounts) solely with Lender Parties and (ii) maintain the existing cash management system of the Loan Parties and MI as in effect on the Effective Date, in all material respects, subject to such modifications as are necessary to implement the security arrangements or other provisions (such as those relating to Permitted Unblocked Accounts) contemplated by the Loan Documents. (o) Performance of Material Contracts. Use commercially reasonable efforts to perform and observe all the terms and provisions of each Material Contract to be performed or observed by it, use commercially reasonable efforts to maintain each such Material Contract in full force and effect, enforce each such Material Contract in accordance with its terms, and cause each of its Subsidiaries to do so, except, in any case, where the failure to do so, either individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. (p) Mortgages. Deliver, no later than 60 days following the Effective Date, deeds of trust, trust deeds and mortgages in form and substance reasonably satisfactory to the Required Lenders, to be promptly negotiated in good faith by all parties, and covering the properties that are owned by any Collateral Grantor and are listed on Schedule 4.01(s) hereto (together with the Assignments of Leases and Rents referred to therein and each other mortgage delivered pursuant to Section 5.01(j), in each case as amended, the "MORTGAGES"), duly executed by the appropriate Collateral Grantor, together with: (i) evidence that counterparts of the Mortgages have been duly recorded in all filing or recording offices that the Administrative Agent may deem necessary or desirable in order to create a valid first and subsisting Lien, subject only to the Liens permitted by the Loan Documents, on the property described therein in favor of the Collateral Agent for the benefit of the Secured Parties and that all filing and recording taxes and fees have been paid, (ii) title searches in respect of such properties, in form and substance satisfactory to the Required Lenders, (iii) the Assignments of Leases and Rents referred to in the Mortgages, duly executed by the appropriate Borrower, and (iv) evidence of the insurance required by the terms of the Mortgages. (q) Ship Mortgages. As soon as practicable, but in any event no later than (i) 60 days, in the case of Panamanian-flagged vessels and (ii) 30 days, in the case of U.S.-flagged vessels, in each case, fleet or ship mortgages in form and substance reasonably satisfactory to the Required Lenders, to be promptly negotiated in good faith by all parties, hereto and covering the vessels identified as vessels to be mortgaged on Schedule 4.01(x) (the "SHIP MORTGAGES"). (r) Accounts. Obtain and deliver to the Administrative Agent, within five Business Days after the Effective Date, with respect to investment or deposit accounts 62 (other than Permitted Unblocked Accounts) maintained with Citibank, and within 30 days following request by the Collateral Agent (or such later date as the Required Lenders may reasonably determine), with respect to other investment and deposit accounts (other than Permitted Unblocked Accounts), account control agreements with respect to all such investment and other deposit accounts of MII and JRMSA and its Subsidiaries that are Collateral Grantors, each in form and substance reasonably satisfactory to the Collateral Agent. (s) Mizuho Cash Collateralization. Upon the first to occur of (i) the next Business Day immediately preceding March 31, 2003 and (ii) 3 Business Days following the receipt of the first $7,500,000 of Net Cash Proceeds described in clauses (A) or (D) of Section 2.06(b), deposit $7,500,000 to be held in the Mizuho Cash Collateral Account. (t) Panamanian Certificates. In the event that a certificate referred to in Section 3.01(a)(v) is not delivered in respect of any Loan Party organized under the laws of Panama on or prior to the Effective Date, such certificate shall be delivered to the Administrative Agent as soon as practicable thereafter. SECTION 5.02. Negative Covenants. So long as any Advance or any other Obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Lender Party shall have any Commitment hereunder, no Loan Party will, at any time, without the prior written consent of the Required Lenders: (a) Liens, Etc. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien on or with respect to any of its properties of any character (including, without limitation, accounts) whether now owned or hereafter acquired, or sign or file or suffer to exist, or permit any of its Subsidiaries to sign or file or suffer to exist, under the Uniform Commercial Code of any jurisdiction, a financing statement that names such Loan Party or any of its Subsidiaries as debtor (other than any financing statement that is filed solely for precautionary purposes in connection with operating leases and any financing statement that is filed without the authorization of such Loan Party or any of its Subsidiaries), or sign or suffer to exist, or permit any of its Subsidiaries to sign or suffer to exist, any security agreement authorizing any secured party thereunder to file such financing statement, or assign, or permit any of its Subsidiaries to assign, any accounts or other right to receive income, except: (i) Liens created or permitted under the Loan Documents; (ii) Permitted Liens; (iii) Liens on or with respect to any of the properties of MII and its Subsidiaries existing on the date hereof; (iv) purchase money Liens upon or in real property or equipment acquired or held by the Borrower or any of its Subsidiaries in the ordinary course of business to secure the purchase price of such property or equipment or to secure Debt incurred solely for the purpose of financing the acquisition, 63 construction or improvement of any such property or equipment to be subject to such Liens; provided, however, that no such Lien shall extend to or cover any property other than the property or equipment being acquired, constructed or improved and proceeds (including, without limitation, proceeds from associated contracts and insurances) of, and improvements, accessories and upgrades to, the property or equipment being acquired, constructed or improved, and no such extension, renewal or replacement shall extend to or cover any property not theretofore subject to the Lien being extended, renewed or replaced; and provided further that the aggregate principal amount of the Debt secured by Liens permitted by this clause (iv) shall not exceed $10,000,000 at any time outstanding; (v) Liens arising in connection with Capitalized Leases permitted under Section 5.02(b)(ii)(C); provided that no such Lien shall extend to or cover any Collateral or assets other than the assets subject to such Capitalized Leases; and proceeds (including, without limitation, proceeds from associated contracts and insurances) of, and improvements, accessories and upgrades to, the property leased pursuant thereto; (vi) (1) Liens securing Remaining L/Cs, and (2) other Liens securing Debt outstanding in an aggregate principal amount not to exceed $5,000,000, provided that no such Lien shall extend to or cover any Collateral; (vii) Liens in favor of BP America, Inc. or any of its Subsidiaries, provided that (A) such Liens shall only cover the leasehold interests owned by JRMSA or any of its Subsidiaries relating to the leased premises located near Morgan City, Louisiana, all rights of the lessee under the related lease agreements, the buildings and other permanent constructions on the leased premises covered by such lease agreements and the equipment of JRMSA or any of its Subsidiaries held on those premises (provided, however, that such Liens shall exclude the "Facilities" (as such term is used in this clause (vii)(A) only, as defined in the Yard Agreement and any inventory or general intangibles related to the "Work", as such term is defined in the Yard Agreement), as Liens on those excluded assets constitute Permitted Liens that may otherwise be granted in favor of BP America, Inc.), (B) the Facilities are promptly secured by a Mortgage (in form reasonably acceptable to the Administrative Agent, to be negotiated in good faith) on such property on a subordinated basis (in no event later than [60] days after the Effective Date) and (C) BP America, Inc. and the Administrative Agent shall have agreed on intercreditor arrangements in respect of such property; (viii) any Lien existing on any asset prior to the acquisition thereof by any Loan Party or any of their respective Subsidiaries, provided that such Lien is not created in contemplation of or in connection with such acquisition and no such Lien shall be extended to cover property other than the asset being acquired and proceeds (including, without limitation, proceeds from associated contracts and insurances) of, and improvements, accessories and upgrades to, the asset being acquired; 64 (ix) rights of setoff of banks; (x) Liens on Permitted L/C Lien Assets to secure Middle Eastern L/Cs and Hedge Agreements permitted under Section 5.02(b)(ii)(H), provided that the Applicable L/C Sublimit of the JRM Borrowers shall be reduced on a dollar-for-dollar basis to the extent that the sum of the aggregate face amount of Middle Eastern L/Cs that are so secured plus the aggregate Agreement Value of Hedge Agreements that are so secured exceeds $25,000,000; (xi) Liens to secure any extension, renewal, refunding or replacement (or successive extensions, renewals, refinancings, refundings or replacements), in whole or in part, of any Debt or other Obligation secured by any Lien referred to in the foregoing clauses (ii), (iii), (iv), (v), (vii), (viii) and (x), provided that (A) the principal amount of the Debt or other obligation secured thereby is no greater than the outstanding principal amount of such Debt or other Obligation immediately before such extension, renewal, refinancing, refunding or replacement (B) such Lien shall only extend to such assets as are already subject to a Lien in respect of such Debt or other Obligation; (xii) Liens permitted by Section 5.02(l) (solely to the extent that any agreement permitted thereunder would constitute a Lien); and (xiii) the financing statements and security agreements existing on the date hereof or relating to any of the Liens described in any of the foregoing clauses (i) through (xi); and (xiv) Liens which are imposed under Section 4068 of ERISA or Section 412(n)(1) of the Code and which would not constitute an Event of Default under Section 6.01(l). (b) Debt. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Debt, except: (i) in the case of the Loan Parties and MI, (A) (other than BWXT), Debt in respect of Hedge Agreements with Hedge Banks designed to hedge against fluctuations in foreign exchange rates incurred in the ordinary course of business and consistent with prudent business practice with the aggregate Agreement Value thereof not to exceed $25,000,000 at any time outstanding, unless, with respect to any such excess amount, the Loan Parties (other than BWXT) shall have deposited with the Collateral Agent as cash collateral for the Obligations of the Loan Parties under the Loan Documents an amount equal to such excess amount within three Business Days following the date on which the aggregate Agreement Value exceeds the amount permitted pursuant to this sub-clause (A), (B) Debt owed to a Collateral Grantor or MII, which Debt (x) shall constitute Pledged Debt and (y) shall be evidenced by promissory notes in form 65 reasonably satisfactory to the Collateral Agent and such promissory notes shall be pledged as security for the Obligations of the holder thereof under the Loan Documents to which such holder is a party and delivered to the Collateral Agent pursuant to the terms of the Security Agreement, (C) Debt consisting of the MII Loans or Debt described in clause (ii) below, (D) Debt consisting of Obligations of BWXT to lenders to CH2M Hill Mound, Inc. in an aggregate amount for all such Debt not to exceed $3,000,000 at any time outstanding, and (E) Subordinated Debt owing to Persons other than MII and its Subsidiaries in an amount not to exceed in the aggregate $25,000,000 at any time outstanding. (ii) in the case of the Loan Parties and their Subsidiaries, (A) Debt under the Loan Documents, (B) Debt secured by Liens permitted by Section 5.02(a)(iv) not to exceed in the aggregate $10,000,000 at any time outstanding, (C) Capitalized Leases entered into after the date hereof not to exceed in the aggregate $10,000,000 at any time outstanding, (D) the Surviving Debt, and any Debt extending the maturity of, or refunding or refinancing (including reasonable fees, costs and expenses incurred in connection with such refunding or refinancing), in whole or in part, any Surviving Debt, provided that the terms of any such extending, refunding or refinancing Debt, and of any agreement entered into and of any instrument issued in connection therewith, are otherwise permitted by the Loan Documents, provided further that the principal amount of such Surviving Debt shall not be increased above the principal amount thereof outstanding immediately prior to such extension, refunding or refinancing, and the direct and contingent obligors therefor shall not be changed, as a result of or in connection with such extension, refunding or refinancing, provided still further that the terms relating to principal amount, rate of interest, amortization, maturity, collateral (if any) and subordination (if any), and other material terms taken as a whole, of any such extending, refunding or refinancing Debt, and of any agreement entered into and of any instrument issued in connection therewith, are no less favorable in any material respect to the Borrowers or the Lender Parties than the terms of any agreement or instrument governing the Surviving Debt being extended, refunded or refinanced, (E) (1) Debt consisting of intercompany Debt between or among any of the Loan Parties or any of their respective Subsidiaries so long as the Obligations of the debtors thereunder are subordinated to their Obligations, if any, under the 66 Loan Documents and are incurred in the ordinary course of business consistent with past practices, and (2) Debt consisting of intercompany Debt owing by the Loan Parties or any of their respective Subsidiaries to any Insurance Subsidiary, provided that such Debt is incurred in the ordinary course of business consistent with past practices, (F) Debt consisting of Obligations to lenders to Construcciones Maritimas Mexicanas, S.A. de C.V., a Mexican corporation, and related unsecured guaranties by JRMSA or its Subsidiaries in the ordinary course of business consistent with past practices, (G) Obligations under the Settlement Agreement, provided that such Obligations (other than interest payment Obligations) shall mature no earlier than on the third anniversary of the confirmation of a plan of reorganization in the Chapter 11 case of B&W, (H) Debt in respect of letters of credit and Hedge Agreements issued by parties that are not Lender Parties; provided that, except as permitted under Section 5.02(a)(vi) or (x), such Debt shall be unsecured, and (I) Debt under Bilateral Obligations. (iii) Debt under the Asbestos Settlement Note. (iv) unsecured Debt of JRMSA, JRMHI and JRMI, in an aggregate amount for all such Debt not to exceed $5,000,000. (v) Notwithstanding any other provision contained in this Section 5.02(b), MII will not permit MI and its Subsidiaries, collectively, to create, incur, assume or suffer to exist consolidated Debt in excess of $100 million in the aggregate (excluding (A) existing Debt of MI and its Subsidiaries as shown on the December 31, 2002 balance sheet of MII and its Consolidated Subsidiaries, (B) any Debt extending the maturity of, or refunding or refinancing (including reasonable fees, costs and expenses incurred in connection with such refunding or refinancing), in whole or in part, any Debt described in clause (A) of this clause (v), (C) the MII Loan made to BWXT, (D) the Asbestos Settlement Note and (E) undrawn letters of credit, but including Advances made to BWXT under the Facilities). (c) Change in Nature of Business. Make, or permit any of its Subsidiaries to make, any material change in the nature of the business of MII and its Subsidiaries, taken as a whole, as carried on at the date hereof. (d) Mergers, Etc. Merge into or consolidate with any Person or permit any Person to merge into it, or permit any of its Subsidiaries to do so, except (i) in a transaction permitted by Section 5.02(e) and (ii) that any Loan Party or Subsidiary of such Loan Party may merge into or consolidate with any other Subsidiary of such Loan Party, provided that (except in the case of any transaction permitted under Section 67 5.02(e)), in the case of any such merger or consolidation, the Person surviving such merger or formed by such consolidation shall be a wholly-owned Subsidiary of such Loan Party, provided further that, in the case of any such merger, to which any Loan Party is a party, the Person surviving such merger shall be a Loan Party, and if such Loan Party is a Collateral Grantor, the Person surviving such merger shall be a Collateral Grantor, provided further that, in the case of any such consolidation, to which any Loan Party is a party, the Person formed by such consolidation shall execute an agreement reasonably satisfactory to the Administrative Agent pursuant to which such Person shall (x) assume the Obligations of such Loan Party under the Loan Documents to which such Loan Party is a party and (y) become a Loan Party, and if such Loan Party is a Collateral Grantor, such agreement shall provide that the Person formed by such consolidation shall be or become a Collateral Grantor; provided, however, that in each case, immediately after giving effect thereto, no event shall occur and be continuing that constitutes a Default. (e) Sales, Etc., of Assets. Sell, lease, transfer or otherwise dispose of, or permit any of its Subsidiaries to sell, lease, transfer or otherwise dispose of, any assets, or grant any option or other right to purchase, lease or otherwise acquire any assets other than Inventory to be sold in the ordinary course of its business, except: (i) sales of Inventory in the ordinary course of its business; (ii) in a transaction authorized by Section 5.02(d); (iii) the sale of any asset (including Equity Interests) by such Loan Party or any Subsidiary of such Loan Party (other than a bulk sale of Inventory and a sale of Receivables other than delinquent accounts for collection purposes only) so long as (A) the purchase price paid (including any holdback or escrow amount for post-closing purchase price adjustments or indemnity claims) to such Loan Party or such Subsidiary for such asset shall be no less than the fair market value of such asset at the time of such sale, (B) the purchase price for such asset shall be paid to such Loan Party or such Subsidiary solely in cash and (C) the aggregate purchase price paid to such Loan Party and all of its Subsidiaries for such asset and all other assets sold by such Loan Party and its Subsidiaries pursuant to this clause (iii) shall not exceed $5,000,000; (iv) the sale of any Excluded Asset so long as (A) the purchase price paid (including any holdback or escrow amount for post-closing purchase price adjustments or indemnity claims) to such Loan Party for such Excluded Asset shall be no less than the fair market value of such asset at the time of such sale and (B) the purchase price for such asset shall be paid to such Loan Party solely in cash, (v) sales of obsolete or worn out property or property no longer used or useful in the business of MII and its Subsidiaries, whether now owned or hereafter acquired, in the ordinary course of business; 68 (vi) any contribution or transfer of Equity Interests in B&W and its Subsidiaries, Equity Interests in MII, the Asbestos Settlement Note, rights to insurance and insurance proceeds or other assets pursuant to the terms of the Settlement Agreement; (vii) any contribution or transfer of intellectual property to B&W and its Subsidiaries and any forgiveness of intercompany receivables or Debt owing from B&W or any of its Subsidiaries in connection with the consummation of the transactions contemplated by the Settlement Agreement; (viii) charters of vessels in the ordinary course of business; (ix) Liens permitted under Section 5.02(a)(x) (to the extent that any such Lien would constitute a sale, transfer or other disposition of property under the laws of any applicable jurisdiction); (x) The sale, lease, transfer or other disposition of any asset by any Loan Party or one of its Subsidiaries to a Loan Party or any Subsidiary of a Loan Party; provided that to the extent any such asset constitutes Collateral, such sale, lease, transfer or other disposition shall not impair the security interest or the enforcement rights of the Secured Parties in respect of such asset; and (xi) so long as no Default shall occur and be continuing, the grant of any option or other right to purchase any asset in a transaction that would be permitted under the provisions of clauses (iii), (iv) and (v) above; provided that in the case of sales of assets pursuant to clauses (iii) and (iv) above, such Borrower shall, not more than three Business Days after the date of receipt by any Borrower or any of its Subsidiaries of the Net Cash Proceeds from such sale, collateralize the Facilities pursuant to, and in the amount set forth in, Section 2.06(b), as specified therein. (f) Investments in Other Persons. Make or hold, or permit any of its Subsidiaries to make or hold, any Investment in any Person, except: (i) Investments existing on the date hereof; (ii) the MII Loans; (iii) equity Investments in wholly owned Subsidiaries; (iv) loans and advances to employees after the Effective Date in the ordinary course of the business of such Loan Party and its Subsidiaries as presently conducted in an aggregate principal amount not to exceed $4,000,000 at any time outstanding; (v) Investments in Cash Equivalents (A) by MII and its non-wholly-owned Subsidiaries, (B) that constitute Collateral, (C) consisting of restricted cash 69 relating to the captive insurance Subsidiaries of MII, (D) that are pledged by such Loan Party or any of such Loan Party's wholly-owned Subsidiaries as cash collateral for Middle Eastern L/Cs or Hedge Agreements as permitted by Section 5.02(b)(ii)(H) or (E) that are invested in by any of such Loan Party's Subsidiaries outside of the United States in the ordinary course of business consistent with past practices; (vi) Investments of MII and its Subsidiaries existing on the date hereof and Investments in joint ventures or pursuant to teaming arrangements made after the date hereof pursuant to binding obligations existing as of the date hereof; (vii) Investments by such Loan Party or any Subsidiary of such Loan Party in Hedge Agreements permitted under Section 5.02(b)(i)(A); (viii) Investments consisting of intercompany Debt permitted under Section 5.02(b)(i)(B) or (c) or 5.02(b)(ii)(E); (ix) Investments in joint ventures of the Loan Parties and Subsidiaries, which joint ventures are formed after the Effective Date and which Investments are consistent with past practices in an aggregate amount for all such Investments not to exceed $10,000,000; (x) Investments in the form of loans to and unsecured guaranties made on behalf of Construcciones Maritimas Mexicanas, S.A. de C.V., a Mexican corporation, in the ordinary course of business and consistent with past practices; and (xi) other Investments made after the Effective Date in an aggregate amount not to exceed $2,500,000 existing at any one time for all such Investments (which may include Investments of any type, including but not limited to Investments of the types referred to in clauses (iv) and (viii) above). (g) Restricted Payments. Solely with respect to MII and BWXT, declare or pay any dividends, purchase, redeem, retire, defease or otherwise acquire for value any of its Equity Interests now or hereafter outstanding, return any capital to its stockholders, as such, make any distribution of assets, Equity Interests, obligations or securities to its stockholders, as such, or permit any of its Subsidiaries to purchase, redeem, retire, defease or otherwise acquire for value any Equity Interests in MII, other than in connection with any Plan or Welfare Plan. Notwithstanding the foregoing, so long as no Default shall have occurred and be continuing at the time of any action described in clause (i) or (ii) below or would result therefrom: (i) MII and BWXT may, except to the extent the Net Cash Proceeds thereof are required to be applied to the prepayment of the Advances pursuant to Section 2.06(b), purchase, redeem, retire, defease or otherwise acquire shares of its capital stock with the proceeds received contemporaneously from the issue of new shares of its capital stock with equal or inferior voting powers, designations, preferences and rights, and 70 (ii) BWXT may declare and pay dividends so long as the proceeds therefrom are ultimately received by MI to be applied solely for Debt service and operating requirements of MI consistent with MI's past operating requirements, and (iii) MII and its Subsidiaries may make required payments under the Settlement Agreement. (h) Lease Obligations. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any obligations as lessee (i) for the rental or hire of real or personal property in connection with any sale and leaseback transaction, or (ii) for the rental or hire of other real or personal property of any kind under leases or agreements to lease (excluding Capitalized Leases), in each case under clause (i) or (ii) above, except in the ordinary course of business. (i) Amendments of Constitutive Documents. Amend, or permit any of its Subsidiaries to amend, its certificate of incorporation or bylaws or other constitutive documents in any manner that would be reasonably expected to have an adverse effect on the Lender Parties. (j) Accounting Changes. Make or permit, or permit any of its Subsidiaries to make or permit, any (i) material change in accounting policies or reporting practices, except (A) as required by generally accepted accounting principles or (B) upon 15 days notice to the Lender Parties, and in the absence of any objection from the Required Lenders, as permitted by generally accepted accounting principles or (ii) change in Fiscal Year. (k) Prepayments, Etc., of Debt. Prepay, redeem, purchase, defease or otherwise satisfy prior to the scheduled maturity thereof in any manner, or make any payment in violation of any subordination terms of, any Debt, except (i) the prepayment of the Advances in accordance with the terms of this Agreement, (ii) any extension, renewal, refunding or replacement of any Debt permitted under Section 5.02(b), (iii) any forgiveness of intercompany receivables or Debt owing from B&W and its Subsidiaries pursuant to the Settlement Agreement, (iv) the prepayment, redemption, purchase, defeasance or other satisfaction of any or all of the Series A Notes and (v) regularly scheduled or required repayments or redemptions of Debt permitted under Section 5.02(b) or amend, modify or change any term or condition of any Surviving Debt or Subordinated Debt in any manner that would, in the aggregate for all such changes, result in the terms of such Debt becoming materially less favorable to the Borrower, or permit any of its Subsidiaries to do any of the foregoing other than to prepay any Debt payable to any Loan Party or any Subsidiary of any Loan Party. (l) Negative Pledge. Enter into or suffer to exist, or permit any of its Subsidiaries to enter into or suffer to exist, any agreement prohibiting or conditioning the creation or assumption of any Lien upon any of its property or assets except (i) in favor of the Secured Parties or (ii) in connection with (A) any Surviving Debt (including any permitted refinancing thereof), or (B) any purchase money Debt permitted by 71 Section 5.02(b)(ii)(B) solely to the extent that the agreement or instrument governing such Debt prohibits a Lien on the property acquired with the proceeds of such Debt, or (C) any Capitalized Lease permitted by Section 5.02(b)(ii)(C) solely to the extent that such Capitalized Lease prohibits a Lien on the property subject thereto, or (D) existing joint venture agreements or (E) existing indentures, or (F) work performed by BWXT for the U.S. Navy, the U.S. Department of Defense, the U.S. Department of Energy or any other department or instrumentality of the U.S. Government or (G) any contract with BP regarding usage of the fabrication yard facilities and related assets referred to in the Yard Agreement. Notwithstanding the foregoing, this Section 5.02(l) does not and shall not apply to the following (in each case, to the extent not otherwise restricted under this Section 5.02): (A) any agreement or arrangement applicable to any Person or the property or assets of such Person acquired by any Loan Party or any of their respective Subsidiaries, existing at the time of such acquisition and not entered into in connection with or in contemplation of such acquisition; provided that the encumbrance or restriction therein is not applicable to any Person or the properties or assets of any Person, other than the Person, or the property or assets of such Person, so acquired and any amendments, modifications, restatements, renewals, extensions, supplements, refundings, replacements or refinancings thereof, provided that the encumbrances and restrictions in any such amendments, modifications, restatements, renewals, extensions, supplements, refundings, replacement or refinancings are no more restrictive, taken as a whole, than those in effect on the date of the acquisition; (B) limitations and restrictions on asset transfers: (1) That restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance, joint venture, partnership interest or contract or similar property or asset, (2) Existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of any Loan Party or any Subsidiary of a Loan Party not otherwise prohibited by the Loan Documents, or, (3) Arising or agreed to in the ordinary course of business, not relating to any Debt, and that do not, individually or in the aggregate, detract from the value of property or assets of the Loan Parties or the Subsidiaries of the Loan Parties in any manner material to MII and its Subsidiaries, taken as a whole; (C) any agreement for the sale or other disposition of all or substantially all of the capital stock of, or property and assets of, a Subsidiary of a Loan Party; (D) contracts and agreements related to any extension, renewal or replacement of Debt that is permitted under Section 5.02(b) of this Agreement, 72 provided that the restrictions contained in the contracts and agreements governing such extended, renewed or replaced Debt are no more restrictive, taken as a whole, than those contained in the contracts and agreements governing the Debt being extended, renewed or replaced; and (E) restrictions imposed by customers under construction contracts entered into in the ordinary course of business. (m) Partnerships, Etc. Become a general partner in any general or limited partnership or joint venture, or permit any of its Subsidiaries to do so, other than in the case of any Subsidiary the sole assets of which consist of its interest in such partnership or joint venture. (n) Speculative Transactions. Engage, or permit any of its Subsidiaries to engage, in any transaction involving commodity options or futures contracts or any similar speculative transactions. (o) Capital Expenditures. Make, or permit any of its Subsidiaries to make, any Capital Expenditures that would cause the aggregate of all such Capital Expenditures made by MII and its Subsidiaries during the term of the Facilities to exceed $80,000,000. (p) Formation of Subsidiaries. Organize or invest, or permit any Subsidiary to organize or invest, in any new Subsidiary, except for the organization or investment (subject to the restrictions of Section 5.01(i)) in any new Subsidiary in the ordinary course of such Loan Party's business consistent with past practices; provided, however, that upon the formation of any Subsidiary of JRMSA in any jurisdiction located within the United States, such Subsidiary shall forthwith execute a Guaranty Supplement (as defined in the Subsidiary Guaranty) and a Security Agreement Supplement (as defined in the Security Agreement), and shall take all other such actions as may be required to comply with the provisions of the Subsidiary Guaranty and the Security Agreement. (q) Payment Restrictions Affecting Subsidiaries. Directly or indirectly, enter into or suffer to exist, or permit any of its Subsidiaries to enter into or suffer to exist, any agreement or arrangement expressly limiting the ability of any of its wholly-owned Subsidiaries to declare or pay dividends or other distributions in respect of its Equity Interests or repay or prepay any Debt owed to, make loans or advances to, or otherwise transfer assets to or invest in, such Loan Party or any wholly-owned Subsidiary of such Loan Party (whether through a covenant restricting dividends, loans, asset transfers or investments, a financial covenant or otherwise), except (i) the Loan Documents and (ii) any agreement or instrument evidencing Surviving Debt (including any permitted replacement or refinancing thereof). Notwithstanding the foregoing, this Section 5.02(q) does not and shall not apply to the following (in each case, to the extent not otherwise restricted under this Section 5.02): (A) any agreement or arrangement applicable to any Person or the property or assets of such Person acquired by any Loan Party or any of their respective Subsidiaries, existing at the time of such acquisition and not entered into in 73 connection with or in contemplation of such acquisition; provided that the encumbrance or restriction therein is not applicable to any Person or the properties or assets of any Person, other than the Person, or the property or assets of such Person, so acquired and any amendments, modifications, restatements, renewals, extensions, supplements, refundings, replacements or refinancings thereof, provided that the encumbrances and restrictions in any such amendments, modifications, restatements, renewals, extensions, supplements, refundings, replacement or refinancings are no more restrictive, taken as a whole, than those in effect on the date of the acquisition; (B) limitations and restrictions on asset transfers (excluding limitations and restrictions on cash payments of dividends, redemptions or distributions with respect to capital stock and on cash repayments of intercompany loans or advances): (1) That restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance, joint venture, partnership interest or contract or similar property or asset, (2) Existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of any Loan Party or any Subsidiary of a Loan Party not otherwise prohibited by the Loan Documents, or (3) Arising or agreed to in the ordinary course of business, not relating to any Debt, and that do not, individually or in the aggregate, detract from the value of property or assets of the Loan Parties or the Subsidiaries of the Loan Parties in any manner material to MII and its Subsidiaries, taken as a whole; (C) Any agreement for the sale or other disposition of all or substantially all of the capital stock of, or property and assets of, a Subsidiary of a Loan Party; (D) Contracts and agreements related to any extension, renewal or replacement of Debt that is permitted under Section 5.02(b) of this Agreement, provided that the restrictions contained in the contracts and agreements governing such extended, renewed or replaced Debt are not more restrictive, taken as a whole, than those contained in the contracts and agreements governing the Debt being extended, renewed or replaced; and (E) Restrictions imposed by customers under construction contracts entered into in the ordinary course of business. SECTION 5.03. Reporting Requirements. So long as any Advance or any other Obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Lender Party shall have any Commitment hereunder, the Loan Parties will furnish to the Agents and the Lender Parties: 74 (a) Default or MAE Notice. (A) As soon as possible and in any event within (A) Three Business Days after a Responsible Officer of MII bewares aware of the occurrence of a Default and (B) seven Business Days after a Responsible Officer of MII becomes aware of any other event or development that, in the reasonable judgment of such officer, would reasonably be expected to have a Material Adverse Effect (other than matters of a general economic nature or generally affecting the industry or industries in which the Loan Parties operate), in each case continuing on the date of such statement, a statement of a Responsible Officer of MII setting forth details of such Default or event, development or occurrence and the action that MII has taken and proposes to take with respect thereto. (b) Annual Financials. (i) As soon as available and in any event within 120 days after the end of each Fiscal Year, a copy of the annual audit report for such year for MII and its Subsidiaries, including therein Consolidated balance sheets of MII and its Subsidiaries as of the end of such Fiscal Year and Consolidated statements of income and cash flows of MII and its Subsidiaries for such Fiscal Year, in each case accompanied by an opinion of Pricewaterhouse Coopers LLP or other independent public accountants of recognized standing reasonably acceptable to the Required Lenders that the consolidated financial statements of MII are prepared in accordance with generally accepted accounting principles, together with (i) a certificate of such accounting firm to the Lender Parties stating that in the course of the regular audit of the business of MII and its Subsidiaries, which audit was conducted by such accounting firm in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge that an Event of Default has occurred and is continuing, or if, in the opinion of such accounting firm, an Event of Default has occurred and is continuing, a statement as to the nature thereof, (ii) a schedule in form reasonably satisfactory to the Required Lenders of the computations used by such accountants in determining, as of the end of such Fiscal Year, compliance with the covenants contained in Section 5.04, provided that in the event of any change in generally accepted accounting principles used in the preparation of such financial statements, MII shall also provide, if necessary for the determination of compliance with Section 5.04, a statement of reconciliation conforming such financial statements to GAAP and (iii) a certificate of the Chief Financial Officer of MII stating that no Event of Default has occurred and is continuing or, if an Event of Default has occurred and is continuing, a statement as to the nature thereof and the action that MII has taken and proposes to take with respect thereto. (ii) As soon as available and in any event within 120 days after the end of each Fiscal Year, a copy the annual unaudited (A) consolidated balance sheets of JRMSA and its Subsidiaries and consolidated balance sheets of BWXT and its Subsidiaries, in each case as of the end of such Fiscal Year, and (B) consolidated statements of income and cash flows of JRMSA and Subsidiaries and consolidated statements of income and cash flows of BWXT and its Subsidiaries, in each case for such Fiscal Year, in each case duly certified by the Chief Financial Officer of MII as having been prepared in accordance with generally accepted accounting principles (subject to normal year-end audit adjustments and the absence of complete footnotes), together with a schedule in form reasonably satisfactory to the Required Lenders of the computations used by such officer in determining, as of the end of such Fiscal Year, compliance with the covenants 75 contained in Section 5.04 applicable to each of JRMSA and its Subsidiaries and BWXT and its Subsidiaries, provided that in the event of any change in generally accepted accounting principles used in the preparation of such financial statements, MII shall also provide, if necessary for the determination of compliance with Section 5.04, a statement of reconciliation conforming such financial statements to GAAP. (c) Quarterly Financials. As soon as available and in any event within 60 days after the end of each of the first three quarters of each Fiscal Year, (i) Consolidated balance sheets of MII and its Subsidiaries, consolidated balance sheets of JRMSA and its Subsidiaries and consolidated balance sheets of BWXT and its Subsidiaries, in each case as of the end of such quarter, (ii) Consolidated statements of income and cash flows of MII and its Subsidiaries, consolidated statements of income and cash flows of JRMSA and Subsidiaries and consolidated statements of income and cash flows of BWXT and its Subsidiaries, in each case for the period commencing at the end of the previous fiscal quarter and ending with the end of such fiscal quarter and (iii) Consolidated statements of income and cash flows of MII and its Subsidiaries, consolidated statements of income and cash flows of JRMSA and its Subsidiaries and consolidated statements of income and cash flows of BWXT and its Subsidiaries, in each case commencing at the end of the previous Fiscal Year and ending with the end of such quarter, setting forth in each case covered by the preceding clauses (i), (ii) and (iii), in comparative form, the corresponding figures for the corresponding date or period of the preceding Fiscal Year, all in reasonable detail and duly certified by the Chief Financial Officer of MII as having been prepared in accordance with generally accepted accounting principles (subject to normal year-end audit adjustments and the absence of complete footnotes), together with (i) a certificate of said officer stating that no Event of Default has occurred and is continuing or, if an Event of Default has occurred and is continuing, a statement as to the nature thereof and the action that MII has taken and proposes to take with respect thereto and (ii) a schedule in form reasonably satisfactory to the Required Lenders of the computations used by MII in determining whether or not the Loan Parties are in compliance with the covenants contained in Section 5.04, provided that in the event of any change in generally accepted accounting principles used in the preparation of such financial statements, MII shall also provide, if necessary for the determination of compliance with Section 5.04, a statement of reconciliation conforming such financial statements to GAAP. (d) Annual Forecasts. As soon as available and in any event no later than 10 days following approval by the board of directors of MII following the end of each Fiscal Year, forecasts prepared by management of MII, in form reasonably satisfactory to the Required Lenders, of balance sheets, income statements and cash flow statements on a quarterly basis for the Fiscal Year following such Fiscal Year and on an annual basis for each Fiscal Year thereafter until the Termination Date. (e) Rolling 4-Week Forecasts. A four-week rolling forecast of inflows and outflows of cash with an explanation of the significant variances from the most recent four-week rolling forecast delivered to the Agents and the Lender Parties (in substantially the form set forth on Exhibit J hereto, or in form otherwise reasonably satisfactory to the Administrative Agent), on a monthly basis in no event later than 30 days following the end of each month, for BWXT and, to the extent reasonably practicable, on a weekly 76 basis, no later than the fifth Business Day after the end of such week, for the JRM Borrowers and their Subsidiaries on a consolidated basis. (f) Backlog Report. For each Borrower, on a quarterly basis, no later than 30 days following the end of each quarter, a backlog report similar to the report set forth on Exhibit K hereto, listing the total backlog amount for BWXT and for each project of the JRM Borrowers reflected therein: (i) the customer and project names, (ii) projected revenue and (iii) projected gross profit and actual gross profit to date, and in the case of the JRM Borrowers and their Subsidiaries on a Consolidated Basis, on a monthly basis no later than 30 days following the end of each month, a report, in form reasonably satisfactory to the Administrative Agent, listing significant contract/project bookings and projected gross profit for each such booking. (g) (i) on a monthly basis, in no event later than 30 days following the end of each month, a status report on the Frontrunner Project outlining project milestones consistent with the ongoing management of the project contract, and such other available information as the Administrative Agent may reasonably request, and (ii) on a quarterly basis, to be delivered no later than 30 days following the end of each such quarter, a variance report (the "FRONTRUNNER VARIANCE REPORT"), in form reasonably satisfactory to the Administrative Agent, showing, on a cumulative basis, any variance (the "FRONTRUNNER VARIANCE") in (1) the sum of the actual cost-to-complete to date of the Frontrunner Project plus the current estimate of the remaining cost-to-complete from (2) the total contract cost at completion as shown in the "December 2002 Contract Cost and Revenue Report" (a preliminary copy of which, subject to audit adjustments, has been delivered to the Required Lenders), in each case as adjusted for change orders executed by the customer. (h) Monthly Cash Balance Report. On a monthly basis, in no event later than 30 days following the end of each month, a report listing (i) all cash balances of MII and its Subsidiaries showing, separately, restricted and unrestricted cash balances, (ii) the current balances of all outstanding intercompany debt of MII and its Subsidiaries and (iii) a schedule setting forth (A) an accounting of the use of Net Cash Proceeds referred to in Section 2.06(b) that are not required to cash collateralize the Facilities and (B) cash or Cash Equivalents used to cash collateralize Middle Eastern L/Cs; in each case, in form reasonably satisfactory to the Administrative Agent. (i) Litigation. Promptly after a Responsible Officer has knowledge of the commencement thereof, notice of all actions, suits, investigations, litigation and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting any Loan Party or any of its Subsidiaries of the type described in Section 4.01(f). (j) Securities Reports. Promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports that MII sends to its stockholders, and copies of all regular, periodic and special reports, and all registration statements, that MII files with the Securities and Exchange Commission or any governmental authority that may be substituted therefor, or with any national securities exchange. 77 (k) Creditor Reports. Promptly after the furnishing thereof, copies of any statement or report furnished to any holder of Debt securities of any Loan Party or of any of its Subsidiaries pursuant to the terms of any indenture, loan or credit or similar agreement and not otherwise required to be furnished to the Lender Parties pursuant to any other clause of this Section 5.03. (l) Agreement Notices. Promptly after receipt thereof, copies of all notices, requests and other documents received by any Loan Party or any of its Subsidiaries under or pursuant to any Material Contract or indenture, loan or credit or similar agreement regarding or related to any material breach or default by any party thereto or any other event that would, in the reasonable judgment of a Responsible Officer of MII, be reasonably expected to have a Material Adverse Effect. (m) Revenue Agent Reports. Within 10 days after receipt, copies of any and all final assessments from the appeals division of the Internal Revenue Service, that determine or otherwise set forth positive adjustments to the Federal income tax liability of the affiliated group (within the meaning of Section 1504(a)(1) of the Internal Revenue Code) of which any Borrower is a member aggregating $5,000,000 or more. (n) ERISA. (i) as soon as possible, and in any event within 30 days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Plan, (ii) as soon as possible and in any event within 10 days after any Responsible Officer of the Loan Parties or any ERISA Affiliate either knows or has reason to know that any ERISA Event has occurred that alone or together with any other ERISA Event has resulted or would reasonably be expected to result in liability of the Loan Parties or any ERISA Affiliate in an aggregate amount exceeding $20,000,000, a statement of a Responsible Officer of MII setting forth details as to such ERISA Event and the action proposed to be taken with respect thereto, together with a copy of the notice, if any, of such ERISA Event given to the PBGC, (i) on the date any records, documents or other information must be furnished to the PBGC with respect to any Plan pursuant to Section 4010 of ERISA, a copy of such records, documents and information, (ii) promptly and in any event within five Business Days after receipt thereof, a copy of any notice the Loan Parties or any ERISA Affiliate receives from the PBGC relating to the intention of the PBGC to terminate any Plan or Plans or to appoint a trustee to administer any Plan or Plans, (iii) upon the filing with the PBGC pursuant to Section 412(n) of the Code or Section 302(f) of ERISA of a notice of failure to make a required installment or other payment with respect to a Plan, a statement of a Responsible Officer setting forth details as to such failure and the action proposed to be taken with respect thereto, together with a copy of such notice given to the PBGC and (iv) promptly and in any event within 30 days after receipt thereof by the Loan Parties or any ERISA Affiliate from the sponsor of a Multiemployer Plan, a copy of each notice received by the Loan Parties or any ERISA Affiliate concerning (A) the imposition of Withdrawal Liability, (B) a determination that a Multiemployer Plan is, or is expected to be, terminated or in reorganization, in each case within the meaning of Title IV of ERISA or (C) the amount of liability incurred, or that may be incurred by such Loan Party or any Affiliate of any Loan Party in connection with any event described in clause (A) or (B). 78 (o) Environmental Conditions. Promptly after a Responsible Officer of any Loan Party has knowledge of the assertion or occurrence thereof, notice of any Environmental Action against or of any noncompliance by any Borrower or any of its Subsidiaries with any Environmental Law or Environmental Permit that would reasonably be expected to cause any property described in the Mortgages to be subject to any material restrictions on ownership, occupancy, use or transferability under any Environmental Law. (p) Other Information. Such other information respecting the business, condition (financial or otherwise), operations, performance, properties or prospects of any Borrower or any of its Subsidiaries as any Agent, or any Lender Party through the Administrative Agent, may from time to time reasonably request. SECTION 5.04. Financial Covenants. So long as any Advance or any other Obligation of any Borrower under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Lender Party shall have any Commitment hereunder, the Borrowers will: (a) Minimum EBITDA. Maintain EBITDA for MII and its Subsidiaries of not less than the amount set forth below as of the respective measurement dates set forth below for the respective measurement periods set forth below:
=================================================================================== MEASUREMENT DATES MEASUREMENT PERIODS EBITDA =================================================================================== - ----------------------------------------------------------------------------------- March 31, 2003 For fiscal quarter ending March 31, 2003 $ 30,000,000 - ----------------------------------------------------------------------------------- June 30, 2003 Two fiscal quarters ending June 30, 2003 $ 60,000,000 - ----------------------------------------------------------------------------------- September 30, 2003 Three fiscal quarters ending June 30, 2003 $ 90,000,000 - ----------------------------------------------------------------------------------- December 31, 2003 Four fiscal quarters ending December 31, 2003 $ 10,000,000 - ----------------------------------------------------------------------------------- March 31, 2004 Four fiscal quarters ending March 31, 2004 $100,000,000 ===================================================================================
(b) Fixed Charge Coverage Ratio. Maintain a Fixed Charge Coverage Ratio for MII and its Subsidiaries of not less than the amount set forth below as of the respective measurement dates set forth below for the respective measurement periods set forth below: 79
============================================================================================= FIXED CHARGE MEASUREMENT DATES MEASUREMENT PERIODS COVERAGE RATIO ============================================================================================= March 31, 2003 For fiscal quarter ending March 31, 2003 1.20 to 1.00 - --------------------------------------------------------------------------------------------- June 30, 2003 Two fiscal quarters ending June 30, 2003 1.25 to 1.00 - --------------------------------------------------------------------------------------------- September 30, 2003 Three fiscal quarters ending September 30, 2003 1.25 to 1.00 - --------------------------------------------------------------------------------------------- December 31, 2003 Four fiscal quarters ending December 31, 2003 1.25 to 1.00 - --------------------------------------------------------------------------------------------- March 31, 2004 Four fiscal quarters ending March 31, 2004 1.25 to 1.00 =============================================================================================
(c) Tangible Net Worth. Maintain at all times an excess of consolidated total tangible assets over consolidated total liabilities (such amounts to exclude the effects of non-cash charges (net of non-cash gains), (2) restructuring charges and liabilities in respect of the Settlement Agreement, (3) non-cash pension plan expenses and non-cash minimum pension liability recognition, (4) contingency reserves for SPAR contracts to the extent, if any, that such contingency reserves exceed $16,900,000 as of December 31,2002, and (5) restructuring charges with respect to operational changes in the Western Hemisphere marine business of JRMSA and its Subsidiaries), of not less than the respective amounts set forth below for MII and its Consolidated Subsidiaries, JRMSA and its consolidated Subsidiaries and BWXT and its consolidated Subsidiaries:
================================================================================ MII JRMSA BWXT ================================================================================ Amount $160,000,000 $ 50,000,000 $130,000,000 ================================================================================
(d) Frontrunner Variance. Maintain at all times a Frontrunner Variance of not greater than 20% in terms of actual and expected costs to complete exceeding the total contract cost at completion as shown in the December 2002 Contract Cost and Revenue Report referred to in Section 5.03(g)(ii), as adjusted for change orders executed by the customer. ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events ("EVENTS OF DEFAULT") shall occur and be continuing: 80 (a) (i) the Borrowers shall fail to pay any principal of any Advance when the same shall become due and payable or (ii) the Borrowers shall fail to pay any interest on any Advance, or any Borrower shall fail to make any other payment under any Loan Document, in each case under this clause (ii) within three Business Days after the same becomes due and payable; or (b) any representation or warranty made by any Borrower (or any of its officers) in or pursuant to any Loan Document shall prove to have been incorrect in any material respect when made; or (c) the Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 2.14, 5.01(e), (f), (j), (n) or (s), 5.02, 5.03 or 5.04; or (d) any Borrower shall fail to perform or observe any other term, covenant or agreement contained in any Loan Document on its part to be performed or observed if such failure shall remain unremedied for 20 days after the earlier of the date on which (i) a Responsible Officer has knowledge of such failure or (ii) written notice thereof shall have been given to such Borrower by any Agent or any Lender Party; or (e) any Borrower or any of its Subsidiaries shall fail to pay any principal of, premium or interest on or any other amount payable in respect of any Debt (other than Subordinated Debt so long as such Debt cannot be accelerated or give rise to the exercise of other remedies by the holders thereof) of such Borrower or such Subsidiary (as the case may be) that is outstanding in a principal amount (or, in the case of any Hedge Agreement, an Agreement Value) of at least $5,000,000 either individually or in the aggregate (but excluding Debt outstanding hereunder), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise); or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt or otherwise to cause, or to permit the holder thereof to cause, such Debt to mature; or any such Debt shall be declared to be due and payable or required to be prepaid or redeemed (other than by a regularly scheduled required prepayment or redemption), purchased or defeased, or an offer to prepay, redeem, purchase or defease such Debt shall be required to be made, in each case prior to the stated maturity thereof; or (f) any Borrower or any of its Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Borrower or any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it) that is being diligently contested by it in good faith, either such proceeding shall remain undismissed or unstayed for a period of 30 days or 81 any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or any substantial part of its property) shall occur; or any Borrower or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (f); or (g) any judgments or orders, either individually or in the aggregate, for the payment of money in excess of $5,000,000 (over and above applicable insurance coverage, so long as such coverage is not being contested by the applicable insurer) shall be rendered against any Borrower or any of its Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (h) any non-monetary judgment or order shall be rendered against any Borrower or any of its Subsidiaries that would be reasonably expected to have a Material Adverse Effect, and there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (i) any provision of any Loan Document after delivery thereof pursuant to Section 3.01 or 5.01(j) shall for any reason cease to be valid and binding on or enforceable against any Loan Party that is a party to such Loan Document, and such defect shall not be cured within 10 Business Days following such Loan Party's receipt of notice thereof, or any such Borrower shall so state in writing; or (j) any Collateral Document or financing statement after delivery thereof pursuant to Section 3.01 or 5.01(j) shall for any reason (other than pursuant to the terms thereof) cease to create a valid and perfected first priority (other than prior Liens permitted under the Loan Documents) lien on and security interest in the Collateral purported to be covered thereby; or (k) a Change of Control shall occur; or (l) any ERISA Event (other than an ERISA Event that has occurred or is reasonably expected to occur that is described in Schedule 4.01(n) hereto) shall have occurred with respect to a Plan and the sum (determined as of the date of occurrence of such ERISA Event) of the Insufficiency of such Plan and the Insufficiency of any and all other Plans with respect to which an ERISA Event shall have occurred and then exist (or the liability of the Borrowers and the ERISA Affiliates related to such ERISA Event) exceeds $20,000,000 and any Loan Party or ERISA Affiliate has incurred or is reasonably expected to incur liability in such amount in connection with such Plan or Plans; or (m) any Loan Party or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such 82 Multiemployer Plan in an amount that, when aggregated with all other amounts required to be paid to Multiemployer Plans by the Loan Parties and the ERISA Affiliates as Withdrawal Liability (determined as of the date of such notification), exceeds $30,000,000 or requires payments exceeding $5,000,000 per annum and (ii) such Loan Party or such ERISA Affiliate does not have reasonable grounds for contesting such Withdrawal Liability or is not in fact contesting such Withdrawal Liability; or (n) any Loan Party or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, and as a result of such reorganization or termination the aggregate annual contributions of the Loan Parties and the ERISA Affiliates to all Multiemployer Plans that are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Multiemployer Plans for the plan years of such Multiemployer Plans immediately preceding the plan year in which such reorganization or termination occurs by an amount exceeding $5,000,000; or (o) an "Event of Default" (as defined in any Mortgage or any Ship Mortgage) shall have occurred and be continuing; or (p) there shall occur any material adverse change in the terms of the Asbestos Settlement Note; or (q) Except as contemplated in the Settlement Agreement, there shall occur any final, nonappealable ruling in the Asset Transfer Case that requires capital stock of any Subsidiary of MII to be transferred to B&W. then, and in any such event, the Administrative Agent (i) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrowers, declare the Commitments of each Lender Party and the obligation of each Lender Party to make Advances (other than Letter of Credit Advances by an Issuing Bank or a Lender pursuant to Section 2.03(c)) and of each Issuing Bank to issue Letters of Credit to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Required Lenders, (A) by notice to the Borrowers, declare the Notes, all interest thereon and all other amounts payable under this Agreement and the other Loan Documents to be forthwith due and payable, whereupon the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower and (B) by notice to each Issuing Bank, direct such Issuing Bank to deliver a Default Termination Notice to the beneficiary of each Letter of Credit issued by it, and each Issuing Bank shall deliver such Default Termination Notices; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to any Borrower under the Federal Bankruptcy Code, (x) the Commitments of each Lender Party and the obligation of each Lender Party to make Advances (other than Letter of Credit Advances by an Issuing Bank or a Lender pursuant to Section 2.03(c)) and of each Issuing Bank to issue Letters of Credit shall automatically be terminated and (y) the Notes, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrowers. 83 SECTION 6.02. Actions in Respect of the Letters of Credit upon Default. If any Event of Default shall have occurred and be continuing, the Administrative Agent may, or shall at the request of the Required Lenders, irrespective of whether it is taking any of the actions described in Section 6.01 or otherwise, make demand upon each Borrower to, and forthwith upon such demand the Borrower will pay to the Collateral Agent on behalf of the Lender Parties in same day funds at the Collateral Agent's office designated in such demand, for deposit in the applicable L/C Cash Collateral Account, an amount equal to the aggregate Available Amount of all Letters of Credit then outstanding; provided that BWXT shall only be required to cash collateralize Letters of Credit issued for its own account. If at any time the Administrative Agent or the Collateral Agent determines that any funds held in either or both of the L/C Cash Collateral Accounts are subject to any right or claim of any Person other than the Agents and the Lender Parties or that the total amount of such funds is less than the aggregate Available Amount of all Letters of Credit, each Borrower will forthwith upon demand by the Administrative Agent or the Collateral Agent pay to the Collateral Agent, as additional funds to be deposited and held in the L/C Cash Collateral Account, an amount equal to the excess of (a) such aggregate Available Amount over (b) the total amount of funds, if any, then held in the applicable L/C Cash Collateral Account that the Administrative Agent or the Collateral Agent, as the case may be, determines to be free and clear of any such right and claim; provided that BWXT shall only be required to cash collateralize Letters of Credit issued for its own account. Upon the drawing of any Letter of Credit for which funds are on deposit in either or both of the L/C Cash Collateral Accounts, such funds shall be applied to reimburse the relevant Issuing Bank or Lenders, as applicable, to the extent permitted by applicable law. ARTICLE VII THE AGENTS SECTION 7.01. Authorization and Action. Each Lender Party (in its capacities as a Lender, an Issuing Bank (if applicable) and on behalf of itself and its Affiliates as potential Hedge Banks) hereby appoints and authorizes each Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement and the other Loan Documents as are delegated to such Agent by the terms hereof and thereof, together with such powers and discretion as are reasonably incidental thereto. As to any matters not expressly provided for by the Loan Documents (including, without limitation, enforcement or collection of the Notes), no Agent shall be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding upon all Lender Parties and all holders of Notes; provided, however, that no Agent shall be required to take any action that exposes such Agent to personal liability or that is contrary to this Agreement or applicable law. Each Agent agrees to give to each Lender Party prompt notice of each notice given to it by any Borrowers pursuant to the terms of this Agreement. SECTION 7.02. Agents' Reliance, Etc. Neither any Agent nor any of their respective directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with the Loan Documents, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the 84 foregoing, each Agent: (a) may treat the payee of any Note as the holder thereof until, in the case of the Administrative Agent, the Administrative Agent receives and accepts an Assignment and Acceptance entered into by the Lender that is the payee of such Note, as assignor, and an Eligible Assignee, as assignee, or, in the case of any other Agent, such Agent has received notice from the Administrative Agent that it has received and accepted such Assignment and Acceptance, in each case as provided in Section 9.07; (b) may consult with legal counsel (including counsel for any Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (c) makes no warranty or representation to any Lender Party and shall not be responsible to any Lender Party for any statements, warranties or representations (whether written or oral) made in or in connection with the Loan Documents; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any Loan Document on the part of any Borrower or to inspect the property (including the books and records) of any Borrower; (e) shall not be responsible to any Lender Party for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, any Loan Document or any other instrument or document furnished pursuant thereto; and (f) shall incur no liability under or in respect of any Loan Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, telecopy or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 7.03. CUSA and Affiliates. With respect to its Commitments, the Advances made by it and the Notes issued to it, CUSA shall have the same rights and powers under the Loan Documents as any other Lender Party and may exercise the same as though it were not an Agent; and the term "Lender Party" or "Lender Parties" shall, unless otherwise expressly indicated, include CUSA in its individual capacity. CUSA and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, accept investment banking engagements from and generally engage in any kind of business with, any Loan Party, any of its Subsidiaries and any Person that may do business with or own securities of any Loan Party or any such Subsidiary, all as if CUSA were not an Agent and without any duty to account therefor to the Lender Parties. SECTION 7.04. Lender Party Credit Decision. Each Lender Party acknowledges that it has, independently and without reliance upon any Agent or any other Lender Party and based on the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender Party also acknowledges that it will, independently and without reliance upon any Agent or any other Lender Party and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. SECTION 7.05. Indemnification. (a) Each Lender Party severally agrees to indemnify each Agent (to the extent not promptly reimbursed by the Borrowers) from and against such Lender Party's ratable share (determined as provided below) of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted 85 against such Agent in any way relating to or arising out of the Loan Documents or any action taken or omitted by such Agent under the Loan Documents (collectively, the "INDEMNIFIED COSTS"); provided, however, that no Lender Party shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent's gross negligence or willful misconduct as found in a final, non-appealable judgment by a court of competent jurisdiction. Without limitation of the foregoing, each Lender Party agrees to reimburse each Agent promptly upon demand for its ratable share of any costs and expenses (including, without limitation, fees and expenses of counsel) payable by the Loan Parties under Section 9.04, to the extent that such Agent is not promptly reimbursed for such costs and expenses by the Loan Parties. In the case of any investigation, litigation or proceeding giving rise to any Indemnified Costs, this Section 7.05 applies whether any such investigation, litigation or proceeding is brought by any Lender Party or any other Person. (b) Each Lender Party severally agrees to indemnify each Issuing Bank (to the extent not promptly reimbursed by the Loan Parties) from and against such Lender Party's ratable share (determined as provided below) of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against such Issuing Bank in any way relating to or arising out of the Loan Documents or any action taken or omitted by such Issuing Bank under the Loan Documents; provided, however, that no Lender Party shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Issuing Bank's gross negligence or willful misconduct as found in a final, non-appealable judgment by a court of competent jurisdiction. Without limitation of the foregoing, each Lender Party agrees to reimburse such Issuing Bank promptly upon demand for its ratable share of any costs and expenses (including, without limitation, fees and expenses of counsel) payable by the Loan Parties under Section 9.04, to the extent that such Issuing Bank is not promptly reimbursed for such costs and expenses by the Loan Parties. (c) For purposes of this Section 7.05, the Lender Parties' respective ratable shares of any amount shall be determined, at any time, according to the sum of (i) the aggregate principal amount of the Advances outstanding at such time and owing to the respective Lender Parties, (ii) their respective Pro Rata Shares of the aggregate Available Amount of all Letters of Credit outstanding at such time, and (iii) their respective Unused Working Capital Commitments at such time. The failure of any Lender Party to reimburse any Agent or any Issuing Bank, as the case may be, promptly upon demand for its ratable share of any amount required to be paid by the Lender Parties to such Agent or such Issuing Bank, as the case may be, as provided herein shall not relieve any other Lender Party of its obligation hereunder to reimburse such Agent or such Issuing Bank, as the case may be, for its ratable share of such amount, but no Lender Party shall be responsible for the failure of any other Lender Party to reimburse such Agent or such Issuing Bank, as the case may be, for such other Lender Party's ratable share of such amount. Without prejudice to the survival of any other agreement of any Lender Party hereunder, the agreement and obligations of each Lender Party contained in this Section 7.05 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the other Loan Documents. 86 SECTION 7.06. Successor Agents. Any Agent may resign at any time by giving written notice thereof to the Lender Parties and the Borrowers and may be removed at any time with or without cause by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation or the Required Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lender Parties, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States or of any State thereof and having a combined capital and surplus of at least $250,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent and, in the case of a successor Collateral Agent, upon the execution and filing or recording of such financing statements, or amendments thereto, and such amendments or supplements to the Mortgages and the Ship Mortgages, and such other instruments or notices, as may be necessary or desirable, or as the Required Lenders may request, in order to continue the perfection of the Liens granted or purported to be granted by the Collateral Documents, such successor Agent shall succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under the Loan Documents. If within 45 days after written notice is given of the retiring Agent's resignation or removal under this Section 7.06 no successor Agent shall have been appointed and shall have accepted such appointment, then on such 45th day (a) the retiring Agent's resignation or removal shall become effective, (b) the retiring Agent shall thereupon be discharged from its duties and obligations under the Loan Documents and (c) the Required Lenders shall thereafter perform all duties of the retiring Agent under the Loan Documents until such time, if any, as the Required Lenders appoint a successor Agent as provided above. After any retiring Agent's resignation or removal hereunder as Agent shall have become effective, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. ARTICLE VIII PARENT GUARANTY SECTION 8.01. Guaranty. (a) The Parent Guarantor hereby unconditionally and irrevocably guarantees the punctual payment when due, whether at scheduled maturity or on any date of a required prepayment or by acceleration, demand or otherwise pursuant to the terms of this Agreement, of all Bilateral Obligations and all Obligations of each Loan Party now or hereafter existing under the Loan Documents (including, without limitation, any extensions, modifications, substitutions, amendments or renewals of any or all of the foregoing Obligations), whether direct or indirect, absolute or contingent, and whether for principal, interest, fees, expenses or otherwise (such Obligations being the "GUARANTEED OBLIGATIONS"), and agrees to pay any and all expenses (including, without limitation, reasonable counsel fees and expenses) incurred by the Agents or the Lender Parties in enforcing any rights under this Guaranty or any other Loan Documents. Without limiting the generality of the foregoing, the Parent Guarantor's liability shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by each Loan Party to the Administrative Agent or any Lender Party under or in respect 87 of the Loan Documents but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving any Loan Party. (b) The Parent Guarantor hereby unconditionally and irrevocably agrees that in the event any payment shall be required to be made to any Agent or any Lender Party under this Guaranty or any other guaranty, the Parent Guarantor will contribute, to the maximum extent permitted by law, such amounts to each other guarantor so as to maximize the aggregate amount paid to any Agent or any Lender Parties (up to the amount of the payment so required to be made) under or in respect of the Loan Documents. SECTION 8.02. Guaranty Absolute. The Parent Guarantor guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of the Loan Documents, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Administrative Agent, the Agents or the Lenders with respect thereto. The Obligations of the Parent Guarantor under this Guaranty are independent of the Guaranteed Obligations or any other Obligations of any Loan Party under the Loan Documents, and a separate action or actions may be brought and prosecuted against the Parent Guarantor to enforce this Guaranty, irrespective of whether any action is brought against any Borrower or whether any Borrower is joined in any such action or actions. To the maximum extent permitted by applicable law, the liability of the Parent Guarantor under this Guaranty shall be irrevocable, absolute and unconditional irrespective of, and the Parent Guarantor hereby irrevocably waives any defenses it may now or hereinafter have in any way relating to, any or all of the following: (a) any lack of validity or enforceability of any Loan Document; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations or any other Obligations of any other Loan Party under the Loan Documents, or any other amendment or waiver of or any consent to departure from any Loan Document, including, without limitation, any increase in the Guaranteed Obligations resulting from the extension of additional credit to the Borrowers, the Parent Guarantor or any of their Subsidiaries or otherwise; (c) any taking, exchange, release or non-perfection of any collateral, or any taking, release or amendment or waiver of or consent to departure from any other guaranty, for all or any of the Guaranteed Obligations; (d) any manner of application of collateral, or proceeds thereof, to all or any of the Guaranteed Obligations, or any manner of sale or other disposition of any collateral for all or any of the Guaranteed Obligations or any other Obligations of any other Loan Party under the Loan Documents or any other assets of the Borrowers, the Parent Guarantor or any of their Subsidiaries; (e) any change, restructuring or termination of the corporate or other legal structure or existence of the Borrowers, the Parent Guarantor or any of their Subsidiaries; (f) any failure of any Agent or any Lender Party to disclose to any Loan Party any information relating to the business, condition (financial or otherwise), operations, 88 performance, properties or prospects of any Loan Party now or hereafter known to any Agent or any Lender Party (the Parent Guarantor waiving any duty on the part of any Agent or any Lender Party to disclose such information); or (g) any other circumstance (including, without limitation, any statute of limitations) or any existence of or reliance on any representation by any Agent or any Lender Party that might otherwise constitute a defense available to, or a discharge of, any Borrower, the Parent Guarantor or any other guarantor or surety. This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by the Administrative Agent or any Lender Party upon the insolvency, bankruptcy or reorganization of any Borrower, the Parent Guarantor or any of their Subsidiaries or otherwise, all as though such payment had not been made. SECTION 8.03. Waiver. (a) The Parent Guarantor hereby unconditionally and irrevocably waives promptness, diligence, notice of acceptance, presentment, demand for performance, notice of nonperformance, default, acceleration, protest or dishonor and any other notice with respect to any of the Guaranteed Obligations and this Guaranty and any requirement that any Agent or any Lender Party protect, secure, perfect or insure any Lien or any property subject thereto or exhaust any right or take any action against any Loan Party or any other Person or any Collateral. (b) The Parent Guarantor hereby unconditionally and irrevocably waives any right to revoke this Guaranty and acknowledges that this Guaranty is continuing in nature and applies to all Guaranteed Obligations, whether existing now or in the future. (c) The Parent Guarantor hereby unconditionally and irrevocably waives (i) any defense arising by reason of any claim or defense based upon an election of remedies by any Agent or any Lender Party that in any manner impairs, reduces, releases or otherwise adversely affects the subrogation, reimbursement, exoneration, contribution or indemnification rights of the Parent Guarantor or other rights of the Parent Guarantor to proceed against any of the Loan Parties, any other guarantor or any other Person or any Collateral and (ii) any defense based on any right of set-off or counterclaim against or in respect of the Obligations of the Parent Guarantor hereunder. (d) The Parent Guarantor acknowledges that the Agents may, except as otherwise required by the Uniform Commercial Code as in effect from time to time in the State of New York or other applicable law, without notice to or demand upon the Parent Guarantor and without affecting the liability of the Parent Guarantor under this Guaranty, foreclose under any mortgage by nonjudicial sale, and the Parent Guarantor hereby waives any defense to the recovery by the Agents and the other Lender Parties against the Parent Guarantor of any deficiency after such nonjudicial sale and any defense or benefits that may be afforded by applicable law. (e) The Parent Guarantor hereby unconditionally and irrevocably waives any duty on the part of any Agent or any Lender Party to disclose to the Parent Guarantor any matter, 89 fact or thing relating to the business, condition (financial or otherwise), operations, performance, properties or prospects of any other Loan Party or any of its Subsidiaries now or hereafter known by any Agent or any Lender Party. (f) The Parent Guarantor acknowledges that it will receive substantial direct and indirect benefits from the financing arrangements contemplated by the Loan Documents and that the waivers set forth in Section 8.02 and this Section 8.03 are knowingly made in contemplation of such benefits. SECTION 8.04. Payments Free and Clear of Taxes, Etc. (a) Any and all payments made by the Parent Guarantor under or in respect of this Guaranty or any other Loan Document shall be made, in accordance with Section 2.12, free and clear of and without deduction for any and all present or future Taxes and subject to the limitations set forth herein. If the Parent Guarantor shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender Party or the Administrative Agent, (i) the sum payable by the Parent Guarantor shall be increased as may be necessary so that after the Parent Guarantor and the Administrative Agent have made all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Lender Party or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Parent Guarantor shall make such deductions and (iii) the Parent Guarantor shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, the Parent Guarantor agrees to pay any present or future Other Taxes that arise from any payment made under or in respect of this Guaranty or any other Loan Document or from the execution, delivery or registration of, performance under, or otherwise with respect to, this Guaranty and the other Loan Documents. (c) The Parent Guarantor will indemnify each Lender Party and the Agents for the full amount of Taxes or Other Taxes and for the full amount of taxes of any kind imposed by any jurisdiction on amounts payable under this Section 8.04, imposed on or paid by such Lender Party or Agent and any liability (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section) paid by such Lender Party or any Agent (as the case may be) arising therefrom or with respect thereto. This indemnification shall be made within 30 days from the date such Lender Party or such Agent (as the case may be) makes reasonable written demand therefore, specifying in reasonable detail the reasons therefor. (d) Within 30 days after the date of any payment of Taxes by or on behalf of the Parent Guarantor, the Parent Guarantor use commercially reasonable efforts to furnish to the Administrative Agent, at its address referred to in Section 9.02, the original or certified copy of a receipt evidencing such payment. If an Agent or Lender Party shall become aware that it is entitled to claim a refund from a taxation authority in respect of Taxes or Other Taxes as to which it has been indemnified by the Parent Guarantor, or with respect to which the Parent Guarantor has paid Additional Amounts, pursuant to this Section 8.04, it shall promptly notify the Parent Guarantor of the availability of such refund claim and shall, within 30 days after receipt of a written request by the Parent Guarantor, make a claim to such taxation authority for 90 such refund at the Parent Guarantor's expense. If an Agent or a Lender Party receives a refund (including pursuant to a claim for refund made pursuant to the preceding sentence) in respect of any Taxes or Other Taxes as to which it has been indemnified by the Parent Guarantor, or with respect to which the Parent Guarantor has paid Additional Amounts, pursuant to this Section 8.04, it shall reasonably promptly following its receipt pay over such refund to the Parent Guarantor (but only to the extent of indemnity payments made, or Additional Amounts paid, by the Parent Guarantor under this Section 8.04 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of such Agent or Lender Party and without interest (other than interest paid by the relevant taxation authority with respect to such refund); provided, however, that the Parent Guarantor, upon the request of such Agent or Lender Party, agrees to repay the amount paid over to the Parent Guarantor (plus penalties, interest or other charges, if any, imposed by the relevant taxation authority in respect of such repayment) to such Agent or Lender Party in the event such Agent or Lender Party is required to repay such refund to such taxation authority. (e) Without prejudice to the survival of any other agreement of the Parent Guarantor hereunder, the agreements and obligations of the Parent Guarantor contained in Section 8.01(a) (with respect to enforcement expenses), the last sentence of Section 8.02 and this Section 8.04 shall survive the payment in full of the Guaranteed Obligations and all other amounts payable under this Guaranty. SECTION 8.05. Continuing Guaranty; Assignments. This Guaranty is a continuing guaranty and shall (a) remain in full force and effect until the latest of (i) the cash payment in full of the Guaranteed Obligations and all other amounts payable under this Guaranty, (ii) the Termination Date and (iii) the latest date of expiration or termination or cash collateralization (as provided herein) of all Letters of Credit, (b) be binding upon the Parent Guarantor, its successors and assigns and (c) inure to the benefit of and be enforceable by the Lender Parties, the Agents and their successors and permitted assigns. Without limiting the generality of the foregoing clause (c), any Lender Party may assign or otherwise transfer all or any portion of its rights and obligations hereunder (including, without limitation, all or any portion of its Commitment, the Advances owing to it and the Note or Notes held by it) to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Lender herein or otherwise, in each case to the extent permitted by Section 9.07. The Parent Guarantor shall not have the right to assignment rights hereunder or any interest herein without the prior written consent of the Administrative Agent. SECTION 8.06. Subrogation. The Parent Guarantor hereby unconditionally and irrevocably agrees not to exercise any rights that it may now or hereafter acquire against any Borrower, any Loan Party or any other guarantor that arise from the existence, payment, performance or enforcement of the Parent Guarantor's Obligations under this Agreement or any other Loan Document, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of the Administrative Agent or any Lender Party against any Borrower, any Loan Party or any other guarantor or any Collateral, whether or not such claim, 91 remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from any Borrower, any Loan Party or any other guarantor, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right, unless and until all of the Guaranteed Obligations and all other amounts payable under this Guaranty shall have been paid in full in cash, all Letters of Credit shall have expired or been terminated or cash collateralized as provided herein and the Commitments shall have expired or terminated. If any amount shall be paid to the Parent Guarantor in violation of the preceding sentence at any time prior to the latest of (a) the payment in full in cash of the Guaranteed Obligations and all other amounts payable under this Guaranty, (b) the Termination Date and (c) the latest date of expiration or termination or cash collateralization (as provided herein) of all Letters of Credit, such amount shall be received and held in trust for the benefit of the Agents and the Lender Parties, shall be segregated from other property and funds of the Parent Guarantor and shall forthwith be paid to the Administrative Agent in the same form as so received (with any necessary endorsement or assignment) to be credited and applied to the Guaranteed Obligations and all other amounts payable under this Guaranty, whether matured or unmatured, in accordance with the terms of the Loan Documents, or to be held as Collateral for any Guaranteed Obligations or other amounts payable under this Guaranty thereafter arising. If (i) the Parent Guarantor shall make payment to the Administrative Agent or any Lender Party of all or any part of the Guaranteed Obligations, (ii) all of the Guaranteed Obligations and all other amounts payable under this Guaranty shall be paid in full in cash, (iii) the Termination Date shall have occurred and (iv) all Letters of Credit shall have been expired or been terminated or cash collateralized as provided herein, the Administrative Agent and the Lender Parties will, at the Parent Guarantor's request and expense, execute and deliver to the Parent Guarantor appropriate documents, without recourse and without representation or warranty, necessary to evidence the transfer by subrogation to the Parent Guarantor of an interest in the Guaranteed Obligations resulting from such payment by the Parent Guarantor. SECTION 8.07. Subordination. The Parent Guarantor hereby subordinates any and all debts, liabilities and other Obligations owed to the Parent Guarantor by each Loan Party (the "Subordinated Obligations") to the Guaranteed Obligations to the extent and in the manner hereinafter set forth in this Section 8.07: (a) Prohibited Payments, Etc. Except during the continuance of an Event of Default, the Parent Guarantor may receive regularly scheduled payments from any other Loan Party on account of Debt owed to it by such Loan Party and permitted under Section 5.02(b). After the occurrence and during the continuance of any Event of Default, however, unless the Administrative Agent otherwise agrees, the Parent Guarantor shall not demand, accept or take any action to collect any payment on account of Debt owed to it by any other Loan Party. (b) Prior Payment of Guaranteed Obligations. The Parent Guarantor agrees that the Secured Parties shall be entitled to receive payment in full in cash of all Guaranteed Obligations before the Parent Guarantor receives payment of any Debt owed to it by any Loan Party. (c) Turn-Over. After the occurrence and during the continuance of any Event of Default, the Parent Guarantor shall, if the Administrative Agent so requests, use commercially reasonable efforts to collect, enforce and receive payments on account of Debt owed to it by any Loan Party as trustee for the Lender Parties and deliver such payments to the Administrative Agent on account of the Guaranteed Obligations, together with any necessary endorsements or 92 other instruments of transfer, but without reducing or affecting in any manner the liability of the Parent Guarantor under the other provisions of this Guaranty. (d) Administrative Agent Authorization. After the occurrence and during the continuance of any Event of Default, the Administrative Agent is authorized and empowered, in its discretion, (i) in the name of the Parent Guarantor, to collect and enforce, and to submit claims in respect of, Subordinated Obligations and to apply any amounts received thereon to the Guaranteed Obligations (including any and all post petition interest), and (ii) to require the Parent Guarantor (A) use commercially reasonable efforts to collect and enforce, and to submit claims in respect of, Debt owed to it by any Loan Party and (B) to pay any amounts received on such obligations to the Administrative Agent for application to the Guaranteed Obligations. ARTICLE IX MISCELLANEOUS SECTION 9.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement or the Notes or any other Loan Document, nor consent to any departure by any Loan Party therefrom, shall in any event be effective unless the same shall be in writing and signed (or, in the case of the Collateral Documents, consented to) by the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all of the Lenders (other than any Lender Party that is, at such time, a Defaulting Lender), do any of the following at any time: (i) waive any of the conditions specified in Section 3.01 or, in the case of the Initial Extension of Credit, Section 3.02, (ii) change the number of Lenders or the percentage of (x) the Commitments, (y) the aggregate unpaid principal amount of the Advances or (z) the aggregate Available Amount of outstanding Letters of Credit that, in each case, shall be required for the Lenders or any of them to take any action hereunder, (iii) amend Section 2.13 or this Section 9.01, (iv) increase the Commitments of the Lenders, (v) reduce the principal of, or interest on, the Notes or any fees payable hereunder, (vi) postpone any date scheduled for any payment of principal of, or interest on, the Notes pursuant to Section 2.04 or 2.07 or any date fixed for payment of fees or other amounts payable hereunder, (vii) release any material portion of the Collateral (except as permitted under Section 5.02(e)) or permit the creation, incurrence, assumption or existence of any Lien on any material portion of the Collateral (except as permitted under Section 5.02(a)) in any transaction or series of related transactions to secure any Obligations other than Obligations owing to the Secured Parties under the Loan Documents or (viii) limit the liability of any Loan Parties under any of the Loan Documents; provided further, that, so long as Mizuho is a Lender under this Agreement, no amendment, waiver or consent shall, unless in writing and signed by Mizuho, in addition to the Lenders required above to take such action, amend any of the definitions of "Mizuho Cash Collateral Account", "Mizuho Obligations" and "Mizuho Termination Date", in each case as set forth in Section 1.01, or amend, waive or consent to any departure from any of Sections 2.05(c), 2.06(c), 5.01(s) and 6.01(c) (solely to the extent it relates to Section 5.01(s)); provided further that no amendment, waiver or consent shall, unless in writing and signed by each Issuing Bank, as the case may be, in addition to the Lenders required above to take such action, affect the rights or obligations of the Issuing Banks, as the case may be, under this Agreement; and provided 93 further that no amendment, waiver or consent shall, unless in writing and signed by an Agent in addition to the Lenders required above to take such action, affect the rights or duties of such Agent under this Agreement or the other Loan Documents. SECTION 9.02. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telegraphic, telecopy or telex communication) and mailed, telegraphed, telecopied, telexed or delivered, if to any Loan Party, at the address specified for such Loan Party on the signature pages hereto; if to any Initial Lender Party, at its Domestic Lending Office specified opposite its name on Schedule I hereto; if to any other Lender Party, at its Domestic Lending Office specified in the Assignment and Acceptance pursuant to which it became a Lender Party; if to either the Collateral Agent or the Administrative Agent, at its address at 2 Penns Way, Suite 200, New Castle, Delaware 19720 (telecopier number: (302) 894-6120), Attention: McDermott Account Officer, with a copy to Citicorp North America, Inc., 1200 Smith Street, Suite 2000, Houston, Texas 77002 (telecopier number: (713) 654-2849), Attention: McDermott Account Officer; or, as to any party, at such other address as shall be designated by such party in a written notice to the other parties. Solely with respect to weekly and monthly deliveries pursuant to Section 5.03(e), (f), (g) and (h), the Borrowers shall be permitted to deliver such deliveries by e-mail at such e-mail address as each of the Administrative Agent and each Lender Party shall have provided, or shall provide, to the Borrowers from time to time. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telegraph, telecopy, telex or e-mail or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 9.02 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 9.02. Delivery by telecopier or e-mail (to the extent permitted hereunder) of an executed counterpart of any amendment or waiver of any provision of this Agreement or the Notes or of any Exhibit hereto to be executed and delivered hereunder shall be effective as delivery of an original executed counterpart thereof. SECTION 9.03. No Waiver; Remedies. No failure on the part of any Lender Party or any Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 9.04. Costs and Expenses. (a) The Borrowers agree to pay on demand (i) all costs and out-of-pocket expenses of each Agent in connection with the preparation, execution, delivery, administration, modification and amendment of the Loan Documents (including, without limitation, (A) all out-of-pocket due diligence, collateral review, syndication, transportation, computer, duplication, appraisal, audit, insurance, consultant, search, filing and recording fees and expenses and (B) the reasonable fees and expenses of counsel for each Agent with respect thereto, with respect to advising such Agent as to its rights and responsibilities, or the perfection, protection or preservation of rights or interests, under the Loan Documents, with respect to negotiations with any Loan Party or with other creditors of any Loan Party or any of its Subsidiaries arising out of any Default or any events or circumstances that may give rise to a Default and with respect to presenting claims in or otherwise participating in 94 or monitoring any bankruptcy, insolvency or other similar proceeding involving creditors' rights generally and any proceeding ancillary thereto) and (ii) all costs and expenses of each Agent and each Lender Party in connection with the enforcement of the Loan Documents, whether in any action, suit or litigation, or any bankruptcy, insolvency or other similar proceeding affecting creditors' rights generally (including, without limitation, the reasonable fees and expenses of counsel for the Administrative Agent and each Lender Party with respect thereto). (b) The Loan Parties agree to indemnify, defend and save and hold harmless each Agent, each Lender Party and each of their Affiliates and their respective officers, directors, employees, agents and advisors (each, an "INDEMNIFIED PARTY") from and against, and shall pay on demand, any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and expenses of counsel) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith) (i) the Facilities, the actual or proposed use of the proceeds of the Advances or the Letters of Credit, the Loan Documents or any of the transactions contemplated thereby or (ii) the actual or alleged presence of Hazardous Materials on any property of any Loan Party or any of its Subsidiaries or any Environmental Action relating in any way to any Loan Party or any of its Subsidiaries, except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 9.04(b) applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by any Loan Party, its directors, shareholders or creditors or an Indemnified Party, whether or not any Indemnified Party is otherwise a party thereto and whether or not the Transaction is consummated. Each Loan Party also agrees not to assert any claim against any Agent, any Lender Party or any of their Affiliates, or any of their respective officers, directors, employees, agents and advisors, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to the Facilities, the actual or proposed use of the proceeds of the Advances or the Letters of Credit, the Loan Documents or any of the transactions contemplated by the Loan Documents. (c) If any payment of principal of, or Conversion of, any Eurodollar Rate Advance is made by any Borrower to or for the account of a Lender Party other than on the last day of the Interest Period for such Advance, as a result of a payment or Conversion pursuant to Section 2.06, 2.09(b)(i) or 2.10(d), acceleration of the maturity of the Notes pursuant to Section 6.01 or for any other reason, or by an Eligible Assignee to a Lender Party other than on the last day of the Interest Period for such Advance upon an assignment of rights and obligations under this Agreement pursuant to Section 9.07 as a result of a demand by a Borrower pursuant to Section 9.07(a), or if any Borrower fails to make any payment or prepayment of an Advance for which a notice of prepayment has been given or that is otherwise required to be made, whether pursuant to Section 2.04, 2.06 or 6.01 or otherwise, such Borrower shall, upon demand by such Lender Party (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender Party any amounts required to compensate such Lender Party for any additional losses, costs or expenses that it may reasonably incur as a result of such payment or Conversion or such failure to pay or prepay, as the case may be, including, without limitation, any loss (including loss of anticipated profits), cost or expense 95 incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender Party to fund or maintain such Advance. (d) If any Loan Party fails to pay when due any costs, expenses or other amounts payable by it under any Loan Document, including, without limitation, fees and expenses of counsel and indemnities, such amount may be paid on behalf of such Loan Party by the Administrative Agent or any Lender Party, in its sole discretion. (e) Without prejudice to the survival of any other agreement of any Loan Party hereunder or under any other Loan Document, the agreements and obligations of such Loan Party contained in Sections 2.10 and 2.12 and this Section 9.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under any of the other Loan Documents. SECTION 9.05. Right of Set-off. Upon (a) the occurrence and during the continuance of any Event of Default and (b) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Agent and each Lender Party and each of their respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and otherwise apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Agent, such Lender Party or such Affiliate to or for the credit or the account of any Loan Party against any and all of the Obligations of such Loan Party now or hereafter existing under the Loan Documents, irrespective of whether such Agent or such Lender Party shall have made any demand under this Agreement or such Note or Notes and although such Obligations may be unmatured. Each Agent and each Lender Party agrees promptly to notify the applicable Loan Party after any such set-off and application; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Agent and each Lender Party and their respective Affiliates under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Agent, such Lender Party and their respective Affiliates may have. SECTION 9.06. Binding Effect. This Agreement shall become effective when it shall have been executed by MII, each Borrower each Agent and the Administrative Agent shall have been notified by each Initial Lender Party that such Initial Lender Party has executed it and thereafter shall be binding upon and inure to the benefit of the Loan Parties, each Agent and each Lender Party and their respective successors and assigns, except that no Loan Party shall have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lender Parties. SECTION 9.07. Assignments and Participations. (a) Each Lender may and, so long as no Default shall have occurred and be continuing, if demanded by any Borrower (following a demand by such Lender pursuant to Section 2.10 or 2.12) upon at least five Business Days' notice to such Lender and the Administrative Agent, will assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment or Commitments, the Advances owing to it and the Note or Notes held by it); provided, however, that (i) each such assignment shall be of a 96 uniform, and not a varying, percentage of all rights and obligations under and in respect of Facilities, (ii) except in the case of an assignment to a Person that, immediately prior to such assignment, was a Lender or an Affiliate of any Lender or an assignment of all of a Lender's rights and obligations under this Agreement, the aggregate amount of the Commitments being assigned to such Eligible Assignee pursuant to such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 (or such lesser amount as shall be approved by the Administrative Agent and, so long as no Default shall have occurred and be continuing at the time of effectiveness of such assignment, each Borrower), (iii) each such assignment shall be to an Eligible Assignee, (iv) each such assignment made as a result of a demand by the Borrower pursuant to this Section 9.07(a) shall be arranged by the applicable Borrower after consultation with the Administrative Agent and shall be either an assignment of all of the rights and obligations of the assigning Lender under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or other such assignments that together cover all of the rights and obligations of the assigning Lender under this Agreement, (v) no Lender shall be obligated to make any such assignment as a result of a demand by the applicable Borrower pursuant to this Section 9.07(a) unless and until such Lender shall have received one or more payments from either such Borrower or one or more Eligible Assignees in an aggregate amount at least equal to the aggregate outstanding principal amount of the Advances owing to such Lender, together with accrued interest thereon to the date of payment of such principal amount and all other amounts payable to such Lender under this Agreement, (vi) no such assignments shall be permitted without the consent of the Administrative Agent until the Administrative Agent shall have notified the Lender Parties that syndication of the Commitments hereunder has been completed and (vii) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Note or Notes subject to such assignment and a processing and recordation fee of $3,500. (b) Upon such execution, delivery, acceptance and recording, from and after the effective date specified in such Assignment and Acceptance, (i) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender or Issuing Bank, as the case may be, hereunder and (ii) the Lender or Issuing Bank assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (other than its rights under Sections 2.10, 2.12 and 8.04 to the extent any claim thereunder relates to an event arising prior to such assignment) and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the remaining portion of an assigning Lender's or Issuing Bank's rights and obligations under this Agreement, such Lender or Issuing Bank shall cease to be a party hereto). (c) By executing and delivering an Assignment and Acceptance, each Lender Party assignor thereunder and each assignee thereunder confirm to and agree with each other and the other parties thereto and hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender Party makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with any Loan Document or the execution, legality, validity, enforceability, 97 genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, any Loan Document or any other instrument or document furnished pursuant thereto; (ii) such assigning Lender Party makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Borrower or the performance or observance by any Borrower of any of its obligations under any Loan Document or any other instrument or document furnished pursuant thereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon any Agent, such assigning Lender Party or any other Lender Party and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes each Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Loan Documents as are delegated to such Agent by the terms hereof and thereof, together with such powers and discretion as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Lender or Issuing Bank, as the case may be. (d) The Administrative Agent shall maintain at its address referred to in Section 9.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lender Parties and the Commitment under each Facility of, and principal amount of the Advances owing under each Facility to, each Lender Party from time to time (the "REGISTER"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrowers, the Agents and the Lender Parties shall treat each Person whose name is recorded in the Register as a Lender Party hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Agent or any Lender Party at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender Party and an assignee, together with any Note or Notes subject to such assignment, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to each Borrower and each other Agent. In the case of any assignment by a Lender, within five Business Days after its receipt of such notice, each Borrower, at its own expense, shall execute and deliver to the Administrative Agent in exchange for the surrendered Note or Notes a new Note to the order of such Eligible Assignee in an amount equal to the Commitment assumed by it under each Facility pursuant to such Assignment and Acceptance and, if any assigning Lender has retained a Commitment hereunder under such Facility, a new Note to the order of such assigning Lender in an amount equal to the Commitment retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit A hereto, as the case may be. 98 (f) Each Issuing Bank may assign to an Eligible Assignee all of its rights and obligations under the undrawn portion of its Letter of Credit Commitment at any time; provided, however, that (i) except in the case of an assignment to a Person that immediately prior to such assignment was an Issuing Bank or an assignment of all of an Issuing Bank's rights and obligations under this Agreement, the amount of the Letter of Credit Commitment of the assigning Issuing Bank being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 and shall be in an integral multiple of $1 in excess thereof, (b) each such assignment shall be to an Eligible Assignee and (c) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with a processing and recordation fee of $3,500. (g) Each Lender Party may sell participations to one or more Persons (other than any Borrower or any of its Affiliates, and subject to the consent of the Borrowers in the case of any participant that is a competitor of any Borrower) in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitments, the Advances owing to it and the Note or Notes (if any) held by it); provided, however, that (i) such Lender Party's obligations under this Agreement (including, without limitation, its Commitments) shall remain unchanged, (ii) such Lender Party shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender Party shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Borrowers, the Agents and the other Lender Parties shall continue to deal solely and directly with such Lender Party in connection with such Lender Party's rights and obligations under this Agreement and (v) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of any Loan Document, or any consent to any departure by any Borrower therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, or release all or substantially all of the Collateral. (h) Any Lender Party may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.07, disclose to the assignee or participant or proposed assignee or participant any information relating to any Borrower furnished to such Lender Party by or on behalf of such Borrower; provided, however, that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree in writing to preserve the confidentiality of any Confidential Information received by it from such Lender Party. (i) In the event that S&P, Moody's or Thompson's BankWatch (or Insurance Watch Ratings Service, in the case of Issuing Banks that are insurance companies (or Best's Insurance Reports, in the case of insurance companies not rated by Insurance Watch Ratings Service)) shall downgrade the long-term certificate deposit ratings of any Issuing Bank, and the resulting ratings shall be below BBB-, Baa3 and C (or the corporate credit ratings of such Issuing Bank shall be below BB, in the case of an Issuing Bank that is an insurance company (or B, in the case of an insurance company not rated by Insurance Watch Ratings Service)), then the 99 Borrowers shall have the right, but not the obligation, at their own expense, upon notice to such Issuing Bank and the Administrative Agent, to replace such Issuing Bank with an assignee (in accordance with and subject to the restrictions contained in paragraph (b) above), and such Issuing Bank hereby agrees to transfer and assign without recourse (in accordance with and subject to the restrictions contained in paragraph (a) above) all its interests, rights and obligations in respect of its Commitment to such assignee; provided, however, that (i) no such assignment shall conflict with any law, rule and regulation or order of any governmental authority and (ii) such assignee shall pay to such Issuing Bank in immediately available funds on the date of such assignment the principal of and interest accrued to the date of payment on the Advances and Letter of Credit Advances made by such Lender hereunder and the Borrowers, the Administrative Agent or such assignee, as applicable, shall pay to such Issuing Bank all other amounts accrued for such Issuing Bank's account or owed to it hereunder. (j) Notwithstanding any other provision set forth in this Agreement, any Lender Party may at any time create a security interest in all or any portion of its rights under this Agreement (including, without limitation, the Advances owing to it and the Note or Notes held by it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System. SECTION 9.08. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of an original executed counterpart of this Agreement. SECTION 9.09. No Liability of the Issuing Banks. Each Borrower assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. Neither any Issuing Bank nor any of its officers or directors shall be liable or responsible for: (a) the use that may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (b) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (c) payment by Issuing Bank against presentation of documents that do not comply with the terms of a Letter of Credit, including failure of any documents to bear any reference or adequate reference to the Letter of Credit; or (d) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit, except that the applicable Borrower shall have a claim against Issuing Bank, and Issuing Bank shall be liable to the applicable Borrower, to the extent of any direct, but not consequential, damages suffered by such Borrower that the Borrower proves were caused by (i) Issuing Bank's willful misconduct or gross negligence as determined in a final, non-appealable judgment by a court of competent jurisdiction in determining whether documents presented under any Letter of Credit comply with the terms of the Letter of Credit or (ii) such Issuing Bank's willful failure to make lawful payment under a Letter of Credit after the presentation to it of a draft and certificates strictly complying with the terms and conditions of the Letter of Credit. In furtherance and not in limitation of the foregoing, Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. 100 SECTION 9.10. Confidentiality. (a) The Loan Parties, the Lender Parties and the Administrative Agent hereby agree that each of the Loan Parties, the Lender Parities and the Administrative Agent (and each of their respective, and their respective Affiliates', employees, officers, directors, agents and advisors) is, and has been from the commencement of discussions with respect to the Facilities established by this Agreement, permitted to disclose to any and all Persons, without limitation of any kind, the structure and tax aspects (as such terms are used in Internal Revenue Code Sections 6011, 6111 and 6112 and the regulations promulgated thereunder) of the Facilities, and all materials of any kind (including opinions or other tax analyses) that are or have been provided to the Loan Parties, such Lender Party or the Administrative Agent related to such structure and tax aspects. In this regard, each of the Loan Parties, the Lender Parties and the Administrative Agent acknowledges and agrees that its disclosure of the structure or tax aspects of the Facilities is not limited in any way by an express or implied understanding or agreement, oral or written (whether or not such understanding or agreement is legally binding). Furthermore, each of the Loan Parties, the Lender Parties and the Administrative Agent acknowledges and agrees that it does not know or have reason to know that its use or disclosure of information relating to the structure or tax aspects of the Facilities is limited in any other manner (such as where the Facilities are claimed to be proprietary or exclusive) for the benefit of any other Person. To the extent that disclosure of the structure or tax aspects of the Facilities by the Loan Parties, the Administrative Agent or the Lender Parties is limited by any existing agreement between the Loan Parties and the Administrative Agent or the Lender Parties, such limitation is agreed to be void ab initio and such agreement is hereby amended to permit disclosure of the structure and tax aspects of the Facilities as provided in this subsection (a). Notwithstanding anything in this subsection (a) to the contrary, each of the Loan Parties, the Lender Parties and the Administrative Agent may (i) retain its privilege to maintain the confidentiality of a communication relating to the Facilities, including a confidential communication with its legal counsel and (ii) subject disclosure of the structure or tax aspects of the Facilities to restrictions reasonably necessary to comply with Federal or state securities laws. (b) Subject to subsection (a) of this Section 9.10, neither any Agent nor any Lender Party may disclose to any Person any confidential, proprietary or non-public information of the Loan Parties furnished to the Agents or the Lender Parties by any Loan Party (such information being referred to collectively herein as the "LOAN PARTY INFORMATION"), except that each of the Agents and each of the Lender Parties may disclose Loan Party Information (i) to its and its Affiliates' employees, officers, directors, agents and advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Loan Party Information and instructed to keep such Loan Party Information confidential on substantially the same terms as provided herein), (ii) to the extent requested by any bank regulatory authority, (iii) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (iv) to any other party to this Agreement, (v) in connection with the exercise of any remedies hereunder or under any other Loan Document or any suit, action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (vi) subject to the execution and delivery of a binding agreement containing provisions substantially the same as those of this Section 9.10, to any assignee of, or any prospective assignee of, any of its rights or obligations under this Agreement, (vii) to the extent such Loan Party Information (A) is or becomes generally available to the public on a non-confidential basis other than as a result of a breach of this Section 9.10 by any Agent or any Lender Party, or (B) is or becomes available to the Administrative Agent or such 101 Lender Party on a nonconfidential basis from a source other than the Loan Parties and (viii) with the consent of the Loan Parties. SECTION 9.11. Release of Collateral. Upon the sale, lease, transfer or other disposition of any item of Collateral of any Collateral Grantor in accordance with the terms of the Loan Documents, the Collateral Agent will, at such Collateral Grantor's expense, execute and deliver to such Borrower such documents as such Collateral Grantor may reasonably request to evidence the release of such item of Collateral from the assignment and security interest granted under the Collateral Documents in accordance with the terms of the Loan Documents. SECTION 9.12. Nature of Obligations. (a) The Borrowers agree that all Obligations of each Borrower (other than BWXT) under or in respect of this Agreement or any other Loan Document shall be joint and several obligations of all the Borrowers; it being understood that BWXT shall not be liable for any such Obligations of any other Loan Party. (b) Each Borrower (other than BWXT) waives presentment to, demand of payment from and protest to the other Borrowers of any of the Obligations, and also waives notice of acceptance of its Obligations and notice of protest for nonpayment. The Obligations of a Borrower (other than BWXT) hereunder shall not be affected by (i) the failure of any Lender or the Administrative Agent to assert any claim or demand or to enforce any right or remedy against the other Borrowers under the provisions of this Agreement or any of the other Loan Documents or otherwise; (ii) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement, any of the other Loan Documents or any other agreement; or (iii) the failure of any Lender to exercise any right or remedy against any other Borrower. (c) Each Borrower (other than BWXT) further agrees that its agreement hereunder constitutes a promise of payment when due and not of collection, and waives any right to require that any resort be had by any Lender to any balance of any deposit account or credit on the books of any Lender in favor of any other Borrower or any other Person. (d) The Obligations of each Borrower hereunder (other than BWXT) shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, compromise, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Obligations of the other Borrowers or otherwise. Without limiting the generality of the foregoing, the Obligations of each Borrower hereunder (other than BWXT) shall not be discharged or impaired or otherwise affected by the failure of the Administrative Agent or any Lender to assert any claim or demand or to enforce any remedy under this Agreement or under any other Loan Document or any other agreement, by any waiver or modification in respect of any thereof, by any default, failure or delay, willful or otherwise, in the performance of the Obligations of the other Borrowers, or by any other act or omission which may or might in any manner or to any extent vary the risk of such Borrower or otherwise operate as a discharge of such Borrower as a matter of law or equity. (e) Each Borrower (other than BWXT) further agrees that its Obligations hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation of the other Borrowers 102 is rescinded or must otherwise be restored by the Administrative Agent or any Lender upon the occurrence of a Bankruptcy Event in respect of such Borrower, any of the other Borrowers or otherwise. (f) In furtherance of the foregoing and not in limitation of any other right which the Administrative Agent or any Lender may have at law or in equity against any Borrower by virtue hereof, upon the failure of a Borrower to pay any Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, each other Borrower (other than BWXT) hereby promises to and will, upon receipt of written demand by the Administrative Agent, forthwith pay, or cause to be paid, in cash the amount of such unpaid Obligations, and thereupon each Lender shall, in a reasonable manner, assign the amount of the Obligations of the other Borrowers owed to it and paid by such Borrower pursuant to this guarantee to such Borrower, such assignment to be pro tanto to the extent to which the Obligations in question were discharged by such Borrower, or make such disposition thereof as such Borrower shall direct (all without recourse to any Lender and without any representation or warranty by any Lender). (g) Upon payment by a Borrower of any amount as provided above, all rights of such Borrower against another Borrower, as the case may be, arising as a result thereof by way of right of subrogation or otherwise shall in all respects be subordinated and junior in right of payment to the prior indefeasible payment in full of all the Obligations to the Lenders SECTION 9.13. Jurisdiction, Etc. (a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents to which it is a party, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the fullest extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final and non-appealable judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or any of the other Loan Documents in the courts of any jurisdiction. (b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents to which it is a party in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. SECTION 9.14. Governing Law. (a) This Agreement and the Notes shall be governed by, and construed in accordance with, the laws of the State of New York. SECTION 9.15. Waiver of Jury Trial. Each of the Borrower, the Agents and the Lender Parties irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to any of the Loan Documents, the Advances, the Letters of Credit or the actions of any Agent or any Lender Party in the negotiation, administration, performance or enforcement thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. THE BORROWERS J. RAY McDERMOTT, S.A. as Borrower By \s\ James R. Easter --------------------------------------- Title: James R. Easter Vice President Finance & Treasurer Address: J. Ray McDermott, S.A. 757 N. Eldridge Parkway Houston, TX 77079 Attention: Chief Financial Officer Telecopier No: 281-870-5015 J. RAY McDERMOTT HOLDINGS, INC. as Borrower By \s\ James R. Easter --------------------------------------- Title: James R. Easter Vice President Finance & Treasurer Address: c/o J. Ray McDermott, S.A. 757 N. Eldridge Parkway Houston, TX 77079 Attention: Chief Financial Officer Telecopier No: 281-870-5015 J. RAY McDERMOTT, INC. as Borrower By \s\ James R. Easter --------------------------------------- Title: James R. Easter Vice President Finance & Treasurer Address: c/o J. Ray McDermott, S.A. 757 N. Eldridge Parkway Houston, TX 77079 Attention: Chief Financial Officer Telecopier No: 281-870-5015 BWX TECHNOLOGIES, INC. as Borrower By \s\ James R. Easter --------------------------------------- Title: James R. Easter Vice President Finance & Treasurer Address: c/o J. Ray McDermott, S.A. 757 N. Eldridge Parkway Houston, TX 77079 Attention: Chief Financial Officer Telecopier No: 281-870-5015 McDERMOTT INTERNATIONAL, INC., as Parent Guarantor By \s\ James R. Easter --------------------------------------- Title: James R. Easter Vice President Finance & Treasurer Address: c/o J. Ray McDermott, S.A. 757 N. Eldridge Parkway Houston, TX 77079 Attention: Chief Financial Officer Telecopier No: 281-870-5015 CITICORP USA, INC., as Administrative Agent and Collateral Agent and in its individual capacity By \s\ Todd J. Mogil --------------------------------------- Title: Todd J. Mogil Vice President THE BANK OF NOVA SCOTIA, as Documentation Agent and in its individual capacity By \s\ V. Gibson --------------------------------------- Title: V. Gibson Assistant Agent CREDIT LYONNAIS NEW YORK BRANCH, as Syndication Agent and in its individual capacity By /s/ Philippe Soustar --------------------------------------- Philippe Soustar Title: Executive Vice President LENDER PARTIES CITIBANK, N.A., as Initial Issuing Bank By \s\ Todd J. Mogil --------------------------------------- Title: Todd J. Mogil Attorney-In-Fact BANK ONE NA By \s\ Carl F. Shafer --------------------------------------- Title: Carl F. Shafer First Vice President HIBERNIA NATIONAL BANK By /s/ Frank Crifasi --------------------------------------- Title: Sr. Vice President MELLON BANK, N.A. By /s/ Gary A. Saul --------------------------------------- Title: First Vice President MIZUHO CORPORATE BANK, LTD. By /s/ Hirofumi Sugano --------------------------------------- Hirofumi Sugano Title: Senior Vice President EX-4.3 5 d04254exv4w3.txt SECURITY AGREEMENT EXHIBIT 4.3 SECURITY AGREEMENT Dated February 10, 2003 From The Grantors referred to herein as Grantors to Citicorp USA, Inc. as Collateral Agent
TABLE OF CONTENTS SECTION PAGE Section 1. Grant of Security............................................ 2 Section 2. Security for Obligations..................................... 7 Section 3. Grantors Remain Liable....................................... 8 Section 4. Delivery and Control of Security Collateral.................. 8 Section 5. Maintaining the Account Collateral........................... 8 Section 6. Investing of Amounts in the Collateral Account............... 9 Section 7. Maintaining Electronic Chattel Paper and Transferable Records...................................................... 10 Section 8. Representations and Warranties............................... 10 Section 9. Further Assurances........................................... 12 Section 10. As to Equipment and Inventory................................ 12 Section 11. Insurance.................................................... 13 Section 12. Post-Closing Changes; Bailees; Collections on Receivables and Related Contracts........................................ 14 Section 13. Voting Rights; Dividends; Etc................................ 15 Section 14. Transfers and Other Liens; Additional Shares................. 16 Section 15. Collateral Agent Appointed Attorney-in-Fact.................. 16 Section 16. Collateral Agent May Perform................................. 17 Section 17. The Collateral Agent's Duties................................ 17 Section 18. Remedies..................................................... 18 Section 19. Indemnity and Expenses....................................... 19 Section 20. Amendments; Waivers; Additional Grantors; Etc................ 20 Section 21. Notices, Etc................................................. 20 Section 22. Continuing Security Interest; Assignments Under the Credit Agreement.................................................... 21 Section 23. Release; Termination......................................... 21 Section 24. Security Interest Absolute................................... 22
2 Section 25. Execution in Counterparts.................................... 23 Section 26. The Mortgages................................................ 23 Section 27. Governing Law................................................ 23
Schedules I - Location, Chief Executive Office, Type Of Organization, Trade Names, Jurisdiction Of Organization And Organizational Identification Number Schedule II - Pledged Equity and Pledged Debt Schedule III - Locations of Equipment and Inventory Schedule IV - Changes in Name, Location, Etc. Schedule V - Account Collateral Schedule VI - Commercial Tort Claims Exhibit A - Form of Security Agreement Supplement Exhibit B - Form of Account Control Agreement (Deposit Account/Securities Account) SECURITY AGREEMENT SECURITY AGREEMENT dated February 10, 2003 made by McDermott International, Inc., a Panamanian corporation ("MII"), J. Ray McDermott, S.A., a Panamanian corporation ("JRMSA"), J. Ray McDermott Holdings, Inc., a Delaware corporation ("JRMHI"), J. Ray McDermott, Inc., a Delaware corporation ("JRMI", and together with JRMSA and JRMHI, the "BORROWERS" and each, a "BORROWER"), the other Persons listed on the signature pages hereof and the Additional Grantors (as defined in Section 20(b)) (MII, the Borrowers, the Persons so listed and the Additional Grantors being, collectively, the "GRANTORS"), to Citicorp USA, Inc., as collateral agent (in such capacity, together with any successor collateral agent appointed pursuant to Article VII of the Credit Agreement (as hereinafter defined), the "COLLATERAL AGENT") for the Secured Parties (as defined in the Credit Agreement). PRELIMINARY STATEMENTS. (1) MII, the Borrowers and BWX Technologies, Inc., a Delaware corporation, have entered into a Credit Agreement dated as of February 10, 2003 (said Agreement, as it may hereafter be amended, amended and restated, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT") with the Lender Parties and the Agents (each as defined therein). Terms defined in the Credit Agreement and not otherwise defined in this Agreement are used in this Agreement as defined in the Credit Agreement. (2) Pursuant to the Credit Agreement, the Grantors are entering into this Agreement in order to grant to the Collateral Agent for the ratable benefit of the Secured Parties a security interest in the Collateral (as hereinafter defined). (3) Each Grantor is the owner of the shares of stock or other Equity Interests (the "INITIAL PLEDGED EQUITY") set forth opposite such Grantor's name on and as otherwise described in Part I of Schedule II hereto and issued by the Persons named therein and of the indebtedness (the "INITIAL PLEDGED DEBT") set forth opposite such Grantor's name on and as otherwise described in Part II of Schedule II hereto and issued by the obligors named therein. (4) MII has opened a collateral deposit account (the "COLLATERAL ACCOUNT"), with Citibank, N. A. at its office at 399 Park Ave., New York, NY 10043. (5) The Grantors have opened deposit accounts and securities accounts (the "BANK ACCOUNTS") with banks, in the names of such Grantors and subject to the terms of this Agreement, as described in Schedule V hereto. (6) It is a condition precedent to the making of Advances and the issuance of Letters of Credit by the Lender Parties under the Credit Agreement and the entry into Secured Hedge Agreements by the Hedge Banks from time to time that the Grantors shall have granted the assignment and security interest and made the pledge and assignment contemplated by this Agreement. (7) Each Grantor will derive substantial direct and indirect benefit from the transactions contemplated by the Loan Documents. 2 (8) Unless otherwise defined in this Agreement or in the Credit Agreement, terms defined in Article 8 or 9 of the UCC (as defined below) and/or in the Federal Book Entry Regulations (as defined below) are used in this Agreement as such terms are defined in such Article 8 or 9 and/or the Federal Book Entry Regulations. "UCC" means the Uniform Commercial Code as in effect, from time to time, in the State of New York; PROVIDED that, if perfection or the effect of perfection or non-perfection or the priority of any security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, "UCC" means the Uniform Commercial Code as in effect from time to time in such other jurisdiction for purposes of the provisions hereof relating to such perfection, effect of perfection or non-perfection or priority. The term "FEDERAL BOOK ENTRY REGULATIONS" means (a) the federal regulations contained in Subpart B ("Treasury/Reserve Automated Debt Entry System (TRADES)") governing book-entry securities consisting of U.S. Treasury bonds, notes and bills and Subpart D ("ADDITIONAL PROVISIONS") of 31 C.F.R. Part 357, 31 C.F.R. Section 357.2, Section 357.10 through Section 357.14 and Section 357.41 through Section 357.44 and (b) to the extent substantially identical to the federal regulations referred to in clause (a) above (as in effect from time to time), the federal regulations governing other book-entry securities. NOW, THEREFORE, in consideration of the premises and in order to induce the Lender Parties to make Advances and issue Letters of Credit under the Credit Agreement, to induce the Hedge Banks to enter into Secured Hedge Agreements and to induce the Secured Parties to enter into foreign exchange spot contracts from time to time and to maintain other Bilateral Obligations, each Grantor hereby agrees with the Collateral Agent for the ratable benefit of the Secured Parties as follows: Section 1. Grant of Security. (x) Each Grantor (other than MII) hereby grants to the Collateral Agent, for the ratable benefit of the Secured Parties, a security interest in such Grantor's right, title and interest in and to the following, in each case, as to each type of property described below, whether now owned or hereafter acquired by such Grantor, wherever located, and whether now or hereafter existing or arising (collectively, the "J. RAY COLLATERAL"): (a) all equipment (major items of movable equipment being "CONTRACTOR'S EQUIPMENT") in all of its forms, including, without limitation, all machinery, tools, motor vehicles, vessels ("VESSELS"), aircraft, furniture and fixtures, and all parts thereof and all accessions thereto and all software related thereto, including, without limitation, software that is embedded in and is part of the equipment (any and all such property being the "EQUIPMENT"); (b) all inventory in all of its forms, including, without limitation, (i) all raw materials, work in process, finished goods and materials used or consumed in the manufacture, production, preparation or shipping thereof, (ii) goods in which such Grantor has an interest in mass or a joint or other interest or right of any kind (including, without limitation, goods in which such Grantor has an interest or right as consignee) and (iii) goods that are returned to or repossessed or stopped in transit by such Grantor), and all accessions thereto and products thereof and documents therefor, and all software related thereto, including, without limitation, software that is embedded in and is part of the inventory (any and all such property being the "INVENTORY"); 3 (c) all accounts (including, without limitation, health-care-insurance receivables), chattel paper (including, without limitation, tangible chattel paper and electronic chattel paper), instruments (including, without limitation, promissory notes), deposit accounts, letter-of-credit rights, general intangibles (including, without limitation, payment intangibles) and other obligations of any kind, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services and whether or not earned by performance, and all rights now or hereafter existing in and to all supporting obligations and in and to all security agreements, mortgages, Liens, leases, letters of credit and other contracts securing or otherwise relating to the foregoing property (any and all of such accounts, chattel paper, instruments, deposit accounts, letter-of-credit rights, general intangibles and other obligations, to the extent not referred to in clause (d), (e) or (f) below, being the "RECEIVABLES", and any and all such supporting obligations, security agreements, mortgages, Liens, leases, letters of credit and other contracts being the "RELATED CONTRACTS"); (d) the following (the "J. RAY SECURITY COLLATERAL"), with respect to such Grantor: (i) the Initial Pledged Equity and the certificates, if any, representing the Initial Pledged Equity, and all dividends, distributions, return of capital, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Initial Pledged Equity and all subscription warrants, rights or options issued thereon or with respect thereto; (ii) the Initial Pledged Debt and the instruments, if any, evidencing the Initial Pledged Debt, and all interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Initial Pledged Debt; (iii) all additional shares of stock and other Equity Interests from time to time acquired by such Grantor, in any manner, and the certificates, if any, representing such additional shares or other Equity Interests, and all dividends, distributions, return of capital, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares or other Equity Interests and all subscription warrants, rights or options issued thereon or with respect thereto, PROVIDED, HOWEVER, that none of the Grantors shall be required to pledge any Equity Interest in any Person organized or formed in a jurisdiction outside of the United States of America that is owned or otherwise held thereby which, when aggregated with all of the other Equity Interests in such Person pledged by such Grantor and the other Grantors, would result in more than 66% of the Equity Interests in such Person entitled to vote (within the meaning of Treasury Regulation Section 1.956-2(c)(2) promulgated under the Internal Revenue Code) (the "VOTING EQUITY INTERESTS") (on a fully diluted basis) being pledged to the Collateral Agent, on behalf of the Secured Parties, under this Agreement and the other Collateral Documents (although all of the Equity Interests in such Person not entitled to vote (within the 4 meaning of Treasury Regulation Section 1.956-2(c)(2) promulgated under the Internal Revenue Code) (the "NON-VOTING EQUITY INTERESTS") shall be pledged by each of the Grantors that owns or otherwise holds any such Non-Voting Equity Interest therein); PROVIDED that, if, as a result of any change in the tax laws of the United States of America after the date of this Agreement, the pledge by such Grantor of any additional Equity Interests in any such Person to the Collateral Agent, on behalf of the Secured Parties, under this Agreement or any of the other Collateral Documents would not result in an increase in the aggregate net consolidated tax liabilities of MII and its Subsidiaries, then, promptly after the change in such laws, all such additional Equity Interests shall be so pledged under this Agreement or such other Collateral Document, as applicable; (iv) all additional indebtedness from time to time owed to such Grantor and the instruments, if any, evidencing such indebtedness, and all interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; (v) all other investment property (including, without limitation, all (A) securities, whether certificated or uncertificated, (B) security entitlements, (C) securities accounts, (D) commodity contracts and (E) commodity accounts) in which such Grantor has now, or acquires from time to time hereafter, any right, title or interest in any manner, and the certificates or instruments, if any, representing or evidencing such investment property, and all dividends, distributions, return of capital, interest, distributions, value, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such investment property and all subscription warrants, rights or options issued thereon or with respect thereto; (e) the following (collectively, the "J. RAY ACCOUNT COLLATERAL"): (i) the Bank Accounts and all funds and financial assets from time to time credited thereto (including, without limitation, all Cash Equivalents), all interest, dividends, distributions, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such funds and financial assets, and all certificates and instruments, if any, from time to time representing or evidencing the Bank Accounts; (ii) all promissory notes, certificates of deposit, deposit accounts, checks and other instruments from time to time delivered to or otherwise possessed by the Collateral Agent for or on behalf of such Grantor, including, without limitation, those delivered or possessed in substitution for or in addition to any or all of the then existing J. Ray Account Collateral; and 5 (iii) all interest, dividends, distributions, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the then existing J. Ray Account Collateral; (f) all commercial tort claims described in Schedule VI hereto (collectively, the "COMMERCIAL TORT CLAIMS COLLATERAL"); (g) all books and records (including, without limitation, customer lists, credit files, printouts and other computer output materials and records) of such Grantor pertaining to any of the J. Ray Collateral; and (h) all proceeds of, collateral for, income, royalties and other payments now or hereafter due and payable with respect to, and supporting obligations relating to, any and all of the J. Ray Collateral (including, without limitation, proceeds, collateral and supporting obligations that constitute property of the types described in clauses (a) through (g) of this Section 1(x) and this clause (h)) and, to the extent not otherwise included, all (A) payments received under insurance (whether or not the Collateral Agent is the loss payee thereof), or under any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing J. Ray Collateral, (B) tort claims, including, without limitation, all commercial tort claims and (C) cash. PROVIDED, HOWEVER, that J. Ray Collateral shall not include any Permitted Unblocked Account (a) used for payroll, employee benefits or disbursements or (b) maintained outside of the United States, in each case maintained in the ordinary course of business consistent with past practices; PROVIDED FURTHER that, notwithstanding the foregoing, if the granting of a security interest in or pledge of any specific item of the J. Ray Collateral is restricted or prohibited (a "RESTRICTION") by, or would cause a breach or default under or termination, avoidance or forfeiture, or right of termination, avoidance or forfeiture (a "REMEDY"), of, any contract, license, law or regulation, then the security interest or pledge created hereby is ineffective with respect to such specific item of J. Ray Collateral, except that the granting of such security interest in or pledge of such specific item of the J. Ray Collateral nonetheless remains effective to the extent (i) the granting of such security interest or pledge is allowed by such contract, license, law or regulation or (ii) such Restriction or Remedy is rendered ineffective under the UCC. (y) MII hereby grants to the Collateral Agent, for the ratable benefit of the Secured Parties, a security interest in MII's right, title and interest in and to the following, in each case, as to each type of property described below, whether now owned or hereafter acquired by MII, wherever located, and whether now or hereafter existing or arising (collectively, the "MII COLLATERAL", and together with the J. Ray Collateral, the "COLLATERAL"): (a) the following (the "MII SECURITY COLLATERAL", and together with the J. Ray Security Collateral, the "SECURITY COLLATERAL"): (i) the Initial Pledged Equity and the certificates, if any, representing the Initial Pledged Equity, and all dividends, distributions, return of capital, cash, instruments and other property from time to time received, receivable or 6 otherwise distributed in respect of or in exchange for any or all of the Initial Pledged Equity and all subscription warrants, rights or options issued thereon or with respect thereto; (ii) the Initial Pledged Debt and the instruments, if any, evidencing the Initial Pledged Debt, and all interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Initial Pledged Debt; (iii) all additional shares of stock and other Equity Interests of or in any issuer of the Initial Pledged Equity or any successor entity from time to time acquired by MII in any manner (such shares and other Equity Interests, together with the Initial Pledged Equity and the shares and other Equity Interests described in Section 1(x)(d)(iii), being the "PLEDGED EQUITY"), and the certificates, if any, representing such additional shares or other Equity Interests, and all dividends, distributions, return of capital, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares or other Equity Interests and all subscription warrants, rights or options issued thereon or with respect thereto; PROVIDED, HOWEVER, that MII shall not be required to pledge any Equity Interest in any Person organized or formed in a jurisdiction outside of the United States of America that is owned or otherwise held thereby which, when aggregated with all of the other Equity Interests in such Person pledged by such Grantor and the other Grantors, would result in more than 66% of the Voting Equity Interests in such Person (on a fully diluted basis) being pledged to the Collateral Agent, on behalf of the Secured Parties, under this Agreement and the other Collateral Documents (although all of the Non-Voting Equity Interests in such Person shall be pledged by MII); PROVIDED that, if, as a result of any change in the tax laws of the United States of America after the date of this Agreement, the pledge by MII of any additional Equity Interests in any such Person to the Collateral Agent, on behalf of the Secured Parties, under this Agreement or any of the other Collateral Documents would not result in an increase in the aggregate net consolidated tax liabilities of MII and its Subsidiaries, then, promptly after the change in such laws, all such additional Equity Interests shall be so pledged under this Agreement or such other Collateral Document, as applicable; (iv) all additional indebtedness from time to time owed to MII by any obligor of the Initial Pledged Debt or any successor entity (such indebtedness, together with the Initial Pledged Debt and the indebtedness described in Section 1(x)(d)(iv), being the "PLEDGED DEBT") and the instruments, if any, evidencing such indebtedness, and all interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; and (b) the following (collectively, the "MII ACCOUNT COLLATERAL", and together with the J. Ray Account Collateral, the "ACCOUNT COLLATERAL"): 7 (i) the Collateral Account, the Bank Accounts and all funds and financial assets from time to time credited thereto (including, without limitation, all Cash Equivalents), all interest, dividends, distributions, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such funds and financial assets, and all certificates and instruments, if any, from time to time representing or evidencing the Collateral Account or the Bank Accounts; (ii) all promissory notes, certificates of deposit, deposit accounts, checks and other instruments from time to time delivered to or otherwise possessed by or under the control of the Collateral Agent for or on behalf of MII, including, without limitation, those delivered or possessed in substitution for or in addition to any or all of the then existing MII Account Collateral; (iii) all interest, dividends, distributions, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the then existing MII Account Collateral; and (c) all proceeds of, collateral for, income, royalties and other payments now or hereafter due and payable with respect to, and supporting obligations relating to, any and all of the MII Collateral (including, without limitation, proceeds, collateral and supporting obligations that constitute property of the types described in clauses (a) and (b) of this Section 1(y) and this clause (c)); PROVIDED, HOWEVER, that MII Collateral shall not include any Permitted Unblocked Account of MII; PROVIDED FURTHER that, notwithstanding the foregoing, if the granting of a security interest in or pledge of any specific item of the MII Collateral is subject to a Restriction under, or would give rise to a Remedy under, any contract, license, law or regulation, then the security interest or pledge created hereby is ineffective with respect to such specific item of MII Collateral, except that the granting of such security interest in or pledge of such specific item of the MII Collateral nonetheless remains effective to the extent (i) the granting of such security interest or pledge is allowed by such contract, license, law or regulation or (ii) such Restriction or Remedy is rendered ineffective under the UCC. Section 2. Security for Obligations. This Agreement hereby secures, in the case of each Grantor, the payment of all Bilateral Obligations and all Obligations of such Grantor now or hereafter existing under the Loan Documents (including, without limitation, any extensions, modifications, substitutions, amendments or renewals of any or all of the foregoing Obligations), whether direct or indirect, absolute or contingent, and whether for principal, interest, fees, expenses or otherwise (all such Obligations, being the "SECURED OBLIGATIONS"), and such Grantor agrees to pay any and all expenses (including, without limitation, reasonable counsel fees and expenses) incurred by the Agents or the Lender Parties in enforcing any rights under this Agreement or any other Loan Documents. Without limiting the generality of the foregoing, this Agreement secures, as to each Grantor, the payment of all amounts that constitute part of the Secured Obligations and would be owed by such Grantor to any Secured Party under the Loan Documents but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving a Loan Party. 8 Section 3. Grantors Remain Liable. Anything herein to the contrary notwithstanding, (a) each Grantor shall remain liable under the contracts and agreements included in such Grantor's Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Collateral Agent of any of the rights hereunder shall not release any Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral and (c) no Secured Party shall have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement or any other Loan Document, nor shall any Secured Party be obligated to perform any of the obligations or duties of any Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. Section 4. Delivery and Control of Security Collateral. (a) All certificates or instruments representing or evidencing Security Collateral (other than the certificates or instruments representing or evidencing Security Collateral identified in Schedule II as being located outside of the United States) shall be delivered to and held by or on behalf of the Collateral Agent pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Collateral Agent. (b) With respect to any Security Collateral in which any Grantor has any right, title or interest and that constitutes an uncertificated security, such Grantor will use commercially reasonable efforts to cause the issuer thereof to agree in an authenticated record with such Grantor and the Collateral Agent that, upon notice from the Collateral Agent that an Event of Default has occurred and is continuing, such issuer will comply with instructions with respect to such security originated by the Collateral Agent without further consent of such Grantor, such authenticated record to be in form and substance reasonably satisfactory to the Collateral Agent. With respect to any Security Collateral in which any Grantor has any right, title or interest and that is not an uncertificated security, upon the request of the Collateral Agent upon the occurrence and during the continuance of an Event of Default, such Grantor will notify each such issuer of Pledged Equity that such Pledged Equity is subject to the security interest granted hereunder. (c) Upon the request of the Collateral Agent upon the occurrence and during the continuance of an Event of Default, such Grantor will notify each such issuer of Pledged Debt that such Pledged Debt is subject to the security interest granted hereunder. Section 5. Maintaining the Account Collateral. So long as any Advance or any other Obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit that has not been cash collateralized (as provided in the Credit Agreement) shall be outstanding, any Secured Hedge Agreement shall be in effect or any Lender Party shall have any Commitment or any Bilateral Obligation contract with Secured Party shall be in effect: (a) Each Grantor will maintain all Account Collateral (other than Account Collateral maintained in the Permitted Unblocked Accounts in the ordinary course of business consistent with past practices) only with the Collateral Agent or with banks (the "PLEDGED ACCOUNT BANKS") that have agreed within the time period specified in Section 5.01(r) of the Credit Agreement, in a record authenticated by the Grantor, the Collateral 9 Agent and the applicable Pledged Account Bank, to upon notice from the Collateral Agent that an Event of Default has occurred and is continuing, comply with instructions originated by the Collateral Agent directing the disposition of funds in the Account Collateral without the further consent of the Grantor, which authenticated record shall be substantially in the form of Exhibit B hereto, or shall otherwise be in form and substance reasonably satisfactory to the Collateral Agent (each such agreement, an "ACCOUNT CONTROL AGREEMENT"). (b) Except for the Permitted Unblocked Accounts, each Grantor agrees that it will not add any bank in the United States that maintains a deposit account for such Grantor or open any new deposit account in the United States with any then existing Pledged Account Bank unless (i) the Collateral Agent shall have received at least 10 days' prior written notice of such additional bank or such new deposit account and (ii) the Collateral Agent shall have received, in the case of a bank or Pledged Account Bank that is not the Collateral Agent, an Account Control Agreement authenticated by such new bank and such Grantor, or a supplement to an existing Account Control Agreement with such then existing Pledged Account Bank, covering such new deposit account (and, upon the receipt by the Collateral Agent of such Account Control Agreement or supplement, Schedule V hereto shall be automatically amended to include such other deposit account). Each Grantor agrees that it will not terminate any bank as a Pledged Account Bank or terminate any Account Collateral, except that the Grantor may terminate a Bank Account, and terminate a bank as a Pledged Account Bank with respect to such Bank Account, if it gives the Collateral Agent at least 10 days' prior written notice of such termination (and, upon such termination, Schedule V hereto shall be automatically amended to delete such Pledged Account Bank and Bank Account). (c) Upon any termination by a Grantor of any Bank Account by such Grantor, or any Pledged Account Bank with respect thereto, such Grantor will immediately transfer all funds and property held in such terminated Bank Account to another Bank Account listed in Schedule V or a new Bank Account that is permitted by clause (b) of this Section 5, so that the Collateral Agent shall have a continuously perfected security interest in such Account Collateral, funds and property. (d) If an Event of Default has occurred and is continuing, the Collateral Agent may, at any time and without notice to, or consent from, the Grantor, transfer, or direct the transfer of, funds from the Account Collateral to satisfy the Grantor's obligations under the Loan Documents. As soon as reasonably practicable after any such transfer, the Collateral Agent agrees to give written notice thereof to the applicable Grantor. Section 6. Investing of Amounts in the Collateral Account. MII may, subject to the provisions of Sections 5 and 18, from time to time (a) invest, or direct the applicable Pledged Account Bank to invest, amounts received with respect to the Collateral Account in such Cash Equivalents credited to (A) the Collateral Account as the Borrower may select or (B) in the case of Cash Equivalents consisting of Security Collateral, a securities account in which the Collateral Agent is the securities intermediary or a securities account subject to a securities account control agreement, and (b) invest interest paid on the Cash Equivalents referred to in 10 clause (a) above, and reinvest other proceeds of any such Cash Equivalents that may mature or be sold, in each case in such Cash Equivalents credited in the same manner. Section 7. Maintaining Electronic Chattel Paper and Transferable Records . (a)So long as any Advance or any other Obligation of any Borrower under any Loan Document shall remain unpaid, any Letter of Credit that has not been cash collateralized (as provided in the Credit Agreement) shall be outstanding, any Secured Hedge Agreement or any Bilateral Obligation owing to a Secured Party shall be in effect or any Lender Party shall have any Commitment, each Grantor will maintain all (i) electronic chattel paper so that the Collateral Agent has control of the electronic chattel paper in the manner specified in Section 9-105 of the UCC and (ii) all transferable records so that the Collateral Agent has control of the transferable records in the manner specified in Section 16 of the Uniform Electronic Transactions Act, as in effect in the jurisdiction governing such transferable record ("UETA"); and (b) Each Grantor will promptly, but in any event within 10 Business Days after a Responsible Officer of MII becoming aware thereof, give notice to the Collateral Agent of any material commercial tort claim that may arise in the future and will promptly execute or otherwise authenticate a supplement to this Agreement, and otherwise take all necessary action, to subject such commercial tort claim to the first priority security interest created under this Agreement. Section 8. Representations and Warranties. Each Grantor represents and warrants as of the date of this Agreement, as follows: (a) Such Grantor's exact legal name, as defined in Section 9-503(a) of the UCC, is correctly set forth in Schedule I hereto. Schedule I hereto lists all trade names of such Grantor (other than such Grantor's exact legal name) that Grantor believes to be of material value or benefit to its business. Such Grantor is located (within the meaning of Section 9-307 of the UCC) and has its chief executive office, in the state or jurisdiction set forth in Schedule I hereto. The information set forth in Schedule I hereto with respect to such Grantor is true and accurate in all material respects. Such Grantor has not, at any time in the three years immediately preceding the date of this Agreement, changed its name, location (within the meaning of the Section 9-307 of the UCC), chief executive office, type of organization or jurisdiction of organization or organizational identification number from those set forth in Schedule I hereto except as disclosed in Schedule IV hereto. (b) Substantially all of the Equipment (other than motor vehicles, aircraft and Vessels) and Inventory of such Grantor that is material to such Grantor's business and located within the United States is located at the places specified therefor in Schedule III hereto. All Security Collateral (other than the certificates or instruments representing or evidencing Security Collateral identified in Schedule II as being located outside of the United States) consisting of certificated securities and instruments have been delivered to the Collateral Agent. 11 (c) Such Grantor is the legal and beneficial owner of the Collateral of such Grantor free and clear of any Lien, except for the security interest created under this Agreement and Liens permitted under the Credit Agreement. (d) The Initial Pledged Equity pledged by such Grantor hereunder has been duly authorized and validly issued and, in the case of Pledged Equity issued by an entity organized under the laws of a jurisdiction located within the United States, is fully paid and non-assessable. With respect to the Pledged Equity that is an uncertificated security, such Grantor has caused or will use commercially reasonable efforts to cause the issuer thereof to agree in an authenticated record with such Grantor and the Collateral Agent that, upon the occurrence and during the continuance of an Event of Default, such issuer will comply with instructions with respect to such security originated by the Collateral Agent without further consent of such Grantor. If such Grantor is an issuer of Pledged Equity, such Grantor confirms that it has received notice of such security interest. The Initial Pledged Debt (other than the instruments representing or evidencing Initial Pledged Debt identified in Schedule II as being located outside of the United States pledged by such Grantor hereunder has been duly authorized, authenticated or issued and delivered, is the legal, valid and binding obligation of the issuers thereof, is evidenced by one or more promissory notes (which notes have been delivered to the Collateral Agent) and is not in default. (e) The Initial Pledged Equity pledged by such Grantor constitutes the percentage of the issued and outstanding Equity Interests of the issuers thereof indicated on Schedule II hereto. (f) In the case of the Grantors other than MII, substantially all of the investment property owned by such Grantor is listed on Schedule II hereto or is held in the accounts listed in Schedule V hereto. In case of MII, substantially all of the investment property owned by such Grantor is listed in Schedule II hereto or is held in the accounts listed in Schedule V hereto, except Equity Interests of any Subsidiary other than McDermott Incorporated and J. Ray McDermott, S.A. (g) Such Grantor has no deposit accounts, other than the Permitted Unblocked Accounts and the Account Collateral listed on Schedule V hereto, as such Schedule V may be amended from time to time pursuant to Section 5(b). (h) Except as contemplated by this Agreement and the other Loan Documents, and except for filings required to be made by MII with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for the grant by such Grantor of the security interest granted hereunder or for the execution, delivery or performance of this Agreement by such Grantor. (i) The Inventory that has been produced or distributed by such Grantor has been produced in material compliance with all requirements of applicable law, including, without limitation, the Fair Labor Standards Act. 12 (j) To the best of such Grantor's knowledge, such Grantor has no commercial tort claims (as defined in Section 9-102(13) of the UCC) other than those listed in Schedule VI hereto. Section 9. Further Assurances. (a) Each Grantor agrees that from time to time, at the expense of such Grantor, such Grantor will promptly execute and deliver, or otherwise authenticate, all further instruments and documents, and take all further action that may be necessary, or that the Collateral Agent may reasonably request, in order to perfect and protect any pledge or security interest granted or purported to be granted by such Grantor hereunder or to enable the Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral of such Grantor. Without limiting the generality of the foregoing, each Grantor will promptly with respect to Collateral of such Grantor: (i) upon the reasonable request of the Collateral Agent, mark conspicuously each chattel paper included in Receivables with a legend, in form and substance reasonably satisfactory to the Collateral Agent, indicating that such chattel paper is subject to the security interest granted hereby; (ii) if any such Collateral shall be evidenced by a promissory note or other instrument or chattel paper, deliver and pledge to the Collateral Agent hereunder such note or instrument or chattel paper duly indorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance reasonably satisfactory to the Collateral Agent; (iii) execute or authenticate and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary, or as the Collateral Agent may reasonably request, in order to perfect and preserve the security interest granted or purported to be granted by such Grantor hereunder; (iv) deliver and pledge to the Collateral Agent for benefit of the Secured Parties certificates representing Pledged Equity that constitutes certificated securities, accompanied by undated stock or bond powers executed in blank; (v) take all commercially reasonable action necessary to ensure that the Collateral Agent has control of Collateral (other than with respect to the Permitted Unblocked Accounts) consisting of deposit accounts, electronic chattel paper, investment property and transferable records as provided in Sections 9-104, 9-105, 9-106 and 9-107 of the UCC and in Section 16 of UETA; and (vi) deliver to the Collateral Agent evidence that all other action that the Collateral Agent may deem reasonably necessary or desirable in order to perfect and protect the security interest created by such Grantor under this Agreement has been taken. (b) Each Grantor hereby authorizes the Collateral Agent to file one or more financing or continuation statements, and amendments thereto, in each case without the signature of such Grantor, and regardless of whether any particular asset described in such financing statements falls within the scope of the UCC. A photocopy or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. (c) Each Grantor will furnish to the Collateral Agent from time to time statements and schedules further identifying and describing the Collateral of such Grantor and such other reports in connection with such Collateral as the Collateral Agent may reasonably request, all in reasonable detail. Section 10. As to Equipment and Inventory. (a) Each Grantor will cause the Equipment that is material to such Grantor to be maintained and preserved in good repair, 13 working order and condition (ordinary wear and tear excepted) and will forthwith, or in the case of any loss or damage to any of such Equipment as soon as practicable after the occurrence thereof, make or cause to be made all repairs, replacements and other improvements in connection therewith that are necessary or desirable in order that the business carried on in connection therewith may be conducted, except to the extent maintenance thereof is not required by Section 5.01(h) of the Credit Agreement. (b) Each Grantor will pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including, without limitation, claims for labor, materials and supplies) against, the Equipment and Inventory of such Grantor, except to the extent payment thereof is not required by Section 5.01(b) of the Credit Agreement. In producing its Inventory, each Grantor will comply with all requirements of applicable law, including, without limitation, the Fair Labor Standards Act. Section 11. Insurance. (a) Each Grantor will, at its own expense, maintain insurance (including self-insurance) with respect to the Vessels and Contractor's Equipment of such Grantor, in such amounts and against such risks, in such form and with such insurers, as such Grantor shall deem appropriate subject to Section 5.01(d) of the Credit Agreement. Each such policy shall (i) name such Grantor and the Collateral Agent as insured or additional insured parties thereunder (without any representation or warranty by or obligation upon the Collateral Agent) as their interests may appear, (ii) contain in respect to insurance covering physical loss and/or damage to the Vessels and/or the Contractor's Equipment the agreement by the insurer that any loss thereunder shall be payable to the Collateral Agent, (iii) provide that there shall be no recourse against the Collateral Agent for payment of premiums or other amounts with respect thereto and (iv) provide that at least 10 days' prior written notice of cancellation or of lapse shall be given to the Collateral Agent by the insurer. Each Grantor will, if so reasonably requested by the Collateral Agent, deliver to the Collateral Agent copies of policies of such insurance and, as often as the Collateral Agent may reasonably request, a certificate of a reputable insurance broker with respect to such insurance. (b) Reimbursement under any liability insurance maintained by any Grantor pursuant to this Section 11 may be paid directly to the Person who shall have incurred liability covered by such insurance. In case of any loss involving damage to Vessels and/or Contractor's Equipment when subsection (c) of this Section 11 is not applicable, the applicable Grantor will make or cause to be made the necessary repairs to or replacements of such Vessels and/or Contractor's Equipment to the extent required by the Credit Agreement, and any proceeds of insurance properly received by or released to such Grantor shall be used by such Grantor, except as otherwise required hereunder or by the Credit Agreement, to pay or as reimbursement for the costs of such repairs or replacements. (c) So long as no Event of Default shall have occurred and be continuing, all insurance payments received by the Collateral Agent in connection with any loss, damage or destruction of any Vessels and/or Contractor's Equipment will be released by the Collateral Agent to the applicable Grantor for the repair, replacement or restoration thereof. To the extent that (i) the amount of any such insurance payments exceeds the cost of any such repair, replacement or restoration, or (ii) such insurance payments are not otherwise required by the applicable Grantor to complete any such repair, replacement or restoration required hereunder, 14 such amount shall be applied to cash collateralize the obligations of the Borrowers to the extent required by Section 2.06(b) of the Credit Agreement. Upon the occurrence and during the continuance of any Event of Default, all insurance payments in respect of such Vessels and/or Contractor's Equipment in excess of $100,000 shall be paid to the Collateral Agent and shall, in the Collateral Agent's sole discretion, (i) be released to the applicable Grantor to be applied as set forth in the first sentence of this subsection (c) or (ii) be held as additional Collateral hereunder or applied as specified in Section 18(b). Section 12. Post-Closing Changes; Bailees; Collections on Receivables and Related Contracts. (a) No Grantor will change its name, type of organization, jurisdiction of organization, organizational identification number or location (within the meaning of Section 9-307 of the UCC) from those set forth in Section 8(a) of this Agreement without first giving at least 30 days' prior written notice to the Collateral Agent and taking all action reasonably required by the Collateral Agent for the purpose of perfecting or protecting the security interest granted by this Agreement. Except as otherwise permitted by the Credit Agreement, no Grantor will become bound by a security agreement authenticated by another Person (determined as provided in Section 9-203(d) of the UCC) without giving the Collateral Agent 30 days' prior written notice thereof and taking all action required by the Collateral Agent to ensure that the perfection and first priority nature of the Collateral Agent's security interest in the Collateral will be maintained. Each Grantor will hold and preserve its records relating to the Collateral, including, without limitation, the Related Contracts, consistent with past practices and will permit representatives of the Collateral Agent upon reasonable notice at any time during normal business hours to inspect and make abstracts from such records and other documents. If any Grantor does not have an organizational identification number and later obtains one, it will forthwith notify the Collateral Agent of such organizational identification number. (b) If any Collateral of any Grantor is at any time in the possession or control of a warehouseman, bailee or agent, or if the Collateral Agent so requests such Grantor will (i) notify such warehouseman, bailee or agent of the security interest created hereunder, (ii) instruct such warehouseman, bailee or agent to hold all such Collateral solely for the Collateral Agent's account subject only to the Collateral Agent's instructions (which shall permit such Collateral to be removed by such Grantor in the ordinary course of business until the Collateral Agent notifies such warehouseman, bailee or agent that an Event of Default has occurred and is continuing), (iii) use commercially reasonable efforts, to cause such warehouseman, bailee or agent to authenticate a record acknowledging that it holds possession of such Collateral for the Collateral Agent's benefit and shall act solely on the instructions of the Collateral Agent without the further consent of the Grantor or any other Person, and (iv) make such authenticated record available to the Collateral Agent. (c) Except as otherwise provided in this subsection (c), each Grantor will continue to use commercially reasonable efforts to collect, at its own expense, all amounts due or to become due such Grantor under the Receivables and Related Contracts. The Collateral Agent shall have the right at any time, upon the occurrence and during the continuance of an Event of Default and upon written notice to such Grantor of its intention to do so, to notify the obligors under any Receivables and Related Contracts of the assignment of such Receivables and Related Contracts to the Collateral Agent and to direct such obligors to make payment of all amounts due or to become due to such Grantor thereunder directly to the Collateral Agent and, upon such 15 notification and at the expense of such Grantor, to enforce collection of any such Receivables and Related Contracts, to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Grantor might have done, and to otherwise exercise all rights with respect to such Receivables and Related Contracts, including, without limitation, those set forth set forth in Section 9-607 of the UCC. After receipt by any Grantor of the notice from the Collateral Agent referred to in the preceding sentence and during the continuance of the Event of Default to which such notice relates, all amounts and proceeds (including, without limitation, instruments) received by such Grantor in respect of the Receivables and Related Contracts of such Grantor shall be received in trust for the benefit of the Collateral Agent hereunder, shall be segregated from other funds of such Grantor and shall be forthwith paid over to the Collateral Agent in the same form as so received (with any necessary indorsement) to be deposited in the Collateral Account and either (A) released to such Grantor on the terms set forth in Section [6] so long as no Event of Default shall have occurred and be continuing or (B) if any Event of Default shall have occurred and be continuing, applied as provided in Section 18(b). No Grantor will consent to the subordination of its right to payment under any of the Receivables and Related Contracts to any other indebtedness or obligations of the obligor thereof. Section 13. Voting Rights; Dividends; Etc. (a) So long as no Default under Section 6.01(f) of the Credit Agreement or Event of Default shall have occurred and be continuing: (i) Each Grantor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Security Collateral of such Grantor or any part thereof for any purpose. (ii) Each Grantor shall be entitled to receive and retain any and all dividends, interest and other distributions paid in respect of the Security Collateral of such Grantor if and to the extent that the payment thereof is not otherwise prohibited by the terms of the Loan Documents; PROVIDED, HOWEVER, that any and all dividends, interest and other distributions paid or payable in the form of instruments or certificated in respect of, or in exchange for, any Security Collateral, shall be, and shall be forthwith delivered to the Collateral Agent to hold as, Security Collateral and shall, if received by such Grantor, be received in trust for the benefit of the Collateral Agent, be segregated from the other property or funds of such Grantor and be forthwith delivered to the Collateral Agent as Security Collateral in the same form as so received (with any necessary indorsement). (iii) The Collateral Agent will execute and deliver (or cause to be executed and delivered) to each Grantor all such instruments as such Grantor may reasonably request for the purpose of enabling such Grantor to receive the dividends or interest payments that it is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuance of a Default under Section 6.01(f) of the Credit Agreement or an Event of Default: (i) All rights of each Grantor (x) to exercise or refrain from exercising the voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 13(a)(i) shall, upon notice to such Grantor by the Collateral Agent, cease and 16 (y) to receive the dividends, interest and other distributions that it would otherwise be authorized to receive and retain pursuant to Section 13(a)(ii) shall automatically cease, and all such rights shall thereupon become vested in the Collateral Agent, which shall thereupon, so long as such Default or Event of Default shall continue, have the sole right to exercise or refrain from exercising such voting and other consensual rights and to receive and hold as Security Collateral such dividends, interest and other distributions. (ii) All dividends, interest and other distributions that are received by any Grantor contrary to the provisions of paragraph (i) of this Section 13(b) shall be received in trust for the benefit of the Collateral Agent, shall be segregated from other funds of such Grantor and shall be forthwith paid over to the Collateral Agent as Security Collateral in the same form as so received (with any necessary indorsement). Section 14. Transfers and Other Liens; Additional Shares. (a) Each Grantor agrees that it will not (i) sell, assign or otherwise dispose of, or grant any option with respect to, any of the Collateral, other than sales, assignments and other dispositions of Collateral, and options relating to Collateral, permitted under the terms of the Credit Agreement, or (ii) create or suffer to exist any Lien upon or with respect to any of the Collateral of such Grantor except for the pledge, assignment and security interest created under this Agreement and Liens permitted under the Credit Agreement. (b) Each Grantor agrees that it will (i) cause each issuer of the Pledged Equity pledged by such Grantor that is a wholly-owned Subsidiary of MII not to issue any Equity Interests or other securities in addition to or in substitution for the Pledged Equity issued by such issuer, except to such Grantor, and (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional Equity Interests or other securities of each issuer of the Pledged Equity received by such Grantor. Section 15. Collateral Agent Appointed Attorney-in-Fact. Each Grantor hereby irrevocably appoints the Collateral Agent such Grantor's attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor or otherwise, from time to time, upon the occurrence and during the continuance of an Event of Default, in the Collateral Agent's discretion, to take any action and to execute any instrument that the Collateral Agent may deem necessary to accomplish the purposes of this Agreement, including, without limitation: (a) to obtain and adjust insurance required to be paid to the Collateral Agent pursuant to Section 11, (b) to ask for, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral, (c) to receive, indorse and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) or (b) above, and (d) to file any claims or take any action or institute any proceedings that the Collateral Agent may deem necessary or desirable for the collection of any of the 17 Collateral or otherwise to enforce the rights of the Collateral Agent with respect to any of the Collateral. Section 16. Collateral Agent May Perform. If any Grantor fails to perform any agreement contained herein, the Collateral Agent may, as the Collateral Agent reasonably deems necessary to protect the security interest granted hereunder in the Collateral or to protect the value thereof, but without any obligation to do so and without notice, itself perform, or cause performance of, such agreement, and the expenses of the Collateral Agent incurred in connection therewith shall be payable by such Grantor under Section 19. Section 17. The Collateral Agent's Duties. (a) The powers conferred on the Collateral Agent hereunder are solely to protect the Secured Parties' interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Collateral Agent shall have no duty as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not any Secured Party has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against any parties or any other rights pertaining to any Collateral. The Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that which it accords its own property. (b) Anything contained herein to the contrary notwithstanding, the Collateral Agent may from time to time, when the Collateral Agent deems it to be necessary, appoint one or more subagents (each, a "SUBAGENT") for the Collateral Agent hereunder with respect to all or any part of the Collateral. In the event that the Collateral Agent so appoints any Subagent with respect to any Collateral, (i) the assignment and pledge of such Collateral and the security interest granted in such Collateral by each Grantor hereunder shall be deemed for purposes of this Security Agreement to have been made to such Subagent, in addition to the Collateral Agent, for the ratable benefit of the Secured Parties, as security for the Secured Obligations of such Grantor, (ii) such Subagent shall automatically be vested, in addition to the Collateral Agent, with all rights, powers, privileges, interests and remedies of the Collateral Agent hereunder with respect to such Collateral, and (iii) the term "Collateral Agent," when used herein in relation to any rights, powers, privileges, interests and remedies of the Collateral Agent with respect to such Collateral, shall include such Subagent; PROVIDED, HOWEVER, that no such Subagent shall be authorized to take any action with respect to any such Collateral unless and except to the extent expressly authorized in writing by the Collateral Agent, with a copy delivered to the Grantors. (c) Anything contained herein to the contrary notwithstanding, the Collateral Agent will not take any action pursuant to this Agreement which would constitute or result in the change of ownership of MI if such change of ownership would require under then-existing law, the prior approval of the U.S. Navy or the U. S. Department of Energy, without first obtaining such approval. The Collateral Agent hereby acknowledges the terms of the Material Contracts and other contracts to which BWX Technologies, Inc. or its Subsidiaries is a party and that such agreements are not superceded by any provision contained herein. 18 Section 18. Remedies. If any Event of Default shall have occurred and be continuing: (a) The Collateral Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party upon default under the UCC (whether or not the UCC applies to the affected Collateral) and also may: (i) require each Grantor to, and each Grantor hereby agrees that it will at its expense and upon request of the Collateral Agent forthwith, assemble all or part of the Collateral as directed by the Collateral Agent and make it available to the Collateral Agent at one or more places and times to be designated by the Collateral Agent that are reasonably convenient to both parties; (ii) without notice except as specified below or as required by applicable law, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Collateral Agent may deem commercially reasonable; (iii) occupy any premises owned or (to the extent permitted by the applicable lease) leased by any of the Grantors where the Collateral or any part thereof is assembled or located for a reasonable period in order to effectuate its rights and remedies hereunder or under law, without obligation to such Grantor in respect of such occupation; and (iv) exercise any and all rights and remedies of any of the Grantors under or in connection with the Collateral, or otherwise in respect of the Collateral, including, without limitation, (A) any and all rights of such Grantor to demand or otherwise require payment of any amount under, or performance of any provision of, the Receivables, the Related Contracts and the other Collateral, (B) withdraw, or cause or direct the withdrawal of, all funds with respect to the Account Collateral and (C) exercise all other rights and remedies with respect to the Receivables, the Related Contracts and the other Collateral, including, without limitation, those set forth in Section 9-607 of the UCC. Each Grantor agrees that, to the extent notice of sale shall be required by law, at least ten Business Days' notice to such Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) Any cash held by or on behalf of the Collateral Agent and all cash proceeds received by or on behalf of the Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Collateral Agent, be held by the Collateral Agent as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Collateral Agent pursuant to Section 19) in whole or in part by the Collateral Agent for the ratable benefit of the Secured Parties against, all or any part of the Secured Obligations, in the following manner: (i) first, paid to the Agents for any amounts then owing to the Agents pursuant to Section 9.04 of the Credit Agreement or otherwise under the Loan 19 Documents, ratably in accordance with such respective amounts then owing to the Agents; and (ii) second, ratably (A) paid to the Lender Parties and the Hedge Banks, respectively, for any amounts then owing to them, in their capacities as such, under the Loan Documents ratably in accordance with such respective amounts then owing to such Lender Parties and the Hedge Banks, PROVIDED that, for purposes of this Section 18, the amount owing to any such Hedge Bank pursuant to any Secured Hedge Agreement to which it is a party (other than any amount therefore accrued and unpaid) shall be deemed to be equal to the Agreement Value therefor and (B) deposited as Collateral in the Collateral Account up to an amount equal to 105% of the aggregate Available Amount of all outstanding Letters of Credit, PROVIDED that in the event that any such Letter of Credit is drawn, the Collateral Agent shall pay to the Issuing Bank that issued such Letter of Credit the amount held in the Collateral Account in respect of such Letter of Credit, PROVIDED FURTHER that, to the extent that any such Letter of Credit shall expire or terminate undrawn and as a result thereof the amount of the Collateral in the Collateral Account shall exceed 105% of the aggregate Available Amount of all then outstanding Letters of Credit, such excess amount of such Collateral shall be applied in accordance with the remaining order of priority set out in this Section 18(b). Any surplus of such cash or cash proceeds held by or on the behalf of the Collateral Agent and remaining after payment in full of all the Secured Obligations shall be paid over to the applicable Grantor or to whomsoever may be lawfully entitled to receive such surplus. (c) Upon notice from the Collateral Agent, all payments received by any Grantor in respect of the Collateral shall be received in trust for the benefit of the Collateral Agent, shall be segregated from other funds of such Grantor and shall be forthwith paid over to the Collateral Agent in the same form as so received (with any necessary indorsement). (d) Subject to Section 9.05 of the Credit Agreement, the Collateral Agent may, without notice to any Grantor except as required by law and at any time or from time to time, charge, setoff and otherwise apply all or any part of the Secured Obligations against any funds held with respect to the Account Collateral or in any other deposit account. Section 19. Indemnity and Expenses. (a) Each Grantor agrees to indemnify, defend and save and hold harmless each Secured Party and each of their Affiliates and their respective officers, directors, employees, agents and advisors (each, an "INDEMNIFIED PARTY") from and against, and shall pay on demand, any and all claims, damages, losses, liabilities and out-of-pocket expenses (including, without limitation, reasonable fees and expenses of counsel) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or resulting from this Agreement (including, without limitation, enforcement of this Agreement), except to the extent such claim, damage, loss, 20 liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. (b) Each Grantor will upon demand pay to the Collateral Agent the amount of any and all reasonable out-of-pocket expenses, including, without limitation, the reasonable fees and expenses of its counsel and of any experts and agents, that the Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from or other realization upon, any of the Collateral of such Grantor, (iii) the exercise or enforcement of any of the rights of the Collateral Agent or the other Secured Parties hereunder or (iv) the failure by such Grantor to perform or observe any of the provisions hereof. Section 20. Amendments; Waivers; Additional Grantors; Etc. (a) No amendment or waiver of any provision of this Agreement, and no consent to any departure by any Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Collateral Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of the Collateral Agent or any other Secured Party to exercise, and no delay in exercising any right hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. (b) Upon the execution and delivery, or authentication, by any Person of a security agreement supplement in substantially the form of Exhibit A hereto (each a "SECURITY AGREEMENT SUPPLEMENT"), (i) such Person shall be referred to as an "ADDITIONAL GRANTOR" and shall be and become a Grantor hereunder, and each reference in this Agreement and the other Loan Documents to "Grantor" shall thereafter also mean and be a reference to such Additional Grantor, and, where the context so permits, each reference in this Agreement and the other Loan Documents to "Collateral" shall thereafter also mean and be a reference to the Collateral of such Additional Grantor, and (ii) the supplemental Schedules I-VI attached to each Security Agreement Supplement shall be incorporated into and become a part of and supplement Schedules I-VI, respectively, hereto, and the Collateral Agent may attach such supplemental schedules to such Schedules; and each reference to such Schedules shall mean and be a reference to such Schedules as supplemented pursuant to each Security Agreement Supplement. Section 21. Notices, Etc. All notices and other communications provided for hereunder shall be either (i) in writing (including telegraphic, telecopier or telex communication) and mailed, telegraphed, telecopied, telexed or otherwise delivered or (ii) by electronic mail (if electronic mail addresses are designated as provided below) confirmed immediately in writing, in the case of MII and the Borrowers or the Collateral Agent, addressed to it at its address specified in the Credit Agreement and, in the case of each Grantor other than the Borrowers and MII, addressed to it at its address set forth opposite such Grantor's name on the signature pages hereto or on the signature page to the Security Agreement Supplement pursuant to which it became a party hereto; or, as to any party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and other communications shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telegraph, telecopy, telex or electronic mail (if confirmed in writing) or on the 21 date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 21 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 21. Delivery by telecopier of an executed counterpart of any amendment or waiver of any provision of this Agreement or of any Security Agreement Supplement or Schedule hereto shall be effective as delivery of an original executed counterpart thereof. Section 22. Continuing Security Interest; Assignments Under the Credit Agreement. This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the latest of (i) the payment in full in cash of the Secured Obligations, (ii) the Termination Date and (iii) the separate cash collateralization of all outstanding Letters of Credit and all Secured Hedge Agreements, (b) be binding upon each Grantor, its successors and assigns and (c) inure, together with the rights and remedies of the Collateral Agent hereunder, to the benefit of the Secured Parties and their respective successors and permitted assigns. Without limiting the generality of the foregoing clause (c), any Lender Party may assign or otherwise transfer all or any portion of its rights and obligations under the Credit Agreement (including, without limitation, all or any portion of its Commitments, the Advances owing to it and the Note or Notes, if any, held by it) to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Lender Party herein or otherwise, in each case, and to the extent, as provided in Section 9.07 of the Credit Agreement. Section 23. Release; Termination. (a) Upon any sale, lease, transfer or other disposition of any item of Collateral of any Grantor in accordance with the terms of the Loan Documents (other than sales of Inventory in the ordinary course of business), the Collateral Agent will, at such Grantor's expense, execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence the release of such item of Collateral from the assignment and security interest granted hereby; PROVIDED, HOWEVER, that (i) at the time of such request and such release no Event of Default shall have occurred and be continuing, (ii) such Grantor shall have delivered to the Collateral Agent, at least five Business Days prior to the date of the proposed release, a written request for release describing the item of Collateral and the terms of the sale, lease, transfer or other disposition in reasonable detail, including, without limitation, the price thereof and any expenses in connection therewith, together with a form of release for execution by the Collateral Agent and a certificate of such Grantor to the effect that the transaction is in compliance with the Loan Documents and as to such other matters as the Collateral Agent may reasonably request and (iii) the portion of proceeds of any such sale, lease, transfer or other disposition required to be applied, or any payment to be made in connection therewith, in accordance with Section 2.06 of the Credit Agreement shall, to the extent so required, be paid or made to, or in accordance with the instructions of, the Collateral Agent when and as required under Section 2.06 of the Credit Agreement. (b) Upon the latest of (i) the payment in full in cash of the Secured Obligations, (ii) the Termination Date and (iii) the separate cash collateralization of all outstanding Letters of Credit and all Secured Hedge Agreements, the pledge and security interest granted hereby shall terminate and all rights to the Collateral shall revert to the applicable Grantor. Upon any such termination, the Collateral Agent will, at the applicable Grantor's 22 expense, execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence such termination. Section 24. Security Interest Absolute. The obligations of each Grantor under this Agreement are independent of the Secured Obligations or any other Obligations of any other Loan Party under or in respect of the Loan Documents, and a separate action or actions may be brought and prosecuted against each Grantor to enforce this Agreement, irrespective of whether any action is brought against such Grantor or any other Loan Party or whether such Grantor or any other Loan Party is joined in any such action or actions. All rights of the Collateral Agent and the other Secured Parties and the pledge, assignment and security interest hereunder, and all obligations of each Grantor hereunder, shall be irrevocable, absolute and unconditional irrespective of, and each Grantor hereby irrevocably waives (to the maximum extent permitted by applicable law) any defenses it may now have or may hereafter acquire in any way relating to, any or all of the following: (a) any lack of validity or enforceability of any Loan Document or any other agreement or instrument relating thereto; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations or any other Obligations of any other Loan Party under or in respect of the Loan Documents or any other amendment or waiver of or any consent to any departure from any Loan Document, including, without limitation, any increase in the Secured Obligations resulting from the extension of additional credit to any Loan Party or any of its Subsidiaries or otherwise; (c) any taking, exchange, release or non-perfection of any Collateral or any other collateral, or any taking, release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Secured Obligations; (d) any manner of application of any Collateral or any other collateral, or proceeds thereof, to all or any of the Secured Obligations, or any manner of sale or other disposition of any Collateral or any other collateral for all or any of the Secured Obligations or any other Obligations of any other Loan Party under or in respect of the Loan Documents or any other assets of any Loan Party or any of its Subsidiaries; (e) any change, restructuring or termination of the corporate structure or existence of any Loan Party or any of its Subsidiaries; (f) any failure of any Secured Party to disclose to any Loan Party any information relating to the business, condition (financial or otherwise), operations, performance, assets, nature of assets, liabilities or prospects of any other Loan Party now or hereafter known to such Secured Party (each Grantor waiving any duty on the part of the Secured Parties to disclose such information); (g) the failure of any other Person to execute this Agreement or any other Collateral Document, guaranty or agreement or the release or reduction of liability of any Grantor or other grantor or surety with respect to the Secured Obligations; or 23 (h) any other circumstance (including, without limitation, any statute of limitations) or any existence of or reliance on any representation by any Secured Party that might otherwise constitute a defense available to, or a discharge of, such Grantor or any other Grantor or a third party grantor of a security interest. This Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Secured Obligations is rescinded or must otherwise be returned by any Secured Party or by any other Person upon the insolvency, bankruptcy or reorganization of any Loan Party or otherwise, all as though such payment had not been made. Section 25. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of an original executed counterpart of this Agreement. Section 26. The Mortgages. In the event that any of the Collateral hereunder is also subject to a valid and enforceable Lien under the terms of any Mortgage or Ship Mortgage and the terms of such Mortgage or Ship Mortgage are inconsistent with the terms of this Agreement, then with respect to such Collateral, the terms of (i) such Mortgage shall be controlling in the case of fixtures and real estate leases, letting and licenses of, and contracts and agreements relating to the lease of, real property, and (ii) such Ship Mortgage shall be controlling, and the terms of this Agreement shall be controlling in the case of all other Collateral. Section 27. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, each Grantor has caused this Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. J. RAY McDERMOTT, S.A. By \s\ James R. Easter ------------------------------ Title: James R. Easter Vice President Finance & Treasurer J. RAY McDERMOTT HOLDINGS, INC. By \s\ James R. Easter ------------------------------ Title: James R. Easter Vice President Finance & Treasurer J. RAY McDERMOTT, INC. By \s\ James R. Easter ------------------------------ Title: James R. Easter Vice President Finance & Treasurer McDERMOTT INTERNATIONAL, INC. By \s\ James R. Easter ------------------------------ Title: James R. Easter Vice President Finance & Treasurer J. RAY McDERMOTT UNDERWATER SERVICES, INC. By \s\ James R. Easter ------------------------------ Title: James R. Easter Treasurer MENTOR SUBSEA TECHNOLOGY SERVICES, INC. By \s\ James R. Easter ------------------------------ Title: James R. Easter Treasurer McDERMOTT TRADE CORPORATION By \s\ James R. Easter ------------------------------ Title: James R. Easter Treasurer J. RAY McDERMOTT TECHNOLOGY, INC. By \s\ James R. Easter ------------------------------ Title: James R. Easter Treasurer OPI VESSELS, INC. By \s\ James R. Easter ------------------------------ Title: James R. Easter Treasurer J. RAY McDERMOTT ENGINEERING HOLDINGS, INC. By \s\ James R. Easter ------------------------------ Title: James R. Easter Treasurer SABINE RIVER REALTY, INC. By \s\ James R. Easter ------------------------------ Title: James R. Easter Treasurer SPARTEC, INC. By \s\ James R. Easter ------------------------------ Title: James R. Easter Treasurer J. RAY McDERMOTT WEST AFRICA HOLDINGS, INC. By \s\ James R. Easter ------------------------------ Title: James R. Easter Treasurer J. RAY McDERMOTT ENGINEERING, LLC By \s\ James R. Easter ------------------------------ Title: James R. Easter Treasurer J. RAY McDERMOTT WEST AFRICA, INC. By \s\ James R. Easter ------------------------------ Title: James R. Easter Treasurer Acknowledged and Accepted: CITICORP USA, INC. By \s\ Todd J. Mogil ------------------------------ Title: Todd J. Mogil Vice President SCHEDULE I TO THE SECURITY AGREEMENT LOCATION, CHIEF EXECUTIVE OFFICE, PLACE WHERE AGREEMENTS ARE MAINTAINED, TYPE OF ORGANIZATION, JURISDICTION OF ORGANIZATION AND ORGANIZATIONAL IDENTIFICATION NUMBER
CHIEF PLACE WHERE EXECUTIVE AGREEMENTS ARE TYPE OF JURISDICTION ORGANIZATIONAL GRANTOR LOCATION OFFICE MAINTAINED ORGANIZATION OF ORGANIZATION I.D. NO. - ------- -------- --------- -------------- ------------ --------------- --------------
SCHEDULE II TO THE SECURITY AGREEMENT PLEDGED EQUITY AND PLEDGED DEBT PART I
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PART II
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SCHEDULE III TO THE SECURITY AGREEMENT LOCATION OF EQUIPMENT AND INVENTORY [NAME OF GRANTOR] LOCATIONS OF EQUIPMENT: LOCATIONS OF INVENTORY: [NAME OF GRANTOR] LOCATIONS OF EQUIPMENT: LOCATIONS OF INVENTORY: [ETC.] SCHEDULE IV TO THE SECURITY AGREEMENT CHANGES IN NAME, LOCATION, ETC. CHANGES IN THE GRANTOR'S NAME (INCLUDING NEW GRANTOR WITH A NEW NAME AND NAMES ASSOCIATED WITH ALL PREDECESSORS IN INTEREST OF THE GRANTOR) CHANGES IN THE GRANTOR'S LOCATION CHANGES IN THE GRANTOR'S CHIEF EXECUTIVE OFFICE CHANGES IN THE LOCATION OF EQUIPMENT AND INVENTORY CHANGES IN THE PLACE WHERE AGREEMENTS ARE MAINTAINED CHANGES IN THE TYPE OF ORGANIZATION CHANGES IN THE JURISDICTION OF ORGANIZATION CHANGES IN THE ORGANIZATIONAL IDENTIFICATION NUMBER SCHEDULE V TO THE SECURITY AGREEMENT ACCOUNT COLLATERAL
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SCHEDULE VI TO THE SECURITY AGREEMENT COMMERCIAL TORT CLAIMS EXHIBIT A TO THE SECURITY AGREEMENT FORM OF SECURITY AGREEMENT SUPPLEMENT [Date of Security Agreement Supplement] Citicorp US, Inc. as the Collateral Agent for the Secured Parties referred to in the Credit Agreement referred to below [1200 Smith Street, Suite 200 Houston, TX 77002] Attn: ___________________ Ladies and Gentlemen: Reference is made to (i) the Credit Agreement dated as of January ___, 2003 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"; terms defined therein, unless otherwise defined herein, being used herein as therein defined), among the Borrowers, the Lender Parties and certain other lender parties party thereto, Citicorp USA, Inc., as Collateral Agent and Administrative Agent for the Lender Parties and such other lender parties thereto, Salomon Smith Barney Inc., as lead arranger and book runner, [NAME OF INSTITUTION], as documentation agent and [NAME OF INSTITUTION], as syndication agent, and (ii) the Security Agreement dated January ___, 2003 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "SECURITY AGREEMENT") made by the Grantors from time to time party thereto in favor of the Collateral Agent for the Secured Parties. SECTION 1. Grant of Security. The undersigned hereby grants to the Collateral Agent, for the ratable benefit of the Secured Parties, a security interest in, all of its right, title and interest in and to all of the Collateral of the undersigned, whether now owned or hereafter acquired by the undersigned, wherever located and whether now or hereafter existing or arising, including, without limitation, the property and assets of the undersigned set forth on the attached supplemental schedules to the Schedules to the Security Agreement. SECTION 2. Security for Obligations. The grant of a security interest in, the Collateral by the undersigned under this Security Agreement Supplement and the Security Agreement secures the payment of all Obligations of the undersigned now or hereafter existing under or in respect of the Loan Documents, whether direct or indirect, absolute or contingent, and whether for principal, reimbursement obligations, interest, premiums, penalties, fees, indemnifications, contract causes of action, costs, expenses or otherwise. Without limiting the generality of the foregoing, this Security Agreement Supplement and the Security Agreement secures the payment of all amounts that constitute part of the Secured Obligations and that would be owed by the undersigned to any Secured Party under the Loan Documents but for the fact that such Secured Obligations are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving a Loan Party. SECTION 3. Supplements to Security Agreement Schedules. The undersigned has attached hereto supplemental Schedules [I through IX] to Schedules [I through IX], respectively, to the Security Agreement, and the undersigned hereby certifies, as of the date first above written, that such supplemental schedules have been prepared by the undersigned in substantially the form of the equivalent Schedules to the Security Agreement and are complete and correct. SECTION 4. Representations and Warranties. The undersigned hereby makes each representation and warranty set forth in Section 9 of the Security Agreement (as supplemented by the attached supplemental schedules) to the same extent as each other Grantor. SECTION 5. Obligations Under the Security Agreement. The undersigned hereby agrees, as of the date first above written, to be bound as a Grantor by all of the terms and provisions of the Security Agreement to the same extent as each of the other Grantors. The undersigned further agrees, as of the date first above written, that each reference in the Security Agreement to an "Additional Grantor" or a "Grantor" shall also mean and be a reference to the undersigned. SECTION 6. Governing Law. This Security Agreement Supplement shall be governed by, and construed in accordance with, the laws of the State of New York. Very truly yours, [NAME OF ADDITIONAL GRANTOR] By ------------------------- Title: Address for notices: ---------------------- ---------------------- ---------------------- EXHIBIT B TO THE SECURITY AGREEMENT FORM OF ACCOUNT CONTROL AGREEMENT (DEPOSIT ACCOUNT/SECURITIES ACCOUNT) ACCOUNT CONTROL AGREEMENT (this "AGREEMENT") dated as of ________, ____, among____________, a ___________ (the "GRANTOR"), Citicorp USA, Inc., a [Delaware] corporation, as Collateral Agent (the "SECURED PARTY"), and _________, a _________ ("____________"), as securities intermediary and depository bank (the "ACCOUNT HOLDER"). PRELIMINARY STATEMENTS: (1) The Grantor has granted the Secured Party a security interest (the "SECURITY INTEREST") in the following accounts maintained by the Account Holder for the Grantor (each, an "ACCOUNT" and collectively, the "ACCOUNTS"): [Insert account numbers and other identifying information.] (2) Terms defined in Article 8 or 9 of the Uniform Commercial Code in effect in the State of New York ("N.Y. UNIFORM COMMERCIAL CODE") are used in this Agreement as such terms are defined in such Article 8 or 9. NOW, THEREFORE, in consideration of the premises and of the mutual agreements contained herein, the parties hereto hereby agree as follows: SECTION 1. The Accounts. The Grantor and Account Holder represent and warrant to, and agrees with, the Secured Party that: (a) The Account Holder maintains each Account for the Grantor, and all property (including, without limitation, all funds and financial assets) held by the Account Holder for the account of the Grantor are, and will continue to be, credited to an Account in accordance with instructions given by the Grantor (unless otherwise provided herein). (b) To the extent that funds are credited to any Account, such Account is a deposit account; and to the extent that financial assets are credited to any Account, such Account is a securities account. The Account Holder is (i) the bank with which each Account that is a deposit account is maintained and (ii) the securities intermediary with respect to financial assets held in any Account that is a securities account. The Grantor is (x) the Account Holder's customer with respect to the Accounts and (y) the entitlement holder with respect to financial assets credited from time to time to any Account. (c) Notwithstanding any other agreement to the contrary, the Account Holder's jurisdiction with respect to each Account for purposes of the N.Y. Uniform Commercial Code is, and will continue to be for so long as the Security Interest shall be in effect, the State of New York. (d) Attached as Exhibit A hereto are statements of the respective Accounts as of the date hereof showing the property credited to each Account. (e) The Grantor and Account Holder do not know of any claim to or interest in any Account or any property (including, without limitation, funds and financial assets) credited to any Account, except for claims and interests of the parties referred to in this Agreement. SECTION 2. Control by Secured Party. The Account Holder will comply with (i) all instructions directing disposition of the funds in any and all of the Accounts, (ii) all notifications and entitlement orders that the Account Holder receives directing it to transfer or redeem any financial asset in any and all of the Accounts, and (iii) all other directions concerning any and all of the Accounts, including, without limitation, directions to distribute to the Secured Party proceeds of any such transfer or redemption or interest or dividends on property in any and all of the Accounts (any such instruction, notification or direction referred to in clause (i), (ii) or (iii) above being an "ACCOUNT DIRECTION"), in each case of clauses (i), (ii) and (iii) above originated by the Secured Party without further consent by the Grantor or any other Person. SECTION 3. Grantor's Rights in Accounts. (a) Except as otherwise provided in this Section 3, the Account Holder will comply with Account Directions and other directions concerning each Account originated by the Grantor without further consent by the Secured Party. (b) Until the Account Holder receives a notice from the Secured Party that the Secured Party will exercise exclusive control over any Account (a "NOTICE OF EXCLUSIVE CONTROL" with respect to such Account), the Account Holder may distribute to the Grantor all interest and regular cash dividends on property (including, without limitation, funds and financial assets) in such Account. (c) If the Account Holder receives from the Secured Party a Notice of Exclusive Control with respect to any Account, the Account Holder will comply only with Account Directions originated by the Secured Party and will cease: (i) complying with Account Directions or other directions concerning such Account originated by the Grantor and (ii) distributing to the Grantor interest and dividends on property (including, without limitation, funds and financial assets) in such Account. SECTION 4. Priority of Secured Party's Security Interest. (a) The Account Holder (i) subordinates to the Security Interest and in favor of the Secured Party any security interest, lien, or right of recoupment or setoff that the Account Holder may have, now or in the future, against any Account or property (including, without limitation, any funds and financial assets) credited to any Account, and (ii) agrees that it will not exercise any right in respect of any such security interest or lien or any such right of recoupment or setoff until the Security Interest is terminated, except that the Account Holder (A) will retain its prior security interest and lien on property credited to any Account, (B) may exercise any right in respect of such security interest or lien, and (C) may exercise any right of recoupment or setoff against any Account, in the case of clauses (A), (B) and (C) above, to secure or to satisfy, and only to secure or to satisfy, payment (x) for such property, (y) for its customary fees and expenses for the routine maintenance and operation of such Account, and (z) if such Account is a deposit account, for the face amount of any items that have been credited to such Account but are subsequently returned unpaid because of uncollected or insufficient funds. (b) The Account Holder will not enter into any other agreement with any Person relating to Account Directions or other directions with respect to any Account. SECTION 5. Statements, Confirmations, and Notices of Adverse Claims. When the Account Holder knows of any claim or interest in any Account or any property (including, without limitation, funds and financial assets) credited to any Account other than the claims and interests of the parties referred to in this Agreement, the Account Holder will promptly notify the Secured Party and the Grantor of such claim or interest. SECTION 6. The Account Holder's Responsibility. (a) Except for permitting a withdrawal, delivery, or payment in violation of Section 3, the Account Holder will not be liable to the Secured Party for complying with Account Directions or other directions concerning any Account from the Grantor that are received by the Account Holder before the Account Holder receives and has a reasonable opportunity to act on a Notice of Exclusive Control. (b) The Account Holder will not be liable to the Grantor or the Secured Party for complying with a Notice of Exclusive Control or with an Account Direction or other direction concerning any Account originated by the Secured Party, even if the Grantor notifies the Account Holder that the Secured Party is not legally entitled to issue the Notice of Exclusive Control or Account Direction or such other direction unless the Account Holder takes the action after it is served with an injunction, restraining order, or other legal process enjoining it from doing so, issued by a court of competent jurisdiction, and had a reasonable opportunity to act on the injunction, restraining order or other legal process. (c) This Agreement does not create any obligation of the Account Holder except for those expressly set forth in this Agreement and, in the case of any Account that is a securities account, in Part 5 of Article 8 of the N.Y. Uniform Commercial Code and, in the case of any Account that is a deposit account, in Article 4 of the N.Y. Uniform Commercial Code. In particular, the Account Holder need not investigate whether the Secured Party is entitled under the Secured Party's agreements with the Grantor to give an Account Direction or other direction concerning any Account or a Notice of Exclusive Control. The Account Holder may rely on notices and communications it believes given by the appropriate party. SECTION 7. Indemnity. The Grantor will indemnify the Account Holder, its officers, directors, employees and agents against claims, liabilities and expenses arising out of this Agreement (including, without limitation, reasonable attorney's fees and disbursements), except to the extent the claims, liabilities or expenses are caused by the Account Holder's gross negligence or willful misconduct as found by a court of competent jurisdiction in a final, non-appealable judgment. SECTION 8. Termination; Survival. (a) The Secured Party may terminate this Agreement by notice to the Account Holder and the Grantor. If the Secured Party notifies the Account Holder that the Security Interest has terminated, this Agreement will immediately terminate. (b) The Account Holder may terminate this Agreement on 60 days' prior notice to the Secured Party and the Grantor, provided that before such termination the Account Holder and the Grantor shall make arrangements to transfer the property (including, without limitation, all funds and financial assets) credited to each Account to another Account Holder that shall have executed, together with the Grantor, a control agreement in favor of the Secured Party in respect of such property in substantially the form of this Agreement or otherwise in form and substance reasonably satisfactory to the Secured Party. (c) Sections 6 and 7 will survive termination of this Agreement. SECTION 9. Governing Law. This Agreement and each Account will be governed by the law of the State of New York. The Account Holder and the Grantor may not change the law governing any Account without the Secured Party's express prior written agreement. SECTION 10. Entire Agreement. This Agreement is the entire agreement, and supersedes any prior agreements, and contemporaneous oral agreements, of the parties concerning its subject matter. SECTION 11. Amendments. No amendment of, or waiver of a right under, this Agreement will be binding unless it is in writing and signed by the party to be charged. SECTION 12. Financial Assets. The Account Holder agrees with the Secured Party and the Grantor that, to the fullest extent permitted by applicable law, all property (other than funds) credited from time to time to any Account will be treated as financial assets under Article 8 of the N.Y. Uniform Commercial Code. SECTION 13. Notices. A notice or other communication to a party under this Agreement will be in writing (except that Account Directions may be given orally), will be sent to the party's address set forth under its name below or to such other address as the party may notify the other parties and will be effective on receipt. SECTION 14. Binding Effect. This Agreement shall become effective when it shall have been executed by the Grantor, the Secured Party and the Account Holder, and thereafter shall be binding upon and inure to the benefit of the Grantor, the Secured Party and the Account Holder and their respective successors and assigns. SECTION 15. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of an original executed counterpart of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. [NAME OF GRANTOR] By ------------------------- Name: Title: Address: ---------------------------- ---------------------------- CITICORP USA, INC., as Collateral Agent By ------------------------- Name: Title: Address: ---------------------------- ---------------------------- [NAME OF ACCOUNT HOLDER] By ------------------------- Name: Title: Address: ---------------------------- ---------------------------- EXHIBIT A [Statements of the various Accounts showing the property credited to each Account EX-4.4 6 d04254exv4w4.txt FORM OF SUBSIDIARY GUARANTEE EXHIBIT 4.4 SUBSIDIARY GUARANTY Dated as of February 11, 2003 From THE GUARANTORS NAMED HEREIN and THE ADDITIONAL GUARANTORS REFERRED TO HEREIN as Guarantors in favor of THE SECURED PARTIES REFERRED TO IN THE CREDIT AGREEMENT REFERRED TO HEREIN
TABLE OF CONTENTS SECTION PAGE Section 1. Guaranty; Limitation of Liability................................ 1 Section 2. Guaranty Absolute................................................ 2 Section 3. Waivers and Acknowledgments...................................... 3 Section 4. Subrogation...................................................... 4 Section 5. Payments Free and Clear of Taxes, Etc............................ 5 Section 6. Representations and Warranties................................... 7 Section 7. Covenants........................................................ 7 Section 8. Amendments, Guaranty Supplements, Etc............................ 7 Section 9. Notices, Etc..................................................... 8 Section 10. No Waiver; Remedies............................................. 8 Section 11. Right of Set-off................................................ 9 Section 12. Indemnification................................................. 9 Section 13. Subordination................................................... 10 Section 14. Continuing Guaranty; Assignments under the Credit Agreement..... 10 Section 15. Execution in Counterparts....................................... 11 Section 16. Governing Law; Jurisdiction; Waiver of Jury Trial, Etc.......... 11 Exhibit A - Guaranty Supplement
SUBSIDIARY GUARANTY SUBSIDIARY GUARANTY dated as of February __, 2003 made by the Persons listed on the signature pages hereof under the caption "Subsidiary Guarantors" and the Additional Guarantors (as defined in Section 8(b)) (such Persons so listed and the Additional Guarantors being, collectively, the "GUARANTORS" and, individually, each a "GUARANTOR") in favor of the Secured Parties (as defined in the Credit Agreement referred to below). PRELIMINARY STATEMENT. McDermott International, Inc., a Panamanian corporation ("MII"), J. Ray McDermott, S.A., a Panamanian corporation ("JRMSA"), J. Ray McDermott Holdings, Inc., a Delaware corporation ("JRMHI"), J. Ray McDermott, Inc., a Delaware corporation ("JRMI"), and BWX Technologies, Inc., a Delaware corporation ("BWXT", and together with JRMSA, JRMHI and JRMI, the "BORROWERS" and each, a "BORROWER"), are parties to a Credit Agreement dated as of February __, 2003 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"; capitalized terms defined therein and not otherwise defined herein being used herein as therein defined), with the banks, financial institutions and other institutional lenders listed on the signature pages thereof as the Initial Lender Parties, Citicorp USA, Inc. ("CUSA"), as Collateral Agent and Administrative Agent for the Lender Parties, Salomon Smith Barney ("SSB"), as lead arranger and book runner, [NAME OF INSTITUTION], as documentation agent, and [NAME OF INSTITUTION], as syndication agent. Each Guarantor may receive, directly or indirectly, a portion of the proceeds of the Advances under the Credit Agreement and will derive substantial direct and indirect benefits from the transactions contemplated by the Credit Agreement. It is a condition precedent to the making of Advances and the issuance of Letters of Credit by the Lender Parties under the Credit Agreement and the entry by the Hedge Banks into Secured Hedge Agreements from time to time that each Guarantor shall have executed and delivered this Guaranty. NOW, THEREFORE, in consideration of the premises and in order to induce the Lender Parties to make Advances and to issue Letters of Credit under the Credit Agreement and the Hedge Banks to enter into Secured Hedge Agreements from time to time, each Guarantor, jointly and severally with each other Guarantor, hereby agrees as follows: Section 1. Guaranty; Limitation of Liability. (a) Each Guarantor hereby unconditionally and irrevocably guarantees the punctual payment when due, whether at scheduled maturity or on any date of a required prepayment or by acceleration, demand or otherwise pursuant to the terms of this Agreement, of all Bilateral Obligations and all Obligations of each other Loan Party now or hereafter existing under or in respect of the Loan Documents (including, without limitation, any extensions, modifications, substitutions, amendments or renewals of any or all of the foregoing Obligations), whether direct or indirect, absolute or contingent, and whether for principal, interest, fees, expenses or otherwise (such Obligations being the "GUARANTEED OBLIGATIONS"), and agrees to pay any and all expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by the Agents or any other Secured Party in enforcing any rights under this Guaranty or any other Loan Documents. Without limiting the generality of the foregoing, each Guarantor's liability shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by any other Loan Party to any Secured Party under or in respect of the Loan Documents but for the 2 fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving such other Loan Party. (b) Each Guarantor, and by its acceptance of this Guaranty, the Agents and each other Secured Party, hereby confirms that it is the intention of all such Persons that this Guaranty and the Obligations of each Guarantor hereunder not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law (as hereinafter defined), the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar foreign, federal or state law to the extent applicable to this Guaranty and the Obligations of each Guarantor hereunder. To effectuate the foregoing intention, the Agents, the other Secured Parties and the Guarantors hereby irrevocably agree that the Obligations of each Guarantor under this Guaranty at any time shall be limited to the maximum amount as will result in the Obligations of such Guarantor under this Guaranty not constituting a fraudulent transfer or conveyance. For purposes hereof, "BANKRUPTCY LAW" means Section 548 of Title 11, U.S. Code, or any similar foreign, federal or state law for the relief of debtors. (c) Each Guarantor hereby unconditionally and irrevocably agrees that in the event any payment shall be required to be made to any Secured Party under this Guaranty or the Parent Guaranty or any other guaranty, such Guarantor will contribute, to the maximum extent permitted by law, such amounts to each other Guarantor and the Parent and each other guarantor so as to maximize the aggregate amount paid to the Secured Parties (up to the amount of the payment so required to be made) under or in respect of the Loan Documents. Section 2. Guaranty Absolute. Each Guarantor guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of the Loan Documents, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of any Secured Party with respect thereto. The Obligations of each Guarantor under or in respect of this Guaranty are independent of the Guaranteed Obligations or any other Obligations of any other Loan Party under or in respect of the Loan Documents, and a separate action or actions may be brought and prosecuted against each Guarantor to enforce this Guaranty, irrespective of whether any action is brought against any Borrower or any other Loan Party or whether any Borrower or any other Loan Party is joined in any such action or actions. To the maximum extent permitted by applicable law, the liability of each Guarantor under this Guaranty shall be irrevocable, absolute and unconditional irrespective of, and each Guarantor hereby irrevocably waives any defenses it may now have or hereafter acquire in any way relating to, any or all of the following: (a) any lack of validity or enforceability of any Loan Document; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations or any other Obligations of any other Loan Party under or in respect of the Loan Documents, or any other amendment or waiver of or any consent to departure from any Loan Document, including, without limitation, any increase in the Guaranteed Obligations resulting from the extension of additional credit to any Loan Party or any of its Subsidiaries or otherwise; 3 (c) any taking, exchange, release or non-perfection of any collateral, or any taking, release or amendment or waiver of or consent to departure from any other guaranty, for all or any of the Guaranteed Obligations; (d) any manner of application of collateral, or proceeds thereof, to all or any of the Guaranteed Obligations, or any manner of sale or other disposition of any collateral for all or any of the Guaranteed Obligations or any other Obligations of any Loan Party under the Loan Documents or any other assets of any Loan Party or any of its Subsidiaries; (e) any change, restructuring or termination of the corporate or other legal structure or existence of any Loan Party or any of its Subsidiaries; (f) any failure of any Secured Party to disclose to any Loan Party any information relating to the business, condition (financial or otherwise), operations, performance, properties or prospects of any other Loan Party now or hereafter known to such Secured Party (each Guarantor waiving any duty on the part of the Secured Parties to disclose such information); (g) the failure of any other Person to execute or deliver this Guaranty, any Guaranty Supplement (as hereinafter defined) or any other guaranty or agreement or the release or reduction of liability of any Guarantor or other guarantor or surety with respect to the Guaranteed Obligations; or (h) any other circumstance (including, without limitation, any statute of limitations) or any existence of or reliance on any representation by any Secured Party that might otherwise constitute a defense available to, or a discharge of, any Loan Party or any other guarantor or surety. This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by any Secured Party or any other Person upon the insolvency, bankruptcy or reorganization of any other Loan Party or otherwise, all as though such payment had not been made. Section 3. Waivers and Acknowledgments. (a) Each Guarantor hereby unconditionally and irrevocably waives promptness, diligence, notice of acceptance, presentment, demand for performance, notice of nonperformance, default, acceleration, protest or dishonor and any other notice with respect to any of the Guaranteed Obligations and this Guaranty and any requirement that any Secured Party protect, secure, perfect or insure any Lien or any property subject thereto or exhaust any right or take any action against any Loan Party or any other Person or any Collateral. (b) Each Guarantor hereby unconditionally and irrevocably waives any right to revoke this Guaranty and acknowledges that this Guaranty is continuing in nature and applies to all Guaranteed Obligations, whether existing now or in the future. (c) Each Guarantor hereby unconditionally and irrevocably waives (i) any defense arising by reason of any claim or defense based upon an election of remedies by any 4 Secured Party that in any manner impairs, reduces, releases or otherwise adversely affects the subrogation, reimbursement, exoneration, contribution or indemnification rights of such Guarantor or other rights of such Guarantor to proceed against any of the other Loan Parties, any other guarantor or any other Person or any Collateral and (ii) any defense based on any right of set-off or counterclaim against or in respect of the Obligations of such Guarantor hereunder. (d) Each Guarantor acknowledges that the Collateral Agent may, except as otherwise required by the Uniform Commercial Code as in effect from time to time in the State of New York or other applicable law, without notice to or demand upon such Guarantor and without affecting the liability of such Guarantor under this Guaranty, foreclose under any mortgage by nonjudicial sale, and each Guarantor hereby waives any defense to the recovery by the Collateral Agent and the other Secured Parties against such Guarantor of any deficiency after such nonjudicial sale and any defense or benefits that may be afforded by applicable law. (e) Each Guarantor acknowledges that it will receive substantial direct and indirect benefits from the financing arrangements contemplated by the Loan Documents and that the waivers set forth in Section 2 and this Section 3 are knowingly made in contemplation of such benefits. Section 4. Subrogation. Each Guarantor hereby unconditionally and irrevocably agrees not to exercise any rights that it may now have or hereafter acquire against any Borrower, any other Loan Party or any other guarantor that arise from the existence, payment, performance or enforcement of such Guarantor's Obligations under or in respect of this Guaranty or any other Loan Document, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of any Secured Party against any Borrower, any Loan Party or any other guarantor or any Collateral, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from any Borrower, any Loan Party or any other guarantor, directly or indirectly, in cash or other property or by setoff or in any other manner, payment or security on account of such claim, remedy or right, unless and until all of the Guaranteed Obligations and all other amounts payable under this Guaranty shall have been paid in full in cash, all Letters of Credit and all Secured Hedge Agreements shall have expired or been terminated, or in the case of Letters of Credit cash collateralized as provided for in the Credit Agreement, and the Commitments shall have expired or been terminated. If any amount shall be paid to any Guarantor in violation of the immediately preceding sentence at any time prior to the latest of (a) the payment in full in cash of the Guaranteed Obligations and all other amounts payable under this Guaranty, (b) the Termination Date and (c) the latest date of expiration or termination of all Letters of Credit and all Secured Hedge Agreements, or in the case of Letters of Credit cash collateralized as provided for in the Credit Agreement, such amount shall be received and held in trust for the benefit of the Secured Parties, shall be segregated from other property and funds of such Guarantor and shall forthwith be paid or delivered to the Administrative Agent in the same form as so received (with any necessary endorsement or assignment) to be credited and applied to the Guaranteed Obligations and all other amounts payable under this Guaranty, whether matured or unmatured, in accordance with the terms of the Loan Documents, or to be held as Collateral for any Guaranteed Obligations or other amounts payable under this Guaranty thereafter arising. If (i) any Guarantor shall make payment to any Secured Party of all or any part of the Guaranteed Obligations, (ii) all 5 of the Guaranteed Obligations and all other amounts payable under this Guaranty shall have been paid in full in cash, (iii) the Termination Date shall have occurred and (iv) all Letters of Credit and all Secured Hedge Agreements shall have expired or been terminated, or in the case of Letters of Credit cash collateralized as provided for in the Credit Agreement, the Secured Parties will, at such Guarantor's request and expense, execute and deliver to such Guarantor appropriate documents, without recourse and without representation or warranty, necessary to evidence the transfer by subrogation to such Guarantor of an interest in the Guaranteed Obligations resulting from such payment made by such Guarantor pursuant to this Guaranty. Section 5. Payments Free and Clear of Taxes, Etc. (a) Any and all payments made by any Guarantor under or in respect of this Guaranty or any other Loan Document shall be made, in accordance with Section 2.12 of the Credit Agreement, free and clear of and without deduction for any and all present or future Taxes. If any Guarantor shall be required by law to deduct any Taxes from or in respect of any sum payable under or in respect of this Guaranty or any other Loan Document to any Secured Party, (i) the sum payable by such Guarantor shall be increased as necessary so that after such Guarantor has made all required deductions (including deductions applicable to additional sums payable under this Section 5), such Secured Party receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Guarantor shall make all such deductions and (iii) such Guarantor shall pay the full amount deducted to the relevant taxation authority in accordance with applicable law. (b) In addition, each Guarantor agrees to pay any present or future Other Taxes that arise from any payment made by or on behalf of such Guarantor under or in respect of this Guaranty or any other Loan Document or from the execution, delivery or registration of, performance under, or otherwise with respect to, this Guaranty and the other Loan Documents. (c) Each Guarantor will indemnify each Secured Party for and hold it harmless against the full amount of Taxes and Other Taxes, and for the full amount of taxes of any kind imposed by any jurisdiction on amounts payable under this Section 5 paid by such Secured Party (including penalties, additions to tax, interest and reasonable expenses) arising therefrom or with respect thereto. This indemnification shall be made within 30 days from the date such Secured Party makes a reasonable written demand (which demand shall be made within a reasonable time), specifying in reasonable detail (with supporting documentation reasonably requested by the Guarantors) the reasons therefor. (d) If a Secured Party shall become aware that it is entitled to claim a refund from a taxation authority in respect of Taxes or Other Taxes as to which it has been indemnified by such Guarantor, or with respect to which such Guarantor has paid Additional Amounts, pursuant to this Section 5, it shall promptly notify such Guarantor of the availability of such refund claim and shall, within 30 days after receipt of a request by such Guarantor, make a claim to such taxation authority for such refund at such Guarantor's expense. If a Secured Party receives a refund (including pursuant to a claim for refund made pursuant to the preceding sentence) in respect of any Taxes or Other Taxes as to which it has been indemnified by such Guarantor, or with respect to which such Guarantor has paid Additional Amounts, pursuant to this Section 5, it shall within 30 days from the date of such receipt pay over such refund to such Guarantor (but only to the extent of indemnity payments made, or Additional Amounts paid, by such Guarantor under this Section 5 with respect to the Taxes or Other Taxes giving rise to such 6 refund), net of all out-of-pocket expenses of such Secured Party and without interest (other than interest paid by the relevant taxation authority with respect to such refund); provided, however, that such Guarantor, upon the request of such Secured Party, agrees to repay the amount paid over to such Guarantor (plus penalties, interest or other charges, if any, imposed by the relevant taxation authority in respect of such repayment) to such Secured Party in the event such Secured Party is required to repay such refund to such taxation authority. (e) Within 30 days after the date of any payment of Taxes by or on behalf of any Guarantor, such Guarantor shall use commercially reasonable efforts to furnish to the Administrative Agent, at its address referred to in Section 9.02 of the Credit Agreement, the original or certified copy of a receipt evidencing such payment. (f) Upon the reasonable request in writing of any Guarantor, each Secured Party organized under the laws of a jurisdiction outside the United States shall, on or prior to the date of its execution and delivery of the Credit Agreement in the case of each Initial Lender Party and on the date of the Assignment and Acceptance or Secured Hedge Agreement pursuant to which it becomes a Secured Party in the case of each other Secured Party, and on or before the date, if any, it changes its Applicable Lending Office, and from time to time thereafter as requested in writing by any Guarantor (but only so long thereafter as such Secured Party remains lawfully able to do so), provide each of the Administrative Agent and such Guarantor with two original Internal Revenue Service Forms W-8BEN or W-8ECI (in the case of a Secured Party that provides a Form W-8BEN other than by reason of the applicability of a tax treaty, the Secured Party shall also provide a certificate representing that such Secured Party is not a "bank" for purposes of Section 881(c) of the Internal Revenue Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code) of any Guarantor and is not a controlled foreign corporation related to any Guarantor (within the meaning of Section 864(d)(4) of the Internal Revenue Code)), as appropriate, or any successor or other form prescribed by the Internal Revenue Service, properly completed and duly executed by such Secured Party, certifying that such Secured Party is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or the Notes and, in the case of a Secured Party providing a Form W-8BEN, certifying that such Secured Party is a foreign corporation, partnership, estate or trust. In addition, each such Lender Party shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Lender Party. If the forms provided by a Secured Party at the time such Secured Party first becomes a party to this Agreement indicate or require a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Taxes for purposes of this Section 5 unless and until such Secured Party provides the appropriate forms certifying that a lesser rate applies, whereupon withholding tax at such lesser rate only shall be considered excluded from Taxes for periods governed by such forms; provided, however, that if, at the effective date of the Assignment and Acceptance pursuant to which a Secured Party becomes a party to this Agreement (or the date, if any a Secured Party changes its Applicable Lending Office), the Secured Party assignor (or such Secured Party) was entitled to payments under subsection (a) of this Section 5 in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes, subject to the provisions of this subsection (f)) United States withholding tax, if any, applicable with respect to the Secured Party assignee (or such Secured Party) on such date. 7 (g) For any period with respect to which a Secured Party has failed to provide any Guarantor following such Guarantor's request therefor pursuant to subsection (f) above with the appropriate form described in subsection (f) above (other than if such failure is due to a change in law occurring after the date on which a form originally was required to be provided or if such form otherwise is not required under subsection (f) above), such Secured Party shall not be entitled to indemnification under subsection (a) or (c) of this Section 5 with respect to Taxes imposed by the United States by reason of such failure; provided, however, that should a Secured Party become subject to Taxes because of its failure to deliver a form required hereunder, such Guarantor shall take such steps as such Secured Party shall reasonably request to assist such Secured Party to recover such Taxes. (h) Any Secured Party claiming any indemnity payment or Additional Amounts payable pursuant to this Section 5 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document reasonably requested in writing by such Guarantor or to change the jurisdiction of its Applicable Lending Office following the reasonable request in writing of such Guarantor if the making of such a filing or change would avoid the need for or reduce the amount of any such indemnity payment or Additional Amounts that may thereafter accrue and would not, in the sole determination of such Secured Party, require the disclosure of information that such Secured Party reasonably considers confidential, or be otherwise disadvantageous to such Secured Party. Section 6. Representations and Warranties. Each Guarantor hereby makes each representation and warranty made in the Loan Documents by the Borrowers with respect to such Guarantor and each Guarantor hereby further represents and warrants as follows: (a) There are no conditions precedent to the effectiveness of this Guaranty that have not been satisfied or waived. (b) Such Guarantor has, independently and without reliance upon any Secured Party and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Guaranty and each other Loan Document to which it is or is to be a party, and such Guarantor has established adequate means of obtaining from each other Loan Party on a continuing basis information pertaining to, and is now and on a continuing basis will be completely familiar with, the business, condition (financial or otherwise), operations, performance, properties and prospects of such other Loan Party. Section 7. Covenants. Each Guarantor covenants and agrees that, so long as any part of the Guaranteed Obligations shall remain unpaid, any Letter of Credit shall be outstanding and not separately cash collateralized, any Lender Party shall have any Commitment or any Secured Hedge Agreement shall be in effect, such Guarantor will perform and observe, and cause each of its Subsidiaries to perform and observe, all of the terms, covenants and agreements set forth in the Loan Documents on its or their part to be performed or observed or that the Borrower has agreed to cause such Guarantor or such Subsidiaries to perform or observe. Section 8. Amendments, Guaranty Supplements, Etc. (a) No amendment or waiver of any provision of this Guaranty and no consent to any departure by any Guarantor 8 therefrom shall in any event be effective unless the same shall be in writing and signed by the Administrative Agent and the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all of the Secured Parties (other than any Lender that is, at such time, a Defaulting Lender), (a) reduce or limit the obligations of any Guarantor hereunder, release any Guarantor hereunder or otherwise limit any Guarantor's liability with respect to the Obligations owing to the Secured Parties under or in respect of the Loan Documents except as provided in the next succeeding sentence, (b) postpone any date fixed for payment hereunder or (c) change the number of Secured Parties or the percentage of (x) the Commitments, (y) the aggregate unpaid principal amount of the Advances or (z) the aggregate Available Amount of outstanding Letters of Credit that, in each case, shall be required for the Secured Parties or any of them to take any action hereunder. Notwithstanding the foregoing, upon the sale of a Guarantor to the extent permitted in accordance with the terms of the Loan Documents, such Guarantor shall be automatically released from this Guaranty. (b) Upon the execution and delivery by any Person of a guaranty supplement in substantially the form of Exhibit A hereto (each, a "GUARANTY SUPPLEMENT"), (i) such Person shall be referred to as an "ADDITIONAL GUARANTOR" and shall become and be a Guarantor hereunder, and each reference in this Guaranty to a "GUARANTOR" shall also mean and be a reference to such Additional Guarantor, and each reference in any other Loan Document to a "SUBSIDIARY GUARANTOR" shall also mean and be a reference to such Additional Guarantor, and (ii) each reference herein to "THIS GUARANTY", "HEREUNDER", "HEREOF" or words of like import referring to this Guaranty, and each reference in any other Loan Document to the "SUBSIDIARY GUARANTY", "THEREUNDER", "THEREOF" or words of like import referring to this Guaranty, shall mean and be a reference to this Guaranty as supplemented by such Guaranty Supplement. Section 9. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telegraphic, telecopy or telex communication) and mailed, telegraphed, telecopied, telexed or delivered to it, if to any Guarantor, addressed to it in care of MII at MII's address specified in Section 9.02 of the Credit Agreement, if to any Agent or any Lender Party, at its address specified in Section 9.02 of the Credit Agreement, if to any Hedge Bank, at its address specified in the Secured Hedge Agreement to which it is a party, or, as to any party, at such other address as shall be designated by such party in a written notice to each other party. All such notices and other communications shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telegraph, telecopy or telex, or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 9 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 9. Delivery by telecopier of an executed counterpart of a signature page to any amendment or waiver of any provision of this Guaranty or of any Guaranty Supplement to be executed and delivered hereunder shall be effective as delivery of an original executed counterpart thereof. Section 10. No Waiver; Remedies. No failure on the part of any Secured Party to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise 9 thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 11. Right of Set-off. Upon (a) the occurrence and during the continuance of any Event of Default and (b) the making of the request or the granting of the consent specified by Section 6.01 of the Credit Agreement to authorize the Administrative Agent to declare the Notes due and payable pursuant to the provisions of said Section 6.01, each Agent and each Lender Party and each of their respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Agent, such Lender Party or such Affiliate to or for the credit or the account of any Guarantor against any and all of the Obligations of such Guarantor now or hereafter existing under the Loan Documents, irrespective of whether such Agent or such Lender Party shall have made any demand under this Guaranty or any other Loan Document and although such Obligations may be unmatured. Each Agent and each Lender Party agrees promptly to notify such Guarantor after any such set-off and application; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Agent and each Lender Party and their respective Affiliates under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Agent, such Lender Party and their respective Affiliates may have. Section 12. Indemnification. (a) Without limitation on any other Obligations of any Guarantor or remedies of the Secured Parties under this Guaranty, each Guarantor shall, to the fullest extent permitted by law, indemnify, defend and save and hold harmless each Secured Party and each of their Affiliates and their respective officers, directors, employees, agents and advisors (each, an "INDEMNIFIED PARTY") from and against, and shall pay on demand, any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and expenses of counsel) that may be incurred by or asserted or awarded against any Indemnified Party in connection with or as a result of any failure of any Guaranteed Obligations to be the legal, valid and binding obligations of any Loan Party enforceable against such Loan Party in accordance with their terms. (b) Each Guarantor hereby also agrees that none of the Indemnified Parties shall have any liability (whether direct or indirect, in contract, tort or otherwise) to any of the Guarantors or any of their respective Affiliates or any of their respective officers, directors, employees, agents and advisors, and each Guarantor hereby agrees not to assert any claim against any Indemnified Party on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to the Facilities, the actual or proposed use of the proceeds of the Advances or the Letters of Credit, the Loan Documents or any of the transactions contemplated by the Loan Documents. (c) Without prejudice to the survival of any of the other agreements of any Guarantor under this Guaranty or any of the other Loan Documents, the agreements and obligations of each Guarantor contained in Section 1(a) (with respect to enforcement expenses), the last sentence of Section 2, Section 5 and this Section 12 shall survive the payment in full of the Guaranteed Obligations and all of the other amounts payable under this Guaranty. 10 Section 13. Subordination Each Guarantor hereby subordinates any and all debts, liabilities and other Obligations owed to such Guarantor by each other Loan Party (the "SUBORDINATED OBLIGATIONS") to the Guaranteed Obligations to the extent and in the manner hereinafter set forth in this Section 13: (a) Prohibited Payments, Etc. Except during the continuance of an Event of Default, each Guarantor may receive regularly scheduled payments from any other Loan Party on account of Debt owed to it by such Loan Party and permitted under Section 5.02(b) of the Credit Agreement. After the occurrence and during the continuance of any Event of Default, however, unless the Administrative Agent otherwise agrees, no Guarantor shall demand, accept or take any action to collect any payment on account of Debt owed to it by any other Loan Party. (b) Prior Payment of Guaranteed Obligations. In any proceeding under any Bankruptcy Law, each Guarantor agrees that the Secured Parties shall be entitled to receive payment in full in cash of all Guaranteed Obligations (including all interest and expenses accruing after the commencement of a proceeding under any Bankruptcy Law, whether or not constituting an allowed claim in such proceeding ("POST PETITION INTEREST")) before such Guarantor receives payment of any Debt owed to it by any other Loan Party. (c) Turn-Over. After the occurrence and during the continuance of any Event of Default, each Guarantor shall, if the Administrative Agent so requests, use commercially reasonable efforts to collect, enforce and receive payments on account of Debt owed to it by any Loan Parties as trustee for the Secured Parties and deliver such payments to the Administrative Agent on account of the Guaranteed Obligations (including all Post Petition Interest), together with any necessary endorsements or other instruments of transfer, but without reducing or affecting in any manner the liability of such Guarantor under the other provisions of this Guaranty. (d) Administrative Agent Authorization. After the occurrence and during the continuance of any Event of Default, the Administrative Agent is authorized and empowered (but without any obligation to so do), in its discretion, (i) in the name of each Guarantor, to collect and enforce, and to submit claims in respect of, Subordinated Obligations and to apply any amounts received thereon to the Guaranteed Obligations (including any and all Post Petition Interest), and (ii) to require each Guarantor (A) to use commercially reasonable efforts to collect and enforce, and to submit claims in respect of, Debt owed to it by any Loan Party and (B) to pay any amounts received on such obligations to the Administrative Agent for application to the Guaranteed Obligations (including any and all Post Petition Interest). Section 14. Continuing Guaranty; Assignments under the Credit Agreement. This Guaranty is a continuing guaranty and shall (a) remain in full force and effect until the latest of (i) the payment in full in cash of the Guaranteed Obligations and all other amounts payable under this Guaranty, (ii) the Termination Date and (iii) the latest date of expiration or termination of all Letters of Credit and all Secured Hedge Agreements or, in the case of the Letters of Credit, the cash collateralization of such Letters of Credit as provided for in the Credit Agreement, 11 (b) be binding upon the Guarantor, its successors and assigns and (c) inure to the benefit of and be enforceable by the Secured Parties and their successors and permitted assigns. Without limiting the generality of clause (c) of the immediately preceding sentence, any Secured Party may assign or otherwise transfer all or any portion of its rights and obligations under the Credit Agreement (including, without limitation, all or any portion of its Commitments, the Advances owing to it and the Note or Notes held by it) to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Secured Party herein or otherwise, in each case as and to the extent provided in Section 9.07 of the Credit Agreement. No Guarantor shall have the right to assign its rights hereunder or any interest herein without the prior written consent of the Secured Parties. Section 15. Execution in Counterparts. This Guaranty and each amendment, waiver and consent with respect hereto may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Guaranty by telecopier shall be effective as delivery of an original executed counterpart of this Guaranty. Section 16. Governing Law; Jurisdiction; Waiver of Jury Trial, Etc. (a) This Guaranty shall be governed by, and construed in accordance with, the laws of the State of New York. (b) Each Guarantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Guaranty or any of the other Loan Documents to which it is or is to be a party, or for recognition or enforcement of any judgment, and each Guarantor hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in such federal court. Each Guarantor agrees that a final and non-appealable judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Guaranty or any other Loan Document shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Guaranty or any other Loan Document in the courts of any jurisdiction. (c) Each Guarantor irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Guaranty or any of the other Loan Documents to which it is or is to be a party in any New York State or federal court. Each Guarantor hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such suit, action or proceeding in any such court. (d) EACH GUARANTOR HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR 12 RELATING TO ANY OF THE LOAN DOCUMENTS, THE ADVANCES OR THE ACTIONS OF ANY SECURED PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF. IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. J. RAY McDERMOTT INTERNATIONAL VESSELS, LTD. By ------------------------------ Title: James R. Easter Treasurer HYDRO MARINE SERVICES, INC. By ------------------------------ Title: James R. Easter Treasurer J. RAY McDERMOTT UNDERWATER SERVICES, INC. By ------------------------------ Title: James R. Easter Treasurer MENTOR SUBSEA TECHNOLOGY SERVICES, INC. By ------------------------------ Title: James R. Easter Treasurer McDERMOTT TRADE CORPORATION By ------------------------------ Title: James R. Easter Treasurer J. RAY McDERMOTT TECHNOLOGY, INC. By ------------------------------ Title: James R. Easter Treasurer OPI VESSELS, INC. By ------------------------------ Title: James R. Easter Treasurer J. RAY McDERMOTT ENGINEERING HOLDINGS, INC. By ------------------------------ Title: James R. Easter Treasurer SABINE RIVER REALTY, INC. By ------------------------------ Title: James R. Easter Treasurer SPARTEC, INC. By ------------------------------ Title: James R. Easter Treasurer J. RAY McDERMOTT WEST AFRICA HOLDINGS, INC. By ------------------------------ Title: James R. Easter Treasurer J. RAY McDERMOTT ENGINEERING, LLC By ------------------------------ Title: James R. Easter Treasurer J. RAY McDERMOTT WEST AFRICA, INC. By ------------------------------ Title: James R. Easter Treasurer EXHIBIT A TO THE SUBSIDIARY GUARANTY SUBSIDIARY GUARANTY SUPPLEMENT _________ __, ____ Citicorp USA, Inc., as Administrative Agent [1200 Smith Street, Suite 200 Houston, TX 77002] Attention: _________ Credit Agreement dated as of February __, 2003 among McDermott International, Inc., a Panamanian corporation ("MII"), J. Ray McDermott, S.A., a Panamanian corporation ("JRMSA"), J. Ray McDermott Holdings, Inc., a Delaware corporation ("JRMHI"), J. Ray McDermott, Inc., a Delaware corporation ("JRMI"), and BWX Technologies, Inc., a Delaware corporation ("BWXT", and together with JRMSA, JRMHI and JRMI, the "BORROWERS" and each, a "BORROWER"), the banks, financial institutions and other institutional lenders listed on the signature pages thereof as the Initial Lender Parties, Citicorp USA, Inc. as Collateral Agent and Administrative Agent for the Lender Parties, Salomon Smith Barney, as lead arranger and book runner, [NAME OF INSTITUTION], as documentation agent, and [NAME OF INSTITUTION], as syndication agent. Ladies and Gentlemen: Reference is made to the above-captioned Credit Agreement and to the Subsidiary Guaranty referred to therein (such Subsidiary Guaranty, as in effect on the date hereof and as it may hereafter be amended, supplemented or otherwise modified from time to time, together with this Guaranty Supplement, being the "SUBSIDIARY GUARANTY"). The capitalized terms defined in the Subsidiary Guaranty or in the Credit Agreement and not otherwise defined herein are used herein as therein defined. Section 1. Guaranty; Limitation of Liability. (a) The undersigned hereby absolutely, unconditionally and irrevocably guarantees the punctual payment when due, whether at scheduled maturity or on any date of a required prepayment or by acceleration, demand or otherwise pursuant to the terms of this Agreement, of all Obligations of each other Loan Party now or hereafter existing under or in respect of the Loan Documents (including, without limitation, any extensions, modifications, substitutions, amendments or renewals of any or all of the foregoing Obligations), whether direct or indirect, absolute or contingent, and whether for principal, interest, premium, fees, indemnities or otherwise (such Obligations being the "GUARANTEED OBLIGATIONS"), and agrees to pay any and all expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by the Agents or any other Secured 2 Party in enforcing any rights under this Guaranty Supplement, the Subsidiary Guaranty or any other Loan Documents. Without limiting the generality of the foregoing, the undersigned's liability shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by any other Borrower to any Secured Party under or in respect of the Loan Documents but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving such other Borrower. (b) The undersigned, and by its acceptance of this Guaranty Supplement, the Agents and each other Secured Party, hereby confirms that it is the intention of all such Persons that this Guaranty Supplement, the Subsidiary Guaranty and the Obligations of the undersigned hereunder and thereunder not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar foreign, federal or state law to the extent applicable to this Guaranty Supplement, the Subsidiary Guaranty and the Obligations of the undersigned hereunder and thereunder. To effectuate the foregoing intention, the Agents, the other Secured Parties and the undersigned hereby irrevocably agree that the Obligations of the undersigned under this Guaranty Supplement and the Subsidiary Guaranty at any time shall be limited to the maximum amount as will result in the Obligations of the undersigned under this Guaranty Supplement and the Subsidiary Guaranty not constituting a fraudulent transfer or conveyance. (c) The undersigned hereby unconditionally and irrevocably agrees that in the event any payment shall be required to be made to any Secured Party under this Guaranty Supplement, the Subsidiary Guaranty, the Parent Guaranty or any other guaranty, the undersigned will contribute, to the maximum extent permitted by applicable law, such amounts to each other Guarantor and each other guarantor so as to maximize the aggregate amount paid to the Secured Parties (up to the amount of the payment so required to be made) under or in respect of the Loan Documents. Section 2. Obligations Under the Guaranty. The undersigned hereby agrees, as of the date first above written, to be bound as a Guarantor by all of the terms and conditions of the Subsidiary Guaranty to the same extent as each of the other Guarantors thereunder. The undersigned further agrees, as of the date first above written, that each reference in the Subsidiary Guaranty to an "ADDITIONAL GUARANTOR" or a "GUARANTOR" shall also mean and be a reference to the undersigned, and each reference in any other Loan Document to a "SUBSIDIARY GUARANTOR" or a "LOAN PARTY" shall also mean and be a reference to the undersigned. Section 3. Representations and Warranties. The undersigned hereby makes each representation and warranty set forth in Section 6 of the Subsidiary Guaranty to the same extent as each other Guarantor. Section 4. Delivery by Telecopier. Delivery of an executed counterpart of a signature page to this Guaranty Supplement by telecopier shall be effective as delivery of an original executed counterpart of this Guaranty Supplement. Section 5. Governing Law; Jurisdiction; Waiver of Jury Trial, Etc. (a) This Guaranty Supplement shall be governed by, and construed in accordance with, the laws of the State of New York. 3 (b) The undersigned hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or any federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Guaranty Supplement, the Subsidiary Guaranty or any of the other Loan Documents to which it is or is to be a party, or for recognition or enforcement of any judgment, and the undersigned hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in such federal court. The undersigned agrees that a final and non-appealable judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Guaranty Supplement or the Subsidiary Guaranty or any other Loan Document shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Guaranty Supplement, the Subsidiary Guaranty or any of the other Loan Documents to which it is or is to be a party in the courts of any other jurisdiction. (c) The undersigned irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Guaranty Supplement, the Subsidiary Guaranty or any of the other Loan Documents to which it is or is to be a party in any New York State or federal court. The undersigned hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such suit, action or proceeding in any such court. (d) THE UNDERSIGNED HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS, THE ADVANCES OR THE ACTIONS OF ANY SECURED PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF. Very truly yours, [NAME OF ADDITIONAL GUARANTOR] By ------------------------------ Title: EX-12.1 7 d04254exv12w1.txt RATIO OF EARNINGS TO FIXED CHARGES . . . EXHIBIT 12.1 RATIO OF EARNINGS TO FIXED CHARGES Our ratio of earnings to fixed charges is as follows:
Nine-Month Fiscal Period Year Year Ended Ended Ended December 31, December 31, March 31, 2002 2001 2000 1999 1999 ---- ---- ---- ---- ---- (In thousands, except for ratios) Earnings: Income (loss) from continuing operations before provision for income taxes and extraordinary item $ (771,141) $ 85,907 $ (14,229) $ 32,503 $ 176,794 Minority interest - - - - (3,516) Equity in undistributed earnings (losses) of affiliates 1,053 (3,418) 18,624 11,165 9,218 Interest expense 15,124 39,663 43,605 35,743 63,240 Portion of rents representative of the interest factor 15,011 14,442 14,418 11,385 31,989 ----------------------------------------------------------------------- $ (739,953) $ 136,594 $ 62,418 $ 90,796 $ 277,725 ----------------------------------------------------------------------- Fixed charges: Interest expense, including amount capitalized 17,947 41,040 45,994 37,679 63,818 Portion of rents representative of the interest factor 15,011 14,442 14,418 11,385 31,989 ----------------------------------------------------------------------- $ 32,958 $ 55,482 $ 60,412 $ 49,064 $ 95,807 ----------------------------------------------------------------------- Ratio of earnings to fixed charges - 2.46x 1.03x 1.85x 2.90x =======================================================================
EX-21.1 8 d04254exv21w1.txt SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 McDERMOTT INTERNATIONAL, INC. SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT YEAR ENDED DECEMBER 31, 2002
JURISDICTION PERCENTAGE OF OF OWNERSHIP NAME OF COMPANY ORGANIZATION INTEREST McDermott International Investments Co., Inc. Panama 100 McDermott International Trading Co., Inc. Panama 100 McDermott Overseas Investment Co. N.V. Netherlands Antilles 100 Delta Catalytic (Holland) B.V. Netherlands 100 J. Ray McDermott, S.A. Panama 100 Hydro Marine Services, Inc. Panama 100 J. Ray McDermott Holdings, Inc. Delaware 100 J. Ray McDermott, Inc. Delaware 100 J. Ray McDermott International, Inc. Panama 100 J. Ray McDermott Contractors, Inc. Panama 100 J. Ray McDermott Middle East, Inc. Panama 100 J. Ray McDermott Middle East (India Ocean) Ltd. Mauritius 100 McDermott Incorporated Delaware 100 Babcock & Wilcox Investment Company Delaware 100 BWX Technologies, Inc. Delaware 100
The subsidiaries omitted from the foregoing list, considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary. EX-23.1 9 d04254exv23w1.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No. 2-83692, No. 33-16680, No. 33-51892, No. 33-51894, No. 33-63832, No. 33-55341, No. 33-60499, No. 333-12531, No. 333-39087 and No. 333-39089) of McDermott International, Inc. and the Registration Statement on Form S-3 (No. 333-69474) of McDermott International, Inc. of our report dated March 24, 2003, relating to the consolidated financial statements of McDermott International, Inc., which appears in this Form 10-K. PricewaterhouseCoopers LLP New Orleans, Louisiana March 27, 2003 -----END PRIVACY-ENHANCED MESSAGE-----