def14a
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment
No. )
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
o Preliminary Proxy Statement
o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Under 14a-12
McDERMOTT INTERNATIONAL, INC.
(Name of Registrant as
Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|
|
|
|
|
|
|
þ |
|
No fee required. |
|
|
|
|
|
|
|
o |
|
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
Title of each class of securities to which transaction applies: N/A |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
Aggregate number of securities to which transaction applies: N/A |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and
state how it was determined): N/A |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
Proposed maximum aggregate value of transaction: N/A |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
Total fee paid: N/A |
|
|
|
|
|
|
|
o |
|
Fee paid previously with preliminary materials. |
|
|
|
o
|
|
Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing
by registration statement number, or the Form or Schedule and the
date of its filing. |
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
Amount previously paid: |
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
Form, Schedule or
Registration Statement No.: |
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
Filing Party: |
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
Date Filed: |
|
McDermott International, Inc.
Bruce W. Wilkinson
Chairman of the Board and
Chief Executive Officer
December 13, 2005
Dear Stockholder:
We invite you to attend a special meeting of stockholders of
McDermott International, Inc., which we have called to ask our
stockholders to consider and vote on a resolution relating to
the proposed settlement of the Chapter 11 proceedings
involving The Babcock & Wilcox Company, a significant
subsidiary of McDermott. We have scheduled this meeting to take
place on Wednesday, January 18, 2006, at
757 N. Eldridge Parkway, Houston, Texas 77079, on the
14th floor, commencing at 10:00 a.m. local time. The
accompanying proxy statement provides information about the
proposed settlement. You should consider this information,
including the discussion of the risks associated with the
proposed settlement which appears beginning on page 15,
before voting on the proposed resolution. Our Board of
Directors has unanimously approved the proposed settlement and
unanimously recommends that you vote FOR the adoption of
the proposed resolution.
If EquiServe Trust Company, N.A., our transfer agent and
registrar, holds your shares of record, we have enclosed a proxy
card for your use. You may vote these shares by completing and
returning the proxy card or, alternatively, calling a toll-free
telephone number or using the Internet as described on the proxy
card. If a broker or other nominee holds your shares in
street name, it has enclosed a voting instruction
form, which you should use to vote those shares. The voting
instruction form indicates whether you have the option to vote
those shares by telephone or by using the Internet.
Your vote is important. Whether or not you plan to attend the
meeting, please take a few minutes now to vote your shares.
Thank you for your interest in our company.
|
|
|
Sincerely yours, |
|
|
|
|
|
BRUCE W. WILKINSON |
McDermott International, Inc.
Notice of Special Meeting of Stockholders
A special meeting of the stockholders of McDermott
International, Inc., a Panamanian corporation, will be held at
757 N. Eldridge Parkway, Houston, Texas 77079, on the
14th floor, on Wednesday, January 18, 2006, at
10:00 a.m. local time, for the following purpose:
|
|
|
To consider and vote on the adoption of a resolution to: |
|
|
|
|
|
authorize and approve the settlement contemplated by the
proposed settlement agreement relating to the Chapter 11
bankruptcy proceedings involving The Babcock & Wilcox
Company, a significant subsidiary of McDermott, in substantially
the form attached to the accompanying proxy statement, with such
modifications or changes as the Board of Directors of McDermott
may approve; and |
|
|
|
authorize and approve McDermotts execution and delivery
of, and performance under, the proposed settlement agreement, in
substantially the form attached to the accompanying proxy
statement, with such modifications or changes as the Board of
Directors of McDermott may approve. |
The accompanying proxy statement sets forth the proposed
resolution under the caption The Special
Meeting General. Appendix A to the
accompanying proxy statement includes a copy of the proposed
settlement agreement.
If you were a stockholder as of the close of business on
December 9, 2005, you are entitled to vote at the meeting
and at any adjournment thereof.
Please indicate your vote by following the instructions the
enclosed proxy card or voting instruction form provides, whether
or not you plan on attending the meeting.
|
|
|
By Order of the Board of Directors, |
|
|
|
|
|
JOHN T. NESSER, III |
|
Secretary |
Dated: December 13, 2005
TABLE OF CONTENTS
|
|
|
|
|
|
|
|
Page | |
|
|
| |
|
|
|
1 |
|
|
|
|
|
1 |
|
|
|
|
|
8 |
|
|
|
|
|
9 |
|
|
|
|
10 |
|
|
|
|
|
10 |
|
|
|
|
|
13 |
|
|
|
|
15 |
|
|
|
|
15 |
|
|
|
|
18 |
|
|
|
|
|
18 |
|
|
|
|
|
19 |
|
|
|
|
|
19 |
|
|
|
|
|
20 |
|
|
|
|
|
20 |
|
|
|
|
|
20 |
|
|
|
|
|
21 |
|
|
|
|
21 |
|
|
|
|
|
21 |
|
|
|
|
|
35 |
|
|
|
|
|
36 |
|
|
|
|
|
37 |
|
|
|
|
|
37 |
|
|
|
|
|
39 |
|
|
|
|
39 |
|
|
|
|
43 |
|
|
|
|
|
44 |
|
|
|
|
|
45 |
|
|
|
|
|
45 |
|
|
|
|
|
46 |
|
|
|
|
47 |
|
|
|
|
49 |
|
|
|
|
|
49 |
|
|
|
|
|
51 |
|
|
|
|
|
52 |
|
|
|
|
|
57 |
|
|
|
|
59 |
|
|
|
|
61 |
|
|
|
|
75 |
|
|
|
|
77 |
|
|
|
|
78 |
|
|
|
|
78 |
|
|
|
|
F-1 |
|
|
|
|
A-1 |
|
Summary
The following discussion summarizes information relating to
the proposed resolution we describe below. You should carefully
read this entire proxy statement and the other documents to
which it refers you for more complete information relating to
that resolution. For instructions on obtaining more information,
see Where You Can Find More Information on
page 78. As used in this proxy statement, the terms
we, us and our refer to
McDermott International, Inc. and its subsidiaries, unless the
context otherwise indicates or we otherwise state.
The Proposed Resolution (see page 18)
Background. The Board of Directors of McDermott
International, Inc., a Panamanian corporation
(McDermott), has called a special meeting of
stockholders of McDermott (the Special Meeting) and
is soliciting proxies of McDermotts stockholders for a
vote at the Special Meeting on a resolution relating to a new
proposed settlement agreement (the Proposed Settlement
Agreement) that would resolve the Chapter 11
proceedings involving The Babcock & Wilcox Company, a
Delaware corporation (B&W), an indirect wholly
owned subsidiary of McDermott, and three of B&Ws
subsidiaries, as debtors (collectively with B&W, the
Chapter 11 Debtors). Those proceedings are
pending in the United States Bankruptcy Court for the Eastern
District of Louisiana (the Bankruptcy Court). The
Proposed Settlement Agreement reflects several significant
changes from the settlement contemplated by the previously
negotiated settlement agreement approved by McDermotts
stockholders at a special meeting held on December 17, 2003
(the Previously Negotiated Settlement Agreement).
Specifically, the Proposed Settlement Agreement:
|
|
|
|
|
reflects substantial changes to the form and amount of
consideration to be contributed to a trust (the Asbestos
PI Trust) to be formed under the laws of Delaware to pay
asbestos-related personal injury claims against B&W and its
subsidiaries (the B&W Entities); |
|
|
|
contemplates the implementation of a mechanism that would
potentially limit the consideration to be contributed to the
Asbestos PI Trust, so that, if the recently proposed
U.S. federal asbestos claims-resolution legislation
(referred to as the Fairness in Asbestos Injury Resolution
Act of 2005 or the FAIR Act) or similar
U.S. federal legislation is enacted and becomes law on or
prior to a negotiated deadline (November 30, 2006), the
Proposed Settlement Agreement would result in cash outflows that
we believe are reasonably comparable to the cash outflows we
would anticipate, in the absence of a settlement, under the
proposed legislation in its current form; and |
|
|
|
provides for B&W and its subsidiaries to remain as indirect
subsidiaries of McDermott. |
The Chapter 11 Debtors filed for protection under
Chapter 11 of the U.S. Bankruptcy Code on
February 22, 2000, in response to increases in the amounts
being demanded to settle asbestos-related personal injury
claims, which put an extraordinary strain on B&Ws
historical claims resolution process, left B&W with no
practicable means of resolving the claims through out-of-court
settlement and threatened B&Ws financing capability
and long-term prospects. The Chapter 11 Debtors took this
action as a means to determine and comprehensively resolve all
pending and future asbestos-related liability claims against
them. After the filing, an asbestos claimants committee
(the ACC) was formed to represent the rights of
asbestos-related personal injury claimants, and the Bankruptcy
Court appointed a future claimants representative (the
FCR) to represent the rights of persons who might
subsequently assert future asbestos-related personal injury
claims.
The Previously Negotiated Settlement. Following the
Chapter 11 filing, we engaged in lengthy negotiations with
the ACC, the FCR, the Chapter 11 Debtors and their
respective representatives to reach a settlement and a
consensual joint plan of reorganization for the Chapter 11
proceedings. By late 2003, those negotiations resulted in the
Previously Negotiated Settlement Agreement.
1
Under the terms of the Previously Negotiated Settlement
Agreement and the related joint plan (the Previously
Negotiated Joint Plan), the Asbestos PI Trust would have
been funded by contributions of:
|
|
|
|
|
all the capital stock of B&W; |
|
|
|
4.75 million shares of common stock of McDermott, with a
guaranty from McDermott that those shares would have a value of
no less than $19 per share on the third anniversary of the
date of issuance; |
|
|
|
$92 million aggregate principal amount of promissory notes
of one of McDermotts significant subsidiaries, McDermott
Incorporated, a Delaware corporation (MI),
guaranteed by McDermott, bearing interest at 7.5% annually, with
payments to be made ratably over an 11-year term; and |
|
|
|
rights to excess insurance coverage to be assigned by McDermott
and most of its subsidiaries, with an aggregate face amount of
available limits of coverage of approximately $1.15 billion. |
As part of the consideration for these contributions, McDermott
and its subsidiaries would have been entitled to the protection
of a channeling injunction, which would have
channeled all pending and future B&W-related
asbestos personal injury claims to the Asbestos PI Trust for
resolution and the Asbestos PI Trust would have indemnified
McDermott and its subsidiaries from any liabilities associated
with those claims.
The Previously Negotiated Settlement Agreement and Previously
Negotiated Joint Plan also contemplated the formation of a
separate trust for the benefit of holders of claims against
B&W for nuclear-related personal injuries allegedly arising
from the operation of two nuclear fuel processing facilities in
Apollo and Parks Township, Pennsylvania (the Apollo/ Parks
Township Claims). That trust would have been funded
primarily through a cash contribution of approximately
$2.8 million and assignments of applicable insurance
rights. McDermott and its subsidiaries would have been entitled
to the protection of a channeling injunction, which would have
channeled all pending and future Apollo/ Parks Township Claims
to that trust for resolution, and that trust would have
indemnified McDermott and its subsidiaries from any liabilities
associated with those claims.
Although McDermotts stockholders approved the Previously
Negotiated Settlement Agreement at the December 17, 2003
special meeting, that approval was expressly conditioned on the
subsequent approval of the Previously Negotiated Settlement
Agreement by McDermotts Board of Directors within
30 days prior to the effective date of the Previously
Negotiated Joint Plan. The McDermott Boards decision on
whether to approve the Previously Negotiated Settlement
Agreement was to be made after consideration of any developments
that might occur prior to the effective date, including any
changes in the status of any potential federal legislation
concerning asbestos liabilities. McDermotts Board of
Directors has not yet taken that requisite approval under
consideration because progress towards an effective date for the
Previously Negotiated Joint Plan has been impeded by various
procedural objections and appeals on the part of:
(1) American Nuclear Insurers relating to insurance
coverage for Apollo/ Parks Township Claims and (2) insurers
whose policies cover asbestos personal injury claims who have
not settled with the Chapter 11 Debtors, McDermott, the ACC
and the FCR. As a result, the Previously Negotiated Settlement
Agreement has not been executed and delivered by the parties to
the negotiations, and, beginning in January 2005, we, together
with the ACC, the FCR, the Chapter 11 Debtors and their
respective representatives, began discussions about alternative
means to expedite the resolution of the Chapter 11
proceedings on a mutually acceptable basis. Those discussions
led to the Proposed Settlement Agreement.
Key Terms of the Proposed Settlement. Under the terms of
the Proposed Settlement Agreement and a related plan of
reorganization the Chapter 11 Debtors, the ACC, the FCR and
MI, as plan proponents, have jointly proposed (the
Proposed Joint Plan), we would retain our ownership
of the equity interests in B&W and its subsidiaries and the
Asbestos PI Trust would be funded by contributions of:
|
|
|
|
|
$350 million in cash, which would be paid by MI or one of
its subsidiaries on the effective date of the Proposed Joint
Plan; |
2
|
|
|
|
|
an additional contingent cash payment of $355 million,
which would be payable by MI or one of its subsidiaries within
180 days of November 30, 2006, but only if the
condition precedent described below is satisfied, which amount
would be payable with interest accruing on that amount at
7% per year from December 1, 2006 to the date of
payment; and |
|
|
|
a note issued by B&W in the aggregate principal amount of
$250 million (the B&W Note), bearing
interest at 7% annually on the outstanding principal balance
from and after December 1, 2006, with a five- year term and
annual principal payments of $50 million each, commencing
on December 1, 2007, provided that, if the condition
precedent described below is not satisfied, only
$25 million principal amount of the B&W Note would be
payable (with the entire $25 million amount due on
December 1, 2007). B&Ws payment obligations under
the B&W Note would be fully and unconditionally guaranteed
by McDermott and Babcock & Wilcox Investment Company, a
Delaware corporation (BWICO), a wholly owned
subsidiary of MI. The guarantee obligations of BWICO and
McDermott would be secured by a pledge of all of B&Ws
capital stock outstanding as of the effective date of the
Proposed Joint Plan. |
McDermott and most of its subsidiaries would also contribute to
the Asbestos PI Trust substantially the same insurance rights as
were to be contributed to the Asbestos PI Trust under the
Previously Negotiated Settlement Agreement. Those insurance
rights relate to numerous insurance policies that have an
aggregate face amount of available limits of coverage of
approximately $1.15 billion. See Description of the
Proposed Settlement Agreement Creation of the
Asbestos PI Trust and Contribution of Assets. As a result,
the proposed settlement would eliminate substantially all of our
excess insurance coverage for the period from April 1, 1979
to April 1, 1986, which we would only partially surrender
under the proposed FAIR Act.
The Proposed Settlement Agreement includes a mechanism that
would potentially limit the consideration to be contributed to
the Asbestos PI Trust if the FAIR Act or similar
U.S. federal legislation is enacted and becomes law.
Specifically, the Proposed Settlement Agreement provides that
the right to receive the $355 million contingent payment
(the Contingent Payment Right) would vest and
amounts under the B&W Note in excess of $25 million
would be payable only upon satisfaction of the condition
precedent that neither the FAIR Act nor any other
U.S. federal legislation designed to resolve
asbestos-related personal injury claims through the
implementation of a national trust shall have been enacted and
become law on or before November 30, 2006 (the
Condition Precedent). The Proposed Settlement
Agreement further provides that:
|
|
|
|
|
if such legislation is enacted and becomes law on or before
November 30, 2006 and is not subject to a legal proceeding
as of January 31, 2007 which challenges the
constitutionality of such legislation (any such proceeding is
referred to as a Challenge Proceeding), the
Condition Precedent would be deemed not to have been satisfied,
and no amounts would be payable under the Contingent Payment
Right and no amounts in excess of $25 million would be
payable under the B&W Note; and |
|
|
|
if such legislation is enacted and becomes law on or before
November 30, 2006, but is subject to a Challenge Proceeding
as of January 31, 2007, the Condition Precedent would be
deemed not to have been satisfied and any rights with respect to
the Contingent Payment Right and payments under the B&W Note
in excess of $25 million would be suspended until either: |
|
|
|
(1) there has been a final, nonappealable judicial decision
with respect to the Challenge Proceeding to the effect that such
legislation is unconstitutional as generally applied to debtors
in Chapter 11 proceedings whose plans of reorganization
have not yet been confirmed and become substantially consummated
(i.e., debtors that are similarly situated to B&W as
of September 1, 2005), so that such debtors would not be
subject to such legislation, in which event the Condition
Precedent would be deemed to have been satisfied, and the
Contingent Payment Right would vest and the B&W Note would
become fully payable pursuant to its terms (in each case subject
to the protection against double payment provisions described
below); or |
3
|
|
|
(2) there has been a final nonappealable judicial decision
with respect to the Challenge Proceeding which resolves the
Challenge Proceeding in a manner other than as contemplated by
the immediately preceding clause, in which event the Condition
Precedent would be deemed not to have been satisfied and no
amounts would be payable under the Contingent Payment Right and
no amounts in excess of $25 million would be payable under
the B&W Note. |
The Proposed Settlement Agreement also includes provisions to
provide some protection against double payment so that, if the
FAIR Act or similar U.S. federal legislation is enacted and
becomes law after November 30, 2006, or the Condition
Precedent is otherwise satisfied (in accordance with the
provisions described in clause (1) above), any payment
McDermott or any of its subsidiaries may be required to make
pursuant to the legislation on account of asbestos-related
personal injury claims against any of the B&W Entities would
reduce, by a like amount:
|
|
|
|
|
first, the amount, if any, then remaining payable pursuant to
the Contingent Payment Right; and |
|
|
|
next, any then remaining amounts payable pursuant to the B&W
Note. |
Under the Proposed Settlement Agreement and the Proposed Joint
Plan, the Apollo/ Parks Township Claims will not be channeled to
a trust, as contemplated by the Previously Negotiated Settlement
Agreement and the Previously Negotiated Joint Plan. Rather, the
Apollo/ Parks Township Claims would remain the responsibility of
the Chapter 11 Debtors and will not be impaired under the
terms of the Proposed Joint Plan in its current form. While the
Proposed Settlement has been structured in a manner to permit
all disputes relating to the Apollo/ Parks Township Claims and
the associated insurance coverage to be resolved after the
Proposed Joint Plan has been confirmed and becomes effective,
B&W, representatives of the claimants in the pending
litigation related to the Apollo/ Parks Township Claims and ARCO
have negotiated an agreement in principle that reflects a
proposed settlement of present Apollo/Parks Township Claims,
including those that are the subject of the Hall Litigation (as
defined in The Proposed
Settlement Background of the Proposed
Settlement Apollo/Parks Township Claims).
The agreement in principle, which has been memorialized in a
term sheet, contemplates, among other things, that:
(1) B&W and ARCO will be provided full and complete
releases from each of the Apollo/ Parks Township Releasors
(which will be defined in a definitive settlement agreement
generally to mean the existing claimants in this litigation and
related pending litigation); (2) ARCO will make a
$27.5 million cash payment to the Apollo/ Parks Township
Releasors upon the effective date of the Proposed Joint Plan;
(3) B&W will make a $47.5 million cash payment to
the Apollo/ Parks Township Releasors upon the effective date of
the Proposed Joint Plan; (4) B&W will make a
$12.5 million payment to the Apollo/ Parks Township
Releasors upon the third anniversary of the effective date of
the Proposed Joint Plan; and (5) B&W and ARCO will
retain all insurance rights, including without limitation with
respect to the claims of the Apollo/ Parks Township present
claimants who are not Apollo/ Parks Township Releasors and with
respect to any future Apollo/ Parks Township Claims. We intend
to seek reimbursement from our nuclear insurers for all amounts
that would be paid by B&W under the proposed settlement. Our
nuclear insurers have refused to fund the proposed settlement of
this litigation and have indicated that, while they do not
anticipate objecting to the terms of the Proposed Joint Plan,
they will object to the proposed settlement of this litigation
unless the settlement does not prejudice our nuclear insurers in
any subsequent litigation brought by us seeking reimbursement
from them.
The Proposed Settlement Agreement contemplates that the Proposed
Joint Plan must become effective, on a final, nonappealable
basis, no later than February 22, 2006 or such later date
as we, the ACC and the FCR may agree to (the Effective
Date Deadline). The Proposed Settlement Agreement further
contemplates that, if the effective date of the Proposed Joint
Plan has not occurred by that date, and is not extended by the
ACC, the FCR and us, acting together, then the settlement
contemplated by the Proposed Settlement Agreement will be
abandoned and the parties will resume their efforts to effect
the settlement contemplated by the Previously Negotiated
Settlement Agreement and the Previously Negotiated Joint Plan.
4
Benefits of the Proposed Settlement. The benefits we
expect to obtain from the proposed settlement include the
following:
|
|
|
|
|
B&W and its subsidiaries would remain as indirect
subsidiaries of McDermott, and we would include the results of
their operations in our consolidated results of operations, and
(subject to ordinary restrictions on accessing cash flows of
subsidiaries) we would regain access to the cash flows of
B&W and its subsidiaries and be in a position to benefit
from the strengths of the B&W Entities, as described
under Information About B&W and Its
Subsidiaries Business; |
|
|
|
the Asbestos PI Trust would indemnify McDermott and its
subsidiaries against asbestos-related personal injury claims
(other than workers compensation claims) attributable to
the business and operations of the B&W Entities; |
|
|
|
McDermott and its subsidiaries, including the B&W Entities,
would receive the protection of a channeling injunction under
Section 524(g) of the U.S. Bankruptcy Code, which
would channel all pending and future asbestos-related personal
injury claims (other than workers compensation claims)
attributable to the business and operations of the B&W
Entities to the Asbestos PI Trust; |
|
|
|
McDermotts captive insurance subsidiaries, which provided
insurance coverage to the B&W Entities for specified risks,
and/or reinsured against specified risks, would generally be
entitled to the same indemnification and channeling injunction
protections as described above; |
|
|
|
the ACC and the FCR would terminate their appeal of a favorable
ruling by the Bankruptcy Court validating a corporate
reorganization we completed in 1998, which involved
B&Ws cancellation of a $313 million intercompany
note receivable and transfers of substantial assets from B&W
to BWICO, including transfers of all the capital stock of
several operating subsidiaries; and |
|
|
|
the likely acceleration of B&Ws emergence from
bankruptcy, because the proposed settlement does not involve
some of the complexities that were reflected in the previously
negotiated settlement and removes the bases for objection by
various parties. |
The protections to be provided to us with regard to
asbestos-related liabilities would apply only to liabilities
attributable to the business and operations of the B&W
Entities and would not apply to any asbestos-related liabilities
for which McDermott or any of its other subsidiaries may
otherwise have responsibility. See Description of the
Proposed Settlement Agreement.
U.S. Federal Income Tax Considerations of the Proposed
Settlement. We have provided a description of the material
U.S. federal income tax consequences to MI and its
subsidiaries of the proposed settlement under the caption
The Proposed Settlement Material
U.S. Federal Income Tax Considerations Relating to the
Proposed Settlement, beginning on page 37 of this
proxy statement.
As discussed more fully in that section, the proposed settlement
should generate significant U.S. federal income tax
deductions associated with the contributions to be made by MI
and its subsidiaries to the Asbestos PI Trust. The Asbestos PI
Trust is expected to qualify as a qualified settlement
fund under Section 468B of the Internal Revenue Code,
as was contemplated by the prior settlement. In order to qualify
as a qualified settlement fund, the Asbestos PI Trust must be:
|
|
|
|
|
established pursuant to an order of, or approved by, the United
States, any state, territory, possession, or political
subdivision thereof, or any agency or instrumentality (including
a court of law) of any of the foregoing and be subject to the
continuing jurisdiction of that governmental authority; |
|
|
|
established to resolve or satisfy one or more contested or
uncontested claims that have resulted or may result from an
event (or related series of events) that has occurred and that
has given rise to at least one claim asserting liability arising
out of, among other things, a tort, breach of contract, or
violation of law; and |
|
|
|
a trust under applicable state law, or its assets must otherwise
be physically segregated from other assets of the transferor
(and related persons). |
5
Assuming that qualification, with respect to the initial
$350 million to be contributed to the Asbestos
PI Trust on or after the effective date of the Proposed
Joint Plan, the associated U.S. federal income tax
deductions will be taken as and when such payment to the
Asbestos PI Trust is made. Similarly, with respect to the
$355 million to be paid pursuant to the Contingent Payment
Right and payments of principal on the B&W Note, the
associated U.S. federal income tax deductions will be taken
as and when such payments to the Asbestos PI Trust are made.
Neither MI nor any of its subsidiaries will be entitled to a
deduction to the extent that the Asbestos PI Trust is funded
through insurance proceeds or the proposed transfer of rights
under insurance policies.
Any deductions for payments made to the Asbestos PI Trust first
would reduce or eliminate the U.S. federal taxable income
of MIs consolidated group for the taxable year in which
the payments are made. To the extent these deductions created a
taxable loss for such year, the loss would constitute a net
operating loss. In general, net operating losses may be carried
back and deducted two years and carried forward 20 years.
To the extent a net operating loss is a specified
liability loss, however, it may be carried back and
deducted ten years. A taxpayer may elect to waive the entire
carryback period with respect to a net operating loss or may
elect to waive only the additional eight years of carryback
afforded net operating losses attributable to specified
liability losses.
A net operating loss constitutes a specified liability loss to
the extent it is attributable to products liability or to
expenses incurred in the investigation or settlement of, or
opposition to, claims against the taxpayer on account of
products liability. Any net operating loss resulting from
payments to the Asbestos PI Trust should constitute a
specified liability loss and accordingly would qualify for the
ten-year carryback period.
For a discussion of how these tax consequences contrast to the
U.S. federal income tax consequences of the previously
negotiated settlement, see The Proposed
Settlement Material U.S. Federal Income Tax
Considerations Relating to the Proposed Settlement.
Risks Associated with the Proposed Settlement. Some of
the risks associated with the proposed settlement include the
following:
|
|
|
|
|
the risk that, if our stockholders adopt the proposed resolution
and the Proposed Joint Plan becomes effective, we may not be
able to take advantage of any subsequently enacted federal
legislation which addresses the resolution of asbestos-related
personal injury claims throughout the United States in a manner
that would be less costly to us than the proposed settlement,
except to the extent we may be relieved of the contingent
payment obligations pursuant to the Proposed Settlement
Agreement if that legislation becomes law on or prior to
November 30, 2006, by virtue of the Condition Precedent
failing to be satisfied; |
|
|
|
the risks associated with the Contingent Payment Right and the
B&W Note, including the substantial contingent payment
obligations and the potential impact of those obligations on our
liquidity and our access to capital; and |
|
|
|
the risks associated with continuing ownership of the B&W
Entities, including the risk of impairments in our investments
in the B&W Entities arising from (1) the operational
risks associated with their business, (2) the significant
pension liabilities of the B&W Entities (which are described
in note 8 to the financial statements of B&W and its
subsidiaries included in this proxy statement), or
(3) contingent liabilities associated with their operations
(including the contingent liabilities discussed in note 10
to the financial statements of B&W and its subsidiaries
included in this proxy statement, many of which would not be
discharged pursuant to the Proposed Joint Plan). |
On the other hand, if our stockholders do not adopt the proposed
resolution, or if the Proposed Joint Plan does not become
effective, on a final, nonappealable basis, on or before the
Effective Date Deadline for any other reason, the Proposed
Settlement Agreement contemplates that, unless the ACC, the FCR
and we agree to extend that deadline, the settlement
contemplated by the Proposed Settlement Agreement
6
will be abandoned and those parties will resume their efforts to
effect the settlement contemplated by the Previously Negotiated
Settlement Agreement and the Previously Negotiated Joint Plan.
However, as discussed above, there have been various objections,
appeals and uncertainties that have impeded the progress of that
previously negotiated settlement, and there is substantial
uncertainty as to whether that settlement would be consummated.
If neither settlement is consummated, the Bankruptcy Court would
be faced with the decision of how the Chapter 11 cases
should proceed, and, under those circumstances, the Bankruptcy
Court would likely consider the following alternatives:
|
|
|
|
|
continuation of the Chapter 11 proceedings until another
plan of reorganization is confirmed and becomes effective; |
|
|
|
appointment of a trustee to assume the administration of the
Chapter 11 proceedings outside of the control of management
of the Chapter 11 Debtors, potentially followed by a
conversion or dismissal of the Chapter 11 proceedings as
described below; |
|
|
|
conversion of the Chapter 11 proceedings to liquidation
proceedings under Chapter 7 of the U.S. Bankruptcy
Code; or |
|
|
|
dismissal of the Chapter 11 proceedings. |
In the case of each of these alternatives, we would continue to
be subject to substantial risks and uncertainties associated
with the pending and future asbestos-related liabilities and
other liabilities of B&W and the other Chapter 11
Debtors. Any one of these alternatives could ultimately result
in the return to the courts of the approximately 300,000
asbestos-related personal injury and related-party claims, as
well as a substantial number of asbestos-related property damage
claims, which are currently pending and proposed to be resolved
through the proposed settlement. Each of these alternatives
could also result in the resumption of litigation relating to
the corporate reorganization we completed in 1998. As a result
of these risks and uncertainties, we cannot predict the outcome
if the proposed settlement fails; however, any such outcome
could have a material and adverse impact on us and the market
value of our common stock. See Risk Factors.
Conditions. There are numerous conditions to the proposed
settlement, including that the Proposed Joint Plan must be
confirmed and become effective. The Proposed Joint Plan sets
forth various conditions to confirmation, including various
required findings of fact and conclusions of law by the
Bankruptcy Court or the United States District Court for the
Eastern District of Louisiana (the District Court),
as well as the approval of the proposed resolution by our
stockholders, with the requisite vote as described below under
The Special Meeting Vote Required
for Approval. The Proposed Joint Plan also establishes
various conditions that must be satisfied after its confirmation
and before it will become effective. These conditions include,
among others, the following:
|
|
|
|
|
Specified court orders, including a confirmation order and an
order or orders entering specified injunctions, including the
channeling injunction to channel asbestos-related claims (other
than workers compensation claims) attributable to the
business or operations of the B&W Entities to the Asbestos
PI Trust, must have been entered or affirmed by the District
Court, and those orders must have become final and nonappealable
and those injunctions must be in full force and effect. The
failure to resolve disputes with remaining objectors, including
the objecting insurers, could materially hinder satisfaction of
this condition. |
|
|
|
The District Court must have issued findings to the effect that
the Proposed Joint Plan complies with the requirements of the
U.S. Bankruptcy Code, including the requirements of
Section 524(g) of the U.S. Bankruptcy Code. |
|
|
|
The applicable parties to the documents ancillary to the
Proposed Joint Plan, to implement the proposed settlement and
the other provisions of the Proposed Joint Plan, must have
executed and delivered those documents. |
7
|
|
|
|
|
The Chapter 11 Debtors must have obtained new financing
arrangements, or an extension of their existing financing
arrangements, to support their operations on their exit from the
Chapter 11 proceedings. |
|
|
|
The ACC and the FCR must have dismissed with prejudice their
appeal from the decision in the adversary proceeding relating to
the corporate reorganization we completed in 1998. |
|
|
|
The Proposed Settlement Agreement must not have been terminated
pursuant to its terms, which provide that the agreement may be
terminated: (1) by mutual consent of the parties;
(2) by the ACC, the FCR or us if McDermott stockholder
approval of the Proposed Settlement Agreement has not been
obtained on or before January 31, 2006; (3) by
McDermott, if its Board of Directors determines that a material
adverse change has occurred in either the financial condition,
assets or operations of the B&W Entities or national or
international general business or economic conditions that
obligates the McDermott Board to terminate the Proposed
Settlement Agreement to avoid a breach of its fiduciary duties;
or (4) by the ACC, the FCR or us if the Proposed Joint Plan
has not become effective, on a final, nonappealable basis, on or
before the Effective Date Deadline. |
While it is possible that conditions to confirmation or
effectiveness may be waived, any such waiver would require
unanimous agreement among the plan proponents. See
Description of the Proposed Settlement
Agreement Conditions.
Accordingly, even assuming adoption of the proposed resolution
at the Special Meeting, we can provide no assurance that the
Proposed Joint Plan will be confirmed and become effective and
that the proposed settlement will be consummated.
The Proposed Resolution. We are asking you to consider
and vote on the adoption of a resolution relating to the
Proposed Settlement Agreement. The proposed resolution would:
|
|
|
|
|
authorize and approve the settlement contemplated by the
Proposed Settlement Agreement, in substantially the form
attached to this proxy statement as Appendix A, with such
modifications or changes as our Board of Directors may later
approve; and |
|
|
|
authorize and approve McDermotts execution and delivery
of, and performance under, the Proposed Settlement Agreement, in
substantially the form attached to this proxy statement as
Appendix A, with such modifications or changes as our Board of
Directors may later approve. |
The proposed resolution is set forth below under the caption
The Special Meeting General.
Appendix A to this proxy statement includes a copy of the
Proposed Settlement Agreement.
Timetable for Confirmation of the Proposed Joint Plan.
The Proposed Joint Plan is subject to ongoing confirmation
proceedings, in the following sequence. First, the Bankruptcy
Court will oversee the plan confirmation process. As part of
that process, on November 10, 2005, the Bankruptcy Court
approved the adequacy of a disclosure statement and procedures
to be followed in connection with a vote to be taken among
various impaired classes of creditors with respect to the
Proposed Joint Plan. The balloting will be completed on
December 16, 2005. The Bankruptcy Court will begin a
hearing on confirmation of the Proposed Joint Plan on
December 22, 2005. The Bankruptcy Court will then prepare
written proposed factual findings and legal conclusions that
would be submitted to the District Court. Thereafter, the
District Court may oversee additional hearings and briefing and
may issue a plan confirmation order. If the District Court
confirms the Proposed Joint Plan, one or more parties may appeal
the District Courts confirmation order to the
U.S. Court of Appeals for the Fifth Circuit in appellate
proceedings that could extend beyond the Effective Date Deadline.
The Special Meeting (see page 18)
Time, Date and Place. We will hold the Special Meeting on
January 18, 2006, at 757 N. Eldridge Parkway,
Houston, Texas 77079, on the 14th floor, commencing at
10:00 a.m. local time.
8
Record Date and Who May Vote. Only holders of record of
our common stock as of the close of business on December 9,
2005 will be entitled to notice of and to vote at the Special
Meeting. On that date, 71,709,770 shares of our common
stock were outstanding. Each share of our common stock entitles
its holder to one vote on all matters properly coming before the
Special Meeting.
How to Vote. You can vote your shares where indicated by
the instructions set forth on the proxy card, including by the
Internet or by telephone, or you can attend and vote your shares
at the Special Meeting.
How to Change Your Vote. You may change your vote by
submitting notice to the Corporate Secretary as described in
this proxy statement or by attending the Special Meeting and
voting in person. If you have instructed a broker or bank to
vote your shares, follow the directions you receive from your
broker or bank to change those instructions.
Quorum. A majority of our outstanding shares of common
stock must be present in person or represented by proxy to
constitute a quorum at the Special Meeting.
Vote Required for Approval. The affirmative vote of a
majority of the shares of our common stock present in person or
represented by proxy at the Special Meeting is required to
approve the proposed resolution, provided that, in order for the
vote to be effective, the number of shares of our common stock
for which votes are cast in favor of the proposed resolution
must represent at least 50% of the voting power of all of the
shares of our common stock outstanding and entitled to vote on
the proposed resolution.
Recommendation of Our Board of Directors (see
page 35)
Our Board of Directors has unanimously approved the proposed
settlement and recommends that you vote FOR the adoption of
the proposed resolution. For a discussion of the factors our
Board of Directors considered in determining to make its
recommendation, see The Proposed Settlement
Recommendation of the Board.
9
Questions and Answers About the Proposed Settlement
and the Special Meeting
Questions About the Proposal
|
|
|
Q: |
|
What are we being asked to approve? |
|
A: |
|
You will be asked to consider and vote on the adoption of a
resolution relating to the Proposed Settlement Agreement. The
proposed resolution would: |
|
|
|
authorize and approve the settlement contemplated by
the Proposed Settlement Agreement, in substantially the form
attached to this proxy statement as Appendix A, with such
modifications or changes as our Board of Directors may later
approve; and |
|
|
|
authorize McDermotts execution and delivery
of, and performance under, the Proposed Settlement Agreement, in
substantially the form attached to this proxy statement as
Appendix A, with such modifications or changes as our Board of
Directors may later approve. |
|
|
|
The proposed resolution is set forth below under the caption
The Special Meeting General. |
|
Q: |
|
Is a stockholder vote necessary to consummate the proposed
settlement? |
|
A: |
|
Yes. The Proposed Settlement Agreement requires, as a condition
to its effectiveness, the approval of the Proposed Settlement
Agreement by the affirmative vote of a majority of the shares of
McDermott common stock present in person or represented by proxy
at the Special Meeting and entitled to vote on the matter,
provided that, in order for the vote to be effective, the number
of shares of McDermott common stock for which votes are cast in
favor of the proposal must represent at least 50% of the voting
power of all of the shares of McDermott common stock outstanding
and entitled to vote on the matter. See The Special
Meeting Vote Required and How Votes Are
Counted. In the context of negotiating the Proposed
Settlement Agreement, we insisted on this stockholder approval
condition to the effectiveness of the proposed settlement
because the McDermott Board of Directors determined that, given
the significance of the proposed settlement, and the substantial
differences in the proposed settlement from the previously
approved settlement, subjecting the Proposed Settlement
Agreement to stockholder approval was appropriate.
McDermotts Board also determined that imposing this
stockholder approval requirement was consistent with the
statement we made in the proxy statement we issued in connection
with the December 17, 2003 special meeting, to the effect
that we would resolicit the vote of McDermotts
stockholders if we amended, or proposed to waive a condition to
the effectiveness of, the Previously Negotiated Joint Plan and
such amendment or waiver would be material to McDermotts
stockholders. |
|
Q: |
|
In view of the proposed legislation being considered by the
U.S. Senate and House of Representatives to resolve pending
and future asbestos-related personal injury claims in the United
States, why are we being asked to vote on the proposed
resolution now? |
|
A: |
|
There is substantial uncertainty as to whether the FAIR Act or
similar U.S. federal legislation will ever be presented for
a vote or passed by the U.S. Senate or House of
Representatives, or whether it will become law. However, with
the entire payment obligation under the Contingent Payment Right
and all payment obligations in excess of $25 million under
the B&W Note being subject to the satisfaction of the
Condition Precedent, the settlement contemplated by the Proposed
Settlement Agreement includes a mechanism that would potentially
limit the consideration to be contributed to the Asbestos PI
Trust, so that, if the FAIR Act or similar U.S. federal
legislation is enacted and becomes law on or prior to
November 30, 2006, the proposed settlement would result in
cash outflows that we believe are reasonably comparable to the
cash outflows we would anticipate having to make under the FAIR
Act in its current form. You should note, however, that the
proposed settlement would eliminate substantially all of our
excess insurance coverage for the period from April 1, 1979
to April 1, 1986, which we would only partially surrender
under the proposed FAIR Act. |
10
|
|
|
|
|
Although the November 30, 2006 cutoff date for
legislative relief under the Proposed Settlement Agreement
reflects a negotiated compromise, our management believes that
the prospects for enactment of the FAIR Act or similar
U.S. federal legislation after that date would be
substantially more uncertain than they are currently,
particularly given the difficulties associated with passage of
significant U.S. federal legislation in the year prior to a
Presidential election. This compromise, together with the other
compromises embodied in the Proposed Settlement Agreement,
reflects the view of McDermotts management and Board of
Directors that some of the benefits of the proposed settlement
over the previously negotiated settlement might not continue to
be available if the prospects for adoption of the FAIR Act or
similar U.S. federal legislation begin to fade or if the
objections and appeals that have been impeding the progress of
the Previously Negotiated Joint Plan toward an effective date
are resolved over an extended period of time or in a manner
other than through the implementation of the settlement
contemplated by the Proposed Settlement Agreement. Given the
uncertainty associated with the FAIR Act, McDermotts
management and Board of Directors believe the settlement
contemplated by the Proposed Settlement Agreement represents an
appropriate compromise to ensure that the equity ownership of
B&W and its subsidiaries will remain with McDermott, to
expedite the resolution of the B&W Chapter 11
proceedings (which have already extended for almost six years)
and to enable compensation to flow to claimants who have
suffered the impact of asbestos-related injuries. |
|
Q: |
|
What will happen if the proposed resolution is not
approved? |
|
A: |
|
If the proposed resolution is not approved at the Special
Meeting, or if the Proposed Joint Plan does not become
effective, on a final, nonappealable basis, on or before the
Effective Date Deadline for any other reason, the Proposed
Settlement Agreement contemplates that, unless the ACC, the FCR
and we agree to extend that deadline, the settlement
contemplated by the Proposed Settlement Agreement will be
abandoned and those parties will resume their efforts to effect
the settlement contemplated by the Previously Negotiated
Settlement Agreement and the Previously Negotiated Joint Plan.
However, there have been various objections, appeals and
uncertainties that have impeded the progress of that previously
negotiated settlement, and there is substantial uncertainty as
to whether that settlement would be consummated. If neither
settlement is consummated, the Bankruptcy Court would be faced
with the decision of how the Chapter 11 cases should
proceed, and, under those circumstances, the Bankruptcy Court
would likely consider the following alternatives: |
|
|
|
continuation of the Chapter 11 proceedings
until another plan of reorganization is confirmed and becomes
effective; |
|
|
|
appointment of a trustee to assume the
administration of the Chapter 11 proceedings outside of the
control of management of the Chapter 11 Debtors,
potentially followed by a conversion or dismissal of the
Chapter 11 proceedings as described below; |
|
|
|
conversion of the Chapter 11 proceedings to
liquidation proceedings under Chapter 7 of the
U.S. Bankruptcy Code; or |
|
|
|
dismissal of the Chapter 11 proceedings. |
|
|
|
Our Board of Directors considered each of these alternatives in
determining to recommend the proposed resolution for adoption by
our stockholders. In the case of each of these alternatives,
McDermott would continue to be subject to various risks and
uncertainties associated with the pending and future
asbestos-related liabilities of B&W and the other
Chapter 11 Debtors (in the absence of federal legislation
that comprehensively resolves those liabilities). These risks
and uncertainties include potential future rulings by the
Bankruptcy Court, the District Court or other courts that could
be adverse to us and the risks and uncertainties associated with
appeals from the rulings issued by the Bankruptcy Court relating
to the corporate reorganization we completed in 1998, which
involved transfers of substantial assets from B&W to BWICO,
and other matters. See Risk Factors and The
Proposed Settlement Background of the Proposed
Settlement Alternatives to the Proposed Settlement
Agreement. |
11
|
|
|
Q: |
|
What factors did the Board of Directors take into
consideration in making its determination to recommend the
proposed resolution? Why has the Board recommended that I vote
to approve the proposed resolution? |
|
A: |
|
In determining to approve the proposed settlement and make its
recommendation, the Board considered the substantial benefits we
would derive from the proposed settlement, including the
benefits we have outlined above under Summary
The Proposed Resolution Benefits of the Proposed
Settlement. The Board also considered the uncertainty as
to whether the FAIR Act will ever become law and the Condition
Precedent included in the Proposed Settlement Agreement, which
would potentially limit the consideration to be contributed to
the Asbestos PI Trust if the FAIR Act or similar
U.S. federal legislation is enacted and becomes law on or
before November 30, 2006. The Board also considered the
factors discussed under Risk Factors and the
alternatives discussed under The Proposed
Settlement Background of the Proposed
Settlement Alternatives to the Proposed Settlement
Agreement, each of which would result in our continuing to
be subject to substantial risks and uncertainties associated
with the pending and future asbestos-related liabilities and
other liabilities of B&W and the other Chapter 11
Debtors. The Board also considered the exclusion of
workers compensation claims from the indemnification and
channeling injunction provisions of the proposed settlement,
together with managements estimate that the ongoing
exposure of the B&W Entities and our captive insurance
companies to those claims would not give rise to material losses
in the foreseeable future. In addition, the Board considered the
need to bring the Chapter 11 proceedings to a close, given
the fact that the Chapter 11 proceedings have required
significant amounts of attention from our senior management and
have resulted in substantial uncertainties for our customers,
suppliers and financing sources, as well as in the market for
our common stock and other securities. |
|
Q: |
|
What are the risks associated with retaining ownership of the
B&W Entities? |
|
A: |
|
If the proposed settlement is consummated, and as a result we
retain our ownership in B&W, our investment in the B&W
Entities could be impaired as a result of future incidents
arising from operational risks associated with the businesses of
the B&W Entities. The B&W Entities also have substantial
pension liabilities (as described in note 8 to the
financial statements of B&W and its subsidiaries included in
this proxy statement). In addition, the B&W Entities are
currently subject to claims for various contingent liabilities
that would not be discharged pursuant to the Proposed Joint
Plan, including present and future Apollo/ Parks Township
Claims, the claims by Iroquois Falls Power Corp. and various
other claims, as discussed in note 10 to the financial
statements of B&W and its subsidiaries included in this
proxy statement. In addition, it is possible that certain other
contingent liabilities, including any such liabilities to Citgo
Petroleum Corporation and PDV Midwest Refinery L.L.C.,
ultimately may not be discharged pursuant to the Proposed Joint
Plan. Citgo Petroleum and PDV Midwest Refinery have asserted
that their claims will not be discharged by the Chapter 11
Proceedings. Furthermore, even though asbestos-related personal
injury claims in jurisdictions outside the United States are
purported to be channeled to, and covered by an indemnification
from, the Asbestos PI Trust pursuant to the channeling
injunction contemplated by the Proposed Joint Plan and the
indemnification provisions of the Proposed Settlement Agreement,
it is possible that, if the channeling were not enforced with
respect to such claims by courts in such jurisdictions and the
assets of the Asbestos PI Trust were insufficient to cover its
indemnification with respect to such claims, the B&W
Entities could, in the future, become subject to liability for
such claims, which liability could be significant. Although the
B&W Entities will indemnify McDermott and its other
subsidiaries from all the contingent liabilities of the B&W
Entities pursuant to the Proposed Settlement Agreement (as would
have been the case under the Previously Negotiated Settlement
Agreement), any material loss suffered by any of the B&W
Entities relating to any of those contingent liabilities
(whether directly or as a result of their indemnification
obligations to McDermott and its other subsidiaries) could have
a material adverse impact on us, particularly by impairing our
investment in, or reducing the profitability, cash flows or value |
12
|
|
|
|
|
of, the B&W Entities. See Risk Factors If
the proposed settlement is consummated, and as a result we
retain our ownership in B&W, our investment in the B&W
Entities could be impaired as a result of future incidents
arising from (1) operational risks associated with the
businesses of the B&W Entities, (2) the significant
pension liabilities of the B&W Entities or (3) the
contingent liabilities associated with their operations. |
|
Q: |
|
What will be the accounting treatment for the proposed
settlement? |
|
A: |
|
As a result of the Chapter 11 filing, beginning on
February 22, 2000, we stopped consolidating the results of
operations of the B&W Entities in our financial statements
and we began accounting for our investment in B&W under 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 B&Ws asbestos-related 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, in connection with the filing of
drafts of the third amended joint plan and related settlement
agreement in the Chapter 11 proceedings, we determined that
a liability related to the previously negotiated settlement was
probable and that the amount of that liability was reasonably
estimable. Accordingly, as of December 31, 2002, we
established an estimate for the cost of the previously
negotiated settlement of $110 million, including tax
expense of $23.6 million, reflecting the present value of
our contemplated contributions to the trusts. The estimate had
been adjusted from 2002 through June 30, 2005 based on the
provisions of the previously negotiated settlement, and a
liability was recorded totaling $146.7 million. As of
September 30, 2005, we no longer evaluated our liability
based on the previously negotiated settlement, as we feel it is
no longer probable. Under the terms of the proposed settlement,
MI would be allowed to maintain its equity in B&W and would
consolidate its operations as of the effective date of the
settlement. Based upon the proposed settlement, upon a
reconsolidation of B&W, we intend to account for the
difference between the carrying amount of our investment in
B&W and B&Ws net assets in a manner similar to a
step acquisition by applying the guidelines of Statement of
Financial Accounting Standards (SFAS) No. 141,
Business Combinations. See The Proposed
Settlement Accounting Treatment of the Proposed
Settlement. For a description of the pro forma effects of
the proposed settlement using that accounting treatment, see
Unaudited Pro Forma Financial Information of
McDermott. |
Questions About Voting
|
|
|
Q: |
|
When and where is the Special Meeting? |
|
A: |
|
The Special Meeting will be held on January 18, 2006 at
757 N. Eldridge Parkway, Houston, Texas 77079, on
the 14th floor, commencing at 10:00 a.m. local time. |
|
Q: |
|
Who is entitled to vote at the Special Meeting? |
|
A: |
|
Only holders of record of our common stock as of the close of
business on December 9, 2005 will be entitled to notice of
and to vote at the Special Meeting. On that date, 71,709,770
shares of our common stock were outstanding. |
|
Q: |
|
How do I vote? |
|
A: |
|
If your shares are held of record with EquiServe Trust Company,
N.A., our transfer agent and registrar, you can vote your shares
where indicated by the instructions set forth on the proxy card,
including by the Internet or telephone, or you can attend and
vote your shares at the Special Meeting. If your shares are held
by a broker or other nominee (i.e., in street
name), they have enclosed a voting instruction form, which
you should use to vote those shares. Whether you have the option
to vote those shares by telephone or by using the Internet is
indicated on the voting instruction form. |
13
|
|
|
Q: |
|
What is the vote required for adoption of the proposed
resolution? |
|
A: |
|
As provided in the Proposed Settlement Agreement, the
affirmative vote of a majority of the shares of our common stock
present in person or represented by proxy at the Special Meeting
is required to approve the proposed resolution, provided that,
in order for the vote to be effective, the number of shares of
our common stock for which votes are cast in favor of the
proposed resolution must represent at least 50% of the voting
power of all of the shares of our common stock outstanding and
entitled to vote on the proposed resolution. |
|
Q: |
|
How will votes be counted? |
|
A: |
|
The Special Meeting will be held if a quorum, consisting of a
majority of our outstanding shares of common stock as of
December 9, 2005, the record date, is represented in person
or by proxy. Abstentions and broker non-votes will be counted as
present and entitled to vote for purposes of determining a
quorum. Broker non-votes are shares held by brokers and other
nominees as to which they have not received voting instructions
from the beneficial owners and lack the discretionary authority
to vote on a particular matter. |
|
Q: |
|
Who will count the votes? |
|
A: |
|
Votes cast by proxy or in person will be counted by one or more
persons we appoint to act as inspectors for the Special Meeting. |
|
Q: |
|
If my shares are held in street name by my
broker, will my broker vote my shares for me? |
|
A: |
|
If you hold your shares in street name, your broker
will not be able to vote your shares unless the broker receives
appropriate instructions from you. We recommend that you contact
your broker for directions on how to instruct your broker to
vote your shares. |
|
Q: |
|
May I change my vote after I have mailed my signed proxy
card? |
|
A: |
|
Yes. Just send in a written notice to our Corporate Secretary or
simply attend the Special Meeting and vote in person. Attending
the Special Meeting, however, will not revoke your proxy unless
you vote at the Special Meeting. |
|
Q: |
|
Will I have dissenters rights? |
|
A: |
|
No. Under Panamanian law, you will have no dissenters
rights in connection with the adoption of the proposed
resolution or the consummation of the proposed settlement. |
|
Q: |
|
Who should I call if I have questions? |
|
A: |
|
If you have questions relating to the proposed resolution or the
Special Meeting, please contact our Corporate Secretary at the
following address or telephone number: |
|
McDermott International, Inc.
757 N. Eldridge Parkway
Houston, Texas 77079
Attention: John T. Nesser, III or
Liane
K. Hinrichs
Telephone: (281) 870-5000
14
Cautionary Statement Regarding Forward-Looking Statements
In accordance with the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995, McDermott cautions
that statements in this proxy statement which are
forward-looking and provide other than historical information
involve risks and uncertainties that may result in actual
outcomes or results that differ from those indicated in the
forward-looking statements. The forward-looking statements in
this proxy statement include, among other things, statements
about: conditions to the consummation and the effectiveness of
the Proposed Joint Plan and Proposed Settlement Agreement;
alternatives to the Proposed Joint Plan and Proposed Settlement
Agreement; the estimated cost of the proposed settlement of the
Chapter 11 proceedings; the estimated cost of contributions
to a proposed national trust fund to resolve asbestos-related
personal injury claims based on the provisions of legislation
currently pending before the U.S. Senate; and the prospects
for that legislation to be enacted and become law. Although we
believe that the expectations reflected in our forward-looking
statements are reasonable, we can give no assurance that those
expectations will prove to have been correct. Those statements
are subject to various underlying assumptions, uncertainties and
risks. If underlying assumptions prove incorrect, or if one or
more of these risks materialize, actual outcomes or results may
vary materially from those expected. For a more complete
discussion of these and other risk factors, see Risk
Factors below and the information in our annual report on
Form 10-K for the year ended December 31, 2004 and our
2005 quarterly reports on Form 10-Q filed with the
Securities and Exchange Commission, which are incorporated into
this proxy statement by reference.
Risk Factors
You should carefully consider the following risks related to
the proposed settlement. For information about risks associated
with McDermotts business, see McDermotts annual
report on Form 10-K for the year ended December 31,
2004, which is incorporated into this proxy statement by
reference. See Where You Can Find More
Information.
|
|
|
If you vote to approve the proposed resolution and the
Proposed Joint Plan becomes effective, the Chapter 11
Debtors may not qualify for participation under the terms of any
subsequently enacted federal legislation addressing the
resolution of asbestos claims. |
The Fairness in Asbestos Injury Resolution Act of 2005 (S. 852),
introduced in the U.S. Senate on April 19, 2005 and
reported favorably out of the Senate Judiciary Committee on
June 16, 2005, would create a privately funded, federally
administered trust fund to resolve pending and future
asbestos-related personal injury claims. In light of continuing
political opposition to the legislation, as well as other
factors, we cannot currently predict whether the draft FAIR Act
will be enacted and become law or, if it does become law, how it
would impact the B&W Chapter 11 proceedings, the
Chapter 11 Debtors or our company. We anticipate that,
during the legislative process, the terms of the draft FAIR Act
will change and that any such changes may be material to the
impact of such legislation on B&W and the other
Chapter 11 Debtors. Although the Condition Precedent
provisions set forth in the Proposed Settlement Agreement would
potentially provide us relief from having to make any payment
pursuant to the Contingent Payment Right and payments under the
B&W Note in excess of $25 million, it is unlikely that
we would be able to avail ourselves of a more favorable outcome
under any legislation that may be enacted and become law after
the effective date of the Proposed Joint Plan. Furthermore, the
Condition Precedent would be deemed satisfied if the FAIR Act or
similar federal legislation does not become law on or before
November 30, 2006. Even if the Condition Precedent is
deemed not to be satisfied, and we are able to benefit from the
relief of having to make these contingent payments, we cannot
assure you that the economic terms of the proposed settlement
will be at least as favorable to us as the economic terms of any
asbestos claims-resolution legislation that may eventually
become law. See Fairness in Asbestos Injury Resolution Act
of 2005 for more information regarding the proposed
legislation.
15
|
|
|
If the Proposed Settlement Agreement and Proposed Joint Plan
become effective and the Condition Precedent is satisfied, MI
will be obligated to make, or to cause one of its subsidiaries
to make, an additional $355 million cash payment to the
Asbestos PI Trust on or before May 29, 2007 (subject to
possible suspension of that payment obligation to a later date)
and the entire $250 million principal amount of the B&W
Note will become payable, which will create significant payment
obligations and could adversely affect our liquidity. |
Under the terms of the Proposed Settlement Agreement, if the
FAIR Act, or other similar legislation addressing resolution of
asbestos claims, does not become law on or before
November 30, 2006, or does become law but then becomes
subject to a proceeding on or before January 31, 2007 which
leads to a judicial decision that such legislation is
unconstitutional as applied to Chapter 11 debtors similarly
situated to B&W as of September 1, 2005, MI will be
obligated to make, or to cause one of its subsidiaries to make,
an additional $355 million cash payment to the Asbestos PI
Trust pursuant to the Contingent Payment Right on or before
May 29, 2007 (subject to the possible suspension of that
payment obligation to a later date as described under
Description of the Proposed Settlement
Agreement Creation of the Asbestos PI Trust and
Contribution of Assets) and the entire $250 million
principal amount of the B&W Note will become payable.
Thus, our obligation to make substantial additional
contributions to the Asbestos PI Trust would be conditioned upon
events that are largely beyond our control.
We anticipate that the $355 million contingent cash
payment, if required, would be funded by available cash,
McDermott share issuances, new borrowings or a combination of
those sources. MI may not be able to obtain any additional
financing that is required to fund the payment on commercially
reasonable terms. In addition, any indebtedness incurred to fund
this cash payment, along with the $250 million B&W
Note, would represent significant additional indebtedness for us
on a consolidated basis.
While our management believes that, even with the addition of
this new debt, our consolidated indebtedness on effectiveness of
the proposed settlement would be reasonable in relation to our
projected capitalization and working capital positions, the
increased level of indebtedness and increased debt service
obligations would increase our vulnerability to cyclical
declines in our businesses. More specifically, our increased
level of consolidated indebtedness and debt service requirements
could affect our operations and expose us to greater risks
during a cyclical decline in several ways, including:
|
|
|
|
|
a greater percentage of our cash flow would be required to be
used to service debt obligations; |
|
|
|
we may not be able to generate sufficient cash flow from
operations to enable us to meet all of our debt service and
other fixed-charge requirements; |
|
|
|
we may not be able to obtain additional financing for working
capital, capital expenditures or general corporate and other
purposes; and |
|
|
|
our flexibility in planning for, or reacting to changes in, our
businesses and the industries in which we compete may be limited. |
|
|
|
If the prospect of federal legislation effectively addressing
the liability of the Chapter 11 Debtors for
asbestos-related personal injury claims does not materialize and
the proposed settlement is not effected, either because the
proposed resolution is not adopted at the Special Meeting, the
Proposed Joint Plan does not become effective on or before the
Effective Date Deadline or for any other reason, our inability
to consummate the proposed settlement could have a material
adverse effect on us. |
If the proposed resolution is not adopted, or if the Proposed
Joint Plan does not become effective, on a final, nonappealable
basis, on or before the Effective Date Deadline for any other
reason, the Proposed Settlement Agreement contemplates that,
unless the ACC, the FCR and we agree to extend that deadline,
the settlement contemplated by the Proposed Settlement Agreement
will be abandoned and those parties will resume their efforts to
effect the settlement contemplated by the Previously Negotiated
Settlement Agreement and the Previously Negotiated Joint Plan.
However, there have been various objections, appeals and
uncertainties that have impeded the progress of that previously
negotiated settlement and there is
16
substantial uncertainty as to whether that settlement would be
consummated. If neither settlement is consummated, the
Bankruptcy Court would be faced with the decision of how the
Chapter 11 cases should proceed, and, under those
circumstances, the Court would likely consider the following
alternatives:
|
|
|
|
|
continuation of the Chapter 11 proceedings until another
plan of reorganization is confirmed and becomes effective; |
|
|
|
appointment of a trustee to assume the administration of the
Chapter 11 proceedings; |
|
|
|
conversion of the Chapter 11 proceedings to liquidation
proceedings under Chapter 7 of the U.S. Bankruptcy
Code; or |
|
|
|
dismissal of the Chapter 11 proceedings. |
In the case of each of these alternatives, we would continue to
be subject to substantial risks and uncertainties associated
with the pending and future asbestos-related liabilities and
other liabilities of B&W and the other Chapter 11
Debtors. Any one of these alternatives could ultimately result
in the return to the courts of the approximately 300,000
asbestos-related personal injury and related-party claims, which
are currently pending and proposed to be resolved through the
proposed settlement. Each of these alternatives could also
result in the resumption of litigation relating to the corporate
reorganization we completed in 1998. As a result of these risks
and uncertainties, we cannot predict the outcome if the proposed
settlement fails; however, any such outcome could have a
material and adverse impact on us and the market value of our
common stock. See The Proposed Settlement
Background of the Proposed Settlement.
|
|
|
If the proposed settlement is consummated, and as a result we
retain our ownership in B&W, our investment in the B&W
Entities could be impaired as a result of future incidents
arising from (1) operational risks associated with the
businesses of the B&W Entities, (2) the significant
pension liabilities of the B&W Entities, or (3) the
contingent liabilities associated with their operations. |
The B&W Entities are subject to a number of risks inherent
in their operations, including:
|
|
|
|
|
the risk that operating accidents may occur, which could result
in injury to or the loss of life or property; |
|
|
|
risks associated with environmental or toxic tort claims,
including delayed manifestation claims for personal injury or
loss of life; |
|
|
|
risks relating to potential pollution or other environmental
mishaps; |
|
|
|
business interruption risks, including those relating to
political action in foreign countries; |
|
|
|
risks associated with labor stoppages; |
|
|
|
risks associated from competing with competitors, some of whom
may have greater financial or other resources; |
|
|
|
risks associated with governmental regulation and changes in
regulations applicable to the businesses of the B&W
Entities; and |
|
|
|
risks associated with international operations, including risks
of war, terrorism and civil unrest, 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 operations are conducted, including through
expropriation, confiscation or nationalization of assets. |
B&W and some of its subsidiaries have been, and in the
future may be, named as defendants in lawsuits asserting large
claims arising from events associated with risks such as these.
Insurance against some of these risks is either unavailable or
available only at rates that we consider uneconomical. A
successful
17
claim against one or more of the B&W Entities for which they
are not fully insured could have a material adverse effect on
our investment in the B&W Entities.
The B&W Entities also have substantial pension liabilities
(as described in note 8 to the financial statements of
B&W and its subsidiaries included in this proxy statement).
In addition, the B&W Entities are currently subject to
claims for various contingent liabilities that would not be
discharged pursuant to the Proposed Joint Plan, including
present and future Apollo/ Parks Township Claims, the claims by
Iroquois Falls Power Corp. and various other claims discussed in
note 10 to the financial statements of B&W and its
subsidiaries included in this proxy statement. In addition, it
is possible that certain contingent liabilities, including any
such liabilities to Citgo Petroleum Corporation and PDV Midwest
Refinery L.L.C., ultimately may not be discharged pursuant to
the Proposed Joint Plan. Citgo Petroleum and PDV Midwest
Refinery have asserted that their claims (which are described in
notes 10 and 15 to the financial statements of B&W and
its subsidiaries included in this proxy statement) will not be
discharged by the Chapter 11 Proceedings. Furthermore, even
though asbestos-related personal injury claims in jurisdictions
outside the United States are purported to be channeled to, and
covered by an indemnification from, the Asbestos PI Trust
pursuant to the channeling injunction contemplated by the
Proposed Joint Plan and the indemnification provisions of the
Proposed Settlement Agreement, it is possible that, if the
channeling were not enforced with respect to such claims by
courts in such jurisdictions and the assets of the Asbestos PI
Trust were insufficient to cover its indemnification with
respect to such claims, the B&W Entities could, in the
future, become subject to liability for such claims, which
liability could be significant. Although the B&W Entities
will indemnify McDermott and its other subsidiaries from all
contingent liabilities of the B&W Entities pursuant to the
Proposed Settlement Agreement (as would have been the case under
the Previously Negotiated Settlement Agreement), any material
loss suffered by any of the B&W Entities relating to any of
those contingent liabilities (whether directly or as a result of
their indemnification obligations to McDermott and its other
subsidiaries) could have a material adverse impact on us,
particularly by impairing our investment in, or reducing the
profitability, cash flows or value of, the B&W Entities.
The Special Meeting
General
We are mailing this proxy statement and accompanying proxy card
to our stockholders beginning on December 13, 2005. Our
Board of Directors is soliciting your proxy to vote your shares
at a Special Meeting to be held on January 18, 2006. We
have called the Special Meeting to ask our stockholders to
consider and vote on the following resolution:
|
|
|
RESOLVED, that the stockholders of McDermott International,
Inc., a Panamanian corporation (McDermott), hereby: |
|
|
|
(1) authorize and approve the settlement contemplated by
the Settlement Agreement to be entered into by and among
McDermott, McDermott Incorporated, a Delaware corporation and a
wholly owned subsidiary of McDermott (MI),
Babcock & Wilcox Investment Company, a Delaware
corporation and a wholly owned subsidiary of MI
(BWICO), The Babcock & Wilcox Company, a
Delaware corporation and a wholly owned subsidiary of BWICO
(B&W), Diamond Power International, Inc., a
Delaware corporation and a wholly owned subsidiary of B&W
(DPII), Americon, Inc., a Delaware corporation and a
wholly owned subsidiary of B&W (Americon),
Babcock & Wilcox Construction Co., Inc., a Delaware
corporation and a wholly owned subsidiary of Americon (together
with B&W, DPII and Americon, the Chapter 11
Debtors), the Asbestos Claimants Committee in the
Chapter 11 bankruptcy proceedings involving the
Chapter 11 Debtors as debtors-in-possession, which are
pending in the United States Bankruptcy Court for the Eastern
District of Louisiana (the Chapter 11
proceedings), and the Legal Representative for Future
Asbestos-Related Claimants in the Chapter 11 proceedings,
in substantially the form attached as Appendix A to the
proxy statement of |
18
|
|
|
McDermott dated as of December 13, 2005, relating to the
special meeting of stockholders of McDermott held on
January 18, 2006 (the Proposed Settlement
Agreement), with such modifications or changes as the
Board of Directors of McDermott may subsequently
approve; and |
|
|
(2) approve the form, terms and provisions of, and
authorize McDermotts execution and delivery of, and
(subject to the ability of the Board of Directors of McDermott
to cause McDermott to terminate the Proposed Settlement
Agreement in certain limited circumstances pursuant to the
provisions of Section 8.3 thereof) performance under, the
Proposed Settlement Agreement, in substantially the form hereby
approved, with such modifications or changes as the Board of
Directors of McDermott may subsequently approve. |
We will bear all expenses incurred in connection with this proxy
solicitation, which we expect to conduct primarily by mail. We
have engaged The Proxy Advisory Group of Strategic Stock
Surveillance, LLC to assist in the solicitation for a fee that
will not exceed $25,000, plus out-of-pocket expenses. In
addition to solicitation by mail and by The Proxy Advisory Group
of Strategic Stock Surveillance, LLC, our officers and regular
employees may solicit your proxy by telephone, by facsimile
transmission or in person, for which they will not be separately
compensated. If your shares are held through a broker or other
nominee (i.e., in street name), we have
requested that your broker or nominee forward this proxy
statement to you and obtain your voting instructions, for which
we will reimburse them for reasonable out-of-pocket expenses. If
your shares are held through the Thrift Plan for Employees of
McDermott Incorporated and Participating Subsidiary and
Affiliated Companies, the trustee of that plan has sent you this
proxy statement and a voting instruction form, which you can use
to direct the trustee on how to vote your plan shares.
Record Date and Who May Vote
Our Board of Directors selected December 9, 2005 as the
record date (the Record Date) for determining
stockholders entitled to vote at the Special Meeting. This means
that if you were a registered stockholder with our transfer
agent and registrar, EquiServe Trust Company, N.A., on the
Record Date, you may vote your shares on the matters to be
considered by our stockholders at the Special Meeting. If your
shares were held in street name on that date, the broker or
other nominee that was the record holder of your shares has the
authority to vote them at the Special Meeting. They have
forwarded to you this proxy statement seeking your instructions
on how you want your shares voted.
On the Record Date, 71,709,770 shares of our common stock
were outstanding. Each outstanding share of common stock
entitles its holder to one vote on each matter to be acted on at
the meeting.
How to Vote
For shares held of record, you can vote your shares in person at
the Special Meeting or vote now by giving us your proxy. You may
give us your proxy by completing the enclosed proxy card and
returning it in the enclosed U.S. postage prepaid envelope
or by calling a toll-free telephone number or using the Internet
as further described in the enclosed proxy card. The telephone
and Internet voting procedures have been designed to verify your
identity through a personal identification or control number and
to confirm that your voting instructions have been properly
recorded. If you vote using either of these electronic means,
you will save us return mail expense. By giving us your proxy,
you will be directing us on how to vote your shares at the
meeting. Even if you plan on attending the meeting, we urge you
to vote now by giving us your proxy. This will ensure that your
vote is represented at the meeting. If you do attend the
meeting, you can change your vote at that time.
If your shares are held in street name, the broker or nominee
that holds your shares will need to obtain your authorization in
order to have the authority to vote those shares for or against
the proposed resolution and has enclosed a voting instruction
form with this proxy statement for that purpose. That broker or
nominee will vote your shares as you direct on its voting
instruction form, which is enclosed. Please complete the voting
instruction form and return it in the enclosed U.S. postage
prepaid envelope. If your shares are held in street name and you
want to vote your shares in person at the Special Meeting,
19
you must obtain a valid proxy from your broker or nominee. You
should refer to the instructions provided in the enclosed voting
instruction form for further information. Additionally, the
availability of telephone or Internet voting will depend on the
voting process used by the broker or nominee that holds your
shares.
You may receive more than one proxy statement and proxy card or
voting instruction form if your shares are held through more
than one account (e.g., through different brokers or
nominees). Each proxy card or voting instruction form covers
only those shares of common stock held in the applicable
account. If you hold shares in more than one account, you will
have to provide voting instructions as to all your accounts to
vote all your shares.
How to Change Your Vote
You may change your proxy voting instructions at any time prior
to the stockholder vote at the Special Meeting. For shares held
of record, you may change your vote by written notice to our
Corporate Secretary, granting a new proxy or by voting in person
at the Special Meeting. Unless you attend the meeting and vote
your shares in person, you should change your vote using the
same method (by telephone, Internet or mail) that you first used
to vote your shares. That way, the inspectors of election for
the meeting will be able to verify your latest vote.
For shares held in street name, you should follow the
instructions in the voting instruction form provided by your
broker or nominee to change your vote. If you want to change
your vote as to shares held in street name by voting in person
at the Special Meeting, you must obtain a valid proxy from the
broker or nominee that holds such shares for you.
Quorum
The Special Meeting will be held only if a quorum exists. The
presence at the meeting, in person or by proxy, of holders of a
majority of our outstanding shares of common stock as of the
Record Date will constitute a quorum. If you attend the meeting
or vote your shares using the enclosed proxy card or voting
instruction form (including any telephone or Internet voting
procedures provided), your shares will be counted toward a
quorum, even if you abstain from voting on the proposed
resolution. Broker non-votes (i.e., shares held by
brokers and other nominees as to which they have not received
voting instructions from the beneficial owners and lack the
discretionary authority to vote on the proposed resolution) also
will count for quorum purposes.
Vote Required and How Votes Are Counted
As provided in the Proposed Settlement Agreement, the adoption
of the proposed resolution requires the affirmative vote of a
majority of the shares of common stock present in person or
represented by proxy at the Special Meeting and entitled to vote
on the matter, provided that, in order for the vote to be
effective, the number of shares of our common stock for which
votes are cast in favor of the proposed resolution must
represent at least 50% of the voting power of all of the shares
of our common stock outstanding and entitled to vote on the
matter. The shares of our common stock outstanding and
entitled to vote on the matter are all the shares that
were outstanding as of the record date, excluding treasury
shares.
You may vote FOR or AGAINST or abstain
from voting on the proposal. If you submit a signed proxy card
without specifying your vote, your shares will be voted
FOR the approval of the Proposed Settlement
Agreement.
Because abstentions are counted for purposes of determining
whether a quorum is present but are not affirmative votes for
the proposal, they have the same effect as votes
AGAINST the proposal.
If you hold your shares in street name and you do not instruct
your broker or nominee how to vote those shares, it may vote
your shares as it decides as to matters for which it has
discretionary authority under applicable New York Stock Exchange
rules. Those rules will not permit brokers or other nominees to
exercise their discretionary authority with respect to the vote
on the proposed resolution. Accordingly,
20
shares held by brokers or other nominees as to which they have
not received voting instructions from the beneficial owners with
regard to the vote on the proposed resolution will be treated as
broker non-votes. While broker non-votes will be
counted toward a quorum, they are not entitled to vote on, or
considered present for purposes of, the vote on the proposed
resolution. However, because of the requirement set forth in the
Proposed Settlement Agreement that, in order for the vote to be
effective, the number of shares of our common stock for which
votes are cast in favor of the proposed resolution must
represent at least 50% of the voting power of all of the shares
of our common stock outstanding and entitled to vote on the
matter, broker non-votes may have the same effect as a vote
AGAINST the proposal.
We are not aware of any other matters that may be presented or
acted on at the meeting. If you vote by signing and returning
the enclosed proxy card or using the telephone or Internet
voting procedures, the individuals named as proxies on the card
may vote your shares, in their discretion, on any other matter
requiring a stockholder vote that comes before the meeting.
Confidential Voting
All voted proxies and ballots will be handled to protect your
voting privacy as a stockholder. Your vote will not be disclosed
except:
|
|
|
|
|
to meet any legal requirements; |
|
|
|
to permit independent inspectors of election to tabulate and
certify your vote; or |
|
|
|
to adequately respond to your written comments on your proxy
card. |
The Proposed Settlement
Background of the Proposed Settlement
B&W and the other Chapter 11 Debtors filed for
protection under Chapter 11 of the U.S. Bankruptcy
Code on February 22, 2000, in response to increases in the
amounts being demanded to settle asbestos-related personal
injury claims that put an extraordinary strain on B&Ws
historical claims resolution process, left B&W with no
practicable means of resolving the claims through out-of-court
settlement and threatened B&Ws financing viability and
long-term prospects. The Chapter 11 Debtors took this
action as a means to determine and comprehensively resolve all
pending and future asbestos-related liability claims against
them. After the bankruptcy filing, the ACC was formed to
represent the rights of asbestos-related personal injury
claimants, and the Bankruptcy Court appointed the FCR to
represent the rights of persons who might subsequently assert
future asbestos-related personal injury claims.
Since 2002, we have been engaged in negotiations with the ACC,
the FCR and other parties to the bankruptcy proceedings to reach
a settlement and a consensual joint plan of reorganization for
the Chapter 11 proceedings. Those negotiations led to the
Previously Negotiated Joint Plan and the Previously Negotiated
Settlement Agreement in 2003. For details regarding the terms of
the Previously Negotiated Settlement Agreement, see
Description of the Previously Negotiated
Settlement Agreement below.
At a special meeting of McDermotts stockholders on
December 17, 2003, McDermotts stockholders voted on
and approved a resolution relating to the Previously Negotiated
Settlement Agreement. The stockholders approval of the
resolution was expressly conditioned on the subsequent approval
of the previously negotiated settlement by McDermotts
Board of Directors. In addition, the Previously Negotiated Joint
Plan provided that it could not become effective without the
approval of the Previously Negotiated Settlement Agreement by
the McDermott Board within 30 days prior to the effective
date of the plan. The McDermott Boards decision on whether
to approve the Previously Negotiated Settlement Agreement was to
be made after consideration of any developments that might occur
prior to the effective date, including any changes in the status
of any potential federal legislation concerning asbestos
liabilities. The affirmative vote of a majority of the shares of
McDermotts common stock present in person or by proxy at
the December 2003 special meeting was required to approve the
resolution related to the
21
Previously Negotiated Settlement Agreement. The voting, which
resulted in approval of the resolution, was as follows:
46,648,582 votes for, 1,126,732 votes against, 411,808
abstentions and no broker non-votes.
Although McDermotts stockholders approved the Previously
Negotiated Settlement Agreement, McDermotts Board has not
taken the requisite approval under consideration because
progress towards an effective date for the Previously Negotiated
Joint Plan has been impeded by various procedural objections and
appeals on the part of: (1) American Nuclear Insurers
relating to insurance coverage for Apollo/ Parks Township Claims
and (2) insurers whose policies cover asbestos personal
injury claims who have not settled with the Chapter 11
Debtors, McDermott, the ACC and the FCR. As a result, the
Previously Negotiated Settlement Agreement has not been executed
and delivered by the parties to the negotiations, and, beginning
in January 2005, we, together with the ACC, the FCR, the
Chapter 11 Debtors and their respective representatives,
began discussions about alternative means to expedite the
resolution of the Chapter 11 proceedings on a mutually
acceptable basis. Those discussions led to the Proposed
Settlement Agreement. For a description of the Proposed
Settlement Agreement, see Description of the Proposed
Settlement Agreement, below.
A summary of the events leading up to B&Ws bankruptcy
and the Proposed Settlement Agreement is set forth below,
including the history of asbestos-related and other claims filed
against B&W, a corporate reorganization we undertook that
has been challenged by other parties to the bankruptcy
proceedings, a description of the settlement negotiation process
and other alternatives we considered.
|
|
|
Asbestos-Related Claims and Bankruptcy Proceedings |
As a result of asbestos-insulated commercial boilers and other
products B&W and some 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. All of these 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).
B&W received its first asbestos claims in the late 1970s.
Initially, our primary insurance carrier, a unit of Travelers
Group, handled the claims. B&W exhausted the limits of most
of our primary products liability insurance coverage in 1989.
Prior to the Chapter 11 filing, B&W had been handling
the claims under a claims-handling program funded primarily by
reimbursements from our excess-coverage insurance carriers. The
excess coverage available for B&Ws asbestos-related
products liability claims extended through March 1986. This
coverage has been provided by a total of approximately 135
insurance companies. We 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.
Pursuant to agreements with the majority of our principal
insurers concerning the method of allocation of claim payments
to the years of coverage, B&W historically negotiated and
settled asbestos-related personal injury claims against it and
billed the appropriate amounts to the insurers. From the early
1980s forward, B&W devised a broad settlement program with
key plaintiffs law firms, entering into informal
arrangements with such firms throughout the country to settle,
rather than litigate, asbestos claims. This program involved
grouping claims that met basic criteria and paying negotiated
settlement amounts. The average amount per settled claim,
including related out-of-pocket attorneys fees and other
related out-of-pocket expenses, over the three calendar years
prior to the Chapter 11 filing was approximately $7,900.
Beginning in the third quarter of calendar year 1999, B&W
experienced a significant increase in the amount demanded by
several plaintiffs attorneys to settle some types of
asbestos-related personal injury claims. These increased demands
significantly impaired B&Ws ability to continue to
resolve its asbestos-related liability through out-of-court
settlements. As a result, B&W filed for bankruptcy,
believing that a
22
Chapter 11 reorganization offered the only viable legal
process through which it and its subsidiaries could seek a
comprehensive resolution of their asbestos-related liability.
On February 22, 2000, the Chapter 11 Debtors filed a
voluntary petition in the Bankruptcy Court for the Eastern
District of Louisiana to reorganize under Chapter 11 of the
U.S. Bankruptcy Code. As a result of the filing, the
Bankruptcy Court issued a temporary restraining order
prohibiting asbestos-related liability lawsuits and other
actions for which there is shared insurance from being brought
against non-filing affiliates of B&W, including McDermott,
MI and J. Ray McDermott, S.A. The temporary restraining order
was converted to a preliminary injunction, which has been
subject to periodic hearings before the Bankruptcy Court for
extension. Currently, the preliminary injunction runs through
January 9, 2006.
Pursuant to an order of the Bankruptcy Court, 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 was set for all other asbestos-related personal
injury claims, asbestos-related property damage claims and
derivative asbestos claims against the Chapter 11 Debtors,
as well as the Apollo/ Parks Township Claims. As of the
March 29, 2001 bar date, over 49,000 allegedly settled
claims had been filed. The Chapter 11 Debtors have accepted
approximately 8,910 as pre-Chapter 11 binding settled
claims at this time, with an aggregate liability of
approximately $69 million. The Bankruptcy Court has
disallowed approximately 33,000 claims as settled claims, and
the Chapter 11 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-related personal
injury claims, 60,000 related-party claims, 183 property damage
claims, 225 derivative asbestos claims and 571 claims relating
to the Apollo/ Parks Township facilities had been filed. Since
the July 30, 2001 bar date, approximately 15,000 additional
personal injury claims have been filed, including approximately
10,000 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.
Approximately 3,900 additional related party claims, 28 property
damage claims, 218 derivative claims and three Apollo/ Parks
Township Claims have also been filed since the July 30,
2001 bar date. A bar date of January 15, 2003 was set for
the filing of specified general unsecured claims. As of
January 15, 2003, more than 2,700 general unsecured claims
were filed, and the Chapter 11 Debtors commenced an
analysis of these claims and filed objections to many of them.
These include claims filed by various insurance companies
seeking recovery from the Chapter 11 Debtors under various
theories and priority tax claims, which appear to be estimates
of liability by taxing authorities for ongoing audits of MI. The
Chapter 11 Debtors believe that these claims are without
merit and are contesting them. The Chapter 11 Debtors
continue to analyze the claims filed by the January 15,
2003 bar date. The estimated total alleged liability, as
asserted by the claimants in the Chapter 11 proceedings and
in filed proofs of claim, of the asbestos-related claims,
including the alleged settled claims, substantially exceeds the
combined value of the Chapter 11 Debtors and the known
available products liability and property damage insurance
coverages. The Chapter 11 Debtors filed a proposed
Litigation Protocol with the District Court on October 18,
2001, setting forth the intention of the Chapter 11 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 the FCR filed briefs opposing the
Litigation Protocol and requesting an estimation of pending and
future claims. No decision was rendered by the Bankruptcy Court
or the District Court and these matters have been stayed pending
the settlement negotiations between the parties.
On May 15, 2000, the Chapter 11 Debtors filed their
first motion for an extension of the exclusive period within
which they had the exclusive right to file a plan of
reorganization and solicit acceptance of that plan. The ACC
filed an opposition to that request. By order dated June 9,
2000, the Bankruptcy Court approved the Chapter 11
Debtors motion and extended the exclusive period for
60 days. Thereafter, the Chapter 11 Debtors filed a
second motion seeking a further extension. The ACC filed an
opposition to that request as well. By order dated
October 13, 2000, the Bankruptcy Court extended the
exclusive period in which the Chapter 11 Debtors had to
file a plan of reorganization until February 22, 2001, and
the period in which they had to obtain acceptances of that plan
in order to preserve the exclusive period until
23
April 23, 2001. Due to the parties inability to reach
a compromise of the issues raised in the Chapter 11
proceedings, the Chapter 11 Debtors filed a motion to
appoint a mediator on January 25, 2001, in an effort to
move the Chapter 11 proceedings toward a consensual plan of
reorganization. As a result, the Bankruptcy Court appointed
Professor Francis McGovern as a mediator to coordinate and
otherwise assist with settlement discussions.
On February 22, 2001, the Chapter 11 Debtors filed a
plan of reorganization and disclosure statement (the
B&W Plan). This plan of reorganization
contemplated a resolution under either a settlement process or a
strategy of litigating asbestos claims. Under the settlement
process, there would have been a consensual agreement of 75% of
the asbestos-related personal injury claimants. A trust would
have been formed and assigned all of the Chapter 11
Debtors insurance rights with an aggregate products
liability value of approximately $1.15 billion. In
addition, $50 million of cash and a $100 million
subordinated 10-year note payable would have been transferred to
the trust. The Chapter 11 Debtors and their nondebtor
affiliates (including McDermott and its other subsidiaries)
would have consented to the assignment of the insurance and
would have released and voided any right they had to the
insurance, with the nondebtor defendants receiving a full
release and protection under the U.S. Bankruptcy Code
against all present and future asbestos-related liability claims
relating to the B&W Entities. The trusts rights to the
insurance would have been protected and could have been
dedicated solely to the resolution of the asbestos-related
claims. Significantly, the protection that would have been
provided to the Chapter 11 Debtors and their nondebtor
affiliates (including McDermott and its other subsidiaries)
would not have included a channeling injunction under
Section 524(g) of the U.S. Bankruptcy Code.
Accordingly, while the B&W Plan contemplated that B&W
and all of its affiliates would have been released and
discharged from all present and future liability for
asbestos-related claims arising out of exposure to products of
the B&W Entities, the absence of a permanent channeling
injunction might have left us with some risk of future
asbestos-related claims attributable to the B&W Entities,
particularly in the event the trust exhausted its assets,
through the payment of claims or otherwise.
Under the litigation strategy, if B&W was not able to reach
a consensual agreement with the plaintiffs, a cram-down option
under the U.S. Bankruptcy Code would have been available.
The claims would still have been channeled to a trust with
$50 million of cash and a $100 million subordinated
10-year note payable, but the Chapter 11 Debtors and their
affiliates would not have transferred their insurance rights.
The Chapter 11 Debtors would have managed the insurance
rights, and claims would have been handled through the
litigation process by the trust. Funding of the trust would have
been from the insurance, the cash, the note payable and equity
of the Chapter 11 Debtors, if necessary.
Shortly after the filing of the B&W Plan, it became apparent
that the ACC, the FCR and other representatives for
asbestos-related claimants found that plan to be unacceptable.
By their filing of the B&W Plan, the Chapter 11 Debtors
preserved their exclusive period through April 23, 2001,
the deadline as of which the Chapter 11 Debtors had to have
obtained acceptance of the initial proposed plan. The
Chapter 11 Debtors filed subsequent requests to extend that
deadline. That deadline was extended until May 8, 2002, at
which time, in response to further objections from the ACC and
the FCR, the Bankruptcy Court allowed the exclusivity period to
expire and permitted other parties in interest to file competing
plans. The ACC and the FCR filed a competing joint plan of
reorganization (the ACC/ FCR Plan) and a related
disclosure statement on July 3, 2002.
The ACC/ FCR Plan contemplated that, on its effective date, all
of the shares of B&W owned by BWICO would be canceled and
new shares would be issued to: (1) a trust established for
the benefit of claimants with asbestos-related personal injury
claims against the Chapter 11 Debtors; and (2) certain
general unsecured creditors of the Chapter 11 Debtors. The
ACC/ FCR Plan further contemplated that McDermott and its
affiliates (other than the B&W Entities) would be enjoined
from any continuing access to the insurance rights that provided
coverage for the Chapter 11 Debtors liability on
account of asbestos-related personal injury claims. Those
insurance rights would be assigned to the trust. The ACC/ FCR
Plan, however, did not contemplate that, absent a settlement,
McDermott and its affiliates (other than the B&W Entities)
would receive the protection of an injunction against present or
future claims based on the Chapter 11 Debtors
asbestos-related liabilities. Instead, it contemplated that
claims against
24
McDermott and its subsidiaries (other than the B&W
Entities), including McDermotts captive insurance
subsidiaries, would survive. Furthermore, it did not contemplate
a settlement of the pending appeal by the ACC and the FCR of a
favorable ruling by the Bankruptcy Court validating the
corporate reorganization we completed in 1998, which involved
B&Ws cancellation of a $313 million intercompany
note receivable and transfers of substantial assets from B&W
to BWICO, including all the capital stock of several operating
subsidiaries. See Corporate
Reorganization.
The ACC/ FCR Plan generally contemplated that:
|
|
|
|
|
asbestos-related personal injury claimants asserting claims
arising from cases of severe asbestosis and malignancies would
have access to 55% of the asbestos trusts resources; |
|
|
|
asbestos-related personal injury claimants asserting claims
based on cases involving nonmalignant asbestosis and pleural
disease would have access to 45% of the asbestos trusts
resources; and |
|
|
|
all asbestos-related personal injury claimants would be entitled
to a quick pay option of $250. |
The trustees of the trust would have had the discretion to
assert defenses to asbestos-related personal injury claims.
Under the ACC/ FCR Plan, the asbestos trust and general
unsecured creditors with allowed claims would have shared pro
rata in a pool of assets consisting of the new stock of B&W
issued on the effective date of the ACC/ FCR Plan, excess cash
of the Chapter 11 Debtors and the monetary value of
specified tax benefits created upon effectuation of the ACC/ FCR
Plan. In addition, certain general unsecured creditors of the
Chapter 11 Debtors would have been entitled to recover the
full amount of insurance proceeds arising from the allowance of
their claims.
The ACC/ FCR Plan also contemplated that a separate trust would
have been created to pay the Apollo/ Parks Township Claims. This
trust would have been funded by access to separate insurance and
a contribution from the Chapter 11 Debtors that would be
reimbursed out of insurance proceeds. McDermott and its
affiliates (other than the B&W Entities) would not have been
protected by an injunction from the assertion of Apollo/ Parks
Township Claims against them, but would have been enjoined from
access to the insurance rights relating to those claims.
As more fully described under Developing the
Previously Negotiated Settlement below, subsequent
settlement discussions between the parties resulted in an
agreement in principle on key terms by August 7, 2002,
which served as a basis for continuing negotiations. Based on
that agreement in principle and subsequent negotiations, on
December 19, 2002, the Chapter 11 Debtors, the ACC,
the FCR and MI, acting together as plan proponents, filed
drafts of the Previously Negotiated Joint Plan, a related joint
disclosure statement and the Previously Negotiated Settlement
Agreement. On March 28, 2003 and again on May 5, 2003,
the parties filed amended drafts of the Previously Negotiated
Joint Plan, the disclosure statement and the Previously
Negotiated Settlement Agreement. On June 25, 2003, the
parties filed a third amended Previously Negotiated Joint Plan
and disclosure statement and another revised version of the
Previously Negotiated Settlement Agreement. On July 7,
2003, the Bankruptcy Court ruled that the third amended
disclosure statement was adequate for purposes of soliciting
votes on whether to accept or reject the Previously Negotiated
Joint Plan and, on July 21, 2003, the solicitation
commenced. Under a voting procedures order entered on
July 10, 2003 by the Bankruptcy Court, August 29, 2003
was established as the voting deadline for the claimants
entitled to vote on the proposed plan of reorganization, and
objections to confirmation were also due by that date. As
discussed below under Developing the
Previously Negotiated Settlement, the Bankruptcy Court
subsequently modified its voting procedures order, effectively
extending the period of time for the asbestos-related personal
injury claimants to complete their voting on the Previously
Negotiated Joint Plan until November 25, 2003, in order to
permit that vote to be completed concurrently with the holding
of the 2003 Special Meeting. The Bankruptcy Court commenced
hearings on the confirmation of the Previously Negotiated Joint
Plan on September 22, 2003.
25
On November 9, 2004, the Bankruptcy Court entered its
Amended Findings of Fact and Conclusions of Law Regarding Core
Matters and Proposed Finding of Fact, Conclusions of Law and
Recommendations to the District Court With Respect to Non-Core
Matters (the Amended Findings and Conclusions). In
its Amended Findings and Conclusions, the Bankruptcy Court
recommended to the District Court that the Previously Negotiated
Joint Plan be confirmed. Also on November 9, 2004, the
Bankruptcy Court entered an order making findings of fact and
conclusions of law on core matters and making recommendations to
the District Court on non-core matters (November 9,
2004 Order). Various insurers and certain claimants
parties filed objections or appeals to the Amended Findings and
Conclusions and the November 9, 2004 Order. The plan
proponents filed a cross-appeal with respect to a bankruptcy law
issue that relates to America Nuclear Insurers policies.
Briefing and other filings regarding the objections and appeals
were completed on May 31, 2005, and the District Court
heard oral argument on July 21, 2005. The District Court
has not yet ruled on the various appeals and objections, and the
timing of any ruling by the District Court is uncertain. Since
the July 21, 2005 oral argument, the plan proponents have
entered into settlement arrangements with a number of the
objectors/appellants. While other settlement negotiations are
continuing, several unresolved objections to and appeals from
the Amended Findings and Conclusions and the November 9,
2004 Order remain pending.
|
|
|
Apollo/ Parks Township Claims |
In 1971, B&W purchased the stock of Nuclear Materials and
Equipment Corporation (NUMEC) from ARCO. NUMEC owned
and operated two nuclear fuel processing facilities located in
Apollo, Pennsylvania and in Parks Township, Pennsylvania. Under
the stock purchase agreement, ARCO agreed to indemnify B&W
for specified claims arising out of these facilities.
B&W merged NUMEC into itself in 1974 and continued to
operate the Parks Township facility until 1980 and the Apollo
facility until 1983. Subsequently, both the Apollo facility and
the Parks Township facility were decommissioned.
On June 7, 1994, Donald F. Hall, Mary Ann Hall and others
filed suit against B&W and ARCO in the United States
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 the Apollo and
Parks Township nuclear fuel processing facilities (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 the course of that trial, B&W
settled all pending punitive damages claims in the Hall
Litigation for $8.0 million. In June 1999, the Court set
aside the $36.7 million judgment and ordered a new trial on
all issues. In November 1999, the Court allowed an interlocutory
appeal by the plaintiffs of some of the issues, including the
granting of the new trial and the Courts rulings on
specified evidentiary matters, which, following B&Ws
bankruptcy filing, the Third Circuit Court of Appeals declined
to accept for review.
The plaintiffs remaining claims against B&W in the
Hall Litigation have been automatically stayed as a result of
B&Ws bankruptcy filing. Under the Proposed Settlement
Agreement and the Proposed Joint Plan, the Apollo/ Parks
Township Claims will not be channeled to a trust, as
contemplated by the Previously Negotiated Settlement Agreement
and the Previously Negotiated Joint Plan. Rather, the Apollo/
Parks Township Claims will remain the responsibility of the
Chapter 11 Debtors and will not be impaired under the terms
of the Proposed Joint Plan in its current form. While the
Proposed Settlement has been structured in a manner to permit
all disputes relating to the Apollo/ Parks Township Claims and
the associated insurance coverage to be resolved after the
Proposed Joint Plan has been confirmed and becomes effective,
B&W, representatives of the claimants in the Hall Litigation
and ARCO have negotiated an agreement in principle that reflects
a proposed settlement of present Apollo/Parks Township Claims,
including those that are the subject of the Hall Litigation. The
agreement in principle, which has been memorialized in a term
sheet, contemplates, among other things, that: (1) B&W
and ARCO will be provided full and complete releases from each
of the Apollo/ Parks Township Releasors (which will be
26
defined in a definitive settlement agreement generally to mean
the existing claimants in the Hall Litigation and related
pending litigation); (2) ARCO will make a
$27.5 million cash payment to the Apollo/ Parks Township
Releasors upon the effective date of the Proposed Joint Plan;
(3) B&W will make a $47.5 million cash payment to
the Apollo/ Parks Township Releasors upon the effective date of
the Proposed Joint Plan; (4) B&W will make a
$12.5 million payment to the Apollo/ Parks Township
Releasors upon the third anniversary of the effective date of
the Proposed Joint Plan; and (5) B&W and ARCO will
retain all insurance rights, including without limitation with
respect to the claims of the Apollo/ Parks Township present
claimants who are not Apollo/ Parks Township Releasors and with
respect to any future Apollo/ Parks Township Claims. We intend
to seek reimbursement from our nuclear insurers for all amounts
that would be paid by B&W under the proposed settlement. Our
nuclear insurers have refused to fund the proposed settlement of
the Hall Litigation and have indicated that, while they do not
anticipate objecting to the terms of the Proposed Joint Plan,
they will object to the proposed settlement of the Hall
Litigation unless the settlement does not prejudice our nuclear
insurers in any subsequent litigation brought by us seeking
reimbursement from them.
In 1998, we completed a corporate reorganization which included,
among other things, B&Ws cancellation of a
$313 million intercompany note receivable and
B&Ws transfer to BWICO of all the capital stock of
Babcock & Wilcox Tracy Power, Inc., Hudson Products
Corporation (Hudson Products), McDermott Technology,
Inc. (MTI) and BWXT (collectively, the 1998
Transfers).
On April 30, 2001, B&W filed a declaratory judgment
action in its Chapter 11 proceeding in the Bankruptcy Court
against MI, BWICO, BWXT, Hudson Products and MTI, seeking a
judgment, among other things, that (1) B&W was not
insolvent at the time of, or rendered insolvent as a result of,
the corporate reorganization that we completed in the fiscal
year ended March 31, 1999, and (2) the transfers
related to the reorganization were not voidable. 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 asserted in this action, among other things, that
B&W was insolvent at the time of the transfers and that
the transfers should be voided. Following a trial on the issue
of solvency, in February 2002 the Bankruptcy Court found the ACC
and FCR failed to sustain their burden of proving B&W was
insolvent at the time of the corporate reorganization. MI,
BWICO, BWXT, Hudson Products and MTI then filed a motion for
summary judgment asking that judgment be entered on a variety of
additional pending counts presented by the ACC and the FCR. The
Bankruptcy Court granted this motion and entered an order
dismissing all claims asserted in complaints filed by the ACC
and the FCR regarding the 1998 Transfers. The ACC and the FCR
have appealed this order to the District Court, but their appeal
would be dismissed if the proposed settlement is finalized.
The Proposed Settlement Agreement and the Proposed Joint Plan
provide for settlement of the claims brought by the ACC and the
FCR relating to the 1998 Transfers. Please read
Description of the Proposed Settlement Agreement for
more information.
During the course of the Chapter 11 proceedings and
continuing to the present, we, the ACC and FCR have been in
settlement negotiations with insurers of B&W and McDermott
that have issued insurance policies pursuant to which certain
rights will be assigned to the Asbestos PI Trust. The settlement
negotiations generally seek to (1) resolve various claims
made by those insurers in litigation initiated after the
Chapter 11 Debtors commenced their Chapter 11 cases
and (2) liquidate insurance policy rights into cash
payments that generally would be paid to or for the benefit of
the Asbestos PI Trust if and when a joint plan of reorganization
becomes effective. To date, we, the ACC and the FCR have:
|
|
|
|
|
entered into conditional settlements with a substantial number
of our insurers, which collectively provide for the payment of
approximately $361 million in insurance proceeds to the
Asbestos |
27
|
|
|
|
|
PI Trust if and when the plan effective date occurs, in
exchange for a release of certain coverage liabilities of these
insurers; |
|
|
|
entered into a conditional settlement agreement with
underwriters at Lloyds, London, Equitas Limited, Equitas
Reinsurance Limited, Equitas Holdings Limited, Equitas
Management Services Limited and Equitas Policyholders Trustee
Limited (Lloyds/ Equitas), under which
Lloyds/ Equitas has paid $415 million into an escrow
account, which amount would be transferred to the Asbestos PI
Trust if and when the plan of reorganization becomes effective,
in exchange for a release of coverage liability of those
entities; |
|
|
|
entered into a conditional settlement agreement with certain
London Market insurance companies under which, in exchange for a
release of coverage liability of such insurers policies,
certain companies will pay $9.9 million into an escrow
account within 60 days, which amount will be transferred to
the Asbestos PI Trust if and when the plan of reorganization
becomes effective, and certain other companies will pay an
additional $131 million to the Asbestos PI Trust, in
installments, after the plan of reorganization becomes
effective; and |
|
|
|
entered into unconditional settlement agreements with two
insolvent insurance company groups, which are currently subject
to insolvency proceedings in the United Kingdom. Under these
settlements, in exchange for a release of certain policies, the
liquidators agreed to pay a total sum in excess of
$18.4 million, which amounts will be retained regardless of
whether the plan of reorganization becomes effective. |
Under the terms of these agreements, the settling insurers would
withdraw any objections to the plan of reorganization and, if
and when the plan becomes effective, these insurers would
receive the benefit of the plans Section 524(g)
injunction with respect to B&W asbestos claims. Certain of
the settlement payments represent discounts of up to
approximately 30% from the remaining products liability limits
available under the policies. The conditional settlements will
become effective, however, only upon the effective date of the
plan of reorganization, and, in the event the plan does not
become effective, the conditional settlements will become null
and void and the remaining products liability limits will be
available to satisfy claims as provided under the policies. The
conditional and unconditional settlements have been approved, or
are in the process of being approved, by the Bankruptcy Court.
We, the ACC and FCR are also engaged in settlement negotiations
with other insurers of B&W. If any agreements are reached,
they would be subject to the approval of the Bankruptcy Court.
For additional information concerning the litigation with these
insurers and the developments leading up to the insurance
settlement agreements, see the discussions in note 10 to
the consolidated financial statements of B&W and its
subsidiaries included in this proxy statement.
|
|
|
Developing the Previously Negotiated Settlement |
At various points in time between the commencement of the
Chapter 11 proceedings and July 1, 2002, our
representatives engaged in discussions with representatives of
the ACC and the FCR regarding the possibility of a negotiated
settlement of the contested issues among the parties in the
proceedings. Those discussions did not result in any agreement
on material issues.
On July 1, 2002, Francis S. Kalman, the Chief Financial
Officer of McDermott, and John T. Nesser, III,
the General Counsel of McDermott, met with representatives of
the ACC and the mediator to further discuss the possibility of a
settlement. During that meeting, the participants agreed on
eight basic points of agreement, which were
memorialized in a preliminary term sheet. Those points of
agreement served as the general basis for further negotiations
that culminated in the Previously Negotiated Settlement
Agreement.
On July 3, 2002, the Board of Directors of McDermott held a
meeting by telephone to discuss the potential settlement. At
that meeting, Messrs. Kalman and Nesser described the
July 1 points of agreement, and the general consensus of
the McDermott Board was that the points of agreement could serve
as a basis for further discussions among the parties.
28
On July 8, 2002, Mr. Nesser sent a letter to the
ACCs national counsel requesting a meeting on
July 12, 2002 to further discuss the potential settlement.
On July 12, 2002, Bruce W. Wilkinson, Chairman of the Board
and Chief Executive Officer of McDermott, Mr. Nesser and
David L. Keller, President and Chief Operating Officer of
B&W, along with their legal and financial advisors,
participated in settlement negotiations with representatives of
the ACC and the FCR and their advisors, at a meeting in New
York City. The mediator was also present at that meeting. The
parties discussed the process and timetable for developing a
detailed agreement on the terms of the proposed settlement, as
well as near-term issues in the Chapter 11 proceedings that
the parties needed to address. In this connection, the parties
generally agreed to a deferral of all litigation among them,
including the appeal by the ACC and the FCR of the Bankruptcy
Courts rulings relating to the 1998 Transfers, while the
parties proceeded with the settlement negotiations.
On July 15 and 16, 2002, Messrs. Wilkinson, Kalman and
Nesser advised each of the members of McDermotts Board of
Directors of developments regarding the potential settlement,
including the substance of the July 12 meeting.
On July 18, 2002, attorneys for the various parties to the
proposed settlement participated in a status conference with the
Bankruptcy Court. The subject of the conference was the
parties request to defer various court proceedings pending
further negotiations toward a potential settlement. As a result,
the Bankruptcy Court entered an order to defer those proceedings.
From July 22 to August 7, 2002, the parties to the
settlement and their legal and financial advisors communicated
by telephone, e-mail, correspondence and in-person meetings. In
these communications, the parties discussed and negotiated
various issues related to the potential settlement, including
settlement terms as reflected in various drafts of a detailed
memorandum of understanding. Although those representatives were
unable to reach agreement on a memorandum of understanding, as
of August 7, 2002, they generally concurred that the
remaining issues were not reasonably likely to stand in the way
of an agreement in principle among the parties.
The Board of Directors of McDermott discussed the potential
settlement at a meeting on August 7, 2002. At that meeting,
Mr. Nesser reviewed the most recent draft of the memorandum
of understanding and described the remaining issues that were
unresolved. Later that day, with the concurrence of
representatives of the ACC and the FCR, McDermott issued a press
release announcing the items of agreement in principle regarding
the potential settlement and cautioning that there were many
open issues remaining to be resolved, resolution of which was
necessary to reach a settlement.
From August 8, 2002 to early September 2002,
representatives of McDermott, B&W, the ACC and the FCR
continued to negotiate to resolve open issues reflected in the
memorandum of understanding. In early September 2002,
representatives of B&W and McDermott began preparing initial
drafts of the Previously Negotiated Joint Plan and Previously
Negotiated Settlement Agreement.
While early drafts of the Previously Negotiated Joint Plan and
Previously Negotiated Settlement Agreement were prepared and
discussed among representatives of the parties, the parties also
considered an alternative settlement structure during the period
from early September 2002 through mid-October 2002. This
alternative structure, which McDermotts management
proposed, would have involved the combination of B&W and
BWXT into a new company and the co-ownership of that new company
by McDermott and the Asbestos PI Trust. The Asbestos PI
Trusts share in the ownership of this new company would
have been economically equivalent to the value of the entire
equity ownership of the B&W Entities. After some
consideration of this alternative, the ACC and the FCR rejected
it without detailed explanation to us.
After several telephonic negotiating sessions among
representatives of the parties, Messrs. Kalman and Nesser,
together with counsel for the Chapter 11 Debtors and
McDermott, met with representatives of the ACC and the FCR in
Washington, D.C. on November 8, 2002. At that meeting,
the parties attempted to reach an agreement on all significant
open issues relating to the draft Previously Negotiated Joint
Plan and Previously Negotiated Settlement Agreement, both of
which needed to be put into substantially complete
29
form in order to meet a filing deadline for the Previously
Negotiated Joint Plan imposed by the Bankruptcy Court. While the
parties did not reach agreement on all the open issues, they
were able to reach agreement on many of these issues and agreed
on a continued information exchange to permit resolution of the
remaining issues.
The plan proponents filed the first version of the Previously
Negotiated Joint Plan on November 19, 2002. Although the
basic terms of the proposed settlement did not materially change
after that filing, numerous ancillary matters and details
remained to be negotiated and finalized. Representatives of the
plan proponents continued to negotiate by telephone and by
e-mail until June 9, 2003, to resolve the remaining issues
relating to the Previously Negotiated Settlement Agreement, and
prepared and negotiated revisions to various ancillary
agreements and other documents, including a transition services
agreement, a tax separation agreement, an intellectual property
agreement and insurance rights assignment agreements. On
March 28, 2003, the plan proponents filed a first amended
version of the Previously Negotiated Joint Plan reflecting
progress in those negotiations through that date, as well as the
addition of provisions to reflect progress in the settlement
discussions relating to the Apollo/ Parks Township Claims and to
define more particularly the insurance rights to be assigned to
the Asbestos PI Trust. On May 5, 2003, the plan proponents
filed a second amended version of the Previously Negotiated
Joint Plan to incorporate various technical amendments to which
the plan proponents agreed, including amendments involving the
settlement relating to Apollo/ Parks Township Claims and the
insurance rights to be assigned to the Asbestos PI Trust and the
trusts to be created for the benefit of holders of Apollo/ Parks
Township Claims and claims for asbestos-related property damages.
On June 9, 2003, Messrs. Nesser and Keller, together
with other representatives of McDermott and the Chapter 11
Debtors, met with the mediator and representatives of the ACC
and the FCR in Washington, D.C. to identify and work to
resolve all open issues relating to the Previously Negotiated
Joint Plan, the Previously Negotiated Settlement Agreement and
various ancillary documents. Following that meeting and a series
of telephonic follow-up meetings extending until June 25,
2003, the plan proponents agreed on the form of the Previously
Negotiated Joint Plan and Previously Negotiated Settlement
Agreement. The plan proponents filed the third amended version
of the Previously Negotiated Joint Plan and related documents,
including the Previously Negotiated Settlement Agreement, with
the Bankruptcy Court on June 25, 2003. The third amended
version of the Previously Negotiated Joint Plan reflected
changes from the second amended version to, among other things,
finalize the provisions for the settlement relating to the
Apollo/ Parks Township Claims.
Subsequent to June 25, 2003 and through August 28,
2003, representatives of the plan proponents continued work to
resolve various issues and finalize various ancillary documents.
Substantially complete forms of those documents were filed with
the Bankruptcy Court on August 28, 2003.
During this period, the plan proponents resolved an issue among
themselves concerning the timing of voting by the
asbestos-related personal injury claimants on whether to accept
or reject the Previously Negotiated Joint Plan. As initially
established by the Bankruptcy Court, the deadline for all
claimants to vote on the Previously Negotiated Joint Plan was
August 29, 2003. The ACC and the FCR urged the Bankruptcy
Court to consider their position that the asbestos-related
personal injury claimants should not have to become bound by
their vote on the Previously Negotiated Joint Plan before
McDermotts stockholders voted on the previously negotiated
settlement. In response, the Bankruptcy Court modified its
previous voting procedures order, effectively extending the
period of time for the asbestos-related personal injury
claimants to complete their voting on the Previously Negotiated
Joint Plan until November 25, 2003. In connection with that
extension, we stated our intention to convene a special meeting
of our stockholders as promptly as practicable.
At a meeting of the Board of Directors of McDermott held on
September 12, 2003, Mr. Nesser, together with outside
counsel for McDermott, reviewed with the McDermott Board the
history of the negotiations leading up to the previously
negotiated settlement, the terms and provisions of the
Previously Negotiated Settlement Agreement and the related
transition services and tax separation agreements and a
preliminary draft of the proxy statement related to the December
2003 special meeting. After a full
30
discussion of issues, the McDermott Board unanimously approved
the submission of the proposed resolution to the stockholders of
McDermott and recommended that those stockholders vote to adopt
the proposed resolution.
|
|
|
Description of the Previously Negotiated Settlement
Agreement |
The Previously Negotiated Settlement Agreement included the
following key terms:
|
|
|
|
|
McDermott would have effectively assigned all its equity in
B&W to the Asbestos PI Trust. |
|
|
|
McDermott and all its subsidiaries would have assigned,
transferred or otherwise made available their rights to all
applicable insurance proceeds to the Asbestos PI Trust,
consisting of rights to excess insurance coverage with an
aggregate face amount of available limits of coverage of
approximately $1.15 billion. |
|
|
|
McDermott would have issued 4.75 million shares of
restricted common stock and caused those shares to be
transferred to the Asbestos PI Trust. The resale of the shares
would have been subject to certain limitations, in order to
provide for an orderly means of selling the shares to the
public. Certain sales by the Asbestos PI Trust would also have
been subject to a McDermott right of first refusal. If any of
the shares issued to the Asbestos PI Trust were 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 McDermott
from time to time, McDermott would have effectively guaranteed
that those shares would have a value of $19.00 per share on
the third anniversary of the date of their issuance. In the
event this guarantee materialized, McDermott would have been
able to satisfy the guaranty obligation by making a cash payment
or through the issuance of additional shares of its common
stock. If McDermott elected to issue shares to satisfy this
guaranty obligation, it would not have been required to issue
more than 12.5 million shares. |
|
|
|
MI would have issued promissory notes to the Asbestos PI Trust
in an aggregate principal amount of $92 million. The notes
would have been unsecured obligations and would have provided
for payments of principal of $8.4 million per year for
11 years, with interest payable on the outstanding balance
at the rate of 7.5% per year. The payment obligations under
those notes would have been guaranteed by McDermott. |
|
|
|
McDermott and all of its subsidiaries, including its captive
insurers, and all of their respective directors and officers,
would have received the full benefit of the protections afforded
by Section 524(g) of the Bankruptcy Code with respect to
personal injury claims attributable to B&Ws use of
asbestos and would have been released and protected from all
pending and future asbestos-related claims stemming from
B&Ws 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 Previously Negotiated Settlement Agreement provided that,
effective as of the effective date of the Previously Negotiated
Joint Plan, each of the Chapter 11 Debtors would have
generally released McDermott, its affiliates (other than the
B&W Entities, but including McDermotts captive
insurers), and their respective directors and officers, from all
pending and future claims arising out of or attributable to the
post-incorporation business or operations of any of the
Chapter 11 Debtors or their past or present subsidiaries
(other than claims arising out of or attributable to the
post-incorporation business or operations of any of the
subsidiaries that were transferred by B&W to BWICO as part
of the 1998 Transfers), including full release and protection
under the U.S. Bankruptcy Code against pending and future
asbestos and other products liability claims, Apollo/ Parks
Township Claims, claims related to the 1998 Transfers and other
intercompany dealings prior to the effective date, various
claims that could be asserted through the Chapter 11
Debtors and that could arise out of, result from or be
attributable to
31
insurance or the placement of insurance under which any of the
Chapter 11 Debtors or any of their respective past or
present subsidiaries is or was insured, and other specified
claims.
From and after the effective date of the Previously Negotiated
Joint Plan, McDermott, its affiliates, and their respective
directors and officers, would have been generally indemnified by:
|
|
|
|
|
the Asbestos PI Trust, with respect to released claims and
damages described in the preceding paragraph that were to be
channeled to the Asbestos PI Trust in accordance with a
channeling injunction, claims related to assigned insurance
rights and other specified claims; and |
|
|
|
a trust created to process and pay Apollo/ Parks Township Claims
(the Apollo/ Parks Township Trust), with respect to
released claims and damages described in the preceding paragraph
that were to be channeled to the Apollo/ Parks Township Trust in
accordance with a channeling injunction, claims related to
assigned insurance rights and other specified claims. |
The B&W Entities also would have generally indemnified
McDermott, its affiliates, and their respective directors and
officers, with respect to the released claims and damages and
other specified claims. In addition, McDermott and its other
subsidiaries would have been relieved of payment obligations on
approximately $37 million of intercompany indebtedness owed
to the B&W Entities, as well as various other existing and
contingent intercompany obligations to the B&W Entities.
In addition to the release and indemnification protections set
forth in the Previously Negotiated Settlement Agreement, the
Previously Negotiated Joint Plan contemplated an injunction, to
be entered or affirmed by the United States District Court for
the Eastern District of Louisiana under Section 524(g) of
the U.S. Bankruptcy Code, permanently enjoining any person
or entity from taking any action against McDermott and the
Chapter 11 Debtors and their respective subsidiaries,
directors and officers, as well as other specified persons and
entities, for the purpose of, directly or indirectly,
collecting, recovering or receiving payment of, on or with
respect to any asbestos-related personal injury claims against
one or more of the Chapter 11 Debtors or their respective
subsidiaries, all of which were to be channeled to the Asbestos
PI Trust for resolution.
The Previously Negotiated Joint Plan also provided for similar
injunctions under Section 105(a) of the
U.S. Bankruptcy Code, covering asbestos-related property
damage claims against one or more of the Chapter 11 Debtors
or their respective subsidiaries and Apollo/ Parks Township
Claims. These injunctions might not have had the same force as a
channeling injunction under Section 524(g) of the
U.S. Bankruptcy Code, particularly in the event one of the
applicable trusts were to exhaust its assets, through payment of
claims or otherwise.
|
|
|
Confirmation Hearings on the Previously Negotiated Joint
Plan and Subsequent Developments Leading to the Proposed
Settlement Agreement and the Proposed Joint Plan |
The terms of the Previously Negotiated Settlement Agreement were
reflected in the Previously Negotiated Joint Plan, which the
plan proponents filed with the Bankruptcy Court on June 25,
2003 and subsequently amended at various dates through
September 30, 2004.
The Bankruptcy Court commenced hearings on the confirmation of
the Previously Negotiated Joint Plan on September 22, 2003.
On November 9, 2004, the Bankruptcy Court entered the
Amended Findings and Conclusions. In its Amended Findings and
Conclusions, the Bankruptcy Court recommended to the District
Court that the Previously Negotiated Joint Plan be confirmed.
Also on November 9, 2004, the Bankruptcy Court entered the
November 9, 2004 Order. Various insurers and certain
parties have filed objections to or appeals from the Amended
Findings and Conclusions and the November 9, 2004 Order.
The plan proponents have filed a cross-appeal with respect to a
bankruptcy law issue that relates to ANIs policies.
Briefing and other filings regarding the appeals and objections
were completed on May 31, 2005, and the District Court
heard oral argument on July 21, 2005. The District Court
has not yet ruled on the various appeals and objections and the
timing of any ruling by the District Court is uncertain. Since
the July 21, 2005 oral argument, the plan proponents have
entered into settlement arrangements with a number of the
objectors/appellants. While other settlement negotiations are
continuing, several unresolved
32
objections to and appeals from the Amended Findings and
Conclusions and the November 9, 2004 Order remain pending.
At a special meeting of our stockholders on December 17,
2003, our stockholders voted on and approved a resolution
relating to the previously negotiated settlement. The
stockholders approval of the resolution was expressly
conditioned on the subsequent approval of the Previously
Negotiated Settlement Agreement by McDermotts Board of
Directors. In addition, the Previously Negotiated Joint Plan
provided that it could not become effective without the approval
of the Previously Negotiated Settlement Agreement by
McDermotts Board within 30 days prior to the
effective date of the plan.
McDermotts Board has not yet taken the requisite approval
under consideration because progress towards an effective date
for the Previously Negotiated Joint Plan has been impeded by
various procedural objections and appeals on the part of:
(1) American Nuclear Insurers relating to insurance
coverage for Apollo/ Parks Township Claims and (2) insurers
whose policies cover asbestos personal injury claims who have
not settled with the Chapter 11 Debtors, MI, the ACC and
the FCR. As a result, the Previously Negotiated Settlement
Agreement has not been executed and delivered by the parties to
the negotiations, and, beginning in January 2005, we, together
with the ACC, the FCR, the Chapter 11 Debtors and their
respective representatives, began discussions about alternative
means to expedite the resolution of the Chapter 11
proceedings on a mutually acceptable basis.
The discussions regarding alternative settlement arrangements
led to several exchanges of term sheet proposals and meetings
among representatives of the plan proponents to discuss those
proposals. As a result of those efforts, on August 25,
2005, the plan proponents agreed on a mutually acceptable term
sheet for the proposed settlement, which McDermott announced on
August 29, 2005.
Based on the August 25, 2005 term sheet, the plan
proponents prepared drafts of definitive settlement
documentation, including drafts of the Proposed Settlement
Agreement, the Proposed Joint Plan and the B&W Note.
Negotiations on those draft documents continued until
September 29, 2005, when they were filed with the
Bankruptcy Court.
At a meeting of the Board of Directors of McDermott held on
August 29, 2005 and a telephonic meeting of the McDermott
Board held on October 17, 2005, Mr. Nesser reviewed
with the McDermott Board the history of the negotiations leading
up to the current proposed settlement and the terms and
provisions of the Previously Negotiated Settlement Agreement and
the Proposed Settlement Agreement. After a full discussion of
issues at those meetings, including the alternatives discussed
under Alternatives to the Proposed Settlement
Agreement below, the McDermott Board unanimously approved
the proposed settlement and the terms and provisions of the
Proposed Settlement Agreement and unanimously approved the
submission of the proposed resolution to the stockholders of
McDermott and recommended that those stockholders vote to adopt
the proposed resolution at the October 17, 2005 telephonic
meeting.
|
|
|
Alternatives to the Proposed Settlement Agreement |
If the proposed resolution is not adopted at the Special
Meeting, or if the Proposed Joint Plan does not become
effective, on a final, nonappealable basis, on or before the
Effective Date Deadline for any other reason, the Proposed
Settlement Agreement contemplates that, unless the ACC, the FCR
and we agree to extend that deadline, the settlement
contemplated by the Proposed Settlement Agreement will be
abandoned and those parties will resume their efforts to effect
the settlement contemplated by the Previously Negotiated
Settlement Agreement and the Previously Negotiated Joint Plan.
However, there have been various objections, appeals and
uncertainties that have impeded the progress of that previously
negotiated settlement, and there is substantial uncertainty as
to whether that settlement would be consummated. If neither
settlement is consummated, the Bankruptcy Court will be faced
with the decision
33
of how the Chapter 11 cases should proceed, and, under
those circumstances, the Bankruptcy Court would likely consider
the following alternatives:
|
|
|
|
|
continuation of the Chapter 11 proceedings until another
plan of reorganization is confirmed and becomes effective; |
|
|
|
appointment of a trustee to assume the administration of the
Chapter 11 proceedings outside of the control of management
of the Chapter 11 Debtors, potentially followed by a
conversion or dismissal of the Chapter 11 proceedings as
described below; |
|
|
|
conversion of the Chapter 11 proceedings to liquidation
proceedings under Chapter 7 of the U.S. Bankruptcy
Code; or |
|
|
|
dismissal of the Chapter 11 proceedings. |
Our Board of Directors considered each of these alternatives in
determining to recommend the proposed resolution for adoption by
our stockholders. In the case of each of these alternatives, we
would continue to be subject to various risks and uncertainties
associated with the pending and future asbestos-related
liabilities of B&W and the other Chapter 11 Debtors (in
the absence of federal legislation that comprehensively resolves
those liabilities). These risks and uncertainties include
potential future rulings by the Bankruptcy Court, the District
Court or other courts that could be adverse to us and the risks
and uncertainties associated with appeals from the rulings
issued by the Bankruptcy Court relating to the 1998 Transfers.
Any one of these alternatives could ultimately result in the
return to the courts of the approximately 300,000
asbestos-related personal injury and related-party claims, which
are currently pending and proposed to be resolved through the
proposed settlement. Each of these alternatives could also
result in the resumption of litigation relating to the 1998
Transfers. The following discussion provides more detail
regarding each of these alternatives.
Continuation of Chapter 11 Proceedings. If the
Chapter 11 Debtors remain in Chapter 11, they could
continue to operate their businesses and manage their properties
as debtors-in-possession until a plan of reorganization is
confirmed and becomes effective. Under this alternative, the
Chapter 11 proceedings could revert to the situation in
which there are two competing plans of
reorganization the B&W Plan and the ACC/ FCR
Plan. It is possible that the Bankruptcy Court could confirm the
ACC/ FCR Plan over our and any other objections. As discussed
under Asbestos-Related Claims and Bankruptcy
Proceedings above, the ACC/ FCR Plan would be considerably
less favorable to us than the Proposed Joint Plan in several
respects, including the loss of our equity interests in the
B&W Entities, the preservation of claims regarding the 1998
Transfers and the absence of channeling injunctions to protect
us and our affiliates from asbestos-related claims attributable
to the business and operations of the B&W Entities and
Apollo/ Parks Township Claims.
Appointment of a Trustee. The Bankruptcy Court could
order the appointment of a trustee on the request of either a
party in interest or the United States Trustee. The trustee
would assume both the authority and responsibility of
administering the Chapter 11 Debtors estates, and
certain legal powers associated with that administration. The
Chapter 11 Debtors would lose the authority otherwise
granted to debtors in possession to manage their affairs on a
day-to-day basis. Once the Bankruptcy Court ordered the
appointment of a trustee, the United States Trustee would select
the trustee. In making that selection, the United States Trustee
would consult not only with us but also with the ACC and the
FCR. Alternatively, any party in interest (including the ACC and
the FCR) could request the election of a trustee by the
creditors of the Chapter 11 Debtors. Whether selected by
the United States Trustee or elected by the creditors, the
trustee could pursue a plan of reorganization or liquidation of
the Chapter 11 Debtors that would be substantially less
favorable to us than the Proposed Joint Plan.
Liquidation Under Chapter 7. The Bankruptcy Court
could convert the Chapter 11 proceedings from
reorganization proceedings to a Chapter 7 liquidation at
the request of a party in interest or the United States Trustee,
if the Bankruptcy Court determines that conversion is in the
best interest of the creditors and the estate. If the B&W
Entities were liquidated under Chapter 7, a trustee would
be elected or appointed to liquidate all of their assets. The
proceeds of liquidation would be distributed to the respective
34
holders of claims against the B&W Entities (including the
asbestos personal injury claimants and the asbestos property
damages claimants) in accordance with the priorities established
by the U.S. Bankruptcy Code. Any assets of the
Chapter 11 Debtors remaining after paying their obligations
would be distributed to BWICO, the sole stockholder of B&W.
Dismissal of the Chapter 11 Proceedings. The
Bankruptcy Court could dismiss the Chapter 11 proceedings
altogether at the request of a party in interest or the United
States Trustee if the Court determines that dismissal is in the
best interest of the creditors and the estate. Upon dismissal,
we and our affiliates, including the Chapter 11 Debtors,
would lose the benefits of the automatic stay afforded by the
U.S. Bankruptcy Code, which, since the commencement of the
reorganization proceedings, has shielded the Chapter 11
Debtors, us and our other affiliates from litigation arising
from the use of asbestos by the B&W Entities.
|
|
|
Remaining Issues to Be Resolved |
Even assuming all requisite approvals of the Proposed Joint Plan
and the proposed settlement are obtained, there are a number of
issues and matters to be resolved prior to completion of the
B&W Chapter 11 proceedings. Remaining issues and
matters to be resolved include, among other things, the
following:
|
|
|
|
|
the Bankruptcy Courts decisions relating to various
substantive and procedural aspects of the Chapter 11
proceedings; |
|
|
|
objections or appeals by some of our insurers and others of the
Bankruptcy Courts Amended Findings and Conclusions and
November 9, 2004 Order; and |
|
|
|
potential appeals as to the confirmation of the Proposed Joint
Plan. |
In addition, there are numerous conditions to the confirmation
of the Proposed Joint Plan and the effectiveness of the Proposed
Joint Plan following confirmation. See Description of the
Proposed Settlement Agreement Conditions.
|
|
|
Timetable for Confirmation of the Proposed Joint
Plan |
The Proposed Joint Plan is subject to ongoing confirmation
proceedings, in the following sequence. First, the Bankruptcy
Court will oversee the plan confirmation process. As part of
that process, on November 10, 2005, the Bankruptcy Court
approved the adequacy of a disclosure statement and procedures
to be followed in connection with a vote to be taken among
various impaired classes of creditors with respect to the
Proposed Joint Plan. The balloting will be completed on
December 16, 2005. The Bankruptcy Court will begin a
hearing on confirmation of the Proposed Joint Plan on
December 22, 2005. The Bankruptcy Court will then prepare
written proposed factual findings and legal conclusions that
would be submitted to the District Court. Thereafter, the
District Court may oversee additional hearings and briefing and
may issue a plan confirmation order. If the District Court
confirms the Proposed Joint Plan, one or more parties may appeal
the District Courts confirmation order to the
U.S. Court of Appeals for the Fifth Circuit in appellate
proceedings that could extend beyond the Effective Date Deadline.
Recommendation of the Board
Our Board of Directors unanimously recommends that you
vote FOR the adoption of the proposed resolution.
In determining to make its recommendation, the Board considered
the benefits we would obtain from the proposed settlement,
including the following:
|
|
|
|
|
the B&W Entities would remain as indirect subsidiaries of
McDermott, and we would include the results of their operations
in our consolidated results of operations, and (subject to
ordinary restrictions on accessing cash flows of subsidiaries)
we would regain access to the cash flows of the B&W Entities
and be in a position to benefit from the strengths of the
B&W Entities through the |
35
|
|
|
|
|
business strategies we intend to employ with respect to the
B&W Entities, as described under Information About
B&W and Its Subsidiaries Business; |
|
|
|
the Asbestos PI Trust would indemnify McDermott and its
subsidiaries against asbestos-related personal injury claims
(other than workers compensation claims) attributable to
the business and operations of the B&W Entities; |
|
|
|
McDermott and its subsidiaries, including the B&W Entities,
would receive the protection of a channeling injunction under
Section 524(g) of the U.S. Bankruptcy Code, which
would channel all pending and future asbestos-related personal
injury claims (other than workers compensation claims)
attributable to the business and operations of the B&W
Entities to the Asbestos PI Trust; |
|
|
|
McDermotts captive insurance subsidiaries, which provided
insurance coverage to the B&W Entities for specified
risks, and/or reinsured against specified risks, would generally
be entitled to the same indemnification and channeling
injunction protections as described above; |
|
|
|
the ACC and the FCR would terminate their appeal of a favorable
ruling by the Bankruptcy Court validating the 1998
Transfers; and |
|
|
|
the likely acceleration of B&Ws emergence from
bankruptcy, because the proposed settlement does not involve
some of the complexities that were reflected in the previously
negotiated settlement and removes the bases for objection by
various parties. |
Additionally, the Board considered the uncertainty as to whether
the FAIR Act will ever become law and the Condition Precedent
included in the Proposed Settlement Agreement, which would
potentially limit the consideration to be contributed to the
Asbestos PI Trust if the FAIR Act or similar U.S. federal
legislation is enacted and becomes law on or before
November 30, 2006. The Board also considered the exclusion
of workers compensation claims from the indemnification
and channeling injunction provisions of the proposed settlement,
together with managements estimate that the ongoing
exposure of the B&W Entities and our captive insurance
companies to those claims would not give rise to material losses
in the foreseeable future. The Board also considered the factors
discussed under Risk Factors (including the fact
that the non-asbestos-related liabilities and contingent
liabilities of the B&W Entities will not be discharged or
otherwise impacted by the Proposed Joint Plan), as well as the
Boards and McDermotts managements
understanding of those risks through the continuing oversight of
the operations of the B&W Entities throughout the
course of the B&W Chapter 11 proceedings. The Board
also considered the alternatives discussed above under
Background of the Proposed
Settlement Alternatives to the Proposed Settlement
Agreement. In addition, the Board considered the need to
bring the Chapter 11 proceedings to a close, given the fact
that the Chapter 11 proceedings have required significant
amounts of attention from our senior management and have
resulted in substantial uncertainties for our customers,
suppliers and financing sources, as well as in the market for
our common stock and other securities.
Accounting Treatment of the Previously Negotiated
Settlement
As a result of the Chapter 11 filing, beginning on
February 22, 2000, we stopped consolidating the results of
operations of B&W and its subsidiaries in our financial
statements and we began accounting for our investment in B&W
under 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 B&Ws 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, in connection with the filing of
drafts of the third amended joint plan and related settlement
agreement in the Chapter 11 proceedings, we determined that
a liability related to the previously negotiated settlement was
probable and that the amount of that liability was reasonably
estimable. Accordingly, as of December 31, 2002, we
established an estimate for the cost of the previously
36
negotiated settlement of $110 million, including tax
expense of $23.6 million, reflecting the present value of
our contemplated contributions to the Asbestos PI Trust. The
estimate had been adjusted from 2002 through June 30, 2005
based on the provision of the previously negotiated settlement,
and a liability was recorded totaling $146.7 million. As of
September 30, 2005, we no longer evaluated our liability
based on the previously negotiated settlement, as we feel it is
no longer probable.
Accounting Treatment of the Proposed Settlement
Under the terms of the proposed settlement, McDermott (through
BWICO) will retain 100% ownership of B&W and will reacquire
control of B&W. McDermott will account for the proposed
settlement similar to a step acquisition by applying the
guidelines of SFAS No. 141 and will account for the
proposed settlement similar to a step purchase. For further
information see Unaudited Pro Forma Financial Information
of McDermott.
Material U.S. Federal Income Tax Considerations Relating
to the Proposed Settlement
For general information only, we have provided a description of
the material U.S. federal income tax consequences to MI and
its subsidiaries of the proposed settlement below. This
description does not purport to be a complete analysis or
listing of all potential tax consequences.
The following description of material U.S. federal income
tax consequences is based on the Internal Revenue Code, the
Treasury Regulations promulgated and proposed thereunder,
judicial decisions and published administrative rulings and
pronouncements of the IRS, all as in effect on the date of this
proxy statement. Legislative, judicial or administrative changes
or interpretations enacted or promulgated in the future could
alter or modify the analysis and conclusions set forth below.
Any such changes or interpretations may be retroactive, and
could significantly affect the U.S. federal income tax
consequences discussed below.
No ruling has been requested or obtained from the IRS with
respect to any of the tax aspects of the proposed settlement.
Accordingly, we can provide no assurance that the IRS will not
challenge the tax consequences described below or that any such
challenge, if made, would not be successful.
The following discussion does not address any foreign, state or
local tax consequences of the proposed settlement, nor does it
purport to address the U.S. federal income tax consequences
of the proposed settlement to the Asbestos PI Trust or holders
of claims subject to the B&W Chapter 11 proceedings.
The proposed settlement should generate significant
U.S. federal income tax deductions associated with the
contributions to be made by MI and its subsidiaries to the
Asbestos PI Trust. The Asbestos PI Trust is expected to
qualify as a qualified settlement fund under
Section 468B of the Internal Revenue Code, as was
contemplated by the prior settlement. In order to qualify as a
qualified settlement fund, the Asbestos PI Trust must be:
|
|
|
|
|
established pursuant to an order of, or approved by, the United
States, any state, territory, possession, or political
subdivision thereof, or any agency or instrumentality (including
a court of law) of any of the foregoing and be subject to the
continuing jurisdiction of that governmental authority; |
|
|
|
established to resolve or satisfy one or more contested or
uncontested claims that have resulted or may result from an
event (or related series of events) that has occurred and that
has given rise to at least one claim asserting liability arising
out of, among other things, a tort, breach of contract, or
violation of law; and |
|
|
|
a trust under applicable state law, or its assets must otherwise
be physically segregated from other assets of the transferor
(and related persons). |
Assuming that qualification, with respect to the initial
$350 million to be contributed to the Asbestos PI Trust on
or after the effective date of the Proposed Joint Plan, the
associated U.S. federal income tax deductions will be taken
as and when such payment to the Asbestos PI Trust is made.
Similarly, with
37
respect to the $355 million to be paid pursuant to the
Contingent Payment Right and payments of principal on the
B&W Note, the associated U.S. federal income tax
deductions will be taken as and when such payments to the
Asbestos PI Trust are made.
Neither MI nor any of its subsidiaries will be entitled to a
deduction to the extent that the Asbestos PI Trust is funded
through insurance proceeds or the proposed transfer of rights
under insurance policies.
Any deductions for payments made to the Asbestos PI Trust first
would reduce or eliminate the U.S. federal taxable income
of MIs consolidated group for the taxable year in which
the payments are made. To the extent these deductions created a
taxable loss for such year, the loss would constitute a net
operating loss. In general, net operating losses may be carried
back and deducted two years and carried forward 20 years.
To the extent a net operating loss is a specified
liability loss, however, it may be carried back and
deducted ten years. The taxpayer may elect to waive the entire
carryback period with respect to a net operating loss or may
elect to waive only the additional eight years of carryback
afforded net operating losses attributable to specified
liability losses.
A net operating loss constitutes a specified liability loss to
the extent it is attributable to products liability or to
expenses incurred in the investigation or settlement of, or
opposition to, claims against the taxpayer on account of
products liability. Any net operating loss resulting from
payments to the Asbestos PI Trust should constitute a specified
liability loss and accordingly would qualify for the ten-year
carryback period.
The U.S. federal income tax consequences of the proposed
settlement differ in several respects from those that would have
resulted from the previously negotiated settlement. The
Previously Negotiated Settlement Agreement contemplated that MI
would enter into a tax separation and sharing agreement with
B&W and its U.S. domestic subsidiaries, which would
reflect various arrangements that would be implemented to:
(1) separate B&W and its U.S. domestic
subsidiaries from MIs consolidated group for
U.S. federal income tax purposes; and (2) allocate the
tax benefits realized from the consummation of the previously
negotiated settlement. In connection with the tax benefits to be
realized, it was contemplated that the Asbestos PI Trust and the
trust to be formed for the benefit of holders of Apollo/ Parks
Township Claims would qualify as qualified settlement
funds for U.S. federal income tax purposes. Assuming
that qualification, B&W would have been entitled to a
current U.S. federal income tax deduction for all transfers
of cash, stock and other property (other than the promissory
notes proposed to be issued by MI) to the trusts to the same
extent it would have been entitled to a deduction if those
amounts were paid directly to holders of personal injury claims.
We also expected that MI would have been entitled to deductions
for the principal amount of the MI promissory notes contributed
to the Asbestos PI Trust as and when such payments were made on
those notes. As with the proposed settlement, neither B&W
nor MI would have been entitled to a deduction to the extent
that the trusts were funded through insurance proceeds or the
transfer of rights under insurance policies.
The tax separation and sharing agreement proposed in connection
with the previously negotiated settlement would have provided
for an agreed method of computing and allocating the tax
benefits that would have resulted from the transfers of property
to the Asbestos PI Trust. Under that agreement:
|
|
|
|
|
MI would have had the economic benefit of any tax deductions
arising from the transfer of the McDermott common stock,
payments on the MI promissory notes and payments made under the
share price guarantee; and |
|
|
|
B&W would have had the economic benefit of any tax
deductions arising from the contribution of its common stock and
cash payments made to the Asbestos PI Trust, other than payments
on the MI promissory notes or the share price guarantee. |
The tax separation and sharing agreement also would have
provided that MI and B&W would be entitled to their
respective economic benefits on a proportionate basis, as the
deductions resulting from the property transferred to the
Asbestos PI Trust were used to offset income of either the MI
consolidated group or B&W.
38
Dissenters Rights
McDermott is a Panamanian corporation. Neither Panamanian law
nor McDermotts articles of incorporation or by-laws
provides for dissenters or similar rights for dissenting
stockholders in connection with the vote on the proposed
resolution or the consummation of the proposed settlement.
Accordingly, our stockholders will have no right to dissent and
obtain payment for their shares.
Description of the Proposed Settlement Agreement
The following discussion describes the material provisions of
the Proposed Settlement Agreement but does not describe all of
its terms. The full text of the Proposed Settlement Agreement is
attached to this proxy statement as Appendix A and is
incorporated into this proxy statement by reference. We urge you
to read the Proposed Settlement Agreement in its entirety.
Parties to the Proposed Settlement Agreement. The parties
to the Proposed Settlement Agreement would include:
|
|
|
|
|
McDermott; |
|
|
|
MI; |
|
|
|
BWICO; |
|
|
|
the Chapter 11 Debtors; |
|
|
|
the ACC; and |
|
|
|
the FCR. |
Creation of the Asbestos PI Trust and Contribution of
Assets
The Proposed Settlement Agreement provides for the contribution
of specified assets to the Asbestos PI Trust, which will be
established to process and pay asbestos-related personal injury
claims, manage the assets of the trust for use in paying
asbestos-related personal injury claims and manage the
disposition of insurance rights assigned to the trust by
McDermott and various subsidiaries of McDermott. Specifically,
the Proposed Settlement Agreement provides that, in
consideration of an asbestos-related personal injury claim
channeling injunction established pursuant to the Proposed Joint
Plan and the releases and indemnification provided under the
Proposed Joint Plan and the Proposed Settlement Agreement:
|
|
|
|
|
McDermott will, and will cause various of its subsidiaries to,
enter into an agreement assigning to the Asbestos PI Trust their
rights to numerous insurance policies that have an aggregate
face amount of available products liability limits of coverage
for, among other things, asbestos-related personal injury claims
of approximately $1.15 billion; and |
|
|
|
McDermott will cause the following other assets to be
contributed to the Asbestos PI Trust: |
|
|
|
|
|
$350 million in cash, to be paid by MI or one of its
subsidiaries on the effective date of the Proposed Joint Plan; |
|
|
|
an additional contingent cash payment of $355 million,
which would be payable by MI or one of its subsidiaries within
180 days of November 30, 2006, but only if the
Condition Precedent is satisfied, which amount would be payable
with interest accruing on that amount at 7% per year from
December 1, 2006 to the date of payment; and |
|
|
|
the B&W Note, which will be in the aggregate principal
amount of $250 million and will bear interest at the rate
of 7% annually on the outstanding principal balance from and
after December 1, 2006, with a five-year term and annual
principal payments of $50 million each, commencing on
December 1, 2007; provided that, if the Condition Precedent
is not satisfied, only $25 million principal amount of the
B&W Note would be payable (with the entire $25 million
amount due on December 1, 2007). B&Ws payment
obligations under the B&W Note would be |
39
|
|
|
|
|
fully and unconditionally guaranteed by BWICO and McDermott. The
guarantee obligations of BWICO and McDermott would be secured by
a pledge of all of B&Ws capital stock outstanding as
of the effective date of the Proposed Joint Plan. |
McDermott and most of its subsidiaries would also contribute to
the Asbestos PI Trust substantially the same insurance rights as
were to be contributed to the Asbestos PI Trust under the
Previously Negotiated Settlement Agreement.
Through the Condition Precedent provisions, the Proposed
Settlement Agreement includes a mechanism that would potentially
limit the consideration to be contributed to the Asbestos PI
Trust if the FAIR Act or similar U.S. federal legislation
is enacted and becomes law. Specifically, the Proposed
Settlement Agreement provides that the right to receive the
$355 million payment pursuant to the Contingent Payment
Right would vest and amounts under the B&W Note in excess of
$25 million would be payable only upon satisfaction of the
Condition Precedent, which is that neither the FAIR Act nor any
other U.S. federal legislation designed to resolve
asbestos-related personal injury claims through the
implementation of a national trust shall have been enacted and
become law on or before November 30, 2006. The Proposed
Settlement Agreement further provides that:
|
|
|
|
|
if such legislation is enacted and becomes law on or before
November 30, 2006 and is not subject to a Challenge
Proceeding (which is a legal proceeding that challenges the
constitutionality of such legislation) as of January 31,
2007, the Condition Precedent would be deemed not to have been
satisfied, and no amounts would be payable under the Contingent
Payment Right and no amounts in excess of $25 million would
be payable under the B&W Note; and |
|
|
|
if such legislation is enacted and becomes law on or before
November 30, 2006, but is subject to a Challenge Proceeding
as of January 31, 2007, the Condition Precedent would be
deemed not to have been satisfied and any rights with respect to
the Contingent Payment Right and payments under the B&W Note
in excess of $25 million would be suspended until either: |
|
|
|
(1) there has been a final, nonappealable judicial decision
with respect to the Challenge Proceeding to the effect that such
legislation is unconstitutional as generally applied to debtors
in Chapter 11 proceedings whose plans of reorganization
have not yet been confirmed and become substantially consummated
(i.e., debtors that are similarly situated to B&W as
of September 1, 2005), so that such debtors would not be
subject to such legislation, in which event the Condition
Precedent would be deemed to have been satisfied, and the
Contingent Payment Right would vest and the Note would become
fully payable pursuant to its terms (in each case subject to the
protection against double payment provisions described
below); or |
|
|
(2) there has been a final nonappealable judicial decision
with respect to the Challenge Proceeding which resolves the
Challenge Proceeding in a manner other than as contemplated by
the immediately preceding clause, in which event the Condition
Precedent would be deemed not to have been satisfied and no
amounts would be payable under the Contingent Payment Right and
no amounts in excess of $25 million would be payable under
the B&W Note. |
The Proposed Settlement Agreement also includes provisions to
provide some protection against double payment so that, if the
FAIR Act or similar U.S. federal legislation is enacted and
becomes law after November 30, 2006, or the Condition
Precedent is otherwise satisfied (in accordance with the
provisions described in clause (1) above), any payment
McDermott or any of its subsidiaries may be required to make
pursuant to the legislation on account of asbestos-related
personal injury claims against any of the B&W Entities would
reduce, by a like amount:
|
|
|
|
|
first, the amount, if any, then remaining payable pursuant to
the Contingent Payment Right; and |
|
|
|
next, any then remaining amounts payable pursuant to the B&W
Note. |
Under the Proposed Settlement Agreement and the Proposed Joint
Plan, the Apollo/ Parks Township Claims will not be channeled to
a trust, as contemplated by the Previously Negotiated Settlement
Agreement and the Previously Negotiated Joint Plan. Rather, the
Apollo/ Parks Township Claims would
40
remain the responsibility of the Chapter 11 Debtors and
will not be impaired under the terms of the Proposed Joint Plan.
While the Proposed Settlement has been structured in a manner to
permit all disputes relating to the Apollo/ Parks Township
Claims and the associated insurance coverage to be resolved
after the Proposed Joint Plan has been confirmed and becomes
effective, B&W, representatives of the claimants in the Hall
Litigation and ARCO have negotiated an agreement in principle
that reflects a proposed settlement of the Hall Litigation
involving existing claimants. The agreement in principle, which
has been memorialized in a term sheet, contemplates, among other
things, that: (1) B&W and ARCO will be provided full
and complete releases from each of the Apollo/ Parks Township
Releasors (which will be defined in a definitive settlement
agreement generally to mean the existing claimants in the Hall
Litigation and related pending litigation); (2) ARCO will
make a $27.5 million cash payment to the Apollo/ Parks
Township Releasors upon the effective date of the Proposed Joint
Plan; (3) B&W will make a $47.5 million cash
payment to the Apollo/ Parks Township Releasors upon the
effective date of the Proposed Joint Plan; (4) B&W will
make a $12.5 million payment to the Apollo/ Parks Township
Releasors upon the third anniversary of the effective date of
the Proposed Joint Plan; and (5) B&W and ARCO will
retain all insurance rights, including without limitation with
respect to the claims of the Apollo/ Parks Township present
claimants who are not Apollo/ Parks Township Releasors and with
respect to any future Apollo/ Parks Township Claims. We intend
to seek reimbursement from our nuclear insurers for all amounts
that would be paid by B&W under the proposed settlement. Our
nuclear insurers have refused to fund the proposed settlement of
the Hall Litigation and have indicated that, while they do not
anticipate objecting to the terms of the Proposed Joint Plan,
they will object to the proposed settlement of the Hall
Litigation unless the settlement does not prejudice our nuclear
insurers in any subsequent litigation brought by us seeking
reimbursement from them.
The Proposed Settlement Agreement contemplates that the Proposed
Joint Plan must become effective, on a final, nonappealable
basis, no later than the Effective Date Deadline. The Proposed
Settlement Agreement further contemplates that, if the effective
date of the Proposed Joint Plan has not occurred by that date,
and is not extended by the ACC, the FCR and us, acting together,
then the settlement contemplated by the Proposed Settlement
Agreement will be abandoned and the parties will resume their
efforts to effect the settlement contemplated by the Previously
Negotiated Settlement Agreement and the Previously Negotiated
Joint Plan.
Channeling Injunction and Indemnification for the
Asbestos-Related Personal Injury Claims
In addition to the release and indemnification protections set
forth in the Proposed Settlement Agreement, the Proposed Joint
Plan provides for an injunction, to be entered or affirmed by
the United States District Court for the Eastern District of
Louisiana under Section 524(g) of the U.S. Bankruptcy
Code, permanently enjoining any person or entity from taking any
action against McDermott and the Chapter 11 Debtors and
their respective subsidiaries, directors and officers, as well
as other specified persons and entities, for the purpose of,
directly or indirectly, collecting, recovering or receiving
payment of, on or with respect to any asbestos-related personal
injury claims against one or more of the Chapter 11 Debtors
or their respective subsidiaries, all of which are to be
channeled to the Asbestos PI Trust for resolution as set forth
in the procedures governing distributions from that trust.
The Proposed Settlement Agreement and the Proposed Joint Plan
also provide that the Asbestos PI Trust will indemnify
McDermott and its subsidiaries and their respective directors
and officers from and against any asbestos-related personal
injury claims that are to be channeled to the Asbestos PI Trust
as described above.
Conditions
General conditions to the obligations of all parties. The
Proposed Settlement Agreement provides for the following
conditions to the obligations of all parties to the agreement:
|
|
|
|
|
no temporary restraining order, preliminary or permanent
injunction or other order issued by a court of competent
jurisdiction or other legal restraint or prohibition preventing
or otherwise interfering |
41
|
|
|
|
|
with the consummation of the settlement as contemplated by the
Proposed Settlement Agreement shall be in effect; |
|
|
|
the channeling injunction contemplated by the Proposed Joint
Plan, which will channel asbestos-related personal injury claims
(other than workers compensation claims) attributable to
the business or operations of the B&W Entities to the
Asbestos PI Trust, shall be in full force and effect; and |
|
|
|
no governmental authority shall have enacted or otherwise
implemented any law, statute, order, rule, regulation, judgment,
decree, award or other requirement that prohibits or restricts
in any material respect the consummation of the settlement
contemplated by the Proposed Settlement Agreement. |
In order to meet the condition that the channeling injunction
must be in full force and effect, the Proposed Joint Plan must
be confirmed by the Bankruptcy Court or the District Court and
must become effective. The Proposed Joint Plan establishes
various conditions to its confirmation and effectiveness.
The conditions to confirmation include, among others, the
following:
|
|
|
|
|
various findings of fact and conclusions of law that must be set
forth in the confirmation order, including, with respect to
insurance matters, that: |
|
|
|
|
|
the various assignments of insurance rights contemplated by the
Proposed Joint Plan do not violate any obligation of the
Chapter 11 Debtors or any of the other assigning entities
under any consent-to-assignment, consent-to-settlement,
cooperation, management-of-claims or no-action provision under
any of the applicable insurance policies or related agreements; |
|
|
|
the various assignments of insurance rights contemplated by the
Proposed Joint Plan do not materially increase any applicable
insurers risk of providing coverage for specified claims,
as compared to the risk that was otherwise being borne by the
insurer prior to the effective date of the Proposed Joint
Plan; and |
|
|
|
the duties and obligations of various insurers are not
diminished, reduced or eliminated by (1) the discharge,
release and extinguishment of various obligations of McDermott
and the Chapter 11 Debtors and their respective officers,
directors, subsidiaries and other affiliates from and in respect
of various asbestos-related claims, (2) the assumption of
responsibility for those claims by the Asbestos PI Trust or
(3) the assignment of the insurance rights to be assigned
pursuant to the Proposed Joint Plan; |
|
|
|
|
|
various findings to the effect that the Proposed Joint Plan
complies with the requirements of Section 524(g) of the
U.S. Bankruptcy Code; |
|
|
|
the entry of an order of the Bankruptcy Court or the District
Court estimating the aggregate value of all asbestos-related
property damage claims (as distinguished from asbestos-related
personal injury claims) against the Chapter 11 Debtors and
determining that such value is not greater than
$700,000; and |
|
|
|
the approval of the Proposed Settlement Agreement, and the
settlement contemplated by the Proposed Settlement Agreement, by
the affirmative vote of a majority of the shares of McDermott
common stock present in person or represented by proxy at the
Special Meeting and entitled to vote on the matter, provided
that, in order for the vote to be effective, the number of
shares of McDermott common stock for which votes are cast in
favor of the proposal must represent at least 50% of the voting
power of all of the shares of McDermott common stock outstanding
and entitled to vote on the matter. |
42
The Proposed Joint Plan also establishes various conditions that
must be satisfied after the confirmation of the Proposed Joint
Plan before it will become effective. These conditions include,
among others, the following:
|
|
|
|
|
Specified court orders, including a confirmation order and an
order or orders entering specified injunctions, including the
channeling injunction contemplated by the Proposed Joint Plan,
which will channel asbestos-related personal injury claims
(other than workers compensation claims) attributable to
the business or operations of the B&W Entities to the
Asbestos PI Trust, must have been entered or affirmed by the
District Court, and those orders must have become final and
nonappealable and those injunctions must be in full force and
effect. The failure to resolve disputes with any objectors could
materially hinder satisfaction of this condition. |
|
|
|
The applicable parties to the documents ancillary to the
Proposed Joint Plan, to implement the proposed settlement and
the other provisions of the Proposed Joint Plan, must have
executed and delivered those documents. |
|
|
|
The Chapter 11 Debtors must have obtained new financing
arrangements, or an extension of their existing financing
arrangements, to support their operations on their exit from the
Chapter 11 proceedings. |
|
|
|
The ACC and the FCR must have dismissed with prejudice their
appeal from the decision in the adversary proceeding relating to
the 1998 Transfers. |
|
|
|
The Proposed Settlement Agreement must not have been terminated
pursuant to its terms, which provide that the agreement may be
terminated (1) by mutual consent of the parties,
(2) by the ACC, the FCR or us if McDermott stockholder
approval of the Proposed Settlement Agreement has not been
obtained on or before January 31, 2006, (3) by
McDermott, if its Board of Directors determines that a material
adverse change has occurred in either the financial condition,
assets or operations of the B&W Entities or national or
international general business or economic conditions that
obligates the Board to terminate the Proposed Settlement
Agreement to avoid a breach of its fiduciary duties, or
(4) by the ACC, the FCR or us if the Proposed Joint Plan
has not become effective, on a final, nonappealable basis, on or
before the Effective Date Deadline. |
While it is possible that conditions to confirmation or
effectiveness in the Proposed Joint Plan may be waived, any such
waiver would require unanimous agreement among the plan
proponents. We do not anticipate re-soliciting our stockholders
for approval of any such waiver unless we propose to waive a
condition to confirmation or effectiveness and such waiver would
be materially adverse to our stockholders, in which case we
would re-solicit the vote of our stockholders.
Fairness in Asbestos Injury Resolution Act of 2005
On April 19, 2005, Senator Arlen Specter introduced in the
United States Senate a bill for the enactment of federal
legislation entitled The Fairness in Asbestos Injury
Resolution Act of 2005 (Senate Bill 852, the FAIR
Act). The bill was referred to the Senate Judiciary
Committee, which held hearings and considered and amended the
bill. The Committee voted to approve the FAIR Act on
May 26, 2005, and the bill was reported to the Senate and
placed on the legislative calendar on June 16, 2005. There
is similar legislation pending in the U.S. House of
Representatives (House of Representatives Bill 1360), which was
introduced in the House of Representatives in 2005 and is based
on a prior version of the FAIR Act introduced in the Senate
in 2004.
It is uncertain whether the FAIR Act or similar legislation will
ever be presented for a vote or passed by the U.S. Senate
or House of Representatives, or whether it will become law. We
cannot predict the final terms or costs associated with any bill
that might become law and impact the B&W Chapter 11
bankruptcy proceedings, the Chapter 11 Debtors and
McDermott. The terms of the pending legislation could change,
and any changes could be material to the impact of such
legislation on the B&W Chapter 11 proceedings, the
Chapter 11 Debtors and McDermott.
43
To enable you to make an informed decision on the proposed
resolution, we include below a summary description of the FAIR
Act as currently drafted. This description focuses on the
legislation pending before the U.S. Senate, as that
legislation has progressed further than the legislation pending
in the U.S. House of Representatives. This description does
not address all material provisions of the proposed FAIR Act. We
encourage you to read the entire FAIR Act as currently drafted.
Overview
The FAIR Act would create a privately funded, federally
administered trust fund to resolve pending and future
asbestos-related personal injury claims. An Office of Asbestos
Disease Compensation within the Department of Labor would be
formed to process asbestos claims and make awards to qualified
claimants. Claimants would qualify for payment from the trust
fund if the claimant meets the FAIR Acts standardized
medical criteria. The level of payment for a qualified claimant
would depend on various factors, including the severity of the
asbestos-related disease.
The trust fund would be funded by existing asbestos trusts and
mandatory payments from companies with asbestos-related
liabilities and their insurers. The FAIR Act
(1) anticipates that the trust fund would collect roughly
$4 billion from existing asbestos trusts and (2) caps
the aggregate payment obligations of participating companies at
$90 billion and insurers at $46 billion. Individual
contributions would be assessed differently for each group. The
methods of assessing contributions among the participants in
each group are discussed below. If individual participating
companies or insurers make their payments in accordance with the
FAIR Act, then they would be shielded from asbestos-related
personal injury claims. See Effect on Existing
Asbestos Claims and Agreements.
|
|
|
Asbestos Defendant Contributions |
Asbestos defendants would be divided into tiers based on prior
asbestos liability-related expenditures, including settlement,
judgment, defense and indemnity costs. Defendants would be
further divided into subtiers based on revenues for the fiscal
year 2002. Additionally, a separate tier would be created for
companies that have prior asbestos expenditures greater than
$1 million and have a Chapter 11 case pending on the
date of enactment of the FAIR Act or during the year preceding
that date. A bankruptcy tier defendant whose bankruptcy was not
caused by asbestos claims would be able to continue through the
normal bankruptcy process and avoid participation in the trust
fund.
Each subtier of defendants would be assessed an annual payment
to the fund. Payments would be required either for a 30-year
period or until the amount received from the defendant
participants equals $90 billion. Defendants with greater
prior asbestos-related liability-related expenditures and
revenues would generally be assessed larger annual payments. For
defendants other than defendants in the bankruptcy tier, annual
payments would be for fixed dollar amounts. Bankruptcy tier
defendants that are still subject to Chapter 11 proceedings
as to which a plan of reorganization has not yet become
effective would be required to make annual payments to the fund
in an amount equal to approximately 1.67 percent of 2002
revenues, capped at $80 million per year.
The fund administrator would have the limited ability to adjust
a defendant participants payment based on financial
hardship or exceptional cases of demonstrated inequity. The fund
administrator would also be directed to reduce the annual
aggregate payment obligation of defendant participants at the
end of the tenth, fifteenth, twentieth and twenty-fifth years of
the fund. However, the administrator would be required to
suspend, cancel or reduce any scheduled payment reduction upon
finding that the current and projected future assets of the fund
are insufficient to satisfy the funds anticipated
obligations. Further, the administrator would be able to assess
surcharges or, after the tenth year of the fund, declare funding
holidays, to adjust for funding shortfalls or overpayments to
the fund. In summary, although the FAIR Act establishes
preliminary payment obligations for individual defendant
participants, those obligations may be adjusted under various
provisions of the FAIR Act.
44
An Asbestos Insurers Commission would be created to determine
the amount to be assessed each insurer to satisfy the
$46 billion aggregate insurer contribution. The Commission
would be required to apply the following factors in assessing
insurer contributions:
|
|
|
|
|
historic premium lines for asbestos-related liability coverage; |
|
|
|
recent loss experiences for asbestos-related liabilities; |
|
|
|
amounts reserved for asbestos-related liabilities; |
|
|
|
the likely costs to each insurer of its future liabilities under
applicable insurance policies; and |
|
|
|
other factors the Commission deems relevant and appropriate. |
Captive insurers of defendant participants would generally not
be assessed funding obligations except to the extent they have
asbestos-related liabilities for claims from persons
unaffiliated with their ultimate corporate parent.
Kickout and Sunset Provisions
The FAIR Act would provide for a temporary stay on pending
asbestos claims upon enactment. If the fund is not operational
and paying claims within nine months of the FAIR Acts
enactment, those stayed claims involving claimants with
exigent health claims, such as those with
mesothelioma or those whose life expectancy is less than one
year due to an asbestos-related illness, would be allowed to
proceed in court. In addition, all pending claims would be
returned to the court system if the fund is not fully
operational and handling claims within 24 months following
enactment of the FAIR Act.
The fund would terminate 180 days after the administrator
determines that the fund does not have sufficient assets to
resolve additional claims and still satisfy all outstanding
obligations. Upon termination, all claimants with unsatisfied
claims could pursue their claims in the court system. Defendant
and insurer participants would be required to continue making
annual payments following the funds termination to satisfy
the funds existing obligations.
Effect on Existing Asbestos Claims and Agreements
Upon determination by the administrator that the fund is fully
operational and processing claims, the FAIR Act would bar any
pending or future asbestos claims in state or federal court
except as provided for by the FAIR Act. Moreover, agreements by
any person with respect to the treatment of asbestos claims that
require future performance would be superseded and of no force
and effect, other than pre-enactment settlement agreements
meeting criteria set out in the FAIR Act. Any plan of
reorganization which has not yet become effective or agreement
by any bankruptcy tier defendant relating to an asbestos claim
would be similarly superseded.
45
Comparison of Treatment of the Chapter 11 Debtors Under
the Proposed FAIR Act as Reported to the Senate by the Senate
Judiciary Committee, the Previously Negotiated Settlement
Agreement and the Proposed Settlement Agreement
The following chart illustrates some of the differences between
the Proposed Settlement Agreement (assuming both satisfaction
and failure of the Condition Precedent), the Previously
Negotiated Settlement Agreement and the draft FAIR Act:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposed | |
|
|
|
|
|
|
|
|
Settlement | |
|
|
|
|
Existing | |
|
|
|
Agreement, No | |
|
Proposed Settlement | |
Consideration Paid, Benefits Received & |
|
Settlement | |
|
FAIR Act Only, with No | |
|
FAIR Act by | |
|
Agreement, with FAIR | |
Liabilities Retained |
|
Agreement | |
|
Settlement | |
|
11/30/06 | |
|
Act by 11/30/06 | |
|
|
| |
|
| |
|
| |
|
| |
B&W business/stock
|
|
|
Surrendered |
|
|
|
Retained |
|
|
|
Retained |
|
|
|
Retained |
|
B&W cash,
assets &liabilities1
|
|
|
Surrendered |
|
|
|
Retained |
|
|
|
Retained |
|
|
|
Retained |
|
Insurance rights
|
|
|
Surrendered |
|
|
|
Partially Surrendered |
|
|
|
Surrendered |
|
|
|
Surrendered |
|
Estimated FAIR Act payments
|
|
|
$0 |
|
|
$750 million/ $335 million (NPV)2 |
|
|
$0 |
|
|
|
$0 |
|
Initial cash payment
|
|
|
$0 |
|
|
|
$0 |
|
|
|
$350 million |
|
|
|
$350 million |
|
Note/contingent note issued
|
|
|
$92 million |
|
|
|
$0 |
|
|
|
$250 million |
|
|
|
$25 million |
|
Stock issued/contingent payment
|
|
>$90 million |
|
|
$0 |
|
|
|
$355 million |
|
|
|
$0 |
|
Estimated gross tax benefits from consideration paid
(at 35%)
|
|
|
$64 million |
|
|
$263 million/ $109 million (NPV)2 |
|
|
$334 million |
|
|
|
$131 million |
|
Future B&W asbestos liability
|
|
|
None |
|
|
Contingent on viability of national trust |
|
|
None |
|
|
|
None |
|
Expected Date of Consummation
|
|
|
Uncertain |
|
|
|
Uncertain |
|
|
|
By 2/22/06 |
|
|
By 2/22/06; FAIR Act Uncertain |
|
|
1 |
B&W available cash as of September 30, 2005 was
$383 million. |
|
2 |
Estimated based upon current draft of the FAIR Act and assuming
30 annual payments of $25 million. As noted above under
Asbestos Defendant Contributions,
payment obligations of asbestos defendants may be adjusted over
the life of the trust fund under various provisions of the FAIR
Act. The Net Present Value is calculated using a 7% discount
rate and assumes payment at the beginning of each period. |
|
|
|
The FAIR Act and the Proposed Settlement |
If the proposed FAIR Act were eventually passed containing the
same provisions as the FAIR Act approved by the Senate Judiciary
Committee, we estimate that the present value of the
Chapter 11 Debtors total payments to the proposed
national trust over a period of 30 years would be
approximately $335 million, assuming the sunset provision
described above does not become applicable. Through use of the
Contingent Payment Right, we believe we have structured the
proposed settlement so that, if the FAIR Act is enacted by
November 30, 2006 and the Condition Precedent is not
satisfied, the aggregate consideration we would deliver pursuant
to the Proposed Settlement Agreement would be similar to the net
present value of the amount we would pay pursuant to the FAIR
Act with no settlement.
46
If the FAIR Act is enacted and becomes law after
November 30, 2006, so that the Condition Precedent is
satisfied, the combined value of the consideration we would be
required to deliver pursuant to the Proposed Settlement would be
substantially greater than the present value of the payments we
would make pursuant to the FAIR Act in its current form. In
addition, the proposed settlement would eliminate substantially
all of our excess insurance coverage for the period from
April 1, 1979 to April 1, 1986, which we would only
partially surrender under the proposed FAIR Act.
|
|
|
The FAIR Act and the Previously Negotiated
Settlement |
We believe the present value of the payments we would make
pursuant to the proposed FAIR Act would be substantially less
than the combined value of the consideration we would be
delivering under the previously negotiated settlement. In
addition, as with the previously negotiated settlement, the
proposed settlement would eliminate substantially all of our
excess insurance coverage, which we would only partially
surrender under the proposed FAIR Act. However, the level of
funding required by the FAIR Act could increase. We can provide
no assurance that the FAIR Act or any similar legislation will
be enacted and, if legislation is enacted, what the terms of
such legislation will be.
|
|
|
Uncertainties Associated With the FAIR Act |
Enactment of the FAIR Act, or other similar legislation
addressing asbestos-related personal injury claims, could have a
material impact on the B&W Chapter 11 proceedings, the
Chapter 11 Debtors and McDermott. The legislative process
is uncertain and there is some risk that the proposed
legislation could be enacted after it is amended or modified to
provide for an exclusion that would apply to the Proposed Joint
Plan, as a result of the adoption of the proposed resolution or
the confirmation of the Proposed Joint Plan, or for some other
reason. Although the Condition Precedent provisions set forth in
the Proposed Settlement Agreement would potentially provide us
relief from having to make any payment pursuant to the
Contingent Payment Right and payments under the B&W Note in
excess of $25 million, it is unlikely that we would be able
to avail ourselves of a more favorable outcome under any
legislation that may subsequently be enacted and become law.
Furthermore, the Condition Precedent would be deemed satisfied
if the FAIR Act or similar federal legislation does not become
law on or before November 30, 2006. Even if the Condition
Precedent is deemed not to be satisfied, and we are able to
benefit from the relief of having to make these contingent
payments, we cannot assure you that the economic terms of the
proposed settlement will be at least as favorable to us as the
economic terms of any asbestos claims-resolution legislation
that may eventually become law.
Information About McDermott and Its Subsidiaries
McDermott is a leading worldwide energy services company.
McDermotts subsidiaries provide engineering, fabrication,
installation, procurement, research, manufacturing,
environmental systems, project management and facility
management services to a variety of customers in the energy
industry, including the U.S. Department of Energy.
McDermott currently operates in three business segments: Marine
Construction Services, Government Operations and Power
Generation Systems.
Marine Construction Services includes the results of operations
of J. Ray McDermott, S.A. and its subsidiaries, which supply
services to offshore oil and gas field developments worldwide.
This segments principal activities include:
|
|
|
|
|
the front-end and detailed engineering, fabrication and
installation of offshore drilling and production
facilities; and |
|
|
|
installation of marine pipelines and subsea production systems. |
This segment operates in most major offshore oil and gas
producing regions throughout the world, including the
U.S. Gulf of Mexico, Mexico, Africa, South America, the
Middle East, India, the Caspian Sea and Asia Pacific.
47
Government Operations includes the results of operations of BWX
Technologies, Inc. and its subsidiaries. This segment includes
the provision of:
|
|
|
|
|
nuclear components to the U.S. Navy; |
|
|
|
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. |
Power Generation Systems includes the results of operations of
McDermotts Power Generation Group, which is conducted
primarily through the B&W Entities. This segment provides a
variety of services, equipment and systems to generate steam and
electric power at energy facilities worldwide. See
Information about B&W and its Subsidiaries below.
For more information about McDermott and its subsidiaries, see
McDermotts annual report on Form 10-K for the year
ended December 31, 2004, and its subsequently filed
quarterly reports on Form 10-Q and current reports on
Form 8-K, which are incorporated into this proxy statement
by reference. See Where You Can Find More
Information.
48
Information About B&W and Its Subsidiaries
Business
The B&W Entities are leading suppliers of fossil fuel-fired
steam generating systems, replacement commercial nuclear steam
generators, environmental equipment and components, and related
services to customers around the world. They design, engineer,
manufacture, construct, and service large utility and industrial
power generation systems, including boilers used to generate
steam in electric power plants, pulp and paper making, chemical
and process applications and other industrial uses.
More specifically, the B&W Entities:
|
|
|
|
|
provide engineered-to-order services, products and systems for
energy conversion worldwide and related auxiliary equipment,
such as burners, pulverizer mills, soot blowers and ash handlers; |
|
|
|
manufacture heavy-pressure equipment for energy conversion, such
as boilers fueled by coal, oil, bitumen, natural gas, solid
municipal waste, biomass and other fuels; |
|
|
|
fabricate steam generators for nuclear power plants; |
|
|
|
design and supply environmental control systems, including both
wet and dry scrubbers for flue gas desulfurization, modules for
selective catalytic reduction of nitrous oxides and
electrostatic precipitators and similar devices; |
|
|
|
construct power plant equipment, and provide related heavy
mechanical erection services; |
|
|
|
support operating plants with a wide variety of services,
including the installation of new systems and replacement parts,
engineered upgrades, construction, maintenance and field
technical services such as condition assessments; |
|
|
|
provide inventory services to help customers respond quickly to
plant interruptions and construction crews to assist in
maintaining and repairing operating equipment; and |
|
|
|
provide power through cogeneration, refuse-fueled power plants,
and other independent power-producing facilities and participate
in this market as a contractor for engineer-procure-construct
services, as an equipment supplier, as an operations and
maintenance contractor and as an owner. |
We believe that B&Ws industry is entering a
high-demand cycle over the next five to seven years as a result
of:
|
|
|
|
|
recent changes in environmental regulation, which have increased
the demand for B&Ws environmental control systems used
in coal-fired power plants, including scrubbers for flue-gas
desulfurization and modules for selective catalytic reduction of
nitrous oxides; |
|
|
|
high natural gas prices, which have resulted in clean coal
becoming less expensive relative to natural gas and accelerated
the trend towards the use of advanced clean-coal technology for
new power plants and retrofits of existing power plants; |
|
|
|
strong demand for replacement parts and services for power
plants installed by B&W, which we expect will continue to
exist for the near future; and |
|
|
|
the Energy Policy Act of 2005, which provides valuable
incentives designed to encourage the use of clean coal. |
We believe that the proposed settlement, if consummated, will
allow us to benefit from the following strengths of B&W:
|
|
|
|
|
B&W has one of the best-known names and longest operating
histories (over 135 years) in the power generation industry; |
49
|
|
|
|
|
B&W has leading market positions in most of its market
sectors, including fossil fuel-fired steam generating systems,
replacement commercial nuclear steam generators, and
environmental equipment and components; |
|
|
|
B&W has an established reputation as a leader in its
industry, which is enhanced by its technologically advanced
equipment and technological know-how; |
|
|
|
B&Ws management team has substantial relevant industry
experience, much of which derives from experience with
B&W; and |
|
|
|
B&W should have a strong balance sheet, even after giving
effect to the proposed settlement. |
We expect that our strategies for B&W, if the proposed
settlement is consummated, would include the following:
|
|
|
|
|
capitalizing on the strong demand for B&Ws services
resulting from the industry factors described above; |
|
|
|
investing in B&Ws technology and assets to maintain
B&Ws reputation as a leader in its industry and to
help B&W pursue new clean-coal and other opportunities; |
|
|
|
selling integrated solutions to meet the demands of customers
seeking single-source solutions to their requirements in order
to differentiate B&W from its competitors and maximize
B&Ws operating margins; and |
|
|
|
selectively pursuing acquisitions and growth opportunities that
augment B&Ws capabilities as a leading provider of
services to many of its customers. |
The principal customers of the B&W Entities are
government-owned and investor-owned utilities and independent
power producers, businesses in various process industries, such
as pulp and paper mills, petrochemical plants, oil refineries
and steel mills, and other steam-using businesses and
governmental units. Customers normally purchase services,
equipment or systems from B&W after an extensive evaluation
process based on competitive bids. B&W generally submits
proposals based on the estimated cost of each job.
B&Ws principal manufacturing plants are located in:
|
|
|
|
|
West Point, Mississippi; |
|
|
|
Lancaster, Ohio; |
|
|
|
Cambridge, Ontario, Canada; |
|
|
|
Melville, Saskatchewan, Canada; and |
|
|
|
Esbjerg, Denmark. |
B&W owns each of these plants.
The B&W Entities use raw materials such as carbon and alloy
steels in various forms, including plates, forgings,
structurals, bars, sheets, strips, heavy wall pipes and tubes.
They also purchase many components and accessories for assembly.
The B&W Entities generally purchase these raw materials and
components as needed for individual contracts. Although
shortages of some raw materials have existed from time to time,
no serious shortage exists at the present time. The B&W
Entities do not depend on a single source of supply for any
significant raw materials.
The B&W Entities primarily compete with:
|
|
|
|
|
a number of domestic and foreign-based companies specializing in
steam-generating systems, equipment and services, including
Alstom S.A., Mitsui Babcock Energy Limited, Babcock Power,
Foster Wheeler Corporation, Aker Kvaerner ASA, Mitsubishi Heavy
Industries, Hitachi, Clyde Bergemann, Inc., the AREVA Group
and United Conveyor Corporation; |
50
|
|
|
|
|
a number of additional companies in the markets for
environmental control equipment and related specialized
industrial equipment and in the independent power-producing
business; and |
|
|
|
other suppliers of replacement parts, repair and alteration
services, and other services required to backfit and maintain
existing steam systems. |
At September 30, 2005, December 31, 2004 and
December 31, 2003, B&Ws consolidated backlog
amounted to $1.6 billion, $1.5 billion and
$1.1 billion, respectively. If, in B&Ws
managements judgment, it becomes doubtful whether a
contract will proceed, B&W adjusts its backlog accordingly.
If a contract is deferred or cancelled, B&W or one of its
subsidiaries is usually entitled to a financial settlement
related to the individual circumstances of the contract.
B&W attempts to cover increased costs of anticipated changes
in labor, material and service costs of long-term contracts
through an estimate of those changes, which are reflected in the
original price. Most of those long-term contracts contain
provisions for progress payments.
B&Ws overall activity depends mainly on the capital
expenditures of electric power generating companies, paper
companies and other steam-using industries. Several factors
influence these expenditures:
|
|
|
|
|
prices for electricity and paper, along with the cost of
production and distribution; |
|
|
|
demand for electricity, paper and other end products of
steam-generating facilities; |
|
|
|
availability of other sources of electricity, paper or other end
products; |
|
|
|
requirements for environmental improvements; |
|
|
|
level of capacity utilization at operating power plants, paper
mills and other steam-using facilities; |
|
|
|
requirements for maintenance and upkeep at operating power
plants and paper mills to combat the accumulated effects of wear
and tear; |
|
|
|
ability of electric generating companies and other steam users
to raise capital; and |
|
|
|
relative prices of fuels used in boilers, compared to prices for
fuels used in gas turbines and other alternative forms of
generation. |
B&Ws products and services are capital intensive. As
such, customer demand is heavily affected by the variations in
customers business cycles and by the overall economies of
the countries in which they operate.
Selected Financial Information
We have derived the following selected financial information
from (1) the audited financial statements of B&W and
subsidiaries included in this proxy statement as of and for the
years ended December 31, 2004, 2003, 2002, 2001 and 2000,
and (2) the unaudited financial statements of B&W and
subsidiaries as of and for the nine-month periods ended
September 30, 2005 and 2004 included in this proxy
statement, which have been prepared on the same basis as the
audited statements and, in the opinion of B&Ws
management, reflect all adjustments necessary for a fair
presentation of the financial position and results of operations
of B&W and its consolidated subsidiaries as of those dates
and for those periods.
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
For the Years Ended | |
|
|
September 30, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Revenues
|
|
$ |
1,086,795 |
|
|
$ |
1,013,439 |
|
|
$ |
1,368,918 |
|
|
$ |
1,408,128 |
|
|
$ |
1,497,401 |
|
|
$ |
1,431,908 |
|
|
$ |
1,162,458 |
|
Income (Loss) from Continuing Operations
|
|
$ |
(406,381 |
) |
|
$ |
82,393 |
|
|
$ |
100,956 |
|
|
$ |
(7,604 |
) |
|
$ |
(232,435 |
) |
|
$ |
35,377 |
|
|
$ |
(3,572 |
) |
Net Income (Loss)
|
|
$ |
(252,861 |
) |
|
$ |
80,781 |
|
|
$ |
99,117 |
|
|
$ |
1,274 |
|
|
$ |
(213,723 |
) |
|
$ |
17,499 |
|
|
$ |
(4,308 |
) |
Total Assets
|
|
$ |
2,783,166 |
|
|
$ |
2,350,632 |
|
|
$ |
2,402,288 |
|
|
$ |
2,297,453 |
|
|
$ |
2,257,072 |
|
|
$ |
2,069,139 |
|
|
$ |
2,013,662 |
|
Current Maturities of Long-Term Debt
|
|
$ |
3,952 |
|
|
$ |
2,984 |
|
|
$ |
4,169 |
|
|
$ |
430 |
|
|
$ |
288 |
|
|
$ |
50 |
|
|
$ |
51 |
|
Long-Term Debt
|
|
$ |
4,100 |
|
|
$ |
4,609 |
|
|
$ |
4,937 |
|
|
$ |
4,970 |
|
|
$ |
4,727 |
|
|
$ |
4,617 |
|
|
$ |
4,667 |
|
Pre-tax results for the nine months ended September 30,
2005, and the years ended December 31, 2004, 2003 and 2002
include losses totaling $477.4 million, $3.6 million,
$73.8 million and $286.5 million, respectively, for
estimated costs relating to future nonemployee asbestos-related
claims and other liability claims.
Managements Discussion and Analysis of Financial
Condition and Results of Operations
B&Ws financial statements have been prepared in
conformity with the American Institute of Certified Public
Accountants Statement of Position 90-7,
Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code, issued November 19, 1990
(SOP 90-7). SOP 90-7 requires a
segregation of liabilities subject to compromise by a Bankruptcy
Court as of the commencement of the bankruptcy proceedings and
identification of all transactions and events that are directly
associated with the reorganization. As used in the following
discussion, B&W refers to The Babcock &
Wilcox Company and its consolidated subsidiaries, unless the
context otherwise requires.
|
|
|
Critical Accounting Policies and Estimates |
We believe the following are the most critical accounting
policies that B&W applies in the preparation of its
financial statements. These policies require B&Ws most
difficult, subjective and complex judgments, often as a result
of the need to make estimates of matters that are inherently
uncertain.
Contracts and Revenue Recognition. B&W generally
recognizes contract revenues and related costs on a
percentage-of-completion method for individual contracts or
combinations of contracts. Under this method, B&W generally
recognizes estimated contract income and resulting revenue based
on costs incurred to date as a percentage of total estimated
costs. Changes in the expected cost of materials and labor,
productivity, scheduling and other factors affect total
estimated costs and resulting contract income. Additionally,
external factors such as weather, customer requirements and
other factors outside of B&Ws control, may also affect
the progress and estimated cost of a projects completion
and therefore the timing of income and revenue recognition.
B&W routinely reviews estimates related to its 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, B&W has had
significant adjustments to earnings as a result of revisions to
contract estimates. Adjustments to overall contract costs due to
unforeseen events may continue to be significant in future
periods.
B&W generally recognizes claims for extra work or changes in
scope of work in contract revenues, to the extent of costs
incurred, when its management believes collection is probable.
Any amounts not collected are reflected as an adjustment to
earnings. B&W regularly assesses customer credit risk
inherent in contract costs. It recognizes contract claim income
when formally agreed with the customer.
Property, Plant and Equipment. B&W carries its
property, plant and equipment at depreciated cost, reduced by
provisions to recognize economic impairment when B&W
determines impairment has occurred. Factors that impact
B&Ws determination of impairment include forecasted
utilization of equipment and
52
estimates of cash flow from projects to be performed in future
periods. B&Ws 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 B&Ws business and result
in future asset impairments.
B&W depreciates its property, plant and equipment using the
straight-line method, over estimated economic useful lives of
eight to 40 years for buildings and three to 28 years
for machinery and equipment.
B&W expenses the costs of maintenance, repairs and renewals,
which do not materially prolong the useful life of an asset, as
it incurs them.
Pension Plans and Postretirement Benefits. B&W
estimates income or expense related to pension and
postretirement benefit plans based on actuarial assumptions,
including assumptions regarding discount rates and expected
returns on plan assets. B&W determines the discount rate
based on a review of published financial data and discussions
with an actuary regarding rates of return on high-quality
fixed-income investments currently available and expected to be
available during the period to maturity of its pension
obligations. Based on historical data and discussions with the
actuary, B&W determines its expected return on plan assets
based on the expected long-term rate of return on plan assets
and the market-related value of the plan assets. Changes in
these assumptions can result in significant changes in the
estimated pension income or expense. B&W revises its
assumptions on an annual basis based on changes in current
interest rates, return on plan assets and the underlying
demographics of its workforce. These assumptions are reasonably
likely to change in future periods and may have a material
impact on future earnings.
Effective January 31, 2005, MI spun-off to B&W the
assets and liabilities associated with B&Ws portion of
MIs pension plan to a new pension plan sponsored by
B&W. Approximately 46% of the participants in the MI pension
plan at January 30, 2005 transferred to the new B&W
sponsored plan. As of September 30, 2005 B&W recorded
its best estimate of this transaction based on data received
from our actuary. B&W recorded an increase in its pension
liability totaling approximately $117.1 million, with
corresponding decreases in other comprehensive income totaling
approximately $100.5 million and in capital in excess of
par value totaling approximately $16.6 million. We expect
this transfer to be completed in the fourth quarter of 2005.
Loss Contingencies. B&W estimates 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.
B&W has accrued its estimates of probable losses when
appropriate. However, 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
estimates related to these matters. B&Ws most
significant loss contingency is its estimate of its
asbestos-related liability. Currently, B&Ws best
estimate of its liability for asbestos claims is based on the
proposal to settle the liability contemplated by the Joint Plan.
Any changes to the proposed settlement could change the estimate
of B&Ws liability for asbestos claims and could be
material to B&Ws financial condition and results of
operations.
Goodwill. SFAS No. 142, Goodwill and
Other Intangible Assets, requires that B&W 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. A discounted cash flow
model is used to determine the fair value of each reporting
unit. Inherent in the model are assumptions regarding forecasted
revenue, operating expenses and future cash flows, which could
differ materially from actual future results.
53
Deferred Taxes. Deferred taxes reflect the net effects of
temporary differences between the financial and tax bases of
assets and liabilities. B&W records a valuation allowance to
reduce its deferred tax assets to the amount that is more likely
than not to be realized. B&W will continue to assess the
adequacy of the valuation allowance on a quarterly basis. Any
changes to its estimated valuation allowance could be material
to B&Ws consolidated financial condition and results
of operations.
Warranty. B&W accrues estimated expense to satisfy
contractual warranty requirements when it recognizes the
associated revenue on the related contracts. In addition,
B&W makes specific provisions where it expects the costs of
warranty to significantly exceed the accrued estimates. Such
provisions could result in a material effect on B&Ws
results of operations, financial position and cash flows.
|
|
|
Nine Months Ended September 30, 2005 Compared to Nine
Months Ended September 30, 2004 |
Revenues increased approximately $73.4 million from
$1,013.4 million in the nine months ended
September 30, 2004 to $1,086.8 million for the nine
months ended September 30, 2005. This increase was
primarily attributable to higher volumes from B&Ws
utility steam system fabrication activities, nuclear services
business, and boiler auxiliary equipment. The increase was
partially offset by lower volumes from B&Ws
fabrication, repair and retrofit of existing facilities.
B&Ws operating income (loss) decreased by
$496.0 million to a loss of $407.7 million in the nine
months ended September 30, 2005 compared to income totaling
$88.3 million in the nine months ended September 30,
2004. This decrease was primarily attributable to a provision
for B&Ws asbestos liability and other liability claims
being recorded in the nine months ended September 30, 2005
totaling $477.4 million, compared to a decrease in this
provision totaling $0.4 million in the nine months ended
September 30, 2004. Also contributing to this decrease was
pension plan expense incurred in the nine months ended
September 30, 2005 totaling approximately
$18.2 million related to the spin-off of MIs pension
plan to a B&W sponsored plan effective January 31,
2005. There was no expense recorded by B&W related to this
plan for the nine months ended September 30, 2004. In
addition, B&W also experienced lower volume and margins from
the fabrication, repair, and retrofit of existing facilities and
replacement nuclear steam generators. In addition, B&W also
experienced lower margins in its utility steam system
fabrication activities and higher selling, general and
administrative expenses. Partially offsetting these reductions
in B&Ws operating income (loss) were higher volumes in
B&Ws utility steam system fabrication activities and
B&Ws nuclear service activities, and higher volume and
margins in B&Ws boiler auxiliary equipment activities.
Interest income increased $5.2 million from
$4.0 million in the nine months ended September 30,
2004 to $9.2 million for the nine months ended
September 30, 2005, primarily due to increases in average
cash and cash equivalents and prevailing interest rates.
B&Ws other-net increased $2.2 million from a loss
of approximately $7.9 million in the nine months ended
September 30, 2004 to a loss of approximately
$5.7 million in the nine months ended September 30,
2005. This increase was primarily attributable to recoveries
from provisions for doubtful account receivables due from
B&Ws insurers received in the nine months ended
September 30, 2005, partially offset by higher minority
interest expense.
B&Ws provision for (benefit from) income taxes
increased by $(155.1) million from a provision totaling
$1.6 million in the nine months ended September 30,
2004 to a benefit totaling $153.5 million in the nine
months ended September 30, 2005. Included in B&Ws
provision for (benefit from) income taxes in the nine months
ended September 30, 2005 is a benefit totaling
approximately $175.0 million related to B&Ws
increased provision for its asbestos liability and other
liability claims. In addition, the nine months ended
September 30, 2004 included a benefit taken for an
adjustment to B&Ws federal deferred tax asset
valuation allowance totaling approximately $26.2 million,
which was recorded as a credit to B&Ws provision for
income taxes. B&W and its subsidiaries operate in different
tax jurisdictions with different statutory rates. These
variances in rates, along with the mix of income in these
jurisdictions, are responsible for the shifts in B&Ws
effective tax rates.
54
|
|
|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003 |
B&Ws revenues decreased approximately
$39.2 million from $1.408 billion for the year ended
December 31, 2003 to $1.369 billion for the year ended
December 31, 2004. This decrease was primarily attributable
to lower volumes from the fabrication, repair and retrofit of
existing facilities and B&Ws utility steam system
fabrication activities. The decrease in revenues was partially
offset by higher volumes from nuclear service, replacement
parts, and boiler cleaning activities.
B&Ws operating income increased by $115.0 million
to $116.8 million for the year ended December 31, 2004
compared to $1.8 million in 2003. This increase was
attributable primarily to a decrease in B&Ws provision
for asbestos-related liability from $73.8 million in the
year ended December 31, 2003 to $3.6 million in the
year ended December 31, 2004. In addition, B&W
experienced higher margins from its utility steam system
fabrication activities, higher volumes from its nuclear service
activities, and increased volume and margin in its non-boiler
construction and boiler cleaning equipment businesses. Partially
offsetting these increases were lower volumes from the
fabrication, repair, and retrofit of existing facilities, lower
margins in B&Ws replacement parts activities, and
higher selling, general and administrative expenses.
Interest income decreased approximately $1.0 million from
$6.0 million in 2003 to approximately $5.0 million in
2004, primarily due to decreases in average cash and cash
equivalents.
Other-net expense increased $6.0 million from expense of
$12.1 million in 2003 to expense of $18.1 million in
2004. This increase was primarily attributable to an increase in
foreign currency exchange losses.
B&Ws provision for (benefit from) income taxes
increased by $10.6 million from a benefit totaling
$8.8 million in the year ended December 31, 2003 to an
expense totaling $1.8 million in the year ended
December 31, 2004. In the year ended December 31,
2004, B&W recorded a benefit taken for an adjustment to its
federal deferred tax asset valuation allowance totaling
approximately $34.1 million, which was recorded as a credit
to B&Ws provision for income taxes. In addition, in
the year ended December 31, 2003, B&W recorded an
additional provision totaling $7.7 million as an increase
to its deferred tax asset valuation allowance.
|
|
|
Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002 |
B&Ws revenues decreased in 2003 from 2002 by
approximately $89 million from $1.497 billion in 2002
to $1.408 billion in 2003. This decrease was primarily
attributable to lower volumes from the fabrication, repair and
retrofit of existing facilities in addition to replacement of
nuclear steam generators and lower nuclear services activities.
Partially offsetting these decreases were high volumes from
B&Ws utility steam fabrication activities, replacement
parts and boiler cleaning equipment.
Operating income for B&W increased by approximately
$206.5 million in 2003 from 2002. In 2002, B&W recorded
an adjustment to its provision for asbestos liability totaling
$286.5 million, compared with an adjustment in 2003
totaling $73.8 million. In addition, B&W experienced
higher margins from its utility steam system fabrication
activities and higher volumes from its boiler cleaning equipment
activities. These increases were partially offset by lower
volumes and margins from the nuclear service and non-boiler
construction activities of B&W. Also B&W experienced
higher selling general and administrative expenses in 2003
related to the Chapter 11 filing.
Interest income increased $1.4 million from
$4.6 million in 2002 to $6.0 million in 2003,
primarily due to an increase in average cash and cash
equivalents and prevailing interest rates.
Interest expense decreased by $1.9 million in 2003 compared
to 2002. This decrease was primarily attributable to lower
amortization of deferred debt issue costs on B&Ws DIP
Credit Facility.
Other-net expense decreased $15 million from expense of
$27.1 million in 2002 to expense of $12.1 million in
2003. The year ended December 31, 2002 included a charge
totaling approximately $22 million to reserve for certain
notes receivable due from affiliates of McDermott, which, as a
result of
55
the Chapter 11 proceedings, were not expected to be
collected, while this amount for the year ended
December 31, 2003 totaled approximately $5.1 million.
B&Ws benefit from income taxes decreased by
$9.8 million from a benefit totaling $18.7 million in
the year ended December 31, 2002 to a benefit totaling
$8.9 million in the year ended December 31, 2003. In
2003, B&W recorded an additional provision totaling
$7.7 million as an increase to its federal deferred tax
asset valuation allowance.
|
|
|
Liquidity and Capital Resources |
In connection with the Chapter 11 filing, the
Chapter 11 Debtors entered into an original
$300 million debtor-in-possession revolving credit facility
(the DIP Credit Facility), which, as amended, now
provides for credit extensions of up to $250 million and
expires in February 2007. All amounts owed under the facility
have a super-priority administrative expense status in the
Chapter 11 proceedings. The Chapter 11 Debtors
obligations under the DIP Credit Facility are
(1) guaranteed by substantially all of B&Ws other
domestic subsidiaries and B&W Canada Ltd. and
(2) secured by security interests in B&W Canada
Ltd.s assets. Additionally, B&W and substantially all
of its domestic subsidiaries granted security interests in their
assets to the lenders under the DIP Credit Facility, which would
become effective upon the defeasance or repayment of MIs
outstanding public debt. We have amended the effective date of
those security interests so that they will not become effective
prior to May 22, 2006. The DIP Credit Facility generally
provides for borrowings by the Chapter 11 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. There
were no borrowings outstanding under the DIP Credit Facility at
September 30, 2005 or December 31, 2004. The DIP
Credit Facility imposes certain financial and non-financial
covenants on B&W and its subsidiaries. The interest rate is,
at B&Ws option, J. P. Morgans prime lending rate
plus 1.25% or LIBOR plus 2.5%, and letters of credit are charged
at 1%.
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&Ws and
its subsidiaries business operations, but for which
McDermott, 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). McDermott,
MI and BWICO have agreed to indemnify and reimburse the
Chapter 11 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 September 30, 2005, approximately
$118.4 million in letters of credit had been issued under
the DIP Credit Facility, of which approximately
$11.1 million was to replace or backstop Pre-existing LCs.
All other Pre-existing LCs have expired.
In the course of the conduct of B&Ws and its
subsidiaries business, McDermott and MI have agreed to
indemnify two surety companies for B&Ws and its
subsidiaries obligations under surety bonds issued in
connection with their customer contracts. At September 30,
2005, the total value of B&Ws and its
subsidiaries customer contracts yet to be completed
covered by such indemnity arrangements was approximately
$28.2 million, of which only a negligible amount related to
bonds issued after February 21, 2000.
B&W had cash and cash equivalents totaling
$392.3 million at September 30, 2005 compared to
$351.5 million at December 31, 2004. At
September 30, 2005 and December 31, 2004,
B&Ws balance in cash and cash equivalents included
approximately $28.1 million and $9.6 million,
respectively, in adjustments for bank overdrafts, with a
corresponding increase in accounts payable for these overdrafts.
Working capital increased to $227.5 million at
September 30, 2005 from $220.9 million at
December 31, 2004.
Effective January 31, 2005, McDermott spun off the assets
and liabilities associated with our portion of the MI Plan to
the Retirement Plan for Employees of The Babcock and
Wilcox Company and Participating Subsidiary and Affiliated
Companies (the New Plan) sponsored by us.
Beginning
56
January 31, 2005, our financial statements will include
pension assets, liabilities and pension costs associated with
the New Plan. Approximately 46% of the employees in the MI Plan
at January 31, 2005 transferred to the New Plan. Based on
data received from its actuary, B&W expects to make cash
contributions to the New Plan totaling approximately
$43 million in 2006 and $35 million in 2007. These
amounts are preliminary and subject to change pending further
analysis by B&Ws actuary.
B&W has assessed its liquidity position as a result of the
Chapter 11 filing and believes that it can continue to fund
its operating activities and meet its debt and capital
requirements for the foreseeable future. However, B&Ws
ability to continue as a going concern depends on its ability to
settle its ultimate asbestos-related 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 financial statements of B&W
have 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 Chapter 11 filing and related events, there is no
assurance that the carrying amounts of B&Ws assets
will be realized or that B&Ws liabilities will be
liquidated or settled for the amounts recorded. The independent
accountants report on the consolidated financial
statements of B&W for the years ended December 31,
2004, 2003 and 2002 includes an explanatory paragraph indicating
that these issues raise substantial doubt about B&Ws
ability to continue as a going concern.
Quantitative and Qualitative Disclosures About Market Risk
Due to covenants in the DIP Credit Facility, B&W is
restricted to certain types of investment instruments. At
December 31, 2004, all of B&Ws investments are
reported as cash equivalents and consist of investments in
short-term money market mutual funds, Eurodollar time deposits
and other high-grade investments. At December 31, 2004,
B&W had short-term investments attributable to cash used in
lieu of issuing letters of credit in other assets totaling
approximately $40.5 million. These short term investments
are carried in other assets to match the corresponding letter of
credit exposure. B&W has limited exposure to market risk
from changes in interest rates on these investments. B&W
attempts to ensure the safety and preservation of its invested
funds by limiting default risk, market risk and reinvestment
risk.
B&W has exposure to changes in interest rates under the DIP
Credit Facility. At December 31, 2004 and 2003, B&W had
no borrowings outstanding under this facility. B&W also has
exposure to changes in interest rates on its variable-rate
long-term debt obligations, which totaled $4.52 million at
December 31, 2004. At December 31, 2004, this debt
carried an interest rate of 2.23%, matures $50,000 per year
over the next five years and had an estimated fair value of
$4.522 million. B&W has no material future earnings or
cash flow exposures from changes in interest rates on the
remainder of its long-term debt obligations, which totaled
$5.8 million at December 31, 2004, as these
obligations have fixed interest rates. Principal cash flows and
related weighted average interest rates by expected maturity
dates for B&Ws fixed-rate long-term debt obligations
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
Maturity Date |
|
Principal Cash Flows | |
|
Interest Rate | |
|
|
| |
|
| |
2005
|
|
$ |
659,000 |
|
|
|
5.18 |
% |
2006
|
|
$ |
2,488,000 |
|
|
|
2.93 |
% |
2007
|
|
$ |
328,000 |
|
|
|
5.32 |
% |
2008
|
|
$ |
338,000 |
|
|
|
5.36 |
% |
2009
|
|
$ |
338,000 |
|
|
|
5.36 |
% |
Thereafter
|
|
$ |
1,446,000 |
|
|
|
6.10 |
% |
These fixed-rate obligations had an estimated fair value
totaling $4.0 million at December 31, 2004.
B&W has operations in foreign locations, and, as a result,
its financial results could be significantly affected by factors
such as changes in foreign currency exchange rates or weak
economic conditions in those foreign markets. In order to manage
the risks associated with foreign currency exchange fluctuations,
57
B&W regularly hedges those risks with foreign currency
forward contracts. B&W does not enter into speculative
forward contracts.
|
|
|
Exchange Rate Sensitivity |
The following tables provide information about B&Ws
foreign currency forward contracts outstanding at
December 31, 2004 and presents 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 forward-looking
statements. These notional amounts generally are used to
calculate the contractual payments to be exchanged under the
contract (contract amounts in thousands).
Forward Contracts to Purchase Foreign Currencies for
U.S. Dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending | |
|
Fair Value at | |
|
Average Contractual | |
Foreign Currency |
|
December 31, 2005 | |
|
December 31, 2005 | |
|
Exchange Rate | |
|
|
| |
|
| |
|
| |
Canadian Dollars
|
|
$ |
27,542 |
|
|
$ |
528 |
|
|
|
1.2252 |
|
Pound Sterling
|
|
$ |
983 |
|
|
$ |
40 |
|
|
|
1.8254 |
|
Danish Kroner
|
|
$ |
1,789 |
|
|
$ |
38 |
|
|
|
5.5110 |
|
Forward Contracts to Sell Foreign Currencies for
U.S. Dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending | |
|
Fair Value at | |
|
Average Contractual | |
Foreign Currency |
|
December 31, 2005 | |
|
December 31, 2005 | |
|
Exchange Rate | |
|
|
| |
|
| |
|
| |
Euros
|
|
$ |
2,164 |
|
|
$ |
(43 |
) |
|
|
1.3397 |
|
Canadian Dollars
|
|
$ |
32,167 |
|
|
$ |
(3,062 |
) |
|
|
1.3343 |
|
58
Selected Historical Consolidated Financial Data of
McDermott
We have prepared the selected historical financial data set
forth below for the years ending December 31, 2000 through
December 31, 2004 using McDermotts audited
consolidated financial statements. We have prepared the selected
historical financial data set forth below for the nine months
ended September 30, 2005 and 2004 using McDermotts
unaudited consolidated financial statements. You should read the
following selected historical financial data together with our
consolidated financial statements and the related notes and with
the section Managements Discussion and Analysis of
Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months | |
|
|
|
|
Ended September 30, | |
|
For the Years Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
STATEMENT OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,457,745 |
|
|
$ |
1,449,338 |
|
|
$ |
1,923,019 |
|
|
$ |
2,335,364 |
|
|
$ |
1,733,821 |
|
|
$ |
1,888,078 |
|
|
$ |
1,803,179 |
|
|
Cost of Operations
|
|
|
(1,164,912 |
) |
|
|
(1,277,082 |
) |
|
|
(1,673,922 |
) |
|
|
(2,252,842 |
) |
|
|
(1,734,580 |
) |
|
|
(1,653,042 |
) |
|
|
(1,606,510 |
) |
|
Selling, general and administrative expenses
|
|
|
(156,038 |
) |
|
|
(141,730 |
) |
|
|
(170,953 |
) |
|
|
(169,764 |
) |
|
|
(157,845 |
) |
|
|
(192,134 |
) |
|
|
(180,810 |
) |
|
Gain (loss) on asset sales and impairments
|
|
|
6,501 |
|
|
|
18,797 |
|
|
|
32,163 |
|
|
|
6,171 |
|
|
|
(7,855 |
) |
|
|
(3,739 |
) |
|
|
(2,818 |
) |
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(313,008 |
) |
|
|
|
|
|
|
|
|
|
Write-off of investment in The Babcock and Wilcox Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(224,664 |
) |
|
|
|
|
|
|
|
|
|
Equity in income (loss) from investees
|
|
|
26,222 |
|
|
|
24,053 |
|
|
|
35,617 |
|
|
|
28,382 |
|
|
|
27,692 |
|
|
|
34,093 |
|
|
|
(9,795 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
169,518 |
|
|
|
73,376 |
|
|
|
145,924 |
|
|
|
(52,689 |
) |
|
|
(676,439 |
) |
|
|
73,256 |
|
|
|
3,246 |
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
13,810 |
|
|
|
3,342 |
|
|
|
5,574 |
|
|
|
3,230 |
|
|
|
8,553 |
|
|
|
19,553 |
|
|
|
27,103 |
|
|
|
Interest expense
|
|
|
(27,784 |
) |
|
|
(25,775 |
) |
|
|
(36,066 |
) |
|
|
(18,993 |
) |
|
|
(15,123 |
) |
|
|
(39,656 |
) |
|
|
(43,603 |
) |
|
|
Loss on The Babcock and Wilcox Company bankruptcy settlement
|
|
|
(5,887 |
) |
|
|
(2,256 |
) |
|
|
(11,187 |
) |
|
|
(14,539 |
) |
|
|
(86,377 |
) |
|
|
|
|
|
|
|
|
|
|
Gain on sale of business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,996 |
|
|
|
|
|
|
|
Other-net
|
|
|
3,647 |
|
|
|
898 |
|
|
|
(1,779 |
) |
|
|
2,123 |
|
|
|
(4,174 |
) |
|
|
4,220 |
|
|
|
(2,584 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before provision for income taxes
|
|
|
153,304 |
|
|
|
49,585 |
|
|
|
102,466 |
|
|
|
(80,868 |
) |
|
|
(773,560 |
) |
|
|
85,369 |
|
|
|
(15,838 |
) |
|
Provision for (benefit from) income taxes
|
|
|
(8,551 |
) |
|
|
30,412 |
|
|
|
40,827 |
|
|
|
21,290 |
|
|
|
14,406 |
|
|
|
110,651 |
|
|
|
10,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
161,855 |
|
|
|
19,173 |
|
|
|
61,639 |
|
|
|
(102,158 |
) |
|
|
(787,966 |
) |
|
|
(25,282 |
) |
|
|
(26,473 |
) |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,219 |
|
|
|
11,572 |
|
|
|
5,260 |
|
|
|
4,391 |
|
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$ |
161,855 |
|
|
$ |
19,173 |
|
|
$ |
61,639 |
|
|
$ |
(95,229 |
) |
|
$ |
(776,394 |
) |
|
$ |
(20,022 |
) |
|
$ |
(22,082 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$ |
2.39 |
|
|
$ |
0.29 |
|
|
$ |
0.94 |
|
|
$ |
(1.59 |
) |
|
$ |
(12.74 |
) |
|
$ |
(0.42 |
) |
|
$ |
(0.44 |
) |
|
|
Net income (loss)
|
|
$ |
2.39 |
|
|
$ |
0.29 |
|
|
$ |
0.94 |
|
|
$ |
(1.49 |
) |
|
$ |
(12.55 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.37 |
) |
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$ |
2.25 |
|
|
$ |
0.28 |
|
|
$ |
0.90 |
|
|
$ |
(1.59 |
) |
|
$ |
(12.74 |
) |
|
$ |
(0.42 |
) |
|
$ |
(0.44 |
) |
|
|
Net income (loss)
|
|
$ |
2.25 |
|
|
$ |
0.28 |
|
|
$ |
0.90 |
|
|
$ |
(1.49 |
) |
|
$ |
(12.55 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.37 |
) |
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months | |
|
|
|
|
Ended September 30, | |
|
For the Years Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
OTHER FINANCIAL DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
180,121 |
|
|
$ |
(665 |
) |
|
$ |
65,306 |
|
|
$ |
(97,546 |
) |
|
$ |
(9,806 |
) |
|
$ |
176,611 |
|
|
$ |
(49,066 |
) |
|
|
Investing activities
|
|
|
(90,800 |
) |
|
|
69,766 |
|
|
|
57,544 |
|
|
|
(16,761 |
) |
|
|
126,429 |
|
|
|
11,693 |
|
|
|
(27,991 |
) |
|
|
Financing activities
|
|
|
25,491 |
|
|
|
(40,619 |
) |
|
|
(38,347 |
) |
|
|
159,578 |
|
|
|
(147,300 |
) |
|
|
(105,672 |
) |
|
|
(255 |
) |
|
Depreciation and amortization
|
|
|
31,117 |
|
|
|
29,021 |
|
|
|
40,293 |
|
|
|
44,504 |
|
|
|
40,620 |
|
|
|
62,264 |
|
|
|
63,890 |
|
|
Capital expenditures
|
|
|
33,170 |
|
|
|
17,548 |
|
|
|
35,644 |
|
|
|
36,057 |
|
|
|
64,852 |
|
|
|
(45,008 |
) |
|
|
(49,300 |
) |
|
Ratio of earnings to fixed charges
|
|
|
5.18 |
|
|
|
2.28 |
|
|
|
2.99 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
2.45 |
|
|
|
1.01 |
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
374,087 |
|
|
$ |
203,278 |
|
|
$ |
259,319 |
|
|
$ |
174,790 |
|
|
$ |
129,517 |
|
|
$ |
196,912 |
|
|
$ |
84,620 |
|
|
Restricted cash and cash equivalents
|
|
|
144,813 |
|
|
|
168,151 |
|
|
|
177,953 |
|
|
|
180,480 |
|
|
|
44,824 |
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
243,602 |
|
|
|
(33,251 |
) |
|
|
58,232 |
|
|
|
(24,304 |
) |
|
|
(167,765 |
) |
|
|
(164,984 |
) |
|
|
(103,391 |
) |
|
Total assets
|
|
|
1,627,152 |
|
|
|
1,244,810 |
|
|
|
1,386,932 |
|
|
|
1,248,874 |
|
|
|
1,278,171 |
|
|
|
2,103,840 |
|
|
|
2,025,627 |
|
|
Total third party debt
|
|
|
264,517 |
|
|
|
280,052 |
|
|
|
280,020 |
|
|
|
316,899 |
|
|
|
141,681 |
|
|
|
309,899 |
|
|
|
419,503 |
|
|
Total equity (deficit)
|
|
|
(53,464 |
) |
|
|
(338,421 |
) |
|
|
(261,443 |
) |
|
|
(363,177 |
) |
|
|
(416,757 |
) |
|
|
770,110 |
|
|
|
776,603 |
|
|
|
(1) |
Effective February 22, 2000, our consolidated financial
results exclude the results of B&W and its consolidated
subsidiaries. |
60
Unaudited Pro Forma Financial Information of McDermott
As a result of the Chapter 11 filing, beginning on
February 22, 2000, we stopped consolidating the results of
operations of B&W and its subsidiaries in our financial
statements and we began accounting for our investment in B&W
under 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 B&Ws 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, in connection with the filing of
drafts of the third amended joint plan of reorganization and
related settlement agreement in the Chapter 11 proceedings,
we determined that a liability related to the previously
negotiated settlement was probable and that the amount of that
liability was reasonably estimable. Accordingly, as of
December 31, 2002, we established an estimate for the cost
of the previously negotiated settlement of $110 million,
including tax expense of $23.6 million, reflecting the
present value of our contemplated contributions to the Asbestos
PI Trust. The estimate had been adjusted from 2002 through
June 30, 2005 based on the provision of the previously
negotiated settlement, and we have recorded a liability of
$146.7 million. As of September 30, 2005, we no longer
evaluate our liability based on the previously negotiated
settlement, as we feel it is no longer probable.
Under the terms of the proposed settlement, McDermott (through
MI and BWICO) will retain 100% ownership of B&W and will
reacquire control of B&W. McDermott will account for this
reacquisition of control over B&W in a manner similar to a
step acquisition by applying the guidelines of
SFAS No. 141.
On August 29, 2005, McDermott announced the Proposed
Settlement Agreement. Under the terms of the Proposed Settlement
Agreement and a related plan of reorganization the
Chapter 11 Debtors, the ACC, the FCR and MI, as plan
proponents, have jointly proposed (the Proposed Joint
Plan), the Asbestos PI Trust would be funded by
contributions of:
|
|
|
|
|
$350 million in cash, which would be paid by MI or one of
its subsidiaries on the effective date of the Proposed Joint
Plan; |
|
|
|
an additional contingent cash payment of $355 million,
which would be payable by MI or one of its subsidiaries within
180 days of November 30, 2006, but only if the
condition precedent described below is satisfied, which amount
would be payable with interest accruing on that amount at
7% per year from December 1, 2006 to the date of
payment; and |
|
|
|
a note issued by B&W in the aggregate principal amount of
$250 million (the B&W Note), bearing
interest at 7% annually on the outstanding principal balance
from and after December 1, 2006, with a five- year term and
annual principal payments of $50 million each, commencing
on December 1, 2007, provided that, if the condition
precedent described below is not satisfied, only
$25 million principal amount of the B&W Note would be
payable. B&Ws payment obligations under the B&W
Note would be fully and unconditionally guaranteed by
Babcock & Wilcox Investment Company, a Delaware
corporation and a wholly owned subsidiary of MI
(BWICO), and McDermott. The guarantee obligations of
BWICO and McDermott would be secured by a pledge of all of
B&Ws capital stock outstanding as of the effective
date of the Proposed Joint Plan. |
McDermott and most of its subsidiaries would also contribute to
the Asbestos PI Trust substantially the same insurance rights as
were to be contributed to the Asbestos PI Trust under the
Previously Negotiated Settlement Agreement. See
Description of the Proposed Settlement
Agreement Creation of the Asbestos PI Trust and
Contribution of Assets.
The Proposed Settlement Agreement includes a mechanism that
would potentially limit the consideration to be contributed to
the Asbestos PI Trust if the FAIR Act or similar
U.S. federal legislation is enacted and becomes law.
Specifically, the Proposed Settlement Agreement provides that the
61
right to receive the $355 million contingent payment (the
Contingent Payment Right) would vest and amounts
under the B&W Note in excess of $25 million would be
payable only upon satisfaction of the condition precedent that
neither the FAIR Act nor any other U.S. federal legislation
designed to resolve asbestos-related personal injury claims
through the implementation of a national trust shall have been
enacted and become law on or before November 30, 2006 (the
Condition Precedent). The Proposed Settlement
Agreement further provides that:
|
|
|
|
|
if such legislation is enacted and becomes law on or before
November 30, 2006 and is not subject to a legal proceeding
as of January 31, 2007 which challenges the
constitutionality of such legislation (any such proceeding is
referred to as a Challenge Proceeding), the
Condition Precedent would be deemed not to have been satisfied,
and no amounts would be payable under the Contingent Payment
Right and no amounts in excess of $25 million would be
payable under the B&W Note; and |
|
|
|
if such legislation is enacted and becomes law on or before
November 30, 2006, but is subject to a Challenge Proceeding
as of January 31, 2007, the Condition Precedent would be
deemed not to have been satisfied and any rights with respect to
the Contingent Payment Right and payments under the B&W Note
in excess of $25 million would be suspended until either: |
|
|
|
(1) there has been a final, nonappealable judicial decision
with respect to the Challenge Proceeding to the effect that such
legislation is unconstitutional as generally applied to debtors
in Chapter 11 proceedings whose plans of reorganization
have not yet been confirmed and become substantially consummated
(i.e., debtors that are similarly situated to B&W as
of September 1, 2005), so that such debtors would not be
subject to such legislation, in which event the Condition
Precedent would be deemed to have been satisfied, and the
Contingent Payment Right would vest and the B&W Note would
become fully payable pursuant to its terms (in each case subject
to the protection against double payment provisions described
below); or |
|
|
(2) there has been a final nonappealable judicial decision
with respect to the Challenge Proceeding which resolves the
Challenge Proceeding in a manner other than as contemplated by
the immediately preceding clause, in which event the Condition
Precedent would be deemed not to have been satisfied and no
amounts would be payable under the Contingent Payment Right and
no amounts in excess of $25 million would be payable under
the B&W Note. |
The Proposed Settlement Agreement also includes provisions to
provide some protection against double payment so that, if the
FAIR Act or similar U.S. federal legislation is enacted and
becomes law after November 30, 2006, or the Condition
Precedent is otherwise satisfied (in accordance with the
provisions described in clause (1) above), any payment
McDermott or any of its subsidiaries may be required to make
pursuant to the legislation on account of asbestos-related
personal injury claims against any of the B&W Entities would
reduce, by a like amount:
|
|
|
|
|
first, the amount, if any, then remaining payable pursuant to
the Contingent Payment right; and |
|
|
|
next, any then remaining amounts payable pursuant to the B&W
Note. |
Under the Proposed Settlement Agreement and the Proposed Joint
Plan, the Apollo/ Parks Township Claims will not be channeled to
a trust, as contemplated by the Previously Negotiated Settlement
Agreement and the Previously Negotiated Joint Plan. Rather, the
Apollo/ Parks Township Claims would remain the responsibility of
the Chapter 11 Debtors and will not be impaired under the
terms of the Proposed Joint Plan. While the Proposed Settlement
has been structured in a manner to permit all disputes relating
to the Apollo/ Parks Townships Claims and the associated
insurance coverage to be resolved after the Proposed Joint Plan
has been confirmed and becomes effective, we are continuing our
efforts to negotiate a mutually satisfactory resolution of the
disputes involving the current claimants in the Hall Litigation
on an expedited basis. We believe that all claims under the Hall
Litigation will be resolved within the limits of coverage of our
insurance policies. However, 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.
62
The Proposed Settlement Agreement contemplates that the Proposed
Joint Plan must become effective, on a final, nonappealable
basis, no later than the Effective Date Deadline. The Proposed
Settlement Agreement further contemplates that, if the effective
date of the Proposed Joint Plan has not occurred by that date,
and is not extended by the ACC, the FCR and us, acting together,
then the settlement contemplated by the Proposed Settlement
Agreement will be abandoned and the parties will resume their
efforts to effect the settlement contemplated by the Previously
Negotiated Settlement Agreement and the Previously Negotiated
Joint Plan.
McDermott is providing the following unaudited pro forma
condensed combined financial statements to help you in your
analysis of the financial aspects of the proposed settlement.
The unaudited pro forma combined financial statements are based
upon the historical financial information of McDermott and
B&W, and should be read in conjunction with the historical
consolidated financial statements and notes thereto of
McDermott, which have been incorporated by reference in this
proxy statement, and B&W, which have been included in this
proxy statement (see Financial Statements of The
Babcock & Wilcox Company and Subsidiaries).
The following unaudited pro forma condensed combined balance
sheet is based on the balance sheets of McDermott and B&W,
and has been prepared to reflect the transaction as if it had
been consummated on September 30, 2005. The following
unaudited pro forma condensed combined statements of income
combine McDermotts and B&Ws results of
operations for the periods presented, assuming the transaction
had occurred on January 1, 2004. The unaudited pro forma
condensed combined financial statements are based on estimates
and assumptions set forth in the notes to such statements, which
are preliminary, subject to change and have been made solely for
purposes of developing such pro forma information. The unaudited
pro forma condensed combined financial statements are not
necessarily an indication of the results that may be achieved in
the future. The pro forma information provided includes both
scenarios outlined above: If the FAIR Act passes on or before
November 30, 2006, and no passage of the FAIR Act by that
date.
Because McDermott will reacquire control of B&W as part of
the proposed settlement, the settlement will be accounted for in
a manner similar to a step purchase in accordance with
accounting principles generally accepted in the United States.
Tax adjustments required as a result of following the accounting
guidelines under purchase business combinations are recorded at
an effective tax rate of 35%. Certain adjustments to the
purchase price to eliminate previously established tax balances
are adjusted using the applicable tax rate present in
McDermotts unaudited consolidated financial statements for
the nine months ended September 30, 2005.
63
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(Assuming passage of the FAIR Act)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MII | |
|
B&W | |
|
|
|
|
|
|
|
|
As of | |
|
As of | |
|
Pro Forma | |
|
|
|
Pro Forma | |
|
|
9/30/2005 | |
|
9/30/2005 | |
|
Adjustments | |
|
|
|
Combined | |
|
|
| |
|
| |
|
| |
|
|
|
| |
|
|
(In thousands) | |
ASSETS: |
Cash & Equivalents
|
|
$ |
518,900 |
|
|
$ |
392,326 |
|
|
$ |
(375,000 |
) |
|
|
A |
|
|
$ |
536,226 |
|
Accounts Rec. Trade
|
|
|
301,688 |
|
|
|
194,571 |
|
|
|
|
|
|
|
|
|
|
|
496,259 |
|
Accounts & Notes Rec. Other
|
|
|
32,919 |
|
|
|
10,909 |
|
|
|
(5,884 |
) |
|
|
B |
|
|
|
37,944 |
|
Contracts in Progress
|
|
|
72,399 |
|
|
|
91,326 |
|
|
|
|
|
|
|
|
|
|
|
163,725 |
|
Inventories
|
|
|
|
|
|
|
62,823 |
|
|
|
|
|
|
|
|
|
|
|
62,823 |
|
Deferred Income Taxes
|
|
|
18,510 |
|
|
|
46,182 |
|
|
|
|
|
|
|
|
|
|
|
64,692 |
|
Other Current Assets
|
|
|
70,367 |
|
|
|
20,016 |
|
|
|
|
|
|
|
|
|
|
|
90,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,014,783 |
|
|
|
818,153 |
|
|
|
(380,884 |
) |
|
|
|
|
|
|
1,452,052 |
|
|
Net PP&E
|
|
|
306,250 |
|
|
|
109,401 |
|
|
|
(109,401 |
) |
|
|
C |
|
|
|
306,250 |
|
Long Term Investment Portfolio
|
|
|
84,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,546 |
|
Note Receivable-Affiliates
|
|
|
|
|
|
|
41,238 |
|
|
|
(41,238 |
) |
|
|
B |
|
|
|
|
|
Insurance Recoverable
|
|
|
|
|
|
|
1,149,989 |
|
|
|
(1,149,989 |
) |
|
|
I |
|
|
|
|
|
Goodwill
|
|
|
12,926 |
|
|
|
96,212 |
|
|
|
(96,212 |
) |
|
|
C |
|
|
|
12,926 |
|
Deferred Income Taxes
|
|
|
72,968 |
|
|
|
415,101 |
|
|
|
(174,513 |
) |
|
|
M |
|
|
|
313,556 |
|
All Other Long Term Assets
|
|
|
135,679 |
|
|
|
153,072 |
|
|
|
(17,316 |
) |
|
|
I |
|
|
|
271,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
1,627,152 |
|
|
$ |
2,783,166 |
|
|
$ |
(1,969,553 |
) |
|
|
|
|
|
$ |
2,440,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & EQUITY: |
Notes Payable & Current Debt Maturities
|
|
|
4,250 |
|
|
|
3,952 |
|
|
|
|
|
|
|
|
|
|
|
8,202 |
|
Accounts Payable
|
|
|
102,525 |
|
|
|
146,445 |
|
|
|
|
|
|
|
|
|
|
|
248,970 |
|
Accounts Payable Affiliates (B&W)
|
|
|
48,593 |
|
|
|
16,731 |
|
|
|
(65,324 |
) |
|
|
B |
|
|
|
|
|
Accrued Employee Benefits
|
|
|
73,484 |
|
|
|
35,267 |
|
|
|
|
|
|
|
|
|
|
|
108,751 |
|
Accrued Liabilities Other
|
|
|
220,024 |
|
|
|
44,294 |
|
|
|
85,000 |
|
|
|
D |
|
|
|
349,318 |
|
Advanced Billings on Contracts
|
|
|
284,214 |
|
|
|
298,746 |
|
|
|
|
|
|
|
|
|
|
|
582,960 |
|
Accrued Warranty Expense
|
|
|
5,909 |
|
|
|
45,170 |
|
|
|
|
|
|
|
|
|
|
|
51,079 |
|
Accrued Taxes Payable
|
|
|
32,182 |
|
|
|
|
|
|
|
(29,952 |
) |
|
|
L |
|
|
|
2,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
771,181 |
|
|
|
590,605 |
|
|
|
(10,276 |
) |
|
|
|
|
|
|
1,351,510 |
|
|
Long-Term Debt
|
|
|
260,267 |
|
|
|
4,100 |
|
|
|
|
|
|
|
|
|
|
|
264,367 |
|
Accrued Post Retirement Benefit
|
|
|
27,014 |
|
|
|
2,235 |
|
|
|
|
|
|
|
|
|
|
|
29,249 |
|
Self Insurance
|
|
|
62,044 |
|
|
|
11,229 |
|
|
|
|
|
|
|
|
|
|
|
73,273 |
|
Pension Liability
|
|
|
325,561 |
|
|
|
134,228 |
|
|
|
(117,079 |
) |
|
|
E |
|
|
|
342,710 |
|
Accrued Cost of B&W Settlement
|
|
|
117,990 |
|
|
|
|
|
|
|
(117,990 |
) |
|
|
N |
|
|
|
|
|
Products Liability Settlement
|
|
|
|
|
|
|
2,177,613 |
|
|
|
(2,177,613 |
) |
|
|
I |
|
|
|
|
|
Other Long-Term Liabilities
|
|
|
116,559 |
|
|
|
90,019 |
|
|
|
(15,183 |
) |
|
|
G |
|
|
|
191,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,680,616 |
|
|
|
3,010,029 |
|
|
|
(2,438,141 |
) |
|
|
|
|
|
|
2,252,504 |
|
Common Stock: Par
|
|
|
72,640 |
|
|
|
1,001 |
|
|
|
(1,001 |
) |
|
|
F |
|
|
|
72,640 |
|
Capital In Excess of Par Value
|
|
|
1,163,204 |
|
|
|
123,068 |
|
|
|
(123,068 |
) |
|
|
F |
|
|
|
1,163,204 |
|
Accumulated Deficit
|
|
|
(899,053 |
) |
|
|
(287,870 |
) |
|
|
492,148 |
|
|
|
F |
|
|
|
(694,775 |
) |
Treasury Stock
|
|
|
(57,866 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,866 |
) |
Other Comprehensive Income (Loss)
|
|
|
(332,389 |
) |
|
|
(63,062 |
) |
|
|
100,509 |
|
|
|
F |
|
|
|
(294,942 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity (Deficit)
|
|
|
(53,464 |
) |
|
|
(226,863 |
) |
|
|
468,588 |
|
|
|
|
|
|
|
188,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Stockholders Equity (Deficit)
|
|
$ |
1,627,152 |
|
|
$ |
2,783,166 |
|
|
$ |
(1,969,553 |
) |
|
|
|
|
|
$ |
2,440,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
pro forma
condensed combined financial statements.
64
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
(Assuming passage of the FAIR Act)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
| |
|
|
|
|
Pro Forma | |
|
|
|
Pro Forma | |
|
|
MII | |
|
B&W | |
|
Adjustments | |
|
|
|
Combined | |
|
|
| |
|
| |
|
| |
|
|
|
| |
|
|
9/30/2005 | |
|
9/30/2005 | |
|
|
|
|
|
|
|
|
(In thousands except per share amounts) | |
Revenues
|
|
$ |
1,457,745 |
|
|
$ |
1,086,795 |
|
|
$ |
(608 |
) |
|
|
J |
|
|
$ |
2,543,932 |
|
Cost and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Operations
|
|
|
1,164,912 |
|
|
|
1,373,944 |
|
|
|
(588,862 |
) |
|
|
H |
|
|
|
1,949,994 |
|
|
Selling, general and administrative expenses
|
|
|
156,038 |
|
|
|
124,116 |
|
|
|
25,000 |
|
|
|
D |
|
|
|
305,154 |
|
|
Gains on asset disposals and impairments
|
|
|
(6,501 |
) |
|
|
(572 |
) |
|
|
|
|
|
|
|
|
|
|
(7,073 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total expenses
|
|
|
1,314,449 |
|
|
|
1,497,488 |
|
|
|
(563,862 |
) |
|
|
|
|
|
|
2,248,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of investees
|
|
|
26,222 |
|
|
|
2,978 |
|
|
|
|
|
|
|
|
|
|
|
29,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
169,518 |
|
|
|
(407,715 |
) |
|
|
563,254 |
|
|
|
|
|
|
|
325,057 |
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
13,810 |
|
|
|
9,244 |
|
|
|
(1,219 |
) |
|
|
K |
|
|
|
21,835 |
|
|
|
Interest expense
|
|
|
(27,784 |
) |
|
|
(2,185 |
) |
|
|
1,219 |
|
|
|
K |
|
|
|
(28,750 |
) |
|
|
(Increase) decrease in the estimated cost of the B&W
settlement
|
|
|
(5,887 |
) |
|
|
|
|
|
|
145,666 |
|
|
|
H |
|
|
|
139,779 |
|
|
|
Other net
|
|
|
3,647 |
|
|
|
(5,725 |
) |
|
|
|
|
|
|
|
|
|
|
(2,078 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total other net
|
|
|
(16,214 |
) |
|
|
1,334 |
|
|
|
145,666 |
|
|
|
|
|
|
|
130,786 |
|
Income (loss) before provision for (benefit from) income taxes
|
|
|
153,304 |
|
|
|
(406,381 |
) |
|
|
708,920 |
|
|
|
|
|
|
|
455,843 |
|
Provision for (benefit from) income taxes
|
|
|
(8,551 |
) |
|
|
(153,520 |
) |
|
|
175,937 |
|
|
|
H |
|
|
|
13,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before Extraordinary Item
|
|
|
161,855 |
|
|
|
(252,861 |
) |
|
|
532,983 |
|
|
|
|
|
|
|
441,977 |
|
Extraordinary Item
|
|
|
|
|
|
|
|
|
|
|
59,547 |
|
|
|
C |
|
|
|
59,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$ |
161,855 |
|
|
$ |
(252,861 |
) |
|
$ |
592,530 |
|
|
|
|
|
|
$ |
501,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: Income before extraordinary item
|
|
$ |
2.39 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
6.53 |
|
|
|
Basic: Net income
|
|
$ |
2.39 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
7.41 |
|
|
|
Diluted: Income before extraordinary item
|
|
$ |
2.25 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
6.13 |
|
|
|
Diluted: Net income
|
|
$ |
2.25 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
6.96 |
|
Shares used in EPS calculations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
67,677,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,677,823 |
|
|
|
Diluted
|
|
|
72,084,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,084,803 |
|
The accompanying notes are an integral part of these unaudited
pro forma
condensed combined financial statements.
65
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
(Assuming passage of the FAIR Act)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended | |
|
|
| |
|
|
|
|
Pro Forma | |
|
|
|
Pro Forma | |
|
|
MII | |
|
B&W | |
|
Adjustments | |
|
|
|
Combined | |
|
|
| |
|
| |
|
| |
|
|
|
| |
|
|
12/31/2004 | |
|
12/31/2004 | |
|
|
|
|
|
|
|
|
(In thousands) | |
Revenues
|
|
$ |
1,923,019 |
|
|
$ |
1,368,918 |
|
|
$ |
(1,212 |
) |
|
|
J |
|
|
$ |
3,290,725 |
|
Cost and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Operations
|
|
|
1,673,922 |
|
|
|
1,093,654 |
|
|
|
(23,647 |
) |
|
|
H |
|
|
|
2,743,929 |
|
|
Selling, general and administrative expenses
|
|
|
203,262 |
|
|
|
161,692 |
|
|
|
25,000 |
|
|
|
D |
|
|
|
389,954 |
|
|
Gains on asset disposals and impairments
|
|
|
(64,472 |
) |
|
|
(246 |
) |
|
|
|
|
|
|
|
|
|
|
(64,718 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total expenses
|
|
|
1,812,712 |
|
|
|
1,255,100 |
|
|
|
1,353 |
|
|
|
|
|
|
|
3,069,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of investees
|
|
|
35,617 |
|
|
|
2,956 |
|
|
|
|
|
|
|
|
|
|
|
38,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
145,924 |
|
|
|
116,774 |
|
|
|
(2,565 |
) |
|
|
|
|
|
|
260,133 |
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,574 |
|
|
|
4,973 |
|
|
|
(1,428 |
) |
|
|
K |
|
|
|
9,119 |
|
|
Interest expense
|
|
|
(36,066 |
) |
|
|
(2,662 |
) |
|
|
1,428 |
|
|
|
K |
|
|
|
(37,300 |
) |
|
(Increase) decrease in the estimated cost of the B&W
settlement
|
|
|
(11,187 |
) |
|
|
|
|
|
|
150,966 |
|
|
|
H |
|
|
|
139,779 |
|
|
Other net
|
|
|
(1,779 |
) |
|
|
(18,129 |
) |
|
|
|
|
|
|
|
|
|
|
(19,908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total other net
|
|
|
(43,458 |
) |
|
|
(15,818 |
) |
|
|
150,966 |
|
|
|
|
|
|
|
91,690 |
|
Income before provision for (benefit from) income taxes
|
|
|
102,466 |
|
|
|
100,956 |
|
|
|
148,401 |
|
|
|
|
|
|
|
351,823 |
|
Provision for (benefit from) income taxes
|
|
|
40,827 |
|
|
|
1,839 |
|
|
|
(22,679 |
) |
|
|
H |
|
|
|
19,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Extraordinary Item
|
|
|
61,639 |
|
|
|
99,117 |
|
|
|
171,080 |
|
|
|
|
|
|
|
331,836 |
|
Extraordinary Item
|
|
|
|
|
|
|
|
|
|
|
59,547 |
|
|
|
C |
|
|
|
59,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$ |
61,639 |
|
|
$ |
99,117 |
|
|
$ |
230,627 |
|
|
|
|
|
|
$ |
391,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: Income before extraordinary item
|
|
$ |
0.94 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
5.05 |
|
|
Basic: Net income
|
|
$ |
0.94 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
5.96 |
|
|
Diluted: Income before extraordinary item
|
|
$ |
0.90 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
4.86 |
|
|
Diluted: Net income
|
|
$ |
0.90 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
5.73 |
|
Shares used in EPS calculations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
65,688,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,688,361 |
|
|
Diluted
|
|
|
68,268,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,268,131 |
|
The accompanying notes are an integral part of these unaudited
pro forma
condensed combined financial statements.
66
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS
Note 1
The currently proposed settlement would be accounted for similar
to a step acquisition under SFAS No. 141, since
McDermott will regain control over B&W. The difference
between McDermotts investment in B&W, which consists
of the $375 million payment reduced by tax benefits under
the currently proposed settlement and certain other liabilities,
is less than the net assets of B&W. As a result, the
existing noncurrent assets at B&W are being reduced to
account for the basis difference between McDermotts
investment in B&W and the net assets of B&W. This
scenario assumes passage of the FAIR Act or similar federal
legislation prior to the effective date of the currently
proposed settlement.
|
|
Note 2 |
Pro Forma Adjustments |
|
|
A |
To record the cash payment to be made on the effective date of
the Proposed Settlement Agreement, at $375 million. Cash to
settle the payment is assumed to come from existing cash on hand. |
|
|
B |
To adjust and eliminate intercompany accounts due to
reconsolidation of B&W into McDermott. |
|
C |
The proposed settlement is being accounted for similar to a step
acquisition since McDermott is regaining control over B&W
through the settlement. The cost to reacquire control of B&W
is a gross amount of $375 million and is reduced by the tax
benefit associated with the settlement and certain assumed
liabilities. The basis difference between McDermotts
investment in B&W and B&Ws net assets is being
allocated in accordance with SFAS No. 141 to the
long-lived assets of B&W with the remainder, including the
related tax impacts, being treated as an extraordinary gain
totaling $59,547. |
|
|
D |
To reclassify liabilities totaling $60 million in
reconsolidation and accrual of associated transaction fees
estimated at $25 million. |
|
|
E |
To adjust for reconsolidation of B&W pension plan previously
spun-off. Effective January 31, 2005, MI spun off the
assets and liabilities associated with B&Ws portion of
MIs pension plan to a plan sponsored by B&W. At
January 31, 2005, B&W recorded this transaction by
reducing stockholders equity and increasing its pension
liability by approximately $117 million based on our best
estimate from data supplied by our actuary. McDermott deferred
recognition of this spin-off pending final resolution of the
B&W Chapter 11 proceedings. |
|
|
F |
To reflect the impact on stockholders equity of the
adjustments to the net assets of B&W. |
|
|
|
|
|
|
Reconciliation of Stockholders Equity:
|
|
|
|
|
Elimination of B&W common stock at effective date of the
currently proposed settlement
|
|
$ |
(1,001 |
) |
Elimination of B&W capital in excess of par value at
effective date of the currently proposed settlement
|
|
|
(123,068 |
) |
Reconciliation of Accumulated Deficit:
|
|
|
|
|
Elimination of B&W deficit at acquisition
|
|
|
287,870 |
|
Expense transaction fees net of tax
|
|
|
(16,250 |
) |
Extraordinary item net of tax (see Note C)
|
|
|
59,547 |
|
Reversal of certain items previously recorded by McDermott no
longer required under the currently proposed settlement
|
|
|
160,981 |
|
|
|
|
|
|
Total accumulated deficit
|
|
$ |
492,148 |
|
|
|
|
|
Adjustment for the reconsolidation of B&W pension plan
previously spun-off (see Note E)
|
|
|
100,509 |
|
|
|
|
|
Total adjustment to stockholders equity
|
|
$ |
468,588 |
|
|
|
|
|
67
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
G |
To adjust workers compensation liability totaling $(3,587)
and deferred gain on intercompany asset sale totaling $(11,596). |
|
H |
To eliminate revaluation of B&W settlement to reflect the
currently proposed settlement, to eliminate intercompany
revenues between B&W and McDermott, and to adjust historical
depreciation expense for the write down of net property, plant
and equipment. |
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
Twelve Months Ended | |
|
|
9/30/2005 | |
|
12/31/2004 | |
|
|
| |
|
| |
Reconciliation of Cost of Operations:
|
|
|
|
|
|
|
|
|
Adjustment to settlement liability
|
|
$ |
(575,308 |
) |
|
$ |
(3,635 |
) |
Adjust depreciation
|
|
|
(12,946 |
) |
|
|
(18,800 |
) |
Intercompany revenue eliminations
|
|
|
(608 |
) |
|
|
(1,212 |
) |
|
|
|
|
|
|
|
|
Total
|
|
$ |
(588,862 |
) |
|
$ |
(23,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
Twelve Months Ended | |
|
|
9/30/2005 | |
|
12/31/2004 | |
|
|
| |
|
| |
Reconciliation of provision for income taxes:
|
|
|
|
|
|
|
|
|
Tax effect on adjustment of prior settlement in cost of
operations
|
|
$ |
201,358 |
|
|
$ |
693 |
|
Tax effect on adjustment related to cost of B&W settlement
recorded in other income (expense)
|
|
|
(21,202 |
) |
|
|
(21,202 |
) |
Tax effect on transaction fees
|
|
|
(8,750 |
) |
|
|
(8,750 |
) |
Tax effect on depreciation adjustment
|
|
|
4,531 |
|
|
|
6,580 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
175,937 |
|
|
$ |
(22,679 |
) |
|
|
|
|
|
|
|
|
|
I |
To adjust the existing B&W insurance recoverable and
products liability settlement to reflect the currently proposed
settlement. |
|
|
J |
To eliminate intercompany revenues between B&W and McDermott. |
|
|
K |
To eliminate intercompany interest income and intercompany
interest expense between B&W and McDermott. |
|
|
L |
Reconciliation of accrued taxes payable: |
|
|
|
|
|
Tax benefit on reversal of previous settlement
|
|
$ |
(28,710 |
) |
Tax expense on reversal of prior intercompany receivables
written-off by McDermott
|
|
|
6,252 |
|
Tax benefit on expensing transaction fees
|
|
|
(8,750 |
) |
Tax expense on reversal of deferred credit on insurance reserves
|
|
|
1,256 |
|
|
|
|
|
Total pro forma adjustments to accrued taxes payable
|
|
$ |
(29,952 |
) |
|
|
|
|
|
|
M |
To adjust deferred tax asset on reversal of insurance
recoverable and products liability settlement totaling
$(201,357) and on the extraordinary items relating to the write
down of net property, plant and equipment totaling $38,290, and
the residual allocation of the difference between
McDermotts investment in B&W and B&Ws net
assets totaling $(11,446). See Note C. |
|
|
N |
To eliminate accrued cost of the previously negotiated
settlement. |
68
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(Assuming no passage of the FAIR Act)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MII | |
|
B&W | |
|
|
|
|
|
|
|
|
As of | |
|
As of | |
|
Pro Forma | |
|
|
|
Pro Forma | |
|
|
9/30/2005 | |
|
9/30/2005 | |
|
Adjustments | |
|
|
|
Combined | |
|
|
| |
|
| |
|
| |
|
|
|
| |
|
|
(In thousands) | |
ASSETS: |
Cash & Equivalents
|
|
$ |
518,900 |
|
|
$ |
392,326 |
|
|
$ |
(705,000 |
) |
|
|
A |
|
|
$ |
206,226 |
|
Accounts Rec. Trade
|
|
|
301,688 |
|
|
|
194,571 |
|
|
|
|
|
|
|
|
|
|
|
496,259 |
|
Accounts & Notes Rec. Other
|
|
|
32,919 |
|
|
|
10,909 |
|
|
|
(5,884 |
) |
|
|
B |
|
|
|
37,944 |
|
Contracts in Progress
|
|
|
72,399 |
|
|
|
91,326 |
|
|
|
|
|
|
|
|
|
|
|
163,725 |
|
Inventories
|
|
|
|
|
|
|
62,823 |
|
|
|
|
|
|
|
|
|
|
|
62,823 |
|
Deferred Income Taxes
|
|
|
18,510 |
|
|
|
46,182 |
|
|
|
|
|
|
|
|
|
|
|
64,692 |
|
Other Current Assets
|
|
|
70,367 |
|
|
|
20,016 |
|
|
|
|
|
|
|
|
|
|
|
90,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,014,783 |
|
|
|
818,153 |
|
|
|
(710,884 |
) |
|
|
|
|
|
|
1,122,052 |
|
Net PP&E
|
|
|
306,250 |
|
|
|
109,401 |
|
|
|
|
|
|
|
|
|
|
|
415,651 |
|
Long Term Investment Portfolio
|
|
|
84,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,546 |
|
Note Receivable-Affiliates
|
|
|
|
|
|
|
41,238 |
|
|
|
(41,238 |
) |
|
|
B |
|
|
|
|
|
Insurance Recoverable
|
|
|
|
|
|
|
1,149,989 |
|
|
|
(1,149,989 |
) |
|
|
I |
|
|
|
|
|
Goodwill
|
|
|
12,926 |
|
|
|
96,212 |
|
|
|
(25,346 |
) |
|
|
C |
|
|
|
83,792 |
|
Deferred Income Taxes
|
|
|
72,968 |
|
|
|
415,101 |
|
|
|
|
|
|
|
|
|
|
|
488,069 |
|
All Other Long Term Assets
|
|
|
135,679 |
|
|
|
153,072 |
|
|
|
(17,316 |
) |
|
|
I |
|
|
|
271,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
1,627,152 |
|
|
$ |
2,783,166 |
|
|
$ |
(1,944,773 |
) |
|
|
|
|
|
$ |
2,465,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & EQUITY: |
Notes Payable & Current Debt Maturities
|
|
|
4,250 |
|
|
|
3,952 |
|
|
|
|
|
|
|
|
|
|
|
8,202 |
|
Accounts Payable
|
|
|
102,525 |
|
|
|
146,445 |
|
|
|
|
|
|
|
|
|
|
|
248,970 |
|
Accounts Payable Affiliates (B&W)
|
|
|
48,593 |
|
|
|
16,731 |
|
|
|
(65,324 |
) |
|
|
B |
|
|
|
|
|
Accrued Employee Benefits
|
|
|
73,484 |
|
|
|
35,267 |
|
|
|
|
|
|
|
|
|
|
|
108,751 |
|
Accrued Liabilities Other
|
|
|
220,024 |
|
|
|
44,294 |
|
|
|
85,000 |
|
|
|
D |
|
|
|
349,318 |
|
Advanced Billings on Contracts
|
|
|
284,214 |
|
|
|
298,746 |
|
|
|
|
|
|
|
|
|
|
|
582,960 |
|
Accrued Warranty Expense
|
|
|
5,909 |
|
|
|
45,170 |
|
|
|
|
|
|
|
|
|
|
|
51,079 |
|
Accrued Taxes Payable
|
|
|
32,182 |
|
|
|
|
|
|
|
(29,952 |
) |
|
|
L |
|
|
|
2,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
771,181 |
|
|
|
590,605 |
|
|
|
(10,276 |
) |
|
|
|
|
|
|
1,351,510 |
|
Long-Term Debt
|
|
|
260,267 |
|
|
|
4,100 |
|
|
|
245,308 |
|
|
|
A |
|
|
|
509,675 |
|
Accrued Post Retirement Benefit
|
|
|
27,014 |
|
|
|
2,235 |
|
|
|
|
|
|
|
|
|
|
|
29,249 |
|
Self Insurance
|
|
|
62,044 |
|
|
|
11,229 |
|
|
|
|
|
|
|
|
|
|
|
73,273 |
|
Pension Liability
|
|
|
325,561 |
|
|
|
134,228 |
|
|
|
(117,079 |
) |
|
|
E |
|
|
|
342,710 |
|
Accrued Cost of B&W Settlement
|
|
|
117,990 |
|
|
|
|
|
|
|
(117,990 |
) |
|
|
M |
|
|
|
|
|
Products Liability Settlement
|
|
|
|
|
|
|
2,177,613 |
|
|
|
(2,177,613 |
) |
|
|
I |
|
|
|
|
|
Other Long-Term Liabilities
|
|
|
116,559 |
|
|
|
90,019 |
|
|
|
(15,183 |
) |
|
|
G |
|
|
|
191,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,680,616 |
|
|
|
3,010,029 |
|
|
|
(2,192,833 |
) |
|
|
|
|
|
|
2,497,812 |
|
Common Stock: Par
|
|
|
72,640 |
|
|
|
1,001 |
|
|
|
(1,001 |
) |
|
|
F |
|
|
|
72,640 |
|
Capital In Excess of Par Value
|
|
|
1,163,204 |
|
|
|
123,068 |
|
|
|
(123,068 |
) |
|
|
F |
|
|
|
1,163,204 |
|
Accumulated Deficit
|
|
|
(899,053 |
) |
|
|
(287,870 |
) |
|
|
271,620 |
|
|
|
F |
|
|
|
(915,303 |
) |
Treasury Stock
|
|
|
(57,866 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,866 |
) |
Other Comprehensive Income (Loss)
|
|
|
(332,389 |
) |
|
|
(63,062 |
) |
|
|
100,509 |
|
|
|
F |
|
|
|
294,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity (Deficit)
|
|
|
(53,464 |
) |
|
|
(226,863 |
) |
|
|
248,060 |
|
|
|
|
|
|
|
(32,267 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Stockholders Equity (Deficit)
|
|
$ |
1,627,152 |
|
|
$ |
2,783,166 |
|
|
$ |
(1,944,773 |
) |
|
|
|
|
|
$ |
2,465,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
pro forma
condensed combined financial statements.
69
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
(Assuming no passage of the FAIR Act)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
| |
|
|
|
|
Pro Forma | |
|
|
|
Pro Forma | |
|
|
MII | |
|
B&W | |
|
Adjustments | |
|
|
|
Combined | |
|
|
| |
|
| |
|
| |
|
|
|
| |
|
|
9/30/2005 | |
|
9/30/2005 | |
|
|
|
|
|
|
|
|
(In thousands except per share amounts) | |
Revenues
|
|
$ |
1,457,745 |
|
|
$ |
1,086,795 |
|
|
$ |
(608 |
) |
|
|
J |
|
|
$ |
2,543,932 |
|
Cost and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Operations
|
|
|
1,164,912 |
|
|
|
1,373,944 |
|
|
|
(9,640 |
) |
|
|
H |
|
|
|
2,529,216 |
|
|
Selling, general and administrative expenses
|
|
|
156,038 |
|
|
|
124,116 |
|
|
|
25,000 |
|
|
|
D |
|
|
|
305,154 |
|
|
Gains on asset disposals and impairments
|
|
|
(6,501 |
) |
|
|
(572 |
) |
|
|
|
|
|
|
|
|
|
|
(7,073 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total expenses
|
|
|
1,314,449 |
|
|
|
1,497,488 |
|
|
|
15,360 |
|
|
|
|
|
|
|
2,827,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of investees
|
|
|
26,222 |
|
|
|
2,978 |
|
|
|
|
|
|
|
|
|
|
|
29,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
169,518 |
|
|
|
(407,715 |
) |
|
|
(15,968 |
) |
|
|
|
|
|
|
(254,165 |
) |
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
13,810 |
|
|
|
9,244 |
|
|
|
(1,219 |
) |
|
|
K |
|
|
|
21,835 |
|
|
|
Interest expense
|
|
|
(27,784 |
) |
|
|
(2,185 |
) |
|
|
1,219 |
|
|
|
K |
|
|
|
(28,750 |
) |
|
|
(Increase) decrease in the estimated cost of the B&W
settlement
|
|
|
(5,887 |
) |
|
|
|
|
|
|
5,887 |
|
|
|
H |
|
|
|
|
|
|
|
Other net
|
|
|
3,647 |
|
|
|
(5,725 |
) |
|
|
|
|
|
|
|
|
|
|
(2,078 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total other net
|
|
|
(16,214 |
) |
|
|
1,334 |
|
|
|
5,887 |
|
|
|
|
|
|
|
(8,993 |
) |
Income (loss) before provision for (benefit from) income taxes
|
|
|
153,304 |
|
|
|
(406,381 |
) |
|
|
(10,081 |
) |
|
|
|
|
|
|
(263,158 |
) |
Provision for (benefit from) income taxes
|
|
|
(8,551 |
) |
|
|
(153,520 |
) |
|
|
(6,181 |
) |
|
|
H |
|
|
|
(168,252 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$ |
161,855 |
|
|
$ |
(252,861 |
) |
|
$ |
(3,900 |
) |
|
|
|
|
|
$ |
(94,906 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
2.39 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
(1.40 |
) |
|
|
Diluted
|
|
$ |
2.25 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
(1.40 |
) |
Shares used in EPS calculations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
67,677,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,677,823 |
|
|
|
Diluted
|
|
|
72,084,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,084,803 |
|
The accompanying notes are an integral part of these unaudited
pro forma
condensed combined financial statements.
70
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
(Assuming no passage of the FAIR Act)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended | |
|
|
| |
|
|
|
|
Pro Forma | |
|
|
|
Pro Forma | |
|
|
MII | |
|
B&W | |
|
Adjustments | |
|
|
|
Combined | |
|
|
| |
|
| |
|
| |
|
|
|
| |
|
|
12/31/2004 | |
|
12/31/2004 | |
|
|
|
|
|
|
|
|
(In thousands) | |
Revenues
|
|
$ |
1,923,019 |
|
|
$ |
1,368,918 |
|
|
$ |
(1,212 |
) |
|
|
J |
|
|
$ |
3,290,725 |
|
Cost and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Operations
|
|
|
1,673,922 |
|
|
|
1,093,654 |
|
|
|
(4,847 |
) |
|
|
H |
|
|
|
2,762,729 |
|
|
Selling, general and administrative expenses
|
|
|
203,262 |
|
|
|
161,692 |
|
|
|
25,000 |
|
|
|
D |
|
|
|
389,954 |
|
|
Gain on asset disposals and impairments
|
|
|
(64,472 |
) |
|
|
(246 |
) |
|
|
|
|
|
|
|
|
|
|
(64,718 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total expenses
|
|
|
1,812,712 |
|
|
|
1,255,100 |
|
|
|
20,153 |
|
|
|
|
|
|
|
3,087,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of investees
|
|
|
35,617 |
|
|
|
2,956 |
|
|
|
|
|
|
|
|
|
|
|
38,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
145,924 |
|
|
|
116,774 |
|
|
|
(21,365 |
) |
|
|
|
|
|
|
241,333 |
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,574 |
|
|
|
4,973 |
|
|
|
(1,428 |
) |
|
|
K |
|
|
|
9,119 |
|
|
Interest expense
|
|
|
(36,066 |
) |
|
|
(2,662 |
) |
|
|
1,428 |
|
|
|
K |
|
|
|
(37,300 |
) |
|
(Increase) decrease in the estimated cost of the B&W
settlement
|
|
|
(11,187 |
) |
|
|
|
|
|
|
11,187 |
|
|
|
H,J |
|
|
|
|
|
|
Other net
|
|
|
(1,779 |
) |
|
|
(18,129 |
) |
|
|
|
|
|
|
|
|
|
|
(19,908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total other net
|
|
|
(43,458 |
) |
|
|
(15,818 |
) |
|
|
11,187 |
|
|
|
|
|
|
|
(48,089 |
) |
Income (loss) before provision for (benefit from) income taxes
|
|
|
102,466 |
|
|
|
100,956 |
|
|
|
(10,178 |
) |
|
|
|
|
|
|
193,244 |
|
Provision for (benefit from) income taxes
|
|
|
40,827 |
|
|
|
1,839 |
|
|
|
(8,057 |
) |
|
|
H |
|
|
|
34,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$ |
61,639 |
|
|
$ |
99,117 |
|
|
$ |
(2,121 |
) |
|
|
|
|
|
$ |
158,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.94 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
2.41 |
|
|
Diluted
|
|
$ |
0.90 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
2.32 |
|
Shares used in EPS calculations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
65,688,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,688,361 |
|
|
Diluted
|
|
|
68,268,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,268,131 |
|
The accompanying notes are an integral part of these unaudited
pro forma
condensed combined financial statements.
71
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS
Note 1
The currently proposed settlement would be accounted for similar
to a step acquisition under SFAS No. 141, since
McDermott will regain control over B&W. The difference
between McDermotts investment in B&W, which consists
of a $705 million payment and a note payable with fair
value totaling $245 million, reduced by tax benefits under
the currently proposed settlement and certain other liabilities,
is less than the net assets of B&W. As a result, the
existing goodwill at B&W is being reduced to account for the
basis difference between McDermotts investment in B&W
and the net assets of B&W. This scenario assumes no passage
of the FAIR Act or similar federal legislation by the effective
date of the currently proposed settlement and recognition of the
contingent payment obligations. If the FAIR Act or similar
federal legislation is enacted and becomes law subsequent to the
effective date of the currently proposed settlement on or before
November 30, 2006, B&W would subsequently record a
favorable adjustment to its pre-tax asbestos liability totaling
approximately $600 million.
|
|
Note 2 |
Pro Forma Adjustments |
|
|
A |
To record the cost of the Proposed Settlement Agreement,
consisting of a note payable and the cash portion of the
settlement at $705 million. The note payable is a long term
note payable, requiring principal payments of $50 million
per year for five years at a stated interest rate of 7%. This
note payable is recorded at its fair value of
$245.3 million. Cash to make the payment on the effective
date of the proposed settlement is assumed to come from cash on
hand. It is possible that McDermott will explore alternative
methods to make that cash payment, including, but not limited
to, issuing additional common stock and seeking third-party
financing. |
|
|
B |
To adjust and eliminate intercompany accounts due to
reconsolidation of B&W into McDermott. |
|
C |
To give effect to the cost to reacquire control of B&W being
less than the net assets of B&W. The basis difference
between McDermotts investment in B&W and
B&Ws net assets is being allocated in accordance with
SFAS No. 141 to the long-lived assets of B&W. The
currently proposed settlement is being accounted for similar to
a step acquisition since McDermott is regaining control over
B&W through the settlement. |
|
|
D |
To reclassify liabilities totaling $60 million in
reconsolidation and accrual of associated transaction fees
estimated at $25 million. |
|
|
E |
To adjust for reconsolidation of B&W pension plan previously
spun-off. Effective January 31, 2005, MI spun off the
assets and liabilities associated with B&Ws portion of
MIs pension plan to a plan sponsored by B&W. At
January 31, 2005, B&W recorded this transaction by
reducing stockholders equity and increasing its pension
liability by approximately $117 million based on our best
estimate from data supplied by our actuary. McDermott deferred
recognition of this spin-off pending final resolution of the
B&W Chapter 11 proceedings. |
72
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
F |
To reflect the impact on stockholders equity of the
adjustments to the net assets of B&W. |
|
|
|
|
|
Reconciliation of Stockholders Equity:
|
|
|
|
|
Elimination of B&W common stock at effective date of the
currently proposed settlement
|
|
$ |
(1,001 |
) |
Elimination of B&W capital in excess of par value at
effective date of the currently proposed settlement
|
|
|
(123,068 |
) |
Reconciliation of Accumulated Deficit:
|
|
|
|
|
Expense transactions fees net of tax
|
|
$ |
(16,250 |
) |
Elimination of B&W deficit at acquisition
|
|
|
287,870 |
|
|
|
|
|
Total adjustment to accumulated deficit
|
|
|
271,620 |
|
|
|
|
|
Adjustment for the reconsolidation of B&W pension plan
previously spun-off (see Note E)
|
|
|
100,509 |
|
|
|
|
|
Total adjustment to stockholders equity
|
|
$ |
248,060 |
|
|
|
|
|
|
|
G |
To adjust workers compensation liability totaling $(3,587)
and deferred gain on intercompany asset sale totaling $(11,596)
due to reconsolidation of B&W. |
|
H |
To eliminate revaluation of B&W settlement to reflect the
currently proposed settlement, to eliminate intercompany
revenues between B&W and McDermott and to record
amortization of intangible assets and additional depreciation
expense on property, plant and equipment. |
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
Twelve Months Ended | |
|
|
9/30/2005 | |
|
12/31/2004 | |
|
|
| |
|
| |
Reconciliation of Cost of Operations:
|
|
|
|
|
|
|
|
|
Adjustment to settlement liability
|
|
$ |
(9,032 |
) |
|
$ |
(3,635 |
) |
Intercompany revenue eliminations
|
|
|
(608 |
) |
|
|
(1,212 |
) |
|
|
|
|
|
|
|
|
Total
|
|
$ |
(9,640 |
) |
|
$ |
(4,847 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
Twelve Months Ended | |
|
|
9/30/2005 | |
|
12/31/2004 | |
|
|
| |
|
| |
Reconciliation of provision for income taxes:
|
|
|
|
|
|
|
|
|
Tax effect on adjustment of prior settlement in cost of
operations
|
|
$ |
2,569 |
|
|
$ |
693 |
|
Tax effect on transaction fees
|
|
|
(8,750 |
) |
|
|
(8,750 |
) |
|
|
|
|
|
|
|
|
Total
|
|
$ |
(6,181 |
) |
|
$ |
(8,057 |
) |
|
|
|
|
|
|
|
|
|
I |
To adjust the existing B&W insurance recoverable, related
accounts receivable and products liability settlement to reflect
the currently proposed settlement. |
73
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
J |
To eliminate intercompany revenues between B&W and McDermott. |
|
|
K |
To eliminate intercompany interest income and intercompany
interest expense between B&W and McDermott. |
|
|
L |
Reconciliation of accrued taxes payable: |
|
|
|
|
|
Tax benefit on reversal of previous settlement
|
|
$ |
(28,710 |
) |
Tax expense on reversal of prior intercompany receivables
written-off by McDermott
|
|
|
6,252 |
|
Tax benefit on expensing transaction fees
|
|
|
(8,750 |
) |
Tax expense on reversal of deferred credit on insurance reserves
|
|
|
1,256 |
|
|
|
|
|
Total pro forma adjustments to accrued taxes payable
|
|
$ |
(29,952 |
) |
|
|
|
|
|
|
M |
To eliminate accrued cost of the previously negotiated
settlement. |
74
Security Ownership of Directors and Executive Officers
The following table sets forth the number of shares of our
common stock beneficially owned as of December 1, 2005 by
our directors, our Chief Executive Officer, our four most highly
compensated executive officers during 2004 (other than our CEO)
and all our directors and executive officers as a group,
including shares that those persons have the right to acquire
within 60 days on the exercise of stock options.
|
|
|
|
|
|
|
Shares | |
|
|
Beneficially | |
Name |
|
Owned | |
|
|
| |
Roger A.
Brown(1)
|
|
|
4,925 |
|
Ronald C.
Cambre(2)
|
|
|
25,472 |
|
Robert A.
Deason(3)
|
|
|
141,898 |
|
Bruce
DeMars(4)
|
|
|
30,518 |
|
John A.
Fees(5)
|
|
|
52,021 |
|
Joe B.
Foster(6)
|
|
|
40,259 |
|
Robert W.
Goldman(7)
|
|
|
225 |
|
Robert L.
Howard(8)
|
|
|
34,644 |
|
Francis S.
Kalman(9)
|
|
|
284,448 |
|
Oliver D.
Kingsley, Jr.(10)
|
|
|
3,075 |
|
D. Bradley
McWilliams(11)
|
|
|
4,805 |
|
John T.
Nesser, III(12)
|
|
|
345,796 |
|
Thomas C.
Schievelbein(13)
|
|
|
4,580 |
|
Bruce W.
Wilkinson(14)
|
|
|
1,083,371 |
|
All directors and executive officers as a group (19
persons)(15)
|
|
|
2,328,613 |
|
|
|
|
|
(1) |
Shares owned by Mr. Brown include 950 shares of common
stock that he may acquire on the exercise of stock options, as
described above, and 950 restricted shares of common stock as to
which he has sole voting power but no dispositive power. |
|
|
(2) |
Shares owned by Mr. Cambre include 16,759 shares of
common stock that he may acquire on the exercise of stock
options, as described above, and 950 restricted shares of common
stock as to which he has sole voting power but no dispositive
power. |
|
|
(3) |
Shares owned by Mr. Deason include 47,334 shares of
common stock that he may acquire on the exercise of stock
options, as described above, and 36,500 restricted shares of
common stock as to which he has sole voting power but no
dispositive power. Also includes 1,921 shares of common
stock held in the McDermott Thrift Plan. |
|
|
(4) |
Shares owned by Admiral DeMars include 18,784 shares of
common stock that he may acquire on the exercise of stock
options, as described above, and 950 restricted shares of common
stock as to which he has sole voting power but no dispositive
power. |
|
|
(5) |
Shares owned by Mr. Fees include 10,667 shares of
common stock that he may acquire on the exercise of stock
options, as described above, and 28,500 restricted shares of
common stock as to which he has sole voting power but no
dispositive power. Also includes 5,323 shares of common
stock held in the McDermott Thrift Plan. |
|
|
(6) |
Shares owned by Mr. Foster include 17,284 shares of
common stock that he may acquire on the exercise of stock
options, as described above, and 1,100 restricted shares of
common stock as to which he has sole voting power but no
dispositive power. |
|
|
(7) |
Shares owned by Mr. Goldman include 225 restricted
shares of common stock as to which he has sole voting power but
no dispositive power. |
75
|
|
|
|
(8) |
Shares owned by Mr. Howard include 18,911 shares of
common stock that he may acquire on the exercise of stock
options, as described above, and 1,100 restricted shares of
common stock as to which he has sole voting power but no
dispositive power. |
|
|
(9) |
Shares owned by Mr. Kalman include 181,234 shares of
common stock that he may acquire on the exercise of stock
options, as described above, and 74,200 restricted shares of
common stock as to which he has sole voting power but no
dispositive power. Also includes 1,293 shares of common
stock held in the McDermott Thrift Plan. |
|
|
(10) |
Shares owned by Mr. Kingsley include 1,050 shares of
common stock that he may acquire on the exercise of stock
options, as described above, and 950 restricted shares of common
stock as to which he has sole voting power but no dispositive
power. |
|
(11) |
Shares owned by Mr. McWilliams include 3,092 shares of
common stock that he may acquire on the exercise of stock
options, as described above, and 1,100 restricted shares of
common stock as to which he has sole voting power but no
dispositive power. |
|
(12) |
Shares owned by Mr. Nesser include 215,067 shares of
common stock that he may acquire on the exercise of stock
options, as described above, and 68,800 restricted shares of
common stock as to which he has sole voting power but no
dispositive power. Also includes 4,380 shares of common
stock held in the McDermott Thrift Plan. |
|
(13) |
Shares owned by Mr. Schievelbein include 2,942 shares
of common stock that he may acquire on the exercise of stock
options, as described above, and 1,100 restricted shares of
common stock as to which he has sole voting power but no
dispositive power. |
|
(14) |
Shares owned by Mr. Wilkinson include 773,300 shares
of common stock that he may acquire on the exercise of stock
options, as described above, and 162,100 restricted shares of
common stock as to which he has sole voting power but no
dispositive power. Also includes 3,199 shares of common
stock held in the McDermott Thrift Plan. |
|
(15) |
Shares owned by all directors and executive officers as a group
include 1,435,841 shares of common stock that may be
acquired on the exercise of stock options, as described above,
and 449,075 restricted shares of common stock as to which
they have sole voting power but no dispositive power. Also
includes 21,663 shares of common stock held in the
McDermott Thrift Plan. |
Shares beneficially owned in all cases constituted less than one
percent of the outstanding shares of common stock, except that
the 1,083,371 shares of common stock beneficially owned by
Mr. Wilkinson constituted approximately 1.51% and the
2,328,613 shares of common stock beneficially owned by all
directors and executive officers as a group constituted
approximately 3.25% of the outstanding shares of common stock on
December 1, 2005, in each case as determined in accordance
with Rule 13d-3(d)(1) under the Securities Exchange Act of
1934.
76
Security Ownership of Certain Beneficial Owners
The following table furnishes information concerning all persons
known by us to beneficially own 5% or more of our outstanding
shares of common stock, which is our only class of voting stock
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and | |
|
|
|
|
|
|
Nature of | |
|
|
|
|
|
|
Beneficial | |
|
Percent of | |
Title of Class |
|
Name and Address of Beneficial Owner |
|
Ownership | |
|
Class(1) | |
|
|
|
|
| |
|
| |
Common Stock
|
|
Third Point Management Company L.L.C.
360 Madison Ave., 24th Floor
New York, NY 10017 |
|
|
4,225,000 |
(2) |
|
|
6.3% |
|
Common Stock
|
|
Vanguard Fiduciary Trust Company,
in its capacity as trustee for our
employee benefit plan
500 Admiral Nelson Blvd.
Malvern, PA 19355 |
|
|
4,074,166 |
(3) |
|
|
6.0% |
|
Common Stock
|
|
Al A. Gonsoulin
4655 Sweetwater Blvd., Suite 300
Sugar Land, TX 77479 |
|
|
4,000,000 |
(4) |
|
|
5.9% |
|
Common Stock
|
|
Glenview Capital Management, LLC
399 Park Ave., Floor 39
New York, NY 10022 |
|
|
3,538,362 |
(5) |
|
|
5.2% |
|
Common Stock
|
|
American Express Financial Corporation
200 AXP Financial Center
Minneapolis, MN 55474 |
|
|
3,451,000 |
(6) |
|
|
5.1% |
|
|
|
(1) |
Percent is based on the outstanding shares of our common stock
on March 1, 2005. |
|
(2) |
As reported on Schedule 13G and other filings filed with
the SEC on April 1, 2004 and February 14, 2005.
According to the filings, each of Third Point Management Company
L.L.C. (Third Point Management) and Mr. Daniel
Loeb, the managing member of Third Point Management, has shared
voting and dispositive power over 4,225,000 shares and sole
voting or dispositive power over no shares. |
|
(3) |
As reported on a Schedule 13G filed with the SEC on
February 2, 2005. According to the filing, Vanguard
Fiduciary Trust Company has shared voting and dispositive power
over 4,074,166 shares and sole voting or dispositive power
over no shares. |
|
(4) |
As reported on a Schedule 13G filed with the SEC on
April 29, 2002. |
|
(5) |
As reported on a Schedule 13G filed with the SEC on
February 10, 2005. According to the filing, each of
Glenview Capital Management, LLC (Glenview Capital
Management), Glenview Capital GP, LLC (Glenview
Capital GP), Glenview Capital Partners, L.P.
(Glenview Capital Partners), Glenview Capital Master
Fund, Ltd. (Glenview Capital Master Fund), Glenview
Institutional Partners, L.P. (Glenview Institutional
Partners) and Mr. Lawrence M. Robbins, the Chief
Executive Officer of Glenview Capital Management and Glenview
Capital GP, may be deemed to have shared voting and dispositive
power over 3,358,362 shares and sole voting or dispositive
power over no shares. Of the shares reported, 307,100 are held
for the account of Glenview Capital Partners; 2,136,400 are held
for the account of Glenview Capital Master Fund;
1,063,000 shares are held for the account of Glenview
Institutional Partners; 56,700 shares are held for the
account of GCM Little Arbor Master Fund, Ltd; 2,140 shares
are held for the account of GCM Little Arbor Institutional
Partners, L.P.; and 3,022 shares are held for the account
of GCM Little Arbor Partners, L.P. |
|
(6) |
As reported on a Schedule 13G filed with the SEC on
February 11, 2005. According to the filing, American
Express Financial Corporation has shared voting and dispositive
power over 3,451,000 shares and sole voting and dispositive
power over no shares. |
77
Stockholders Proposals
Under the provisions of our by-laws, the only matters that may
be brought before the Special Meeting are matters that are
brought by or at the direction of our Board of Directors. If a
stockholder desires to bring a matter before a meeting of our
stockholders, the next opportunity to do so will be at our 2006
Annual Meeting.
Any stockholder who wishes to have a qualified proposal
considered for inclusion in our proxy statement for our 2006
Annual Meeting must send notice of the proposal to our Corporate
Secretary at our principal executive office no later than
December 2, 2005. If you make such a proposal, you must
provide your name, address, the number of shares of common stock
you hold of record or beneficially, the date or dates on which
such common stock was acquired and documentary support for any
claim of beneficial ownership.
In addition, any stockholder who intends to submit a proposal
for consideration at our 2006 Annual Meeting, but not for
inclusion in our proxy materials, or who intends to submit
nominees for election as directors at the meeting must notify
our Corporate Secretary. Under our by-laws, such notice must
(1) be received at our executive offices no earlier than
November 4, 2005 or later than January 4, 2006 and
(2) satisfy specified requirements. A copy of the pertinent
by-law provisions can be found on our website at
www.mcdermott.com at Investor Relations
Corporate Governance.
Where You Can Find More Information
We file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange
Commission.
You may read and copy any materials we file with the SEC at the
SECs Public Reference Room at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. For further
information on the operation of the Public Reference Room,
please call the SEC at 1-800-SEC-0330. Additionally, the SEC
maintains an Internet site (http://www.sec.gov) that contains
reports, proxy and information statements, and other information
regarding our company.
Our website address is http://www.mcdermott.com. We make
available through this website under SEC Filings,
free of charge, our annual, quarterly and current reports, and
amendments to those reports as soon as reasonably practicable
after we electronically file those materials with, or furnish
those materials to, the SEC.
The SEC allows us to incorporate by reference the
information McDermott files with it, which means we can disclose
important information to you by referring you to those
documents. The information we incorporate by reference is an
important part of this proxy statement, and later information
that McDermott files with the SEC will automatically update and
supersede that information. We incorporate by reference the
documents listed below and any future filings McDermott makes
with the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 prior to the date of the Special
Meeting:
|
|
|
|
|
our annual report on Form 10-K for the year ended
December 31, 2004; |
|
|
|
our quarterly reports on Form 10-Q for the quarters ended
March 31, 2005, June 30, 2005 and September 30,
2005; and |
|
|
|
our current reports on Form 8-K filed on January 7,
2005, February 4, 2005, February 28, 2005,
March 24, 2005, May 4, 2005, May 18, 2005
(excluding Item 7.01 and related Item 9.01),
June 9, 2005 and November 16, 2005 (excluding
Items 2.02 and 7.01 and related Item 9.01). |
78
We will provide without charge to each person, including any
beneficial owner, to whom a copy of this proxy statement has
been delivered, upon written or oral request, a copy of any or
all the documents we incorporate by reference in this proxy
statement, other than any exhibit to any of those documents,
unless we have specifically incorporated that exhibit by
reference into the information this proxy statement
incorporates. You may request copies by writing or telephoning
us at the following address:
|
|
|
McDermott International, Inc. |
|
757 N. Eldridge Parkway |
|
Houston, Texas 77079 |
|
Attention: Corporate Secretary |
|
Telephone: (281) 870-5000 |
|
|
|
By Order of the Board of Directors, |
|
|
|
|
|
JOHN T. NESSER, III |
|
Secretary |
Dated: December 13, 2005
79
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
Page | |
|
|
Number | |
|
|
| |
Consolidated Financial Statements for The Babcock &
Wilcox Company for the nine months ended September 30, 2005
and 2004 (unaudited) and for the years ended
December 31, 2004, 2003 and 2002
|
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
F-3 |
|
|
|
|
|
F-5 |
|
|
|
|
|
F-6 |
|
|
|
|
|
F-7 |
|
|
|
|
|
F-8 |
|
|
|
|
|
F-10 |
|
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder of
The Babcock & Wilcox Company
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income (loss),
comprehensive income (loss), stockholders equity
(deficit), and cash flows present fairly, in all material
respects, the financial position of The Babcock &
Wilcox Company and its subsidiaries (the Company) at
December 31, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Companys 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 the
auditing standards of the Public Company Accounting Oversight
Board (United States). Those standards 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.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Notes 1 and 2 to the consolidated
financial statements, The Babcock & Wilcox Company
filed a voluntary petition in the U.S. Bankruptcy Court to
reorganize under Chapter 11 of the Bankruptcy Code on
February 22, 2000, which raises substantial doubt about its
ability to continue as a going concern. Managements plans
with regard to these matters are also described in Note 2.
The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
March 25, 2005
F-2
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
(In thousands) | |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
392,326 |
|
|
$ |
351,541 |
|
|
$ |
370,657 |
|
Short-term investments
|
|
|
820 |
|
|
|
|
|
|
|
|
|
Accounts receivable trade, net
|
|
|
194,571 |
|
|
|
168,312 |
|
|
|
188,244 |
|
Accounts receivable other
|
|
|
10,909 |
|
|
|
3,019 |
|
|
|
3,711 |
|
Contracts in progress
|
|
|
91,326 |
|
|
|
94,664 |
|
|
|
43,897 |
|
Inventories
|
|
|
62,823 |
|
|
|
57,550 |
|
|
|
45,762 |
|
Deferred income taxes
|
|
|
46,182 |
|
|
|
52,631 |
|
|
|
39,249 |
|
Other current assets
|
|
|
19,196 |
|
|
|
6,481 |
|
|
|
9,860 |
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
818,153 |
|
|
|
734,198 |
|
|
|
701,380 |
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
3,592 |
|
|
|
3,516 |
|
|
|
3,343 |
|
Buildings
|
|
|
81,436 |
|
|
|
78,563 |
|
|
|
74,242 |
|
Machinery and equipment
|
|
|
210,887 |
|
|
|
201,060 |
|
|
|
176,543 |
|
Property under construction
|
|
|
17,416 |
|
|
|
13,455 |
|
|
|
8,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313,331 |
|
|
|
296,594 |
|
|
|
262,334 |
|
Less accumulated depreciation
|
|
|
203,930 |
|
|
|
193,606 |
|
|
|
164,485 |
|
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
|
109,401 |
|
|
|
102,988 |
|
|
|
97,849 |
|
|
|
|
|
|
|
|
|
|
|
Notes Receivable Affiliates
|
|
|
41,238 |
|
|
|
10,342 |
|
|
|
10,735 |
|
|
|
|
|
|
|
|
|
|
|
Products Liabilities Insurance Recoverable (Note 2)
|
|
|
1,149,989 |
|
|
|
1,152,489 |
|
|
|
1,152,489 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
96,212 |
|
|
|
97,395 |
|
|
|
96,571 |
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Taxes
|
|
|
415,101 |
|
|
|
190,721 |
|
|
|
171,734 |
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
153,072 |
|
|
|
114,155 |
|
|
|
66,695 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$ |
2,783,166 |
|
|
$ |
2,402,288 |
|
|
$ |
2,297,453 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
CONSOLIDATED BALANCE SHEETS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
Liabilities Not Subject to Compromise:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and current maturities of long-term debt
|
|
$ |
3,952 |
|
|
$ |
4,169 |
|
|
$ |
430 |
|
Accounts payable
|
|
|
146,445 |
|
|
|
119,844 |
|
|
|
96,958 |
|
Accounts payable affiliates
|
|
|
16,731 |
|
|
|
10,298 |
|
|
|
20,067 |
|
Accrued employee benefits
|
|
|
35,267 |
|
|
|
44,539 |
|
|
|
35,519 |
|
Accrued liabilities other
|
|
|
44,294 |
|
|
|
43,775 |
|
|
|
27,281 |
|
Advance billings on contracts
|
|
|
298,746 |
|
|
|
230,022 |
|
|
|
268,568 |
|
Accrued warranty expense
|
|
|
45,170 |
|
|
|
47,813 |
|
|
|
50,859 |
|
U.S. and foreign income taxes payable
|
|
|
|
|
|
|
12,848 |
|
|
|
4,351 |
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
590,605 |
|
|
|
513,308 |
|
|
|
504,033 |
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
|
4,100 |
|
|
|
4,937 |
|
|
|
4,970 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated Postretirement Benefit Obligation
|
|
|
2,235 |
|
|
|
1,945 |
|
|
|
1,446 |
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
144,478 |
|
|
|
21,135 |
|
|
|
31,123 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities Subject to Compromise (Note 2)
|
|
|
2,268,611 |
|
|
|
1,764,489 |
|
|
|
1,776,197 |
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $10.00 per share, authorized and
issued 100,100 at September 30, 2005, December 31,
2004 and 2003
|
|
|
1,001 |
|
|
|
1,001 |
|
|
|
1,001 |
|
|
Capital in excess of par value
|
|
|
123,068 |
|
|
|
134,491 |
|
|
|
134,717 |
|
|
Accumulated deficit
|
|
|
(287,870 |
) |
|
|
(35,009 |
) |
|
|
(134,126 |
) |
|
Accumulated other comprehensive loss
|
|
|
(63,062 |
) |
|
|
(4,009 |
) |
|
|
(21,908 |
) |
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity (Deficit)
|
|
|
(226,863 |
) |
|
|
96,474 |
|
|
|
(20,316 |
) |
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$ |
2,783,166 |
|
|
$ |
2,402,288 |
|
|
$ |
2,297,453 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Years Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
|
|
(In thousands) | |
Revenues
|
|
$ |
1,086,795 |
|
|
$ |
1,013,439 |
|
|
$ |
1,368,918 |
|
|
$ |
1,408,128 |
|
|
$ |
1,497,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
894,156 |
|
|
|
803,155 |
|
|
|
1,090,019 |
|
|
|
1,167,440 |
|
|
|
1,276,259 |
|
|
Selling, general and administrative expenses
|
|
|
119,844 |
|
|
|
117,768 |
|
|
|
153,758 |
|
|
|
141,424 |
|
|
|
121,256 |
|
|
Provision for asbestos liability and other liability claims
(Note 2, 15)
|
|
|
477,399 |
|
|
|
(359 |
) |
|
|
3,635 |
|
|
|
73,807 |
|
|
|
286,519 |
|
|
Reorganization charges (Note 2)
|
|
|
6,089 |
|
|
|
6,541 |
|
|
|
7,688 |
|
|
|
22,833 |
|
|
|
18,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses
|
|
|
1,497,488 |
|
|
|
927,105 |
|
|
|
1,255,100 |
|
|
|
1,405,504 |
|
|
|
1,702,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Income (Loss) from Investees
|
|
|
2,978 |
|
|
|
2,014 |
|
|
|
2,956 |
|
|
|
(869 |
) |
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(407,715 |
) |
|
|
88,348 |
|
|
|
116,774 |
|
|
|
1,755 |
|
|
|
(204,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9,244 |
|
|
|
3,994 |
|
|
|
4,973 |
|
|
|
6,017 |
|
|
|
4,622 |
|
|
Interest expense
|
|
|
(2,185 |
) |
|
|
(2,023 |
) |
|
|
(2,662 |
) |
|
|
(3,235 |
) |
|
|
(5,155 |
) |
|
Other-net
|
|
|
(5,725 |
) |
|
|
(7,926 |
) |
|
|
(18,129 |
) |
|
|
(12,141 |
) |
|
|
(27,104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,334 |
|
|
|
(5,955 |
) |
|
|
(15,818 |
) |
|
|
(9,359 |
) |
|
|
(27,637 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Provision for (Benefit from) Income Taxes
|
|
|
(406,381 |
) |
|
|
82,393 |
|
|
|
100,956 |
|
|
|
(7,604 |
) |
|
|
(232,435 |
) |
Provision for (Benefit from) Income Taxes
|
|
|
(153,520 |
) |
|
|
1,612 |
|
|
|
1,839 |
|
|
|
(8,878 |
) |
|
|
(18,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
(252,861 |
) |
|
$ |
80,781 |
|
|
$ |
99,117 |
|
|
$ |
1,274 |
|
|
$ |
(213,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Years Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
|
|
(In thousands) | |
Net Income (Loss)
|
|
$ |
(252,861 |
) |
|
$ |
80,781 |
|
|
$ |
99,117 |
|
|
$ |
1,274 |
|
|
$ |
(213,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
1,447 |
|
|
|
(5,158 |
) |
|
|
16,424 |
|
|
|
20,280 |
|
|
|
4,589 |
|
Minimum pension liability adjustment, net of tax expense
(benefit) of ($39,199,000) in the nine months ended
September 30, 2005 and ($953,000), $914,000 and
($3,918,000) in the years ended December 31, 2004, 2003 and
2002, respectively
|
|
|
(61,310 |
) |
|
|
|
|
|
|
2,472 |
|
|
|
(4,349 |
) |
|
|
(9,341 |
) |
Unrealized gains (losses) on derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) arising during the period, net of tax
expense (benefit) of $413,000 and $306,000 in the nine months
ended September 30, 2005 and 2004, respectively, and
($732,000), $869,000 and $615,000 in the years ended
December 31, 2004, 2003 and 2002, respectively
|
|
|
472 |
|
|
|
(511 |
) |
|
|
(1,283 |
) |
|
|
1,557 |
|
|
|
828 |
|
|
Reclassification adjustment for gains included in net income,
net of tax (expense) benefit of $199,000 and $61,000 in the
nine months ended September 30, 2005 and 2004,
respectively, and $169,000, ($696,000) and ($125,000) in the
years ended December 31, 2004, 2003 and 2002, respectively
|
|
|
338 |
|
|
|
103 |
|
|
|
286 |
|
|
|
(1,185 |
) |
|
|
(212 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
(59,053 |
) |
|
|
4,750 |
|
|
|
17,899 |
|
|
|
16,303 |
|
|
|
(4,136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
|
|
$ |
(311,914 |
) |
|
$ |
85,531 |
|
|
$ |
117,016 |
|
|
$ |
17,577 |
|
|
$ |
(217,859 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
Total | |
|
|
Common Stock | |
|
Capital in | |
|
Retained | |
|
Other | |
|
Stockholders | |
|
|
| |
|
Excess of | |
|
Earnings | |
|
Comprehensive | |
|
Equity | |
|
|
Shares | |
|
Par Value | |
|
Par Value | |
|
(Deficit) | |
|
Loss | |
|
(Deficit) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except for share amounts) | |
Balance December 31, 2001
|
|
|
100,100 |
|
|
$ |
1,001 |
|
|
$ |
134,729 |
|
|
$ |
78,323 |
|
|
$ |
(34,075 |
) |
|
$ |
179,978 |
|
Tax benefit on exercise of McDermott International, Inc. stock
options
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Payment to McDermott International, Inc. resulting from the
exercise of McDermott International, Inc. stock options
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
(20 |
) |
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213,723 |
) |
|
|
|
|
|
|
(213,723 |
) |
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,341 |
) |
|
|
(9,341 |
) |
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,589 |
|
|
|
4,589 |
|
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
616 |
|
|
|
616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2002
|
|
|
100,100 |
|
|
|
1,001 |
|
|
|
134,717 |
|
|
|
(135,400 |
) |
|
|
(38,211 |
) |
|
|
(37,893 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,274 |
|
|
|
|
|
|
|
1,274 |
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,349 |
) |
|
|
(4,349 |
) |
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,280 |
|
|
|
20,280 |
|
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
372 |
|
|
|
372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2003
|
|
|
100,100 |
|
|
|
1,001 |
|
|
|
134,717 |
|
|
|
(134,126 |
) |
|
|
(21,908 |
) |
|
|
(20,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit on exercise of McDermott International, Inc. stock
options
|
|
|
|
|
|
|
|
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
145 |
|
Payment to McDermott International, Inc. resulting from the
exercise of McDermott International, Inc. stock options
|
|
|
|
|
|
|
|
|
|
|
(371 |
) |
|
|
|
|
|
|
|
|
|
|
(371 |
) |
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,117 |
|
|
|
|
|
|
|
99,117 |
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,472 |
|
|
|
2,472 |
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,424 |
|
|
|
16,424 |
|
Unrealized loss on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(997 |
) |
|
|
(997 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004
|
|
|
100,100 |
|
|
$ |
1,001 |
|
|
$ |
134,491 |
|
|
$ |
(35,009 |
) |
|
$ |
(4,009 |
) |
|
$ |
96,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Years Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
|
|
(In thousands) | |
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
(252,861 |
) |
|
$ |
80,781 |
|
|
$ |
99,117 |
|
|
$ |
1,274 |
|
|
$ |
(213,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
13,358 |
|
|
|
13,319 |
|
|
|
19,838 |
|
|
|
17,015 |
|
|
|
12,528 |
|
Income from investees, less dividends
|
|
|
(2,978 |
) |
|
|
(1,374 |
) |
|
|
(1,316 |
) |
|
|
1,029 |
|
|
|
(162 |
) |
Gain (loss) on asset disposals and impairment net
|
|
|
(572 |
) |
|
|
102 |
|
|
|
(180 |
) |
|
|
49 |
|
|
|
(104 |
) |
Provision for (benefit from) deferred taxes
|
|
|
1,818 |
|
|
|
(27,123 |
) |
|
|
(32,596 |
) |
|
|
(30,719 |
) |
|
|
(44,714 |
) |
Adjustment to asbestos liability
|
|
|
299,089 |
|
|
|
(359 |
) |
|
|
3,635 |
|
|
|
73,807 |
|
|
|
286,519 |
|
Other
|
|
|
|
|
|
|
(7 |
) |
|
|
(3 |
) |
|
|
(181 |
) |
|
|
|
|
Changes in assets and liabilities net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(36,629 |
) |
|
|
1,159 |
|
|
|
37,852 |
|
|
|
30,145 |
|
|
|
20,134 |
|
|
Accounts payable
|
|
|
34,706 |
|
|
|
(21,146 |
) |
|
|
5,950 |
|
|
|
(42,641 |
) |
|
|
29,967 |
|
|
Inventories
|
|
|
(5,967 |
) |
|
|
(6,487 |
) |
|
|
(6,885 |
) |
|
|
1,644 |
|
|
|
1,806 |
|
|
Net contracts in progress and advance billings
|
|
|
68,785 |
|
|
|
(71,899 |
) |
|
|
(89,965 |
) |
|
|
(828 |
) |
|
|
78,295 |
|
|
Products and environmental liabilities
|
|
|
42 |
|
|
|
(13 |
) |
|
|
(1,263 |
) |
|
|
80 |
|
|
|
(271 |
) |
|
Income taxes
|
|
|
(6,674 |
) |
|
|
5,074 |
|
|
|
7,479 |
|
|
|
5,397 |
|
|
|
(19,504 |
) |
|
Retainages, long-term
|
|
|
(8,865 |
) |
|
|
(14,163 |
) |
|
|
(19,489 |
) |
|
|
(844 |
) |
|
|
13,160 |
|
|
Other
|
|
|
(19,753 |
) |
|
|
6,470 |
|
|
|
(1,018 |
) |
|
|
7,670 |
|
|
|
(338 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
83,499 |
|
|
|
(35,666 |
) |
|
|
21,156 |
|
|
|
62,897 |
|
|
|
163,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in escrow accounts
|
|
|
(23,067 |
) |
|
|
(9,406 |
) |
|
|
(28,145 |
) |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(19,906 |
) |
|
|
(10,406 |
) |
|
|
(18,560 |
) |
|
|
(11,915 |
) |
|
|
(22,410 |
) |
Maturities of investments
|
|
|
|
|
|
|
407 |
|
|
|
407 |
|
|
|
|
|
|
|
|
|
Proceeds from asset disposals
|
|
|
639 |
|
|
|
154 |
|
|
|
297 |
|
|
|
162 |
|
|
|
362 |
|
Acquisitions of businesses
|
|
|
|
|
|
|
(2,382 |
) |
|
|
(2,382 |
) |
|
|
92 |
|
|
|
(6,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(42,334 |
) |
|
|
(21,633 |
) |
|
|
(48,383 |
) |
|
|
(11,661 |
) |
|
|
(29,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-8
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
CONSOLIDATED STATEMENTS OF CASH
FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Years Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
|
|
(In thousands) | |
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of short-term borrowing and long-term debt
|
|
|
(407 |
) |
|
|
(356 |
) |
|
|
(481 |
) |
|
|
(392 |
) |
|
|
(338 |
) |
Payment to McDermott International, Inc. resulting from the
exercise of McDermott International, Inc. stock options
|
|
|
(2,156 |
) |
|
|
|
|
|
|
(371 |
) |
|
|
|
|
|
|
(20 |
) |
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(875 |
) |
|
|
(2,010 |
) |
|
|
|
|
Increase (decrease) in short-term borrowing
|
|
|
|
|
|
|
(967 |
) |
|
|
241 |
|
|
|
|
|
|
|
|
|
Other
|
|
|
(9 |
) |
|
|
(36 |
) |
|
|
(47 |
) |
|
|
(133 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN FINANCING ACTIVITIES
|
|
|
(2,572 |
) |
|
|
(1,359 |
) |
|
|
(1,533 |
) |
|
|
(2,535 |
) |
|
|
(358 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
|
|
|
2,192 |
|
|
|
3,431 |
|
|
|
9,644 |
|
|
|
11,894 |
|
|
|
878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
40,785 |
|
|
|
(55,227 |
) |
|
|
(19,116 |
) |
|
|
60,595 |
|
|
|
135,069 |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
351,541 |
|
|
|
370,657 |
|
|
|
370,657 |
|
|
|
310,062 |
|
|
|
174,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$ |
392,326 |
|
|
$ |
315,430 |
|
|
$ |
351,541 |
|
|
$ |
370,657 |
|
|
$ |
310,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
2,014 |
|
|
$ |
1,845 |
|
|
$ |
2,651 |
|
|
$ |
3,486 |
|
|
$ |
6,571 |
|
Income taxes (net of refunds)
|
|
$ |
35,032 |
|
|
$ |
6,679 |
|
|
$ |
7,491 |
|
|
$ |
(17,607 |
) |
|
$ |
26,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF REORGANIZATION CASH FLOWS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(1,194 |
) |
|
$ |
(845 |
) |
|
$ |
(1,299 |
) |
Legal and professional fees
|
|
$ |
5,926 |
|
|
$ |
9,321 |
|
|
$ |
10,923 |
|
|
$ |
23,028 |
|
|
$ |
20,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory note issued to purchase the common shares of B&W
Volund ApS
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-9
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
The Babcock & Wilcox Company (a wholly owned subsidiary
of Babcock & Wilcox Investment Company) and its
subsidiaries and controlled joint ventures consistent with the
Financial Accounting Standards (FASB) Interpretation
No. 46, Consolidation of Variable Interest
Entities (FIN 46). 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 in consolidation. We present the notes
to our consolidated financial statements on the basis of
continuing operations, unless otherwise indicated. The financial
information for the nine months ended September 30, 2005
and 2004 is presented in accordance with GAAP for interim
financial information and therefore does not include all
disclosures required under GAAP for complete financial
statements. In addition, the interim financial statements as of
September 30, 2005 and the nine-month periods ended
September 30, 2005 and 2004 is unaudited; however, in our
opinion, the interim financial statements reflect all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim
periods.
In these footnotes, the following terms have the meanings set
forth below:
|
|
|
|
|
McDermott means McDermott International, Inc.; |
|
|
|
J. Ray means J. Ray McDermott, S.A., a subsidiary of
McDermott, and its consolidated subsidiaries; |
|
|
|
MI means McDermott Incorporated, a subsidiary of
McDermott, and its consolidated subsidiaries; |
|
|
|
BWICO means Babcock & Wilcox Investment
Company, a subsidiary of McDermott, and its consolidated
subsidiaries; |
|
|
|
BWXT means BWX Technologies, Inc., a subsidiary of
BWICO; and |
|
|
|
B&W means The Babcock & Wilcox Company,
the parent organization. |
Unless the context otherwise indicates, we,
us and our mean B&W 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 their asbestos liability. As a
result of the Chapter 11 filing, our operations have been
subject to the jurisdiction of the Bankruptcy Court since
February 22, 2000. See Note 2 for a discussion of the
B&W Chapter 11 proceedings (the Chapter 11
proceedings) and further information on our asbestos
liabilities.
Our financial statements as of December 31, 2004 and 2003
have been prepared in conformity with the American Institute of
Certified Public Accountants Statement of
Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code, issued
November 19, 1990 (SOP 90-7).
SOP 90-7 requires a segregation of liabilities subject to
compromise by the Bankruptcy Court as of the bankruptcy filing
date and identification of all transactions and events that are
directly associated with the
F-10
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reorganization. See Note 2 for a detailed description of
the liabilities subject to compromise at December 31, 2004
and 2003 and reorganization charges for the years ended
December 31, 2004, 2003, and 2002.
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.
|
|
|
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 losses of $8,178,000,
$6,628,000 and $2,895,000 for the years ended December 31,
2004, 2003 and 2002, 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, or a
cost-to-cost method, as applicable to the product or activity
involved. Some of our alliance contracts contain a
risk-and-reward element, whereby a portion of total compensation
is tied to the overall performance of the alliance participants.
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. For all contracts, if a current estimate
of total contract cost indicates a loss on a contract, the
projected loss is recognized in full when determined. Variations
from estimated contract performance could result in a material
adjustment to operating results for any 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, 2004, we have included in
accounts receivable and contracts in progress approximately
$1,964,000 relating to
F-11
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
commercial contract claims whose final settlement is subject to
future determination through negotiations or other procedures
which had not been completed.
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Included in Contracts in Progress:
|
|
|
|
|
|
|
|
|
|
Costs incurred less costs of revenue recognized
|
|
$ |
4,167 |
|
|
$ |
9,694 |
|
|
Revenues recognized less billings to customers
|
|
|
90,497 |
|
|
|
34,203 |
|
|
|
|
|
|
|
|
|
Contracts in Progress
|
|
$ |
94,664 |
|
|
$ |
43,897 |
|
|
|
|
|
|
|
|
Included in Advance Billings on Contracts:
|
|
|
|
|
|
|
|
|
|
Billings to customers less revenues recognized
|
|
$ |
233,789 |
|
|
$ |
254,919 |
|
|
Costs incurred less costs of revenue recognized
|
|
|
(3,767 |
) |
|
|
13,649 |
|
|
|
|
|
|
|
|
|
Advance Billings on Contracts
|
|
$ |
230,022 |
|
|
$ |
268,568 |
|
|
|
|
|
|
|
|
We are usually entitled to financial settlements relative to the
individual circumstances of deferrals or cancellations of
long-term contracts. We do not recognize those settlements or
claims for additional compensation until we reach final
settlements with our customers.
The following amounts represent retainages on contracts:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Retainages expected to be collected in 2005
|
|
$ |
10,705 |
|
|
$ |
12,273 |
|
Retainages expected to be collected after one year
|
|
|
23,345 |
|
|
|
3,856 |
|
|
|
|
|
|
|
|
Total Retainages
|
|
$ |
34,050 |
|
|
$ |
16,129 |
|
|
|
|
|
|
|
|
We have included in accounts receivable trade
retainages expected to be collected in 2005. Retainages expected
to be collected after one year are included in other assets. Of
the long-term retainages at December 31, 2004, we
anticipate collecting $18,266,000 in 2006, $1,344,000 in 2007
and $3,735,000 in 2008.
We carry our inventories at the lower of cost or market. We
determine cost on an average cost basis except for certain
materials inventories, for which we use the last-in first-out
(LIFO) method. We determined the cost of
approximately 17% and 16% of our total inventories using the
LIFO method at December 31, 2004 and 2003, respectively.
The value of inventories priced at LIFO is $9,713,000 as of
December 31, 2004. Inventories are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
September 30, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
(In thousands) | |
Raw Materials and Supplies
|
|
$ |
49,039 |
|
|
$ |
44,592 |
|
|
$ |
37,684 |
|
Work in Progress
|
|
|
7,252 |
|
|
|
5,888 |
|
|
|
3,021 |
|
Finished Goods
|
|
|
6,532 |
|
|
|
7,070 |
|
|
|
5,057 |
|
|
|
|
|
|
|
|
|
|
|
Total Inventories
|
|
$ |
62,823 |
|
|
$ |
57,550 |
|
|
$ |
45,762 |
|
|
|
|
|
|
|
|
|
|
|
F-12
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of accumulated other comprehensive loss included
in stockholders equity (deficit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
September 30, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
(In thousands) | |
Currency Translation Adjustments
|
|
$ |
15,821 |
|
|
$ |
14,374 |
|
|
$ |
(2,050 |
) |
Minimum Pension Liability
|
|
|
(78,746 |
) |
|
|
(17,436 |
) |
|
|
(19,908 |
) |
Net Unrealized Gain (Loss) on Derivative Financial Instruments
|
|
|
(137 |
) |
|
|
(947 |
) |
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
|
|
$ |
(63,062 |
) |
|
$ |
(4,009 |
) |
|
$ |
(21,908 |
) |
|
|
|
|
|
|
|
|
|
|
We accrue estimated expense to satisfy contractual warranty
requirements when we recognize the associated revenue on the
related contracts. In addition, we make specific provisions
where we expect warranty costs to significantly exceed the
accrued estimates. Such provisions could result in a material
effect on our results of operations, financial position and cash
flows.
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
$14,404,000, $10,732,000 and $10,715,000 in the years ended
December 31, 2004, 2003 and 2002, respectively.
We evaluate the realizability of our long-lived assets,
including property, plant and equipment, whenever events or
changes in circumstances indicate that we may not be able to
recover the carrying amounts of those assets.
|
|
|
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.
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 3 to 28 years for
machinery and equipment. Our depreciation expense was
$18,769,000, $16,205,000 and $12,110,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
The majority of our goodwill pertains to our acquisition by MI.
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
F-13
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
test for impairment. We have completed our annual goodwill
impairment test and determined that no impairment charge was
necessary in 2002, 2003 or 2004.
Changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance at beginning of period
|
|
$ |
96,571 |
|
|
$ |
98,787 |
|
|
$ |
74,394 |
|
Adjustments
|
|
|
|
|
|
|
(3,642 |
) |
|
|
23,772 |
|
Currency translation adjustments
|
|
|
824 |
|
|
|
1,426 |
|
|
|
621 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
97,395 |
|
|
$ |
96,571 |
|
|
$ |
98,787 |
|
|
|
|
|
|
|
|
|
|
|
The adjustments to goodwill in the year ended December 31,
2003 primarily represent an allocation to intangible assets of
amounts pertaining to the acquisitions recorded in the year
ended December 31, 2002, based on better information
received subsequent to December 31, 2002.
Pursuant to our adoption of SFAS No. 142, we evaluated
our other intangible assets to determine which intangible assets
as of January 1, 2002 have definite useful lives. We
continue to amortize these intangible assets. In addition, we
have identified certain trademarks as having indefinite useful
lives and no longer amortize those assets. We have included all
of our intangible assets, consisting primarily of trademarks and
licenses, in other assets, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cost
|
|
$ |
9,952 |
|
|
$ |
9,252 |
|
|
$ |
6,307 |
|
|
Accumulated amortization
|
|
|
(4,583 |
) |
|
|
(4,011 |
) |
|
|
(3,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$ |
5,369 |
|
|
$ |
5,241 |
|
|
$ |
2,314 |
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$ |
1,305 |
|
|
$ |
1,305 |
|
|
$ |
1,305 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,305 |
|
|
$ |
1,305 |
|
|
$ |
1,305 |
|
|
|
|
|
|
|
|
|
|
|
The following summarizes the changes in the carrying amount of
other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance at beginning of period
|
|
$ |
6,546 |
|
|
$ |
3,619 |
|
|
$ |
4,037 |
|
Additions
|
|
|
1,166 |
|
|
|
3,704 |
|
|
|
|
|
Amortization expense
|
|
|
(1,038 |
) |
|
|
(777 |
) |
|
|
(418 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
6,674 |
|
|
$ |
6,546 |
|
|
$ |
3,619 |
|
|
|
|
|
|
|
|
|
|
|
F-14
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Estimated amortization expense for the next five years is:
2005 $549,000; 2006 $549,000;
2007 $549,000; 2008 $525,000;
2009 $525,000.
We have included deferred debt issuance costs in other assets.
We amortize deferred debt issuance costs as interest expense
over the life of the related debt. Following are the changes in
the carrying amount of these assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance at beginning of period
|
|
$ |
832 |
|
|
$ |
707 |
|
|
$ |
3,314 |
|
Additions
|
|
|
875 |
|
|
|
2,010 |
|
|
|
|
|
Interest expense debt issuance costs
|
|
|
(706 |
) |
|
|
(1,885 |
) |
|
|
(2,607 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
1,001 |
|
|
$ |
832 |
|
|
$ |
707 |
|
|
|
|
|
|
|
|
|
|
|
Our cash equivalents are highly liquid investments, with
maturities of three months or less when purchased.
|
|
|
Derivative Financial Instruments |
Our foreign 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 derivatives 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
statements of income.
At December 31, 2004, we participated in McDermotts
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
McDermotts employee stock options equals or exceeds the
fair value of the underlying stock on the measurement date, no
compensation expense is recognized. If the measurement date is
later than the date of grant, compensation expense is recorded
to the measurement date based on the quoted market price of the
underlying stock at the end of each reporting period. Stock
options granted to our employees during the pendency of the
Chapter 11 proceedings are accounted for using the fair
value method of SFAS No. 123 Accounting for
F-15
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-Based Compensation, as our employees are not
considered employees of McDermott for purposes of APB 25.
Our stock-based compensation cost includes amounts related to
stock options that require variable accounting.
The following table illustrates the effect on net income if we
had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Years Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
|
|
(In thousands) | |
Net income (loss), as reported
|
|
$ |
(252,861 |
) |
|
$ |
80,781 |
|
|
$ |
99,117 |
|
|
$ |
1,274 |
|
|
$ |
(213,723 |
) |
Add back (deduct): stock-based compensation cost included in net
income (loss), net of related tax effects
|
|
|
901 |
|
|
|
(231 |
) |
|
|
321 |
|
|
|
1,178 |
|
|
|
(339 |
) |
Add back (deduct): total stock-based compensation cost
determined under fair-value-based method, net of related tax
effects
|
|
|
(130 |
) |
|
|
134 |
|
|
|
82 |
|
|
|
(1,529 |
) |
|
|
(730 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
(252,090 |
) |
|
$ |
80,684 |
|
|
$ |
99,520 |
|
|
$ |
923 |
|
|
$ |
(214,792 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective January 1, 2003, we adopted
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. Our adoption of
SFAS No. 143 had no impact on our consolidated
financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation
No. 45, Guarantors 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. Effective January 1,
2003, we adopted the initial recognition and measurement
provisions of this Interpretation on a prospective basis for
guarantees issued or modified after December 31, 2002. Our
adoption of the recognition and measurement provisions of this
Interpretation did not have a material effect on our
consolidated financial position or results of operations.
In January 2003, the FASB issued FIN 46, which addresses
consolidation of variable interest entities (VIEs)
that either do not have sufficient equity investment at risk to
permit the entity to finance its activities without additional
subordinated financial support or whose equity investors lack an
essential characteristic of a controlling financial interest. In
December 2003, the FASB revised FIN 46. FIN 46 applies
immediately to VIEs created after January 31, 2003, and to
VIEs in which an enterprise obtains an interest after that date.
For a variable interest in a VIE acquired before
February 1, 2003, we adopted
F-16
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FIN 46 as of January 1, 2004, the revised effective
date. At the date of adoption of FIN 46, we had no entities
that required consolidation as a result of adopting the
provisions of FIN 46, as amended.
In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires a
financial instrument within its scope to be classified as a
liability. It is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning
after June 15, 2003. These effective dates are not
applicable to the provisions of paragraphs 9 and 10 of
SFAS No. 150, as they apply to mandatorily redeemable
noncontrolling interests, because the FASB has delayed these
provisions indefinitely. Our adoption of SFAS No. 150
has had no material effect on our consolidated financial
position or results of operations. Any future impact will depend
on whether we enter into financial instruments within its scope.
In December 2003, the FASB revised SFAS No. 132,
Employers Disclosures about Pensions and Other
Postretirement Benefits. It does not change the
measurement or recognition of pension and other postretirement
benefit plans. It requires additional disclosures to those in
the original SFAS No. 132 about the assets,
obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other defined benefit
postretirement plans. It also requires disclosure of the
components of net periodic benefit cost in interim financial
statements. See Note 8 for the required disclosures about
our pension plans and postretirement benefits.
In January 2004, the FASB issued a staff position in response to
certain accounting issues raised by the enactment of the
Medicare Prescription Drug, Improvement and Modernization Act of
2003 on December 8, 2003. With regard to our financial
reporting, the most significant issue concerns how and when to
account for the federal subsidy to plan sponsors provided for in
the Act. The staff position allows a company to defer
recognizing the impact of the new legislation in its accounting
for postretirement health benefits. If elected, the deferral is
effective until authoritative guidance on the accounting for the
federal subsidy is issued or until certain significant events
occur, such as a plan amendment. We made this deferral election.
In May 2004, the FASB issued Staff Position
No. FAS 106-2, Accounting and Disclosure
Requirements related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, which provides
authoritative guidance on accounting for the effects of the new
Medicare prescription drug legislation. We adopted this staff
position as of July 1, 2004 and its impact was not material.
In December 2004, the FASB issued revised
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123R). The
revised statement establishes standards for the accounting of
transactions in which an entity exchanges its equity instruments
for goods or services, particularly transactions in which an
entity obtains employee services in share-based payment
transactions. It eliminates the alternative to use
APB 25s intrinsic value method of accounting, which
was permitted in SFAS 123 as originally issued. Under
APB 25, issuing stock options to employees generally did
not result in recognition of compensation cost.
SFAS No. 123R requires entities to recognize the cost
of employee services for these purposes based on the grant-date
fair value of those awards (with limited exceptions). The
revised statement requires a public entity to measure the cost
of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. The
cost is to be recognized over the period during which the
employee is required to provide service in exchange for the
award. Changes in fair value during that service period are to
be recognized as compensation cost over that period. In
addition, SFAS No. 123R amends SFAS No. 95,
Statement of Cash Flows, to require reporting of
excess tax benefits as a financing cash flow, rather than as a
reduction of taxes paid. The
F-17
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
provisions of the revised statement will become effective for
financial statements issued for the first interim reporting
beginning after June 15, 2005. See the Stock-Based
Compensation discussion above for the impact of this
statement on our consolidated results.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs. The statement amends Accounting
Research Bulletin (ARB) No. 43, Inventory
Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted
material. ARB No. 43 previously stated that these costs
must be so abnormal as to require treatment as
current-period charges. SFAS No. 151 requires
that those items be recognized as current period charges
regardless of whether they meet the criterion of so
abnormal. In addition, this statement requires that
allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production
facilities. The statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005,
with earlier application permitted for fiscal years beginning
after the issue date of the statement. We do not expect our
adoption of SFAS No. 151 to have a material impact on
our financial condition, results of operations or cash flow.
In December 2004, the FASB issued SFAS No. 153,
Exchange of Non-Monetary Assets An Amendment
of APB Opinion No. 29. SFAS No 153 amends APB
Opinion No. 29, Accounting for Nonmonetary
Transactions, to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a
general exception for exchanges on nonmonetary assets whose
results are not expected to significantly change the future cash
flows of the entity. The statement is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after
June 15, 2005. We do not expect our adoption of
SFAS No. 153 to have a significant impact on our
financial condition, results of operation or cash flow.
|
|
NOTE 2 |
CHAPTER 11 PROCEEDINGS |
As a result of asbestos-containing boilers and other products
B&W and certain of its subsidiaries sold, installed or
serviced in prior decades, we are 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 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 Chapter 11 Debtors). The
Chapter 11 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
derivative asbestos liability lawsuits and other actions for
which there is shared insurance from being brought against
nonfiling affiliates of the Chapter 11 Debtors, including
BWXT, MI, J. Ray and McDermott. The preliminary injunction is
subject to periodic hearings before the Bankruptcy Court for
extension. Currently, the preliminary injunction extends through
October 10, 2005. We intend to seek extensions of the
preliminary injunction periodically through the pendency of the
Chapter 11 proceeding and believe that extensions will
continue to be granted by the Bankruptcy Court while the
confirmation and settlement process continues, although
modifications to the nature and scope of the injunction may
occur.
F-18
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Insurance Coverage and Pending Claims |
Prior to the filing, the Chapter 11 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 September 30, 2005,
receivables of $17,316,000 were due from insurers for
reimbursement of settled claims paid by the Chapter 11
Debtors prior to the Chapter 11 filing. Currently, certain
insurers are refusing to reimburse the Chapter 11 Debtors
for these receivables until the Chapter 11 Debtors
assumption, in bankruptcy, of their pre-filing contractual
reimbursement arrangements with such insurers.
Pursuant to the Bankruptcy Courts order, a March 29,
2001 bar date was set for the submission of allegedly unpaid
pre-Chapter 11 filing 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 Chapter 11 Debtors. As of
the March 29, 2001 bar date, over 49,000 allegedly settled
claims had been filed. The Chapter 11 Debtors have accepted
approximately 8,910 as pre-Chapter 11 filing binding
settled claims at this time, with an aggregate liability of
approximately $69,000,000. The Bankruptcy Court has disallowed
approximately 33,000 claims as settled claims. If the Bankruptcy
Court determined these claims were not settled prior to the
filing, these claims were refiled as unsettled personal injury
claims. As of July 30, 2001, approximately 223,000
additional asbestos personal injury claims, 60,000 related party
claims, 183 property damage claims, 225 derivative asbestos
claims and 571 claims relating to the Apollo/ Parks Township
facilities had been filed. Since the July 30, 2001 bar
date, approximately 15,000 additional personal injury claims
were filed, including approximately 10,000 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. Approximately 3,900 additional
related-party claims, 28 property damage claims, 218 derivative
claims and three Apollo/ Parks Township claims also were filed
since the July 30, 2001 bar date. A bar date of
January 15, 2003 was set for the filing of certain general
unsecured claims. As of January 15, 2003, approximately
2,700 general unsecured claims were filed, and the Debtors
commenced an analysis of these claims and filed objections to
many of them. These include claims filed by various insurance
companies seeking recovery from the Debtors under various
theories, and priority tax claims, which appear to be estimates
of liability by taxing authorities for ongoing audits of
McDermott. The Chapter 11 Debtors believe that these claims
are without merit and are contesting them. The Debtors continue
to analyze the claims filed by the January 15, 2003 bar
date. The estimated total alleged liability, as asserted by the
claimants in the Chapter 11 proceedings and in filed proofs
of claim, of the asbestos-related claims, including the alleged
settled claims, exceeds the combined value of the
Chapter 11 Debtors and certain assets we transferred to
BWICO in a corporate reorganization completed in 1999 and the
known available products liability and property damage insurance
coverages. The Chapter 11 Debtors filed a proposed
Litigation Protocol with the U.S. District Court on
October 18, 2001, setting forth the intention of the
Chapter 11 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 Asbestos
Claimants Committee (ACC) and the Future Claimants
Representatives (FCR) filed briefs opposing the
Litigation Protocol and requesting an estimation of pending and
future claims. No decision was rendered by the Court, and these
matters were stayed pending the Chapter 11 settlement
negotiations between the parties.
During the course of the Chapter 11 proceedings and
continuing to the present, we and the ACC and FCR have been in
settlement negotiations with our insurers and those of McDermott
that have issued the insurance policies whose rights will be
assigned to the asbestos personal injury trust under the plan of
reorganization. The negotiations generally seek to liquidate
insurance policy rights into cash payments that
F-19
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
would be paid to or for the benefit of the asbestos personal
injury settlement trust if and when the plan of reorganization
becomes effective. To date, we and the ACC and FCR have:
|
|
|
|
|
entered into conditional settlements with a substantial number
of our insurers, which collectively provide for the payment of
approximately $316,000,000 in insurance proceeds to the asbestos
personal injury trust if and when the plan effective date
occurs, in exchange for a release of certain coverage
liabilities of these insurers; |
|
|
|
entered into a conditional settlement agreement with
underwriters at Lloyds, London, Equitas Limited, Equitas
Reinsurance Limited, Equitas Holdings Limited, Equitas
Management Services Limited and Equitas Policyholders Trustee
Limited (Lloyds/ Equitas), under which
Lloyds/ Equitas has paid $415,000,000 into an escrow
account, which amount would be transferred to the asbestos
personal injury trust if and when the plan becomes effective, in
exchange for a release of coverage liability of those
entities; and |
|
|
|
entered into unconditional settlement agreements with two
insolvent insurance company groups, which are currently subject
to insolvency proceedings in the United Kingdom. Under these
settlements, in exchange for a release of certain policies, the
liquidators agreed to pay a total sum in excess of $18,400,000,
which amounts will be retained regardless of whether the plan of
reorganization becomes effective. |
Under the terms of these agreements, the settling insurers would
withdraw any objections to the plan of reorganization and, if
and when the plan becomes effective, these insurers would
receive the benefit of the plans Section 524(g)
injunction with respect to our asbestos claims. Certain of the
settlement payments represent discounts of up to approximately
30% from the remaining products liability limits available under
the policies. However, the conditional settlements will become
effective only upon the effective date of the plan and in the
event the plan does not become effective, the conditional
settlements will become null and void and the remaining products
liability limits will be available to satisfy claims as provided
under the policies. The conditional and unconditional
settlements have been approved, or are in the process of being
approved, by the Bankruptcy Court. We, the ACC and FCR are also
engaged in settlement negotiations with our other insurers,
which, if agreements are reached, would be subject to the
approval of the Bankruptcy Court. See Note 10 for
information on legal proceedings involving Travelers and certain
underwriters at Lloyds and Turegum Insurance Company and
Lloyds, London and certain London market companies.
|
|
|
Settlement Negotiations and Joint Plan of
Reorganization Confirmation Proceedings |
We reached an agreement in principle with the ACC and the FCR
concerning a potential settlement for the Chapter 11
proceedings. That agreement in principle includes the following
key terms:
|
|
|
|
|
McDermott would effectively assign all its equity in B&W to
a trust to be created for the benefit of the asbestos personal
injury claimants. |
|
|
|
McDermott and all its subsidiaries would assign, transfer or
otherwise make available their rights to all applicable
insurance proceeds to the trust. |
|
|
|
McDermott 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 a McDermott 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 |
F-20
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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 McDermott from time to time, McDermott 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. McDermott 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 McDermott 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 $92,000,000. The notes would be unsecured
obligations and would provide for payments of principal of
$8,360,000 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 McDermott. |
|
|
|
McDermott and all of its subsidiaries, including its captive
insurers, and all of their respective directors and officers,
would receive the full benefit of the protections afforded by
Section 524(g) of the Bankruptcy Code with respect to
personal injury claims attributable to B&Ws use of
asbestos and would be released and protected from all pending
and future asbestos-related claims stemming from B&Ws
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 proposed settlement is conditioned on the approval by
McDermotts Board of Directors (the Board), as
described below. |
The proposed settlement has been reflected in a third amended
joint plan of reorganization and accompanying form of settlement
agreement filed by the parties with the Bankruptcy Court on
June 25, 2003, and as amended through September 30,
2004, together with a third amended joint disclosure statement
filed on June 25, 2003. According to documents filed with
the Bankruptcy Court, the asbestos personal injury claimants
have voted in favor of the proposed plan of reorganization
sufficient to meet legal requirements.
The Bankruptcy Court commenced hearings on the confirmation of
the proposed plan of reorganization on September 22, 2003.
On November 9, 2004, the Bankruptcy Court entered its
Amended Findings of Fact and Conclusions of Law Regarding Core
Matters and Proposed Finding of Fact, Conclusions of Law and
Recommendations to the District Court With Respect to Non-Core
matters (the Amended Findings and Conclusions). In
its Amended Findings and Conclusions, the Bankruptcy Court
recommended to the District Court that the plan be confirmed.
Also on November 9, 2004, the Bankruptcy Court entered an
order making findings of fact and conclusions of law on core
matters and making recommendations to the District Court on
non-core matters (Nov.
9th Order).
Various parties have filed appeals and/or objections to the
Amended Findings and Conclusions and the Nov.
9th Order.
The plan proponents have filed a cross-appeal with respect to an
insurance issue that relates to ANIs policies. Briefing
and other filings regarding the parties appeals and
objections were completed on May 31, 2005, and the District
Court held oral arguments on July 21, 2005. The District
Court has not yet ruled on the various appeals and objections
and the timing of any ruling by the District Court is uncertain.
Following the ruling by the District Court, any unsatisfied
party may appeal the ruling to the Fifth Circuit Court of
Appeals.
At a special meeting of McDermotts stockholders on
December 17, 2003, McDermotts stockholders voted on
and approved a resolution relating to the proposed settlement
that would resolve the Chapter 11 proceedings. The
stockholders approval of the resolution is conditioned on
the subsequent approval of the
F-21
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
proposed settlement by McDermotts Board. McDermott would
become bound to the settlement only when the joint plan of
reorganization becomes effective, and the plan of reorganization
cannot become effective without the approval of McDermotts
Board within 30 days prior to the effective time of the
plan. The decision of McDermotts Board on whether to
approve the proposed settlement will be made after consideration
of any developments that might occur prior to the effective
date, including any changes in the status of any potential
federal legislation concerning asbestos liabilities, including
The Fairness in Asbestos Injury Resolution (FAIR) Act
of 2005 (H.R. 1360) introduced as a bill in March 2005 in
the U.S. House of Representatives, and Senate Bill S.852
introduced in the U.S. Senate on April 19, 2005 and
reported favorably out of the Senate Judiciary Committee on
June 16, 2005. Both H.R. 1360 and S.852 would create a
privately funded, federally administered trust fund to resolve
pending and future asbestos-related personal injury claims.
Under the terms of S.852 and H.R. 1360, companies that have made
expenditures in connection with asbestos personal injury claims,
as well as insurance companies, would contribute amounts to a
national trust on a periodic basis to fund payment of claims
filed by asbestos personal injury claimants who qualify for
payment based on a specified allocation methodology. The draft
legislation also contemplates, among other things, that the
national fund would terminate if, after the administrator of the
fund begins to process claims, the administrator determines
that, if any additional claims are resolved, the fund would not
have sufficient resources when needed to pay 100% of all
resolved claims, the funds debt repayment and other
obligations. In that event, the fund would pay all then resolved
claims in full, and the legislation would generally become
inapplicable to all unresolved claims and all future claims. As
a result, absent further federal legislation, with regard to the
unresolved claims and future claims, the claimants and
defendants would return to the tort system. There are many other
provisions in S.852 and H.R. 1360 that would impact B&W and
the other Chapter 11 Debtors, the Chapter 11
proceedings and McDermott.
It is not possible to determine whether S.852 or H.R. 1360 will
be presented for a vote or adopted by the full Senate or the
House of Representatives, or signed into law. Nor is it possible
at this time to predict the final terms of any bill that might
become law or its impact on B&W and the other
Chapter 11 Debtors or the Chapter 11 proceedings. We
anticipate that, during the legislative process, the terms of
S.852 and H.R. 1360 will change and that any such changes may be
material to the impact of such legislation on B&W and the
other Chapter 11 Debtors. In light of continuing opposition
to the legislation, as well as other factors, we cannot
currently predict whether S.852 or H.R. 1360 will be enacted or,
if enacted, how either would impact the Chapter 11
proceedings, the Chapter 11 Debtors or McDermott.
If the proposed settlement is finalized, it would generate
significant tax benefits, which we and MI would share under the
terms of a proposed tax separation agreement. This tax
separation agreement would allocate those tax benefits as
follows:
|
|
|
|
|
MI would have the economic benefit of any tax deductions arising
from the transfer of the McDermott common stock, payments on the
MI promissory notes and any payments made under the share price
guaranty; and |
|
|
|
B&W would have the economic benefit of any tax deductions
arising from the contribution of its common stock and any cash
payments made to the trust, other than payments on the MI
promissory notes or the share price guaranty. |
Neither we nor MI would be entitled to a deduction to the extent
that the trust is funded through insurance proceeds or the
proposed transfer of rights under various insurance policies.
The proposed tax separation and sharing agreement provides that
we and MI will be entitled to our respective economic
F-22
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
benefits on a proportionate basis, as the deductions resulting
from the property transferred to the trust are used to offset
income of either the MI consolidated group or our company.
If the proposed settlement is not finalized, McDermott would be
subject to various risks and uncertainties associated with the
pending and future asbestos liability of B&W and the other
Chapter 11 Debtors (in the absence of federal legislation
that comprehensively resolves those liabilities on terms that
are not materially less favorable to McDermott than the terms of
the proposed settlement). These risks and uncertainties include
potential future rulings by the Bankruptcy Court that could be
adverse to McDermott and the risks and uncertainties associated
with appeals from the ruling issued by the Bankruptcy Court on
February 8, 2002, which found the ACC and FCR failed to
sustain their burden of proving us insolvent 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.
At September 30, 2005 and December 31, 2004 and 2003,
we recorded asbestos liabilities and other liability claims of
$2,177,613,000 (unaudited), $1,671,686,000 and $1,668,051,000,
respectively. At September 30, 2005, this represents our
best estimate of B&Ws liability for asbestos claims
based on the proposed settlement. We have recorded an asbestos
products liability insurance recoverable of $1,149,989,000
(unaudited) at September 30, 2005 and $1,152,489,000
at December 31, 2004 and 2003.
|
|
|
Remaining Issues to Be Resolved |
Even assuming all requisite approvals of the proposed plan of
reorganization and the proposed settlement are obtained, there
are a number of issues and matters to be resolved prior to
finalization of the Chapter 11 proceedings. Remaining
issues and matters to be resolved include, among other things,
the following:
|
|
|
|
|
the outcome of ongoing negotiations with several of our insurers
as to amounts of coverage and their participation in the funding
of the settlement trusts; |
|
|
|
the Bankruptcy and District Courts decisions relating to
various substantive and procedural aspects of the
Chapter 11 proceedings; |
|
|
|
appeals and/or objections by some of our insurers and others of
the November 9, 2004 Bankruptcy Court Amended Findings and
Conclusions and the November 9, 2004 Order and potential
appeals as to the confirmation of the plan of
reorganization; and |
|
|
|
conversion of our debtor-in-possession financing to exit
financing (See Note 7). |
As a result of the Chapter 11 filing, we are prohibited
from paying dividends to our parent, BWICO.
F-23
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our liabilities subject to compromise reflected in the balance
sheet consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
September 30, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
(In thousands) | |
Accounts and notes payable
|
|
$ |
3,095 |
|
|
$ |
3,131 |
|
|
$ |
3,588 |
|
Accrued employee benefits
|
|
|
10,994 |
|
|
|
10,994 |
|
|
|
10,994 |
|
Accrued liabilities other
|
|
|
385 |
|
|
|
509 |
|
|
|
11,840 |
|
Accrued warranty reserve
|
|
|
98 |
|
|
|
98 |
|
|
|
98 |
|
Products liabilities
|
|
|
2,177,659 |
|
|
|
1,671,686 |
|
|
|
1,668,051 |
|
Accumulated postretirement benefit obligation
|
|
|
56,375 |
|
|
|
58,628 |
|
|
|
62,895 |
|
Long-term debt
|
|
|
4,431 |
|
|
|
4,467 |
|
|
|
4,520 |
|
Other non-current liabilities
|
|
|
15,574 |
|
|
|
14,976 |
|
|
|
14,211 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,268,611 |
|
|
$ |
1,764,489 |
|
|
$ |
1,776,197 |
|
|
|
|
|
|
|
|
|
|
|
Our reorganization charges consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
Years Ended December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
|
|
Legal and professional fees
|
|
$ |
6,089 |
|
|
$ |
6,541 |
|
|
$ |
8,882 |
|
|
$ |
23,678 |
|
|
$ |
19,664 |
|
Interest earned as a result of the Chapter 11 proceedings
|
|
|
|
|
|
|
|
|
|
|
(1,194 |
) |
|
|
(845 |
) |
|
|
(1,299 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
6,089 |
|
|
$ |
6,541 |
|
|
$ |
7,688 |
|
|
$ |
22,833 |
|
|
$ |
18,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The timing and ultimate outcome of the Chapter 11
proceedings are uncertain. Any changes in the estimate of our
non-employee asbestos products liability and insurance
recoverables, and differences between the proportion of such
liabilities covered by insurance and that experienced in the
past, could result in material adjustments to our financial
statements.
We have assessed our liquidity position as a result of the
Chapter 11 filing and believe that we can continue to fund
our operating activities and meet our debt and capital
requirements for the foreseeable future. However, our ability to
continue as a going concern depends on our ability to settle our
ultimate asbestos liability from net assets, future profits and
cash flow and available insurance proceeds, whether through the
confirmation of a plan of reorganization or otherwise. The
accompanying consolidated financial statements have 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 carrying amounts of assets will be realized or
that liabilities will be liquidated or settled for the amounts
recorded.
In April 2004, Diamond Power International, Inc.
(DPII), a subsidiary of B&W, acquired a
50% interest in Diamond Power Hubei Machine Co. Ltd.
(Diamond Hubei). Diamond Hubei is located in China
and is a supplier of boiler cleaning equipment to the utility
power market. The remaining 50% interest in Diamond Hubei
is owned by a subsidiary of McDermott. DPII purchased Diamond
Hubei
F-24
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for a total cost of $2,382,000. DPII consolidates Diamond Hubei
consistent with FIN 46R as DPII is the primary beneficiary.
In October 2002, we acquired Babcock & Wilcox Volund
ApS (Volund) from McDermott. As a result of this
acquisition, we funded the payment of $14,482,000 to McDermott
in settlement of a note between Volund and McDermott. In
addition, we issued a promissory note of $3,000,000 to McDermott
to purchase the common shares of Volund. We recorded $17,421,000
of goodwill as a result of this acquisition. Had Volund been
consolidated for 2002, revenues and net loss for the year ended
December 31, 2002 would have been $1,544,133,000 and
($215,503,000), respectively.
NOTE 4 EQUITY METHOD INVESTMENTS
We have included in other assets investments in joint ventures
and other entities that we account for using the equity method
of $19,841,000 and $18,525,000 at December 31, 2004 and
2003, respectively. The undistributed earnings of our equity
method investees were $11,728,000 and $10,412,000 at
December 31, 2004 and 2003, 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, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Current Assets
|
|
$ |
5,871 |
|
|
$ |
4,377 |
|
Non-Current Assets
|
|
|
82,779 |
|
|
|
82,480 |
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
88,650 |
|
|
$ |
86,857 |
|
|
|
|
|
|
|
|
Current Liabilities
|
|
$ |
6,063 |
|
|
$ |
6,468 |
|
Non-Current Liabilities
|
|
|
37,857 |
|
|
|
42,107 |
|
Owners Equity
|
|
|
44,730 |
|
|
|
38,282 |
|
|
|
|
|
|
|
|
Total Liabilities and Owners Equity
|
|
$ |
88,650 |
|
|
$ |
86,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Revenues
|
|
$ |
24,619 |
|
|
$ |
19,690 |
|
|
$ |
20,397 |
|
Gross Profit
|
|
$ |
7,417 |
|
|
$ |
2,408 |
|
|
$ |
2,432 |
|
Net Income
|
|
$ |
8,924 |
|
|
$ |
383 |
|
|
$ |
503 |
|
Our investment in equity method investees was greater than our
underlying equity in net assets of those investees based on
stated ownership percentages by $3,164,000 and $3,785,000 at
December 31, 2004 and 2003, respectively. These differences
are primarily related to the timing of distribution of dividends
and various adjustments under generally accepted accounting
principles.
F-25
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our transactions with unconsolidated affiliates included the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Sales to
|
|
$ |
3,859 |
|
|
$ |
3,721 |
|
|
$ |
3,404 |
|
Dividends received
|
|
$ |
1,640 |
|
|
$ |
160 |
|
|
$ |
38 |
|
Our accounts receivable-trade, net includes receivables from
unconsolidated affiliates of $37,000 and $57,000 at
December 31, 2004 and 2003, respectively.
NOTE 5 INCOME TAXES
We are included in the U.S. federal return filed by MI.
MIs policy for intercompany allocation of
U.S. federal income taxes provides generally that we
compute the provision for U.S. federal income taxes on a
separate company basis. We settle against our amounts receivable
from MI in the amount we would have paid to or received from the
Internal Revenue Service (IRS) had we not been a
member of the consolidated tax group. We made cash payments of
$25,812,000 and $15,643,000 to MI during the years ended
December 31, 2004 and December 31, 2003, respectively.
Net deferred tax assets include allocated U.S. federal net
deferred tax assets of $229,153,000 and $200,742,000 at
December 31, 2004 and 2003, respectively, under MIs
policy for intercompany allocation of U.S. federal income
taxes.
F-26
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2004 and 2003 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Contracts
|
|
$ |
15,138 |
|
|
$ |
19,869 |
|
|
Accrued warranty expense
|
|
|
17,494 |
|
|
|
18,517 |
|
|
Accrued vacation pay
|
|
|
3,850 |
|
|
|
3,613 |
|
|
Accrued liabilities for self-insurance (including postretirement
health care benefits)
|
|
|
34,462 |
|
|
|
32,908 |
|
|
Accrued liabilities for executive and employee incentive
compensation
|
|
|
14,788 |
|
|
|
15,891 |
|
|
Environmental and products liabilities
|
|
|
651,958 |
|
|
|
650,540 |
|
|
Bad debts
|
|
|
1,303 |
|
|
|
1,309 |
|
|
Foreign tax credit carryforwards
|
|
|
|
|
|
|
822 |
|
|
Pension liabilities
|
|
|
7,070 |
|
|
|
8,264 |
|
|
Other
|
|
|
8,033 |
|
|
|
9,167 |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
754,096 |
|
|
|
760,900 |
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred tax assets
|
|
|
(41,980 |
) |
|
|
(76,063 |
) |
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
712,116 |
|
|
|
684,837 |
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
6,710 |
|
|
|
8,754 |
|
Prepaid pension costs
|
|
|
6,315 |
|
|
|
5,646 |
|
Investments in joint ventures and affiliated companies
|
|
|
6,893 |
|
|
|
9,225 |
|
Insurance and other recoverables
|
|
|
449,471 |
|
|
|
449,471 |
|
Other
|
|
|
2,556 |
|
|
|
4,166 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
471,945 |
|
|
|
477,262 |
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
240,171 |
|
|
$ |
207,575 |
|
|
|
|
|
|
|
|
Income (Loss) before provision for (benefit from) income taxes
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
U.S.
|
|
$ |
61,629 |
|
|
$ |
(25,146 |
) |
|
$ |
(224,279 |
) |
Other than U.S.
|
|
|
39,327 |
|
|
|
17,542 |
|
|
|
(8,156 |
) |
|
|
|
|
|
|
|
|
|
|
Income (Loss) before provision for (benefit from) income taxes
|
|
$ |
100,956 |
|
|
$ |
(7,604 |
) |
|
$ |
(232,435 |
) |
|
|
|
|
|
|
|
|
|
|
F-27
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for (benefit from) income taxes consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$ |
17,327 |
|
|
$ |
10,001 |
|
|
$ |
14,460 |
|
|
U.S. State and local
|
|
|
2,771 |
|
|
|
5,560 |
|
|
|
3,396 |
|
|
Other than U.S.
|
|
|
14,337 |
|
|
|
6,280 |
|
|
|
8,146 |
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
34,435 |
|
|
|
21,841 |
|
|
|
26,002 |
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
(28,411 |
) |
|
|
(29,178 |
) |
|
|
(38,915 |
) |
|
U.S. State and local
|
|
|
359 |
|
|
|
(4,355 |
) |
|
|
4,186 |
|
|
Other than U.S.
|
|
|
(4,544 |
) |
|
|
2,814 |
|
|
|
(9,985 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(32,596 |
) |
|
|
(30,719 |
) |
|
|
(44,714 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
$ |
1,839 |
|
|
$ |
(8,878 |
) |
|
$ |
(18,712 |
) |
|
|
|
|
|
|
|
|
|
|
The effective income tax rate is reconciled to the statutory
federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
Percent | |
|
Percent | |
|
Percent | |
|
|
| |
|
| |
|
| |
Statutory federal tax rate
|
|
|
35.0 |
|
|
|
(35.0 |
) |
|
|
(35.0 |
) |
State and local income tax effect
|
|
|
2.1 |
|
|
|
(17.0 |
) |
|
|
4.8 |
|
Foreign operations
|
|
|
(4.3 |
) |
|
|
11.6 |
|
|
|
0.9 |
|
Chapter 11 settlement cost
|
|
|
1.3 |
|
|
|
34.3 |
|
|
|
1.1 |
|
Non-deductible business expenses
|
|
|
0.5 |
|
|
|
22.3 |
|
|
|
0.2 |
|
Federal valuation allowance
|
|
|
(33.5 |
) |
|
|
(180.5 |
) |
|
|
20.4 |
|
Dividends from affiliates
|
|
|
0.1 |
|
|
|
131.8 |
|
|
|
0.0 |
|
Foreign tax credit expiration (utilization)
|
|
|
0.8 |
|
|
|
(81.5 |
) |
|
|
0.0 |
|
Other
|
|
|
(0.2 |
) |
|
|
(2.8 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
1.8 |
|
|
|
(116.8 |
) |
|
|
(8.1 |
) |
|
|
|
|
|
|
|
|
|
|
We would be subject to withholding taxes on distributions of
earnings from certain foreign subsidiaries. We have not provided
for any taxes, as we treat these earnings as indefinitely
reinvested. For the year ended December 31, 2004, the
undistributed earnings of foreign subsidiaries amounted to
approximately $89,000,000. We estimate the unrecognized deferred
income tax liability on these earnings is approximately
$34,700,000. Withholding taxes of approximately $3,900,000 would
be payable to the applicable foreign jurisdictions upon
remittance of all previously unremitted earnings.
The American Jobs Creation Act of 2004 introduced a special
one-time dividends received deduction on the repatriation of
certain foreign earnings to a U.S. taxpayer, provided
several criteria are met. Although that Act was signed into law
in October 2004, the practical application of a number of the
provisions of the repatriation provision remains unclear. We
anticipate the IRS will provide clarifying language on key
elements of the repatriation provision. We have conducted a
preliminary identification of
F-28
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
potential repatriation and reinvestment opportunities. However,
we expect the IRS clarifying language to affect our
evaluation of the economic value of implementing individual
opportunities and our ability to meet the overall qualifying
criteria. As a result, we will be unable to complete a
determination of the Jobs Creation Acts effect on our plan
for reinvestment or repatriation of foreign earnings until the
clarifying language is released. We are also reviewing the other
provisions of the Jobs Creation Act, including the provision
which will permit a U.S. taxpayer to claim in its 2005 tax
filing a deduction from taxable income attributable to its
domestic production and manufacturing activities. Various
domestic activities that we perform would be considered
production and manufacturing activities as defined in the Jobs
Creation Act.
MI has reached settlements with the IRS concerning its
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 the fiscal years
ended March 31, 1993 through December 31, 2000
asserting deficiencies in the amount of taxes reported. We are
also under routine tax audit examination in various
U.S. state and local taxing jurisdictions in which we have
operated. These examinations cover various tax years and are in
various stages of finalization. We believe that any income taxes
ultimately assessed in the U.S. or by U.S. state and
local taxing authorities will not materially exceed amounts for
which we have already provided.
We are under routine tax audit examination in various foreign
jurisdictions in which we operate. These examinations cover
various tax years and are in various stages of finalization. We
believe that any income taxes ultimately assessed in these
foreign jurisdictions will not materially exceed amounts for
which we have already provided.
We have provided a valuation allowance ($41,980,000 at
December 31, 2004) for state and foreign deferred tax
assets that cannot be realized through carrybacks and future
reversals of existing taxable temporary differences. The
decrease in the valuation allowance is primarily due to
increased income in the carryback period and significant
improvement in future book and taxable income. We believe that
our remaining deferred tax assets at December 31, 2004 are
realizable through carrybacks to prior tax years, future
reversals of existing taxable temporary differences and our
estimate of future taxable income which has been based on a
short-term outlook for two years. We intend to re-evaluate this
approach and assess the adequacy of our valuation allowance
based on significant events and operating performance in
subsequent periods. Any changes to our estimated valuation
allowance could be material to the financial statements.
We have net operating loss carryforwards of approximately
$9,707,000 available to offset future taxable income in foreign
jurisdictions. Approximately $1,916,000 of the foreign net
operating loss carryforwards is scheduled to expire in 2006. The
remaining portion of the foreign net operating loss has an
indefinite carryforward period.
NOTE 6 RELATED PARTY TRANSACTIONS
We have material transactions with McDermott and its other
subsidiaries occurring in the normal course of operations. These
transactions included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
General and administrative costs
|
|
$ |
11,778 |
|
|
$ |
10,542 |
|
|
$ |
9,642 |
|
Insurance premiums
|
|
$ |
14,687 |
|
|
$ |
19,669 |
|
|
$ |
5,847 |
|
Sale of fabrication, construction and engineering services
|
|
$ |
882 |
|
|
$ |
2,269 |
|
|
$ |
1,762 |
|
Purchase of engineering and fabrication services
|
|
$ |
330 |
|
|
$ |
174 |
|
|
$ |
301 |
|
F-29
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We also have transactions with unconsolidated affiliates of
McDermott and its other subsidiaries. These transactions
included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Sales to
|
|
$ |
4,271 |
|
|
$ |
3,940 |
|
|
$ |
1,429 |
|
Purchases from
|
|
$ |
4 |
|
|
$ |
3,468 |
|
|
$ |
1,963 |
|
As a result of the Chapter 11 filing, B&W and its
filing subsidiaries were required to segregate intercompany
balances as of the filing date (Pre-Petition) from
transactions occurring after the filing date
(Post-Petition). B&W and its filing subsidiaries
are precluded from making payments on any Pre-Petition balances
with McDermott and its subsidiaries. Post-Petition balances are
cash settled, generally within 60 to 90 days of the
transaction.
Our accounts receivable-trade, net includes receivables from
unconsolidated affiliates of McDermott of $277,000 and $438,000
at December 31, 2004 and 2003, respectively. Our accounts
payable includes payables to these affiliates of $515,000 and
$697,000 at December 31, 2004 and 2003, respectively.
Our notes receivable-affiliates include a non-interest bearing
note from BWICO of $10,342,000 and $10,735,000 at
December 31, 2004 and 2003, respectively, and interest
bearing notes from affiliates of McDermott of $30,813,000 and
$27,076,000 at December 31, 2004 and 2003, respectively. A
reserve for an amount equal to the interest bearing notes at
December 31, 2004 and 2003 was established because it is
probable that, as a result of the proposed Chapter 11
settlement, these notes may not be settled. All notes are
payable by the borrower within 30 days of written demand.
We included in interest income $1,199,000, $1,140,000 and
$990,000 of interest on interest-bearing notes in the years
ended December 31, 2004, 2003 and 2002, respectively.
We participate in the Thrift Plan for Employees of McDermott
Incorporated and Participating Subsidiary and Affiliated
Companies (the Thrift Plan), which is a defined
contribution plan that includes a cash or deferred arrangement.
Matching employer contributions, which are in the form of
McDermott common stock, are equal to 50% of the first 6% of
compensation (as defined in the Thrift Plan) contributed by
participants. Our charges for contributions made under the
Thrift Plan were $3,070,000, $2,951,000 and $2,758,000 for the
years ended December 31, 2004, 2003 and 2002, respectively.
NOTE 7 LONG-TERM DEBT AND
NOTES PAYABLE
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Long-term debt consists of:
|
|
|
|
|
|
|
|
|
|
Project financing notes payable through 2012(1)
|
|
$ |
4,517 |
|
|
$ |
4,570 |
|
|
Other notes payable and capitalized lease obligations(2)
|
|
|
9,106 |
|
|
|
5,400 |
|
|
|
|
|
|
|
|
|
|
|
13,623 |
|
|
|
9,970 |
|
|
Less: Amounts due within one year
|
|
|
4,219 |
|
|
|
480 |
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$ |
9,404 |
|
|
$ |
9,490 |
|
|
|
|
|
|
|
|
F-30
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(1) |
Interest at various rates ranging to 1.7% |
|
(2) |
Interest at various rates ranging from 3.9% to 7.4% |
We have included long-term debt of $4,467,000 and $4,520,000 in
liabilities subject to compromise at December 31, 2004 and
2003, respectively. Maturities of long-term debt during the five
years subsequent to December 31, 2004 are as follows:
2005 $717,000; 2006 $2,538,000;
2007 $378,000; 2008 $388,000; 2009
-$388,000.
In connection with the Chapter 11 filing, the
Chapter 11 Debtors entered into a $300,000,000
debtor-in-possession revolving credit and letter of credit
facility (the DIP Credit Facility), which, as
amended, now provides for credit extensions of up to
$250,000,000 and expires in February 2007. All amounts owed
under the facility have a super-priority administrative expense
status in the Chapter 11 proceedings. The Chapter 11
Debtors obligations under the facility are
(1) guaranteed by substantially all of B&Ws other
domestic subsidiaries and B&W Canada Ltd. and
(2) secured by a security interest in B&W Canada
Ltd.s assets. Additionally, B&W and substantially all
of its domestic subsidiaries have agreed that they will grant a
security interest in their assets to the lenders under the DIP
Credit Facility upon the defeasance or repayment of MIs
public debt. The DIP Credit Facility generally provides for
borrowings by the Chapter 11 Debtors for working capital
and other general corporate purposes and the issuance of letters
of credit, except that the total of all borrowings and
non-performance letters of credit issued under the facility
cannot exceed $100,000,000 in the aggregate. There were no
borrowings under this facility at December 31, 2004 or
2003. The DIP Credit Facility also imposes certain financial and
non-financial covenants on us.
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 our business
operations, but for which McDermott, 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
$172,000,000 (the Pre-existing LCs). McDermott, MI
and BWICO each have agreed to indemnify and reimburse the
Chapter 11 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, 2004, approximately
$196,544,000 in letters of credit had been issued under the DIP
Credit Facility, of which approximately $17,290,000 was to
replace or backstop Pre-existing LCs. The interest rate is Libor
plus 2.50%, or prime plus 1.25% depending upon notification to
borrow. Commitment fees under this facility totaled
approximately $922,000, $462,000 and $984,000 for the years
ended December 31, 2004, 2003 and 2002, respectively.
NOTE 8 PENSION PLANS AND POSTRETIREMENT
BENEFITS
|
|
|
Pension and Postretirement Plans |
We participated in the Retirement Plan for Employees of
McDermott Incorporated (the MI Plan). The MI Plan is
a non-contributory plan that provides retirement benefits for
substantially all regular full-time employees. Salaried plan
benefits under the MI Plan are based on final average
compensation and years of service, while hourly plan benefits
are based on a flat benefit rate and years of service. MIs
funding policy is to fund applicable pension plans to meet the
minimum funding requirements of the Employee Retirement Income
Security Act of 1974 (ERISA) and, generally, to fund
other pension plans as recommended by the respective plan
actuary and in accordance with applicable law.
F-31
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
MI has made no allocation of expense to us for the years ended
December 31, 2004 and 2003. If an allocation had been made
for 2004, we would have recorded expense of approximately
$38,600,000 based on information provided by our actuary.
We provide other retirement benefits, primarily through
non-contributory pension plans, for employees of certain foreign
subsidiaries of B&W, and supply postretirement health care
and life insurance benefits to our union employees based on our
union contracts. These benefits are summarized below:
|
|
|
Obligations and Funded Status |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | |
|
Other Benefits | |
|
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
|
$ |
147,111 |
|
|
$ |
117,571 |
|
|
$ |
80,005 |
|
|
$ |
83,176 |
|
Service cost
|
|
|
4,298 |
|
|
|
3,984 |
|
|
|
88 |
|
|
|
75 |
|
Interest cost
|
|
|
8,908 |
|
|
|
8,736 |
|
|
|
4,632 |
|
|
|
5,012 |
|
Plan participants contributions
|
|
|
267 |
|
|
|
178 |
|
|
|
|
|
|
|
|
|
Curtailments
|
|
|
(247 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
(764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in assumptions
|
|
|
(282 |
) |
|
|
2,066 |
|
|
|
694 |
|
|
|
3,010 |
|
Actuarial (gain) loss
|
|
|
3,403 |
|
|
|
3,016 |
|
|
|
(1,538 |
) |
|
|
(2,447 |
) |
Foreign currency exchange rate changes
|
|
|
13,190 |
|
|
|
22,892 |
|
|
|
368 |
|
|
|
575 |
|
Benefits paid
|
|
|
(10,254 |
) |
|
|
(11,332 |
) |
|
|
(9,381 |
) |
|
|
(9,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of period
|
|
|
165,630 |
|
|
|
147,111 |
|
|
|
74,868 |
|
|
|
80,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
|
110,671 |
|
|
|
87,470 |
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
12,959 |
|
|
|
12,014 |
|
|
|
|
|
|
|
|
|
Company contributions
|
|
|
10,697 |
|
|
|
6,582 |
|
|
|
9,381 |
|
|
|
9,396 |
|
Plan participants contributions
|
|
|
267 |
|
|
|
178 |
|
|
|
|
|
|
|
|
|
Foreign currency exchange rate changes
|
|
|
10,177 |
|
|
|
15,759 |
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(10,254 |
) |
|
|
(11,332 |
) |
|
|
(9,381 |
) |
|
|
(9,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at the end of period
|
|
|
134,517 |
|
|
|
110,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(31,113 |
) |
|
|
(36,440 |
) |
|
|
(74,868 |
) |
|
|
(80,005 |
) |
Unrecognized net obligation
|
|
|
|
|
|
|
(48 |
) |
|
|
1,997 |
|
|
|
2,039 |
|
Unrecognized prior service cost
|
|
|
2,861 |
|
|
|
2,920 |
|
|
|
355 |
|
|
|
355 |
|
Unrecognized actuarial (gain) loss
|
|
|
43,884 |
|
|
|
44,940 |
|
|
|
1,822 |
|
|
|
3,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
15,632 |
|
|
$ |
11,372 |
|
|
$ |
(70,694 |
) |
|
$ |
(74,462 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | |
|
Other Benefits | |
|
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Amounts recognized in the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
$ |
(18,320 |
) |
|
$ |
(24,024 |
) |
|
$ |
(70,694 |
) |
|
$ |
(74,462 |
) |
Intangible asset
|
|
|
3,237 |
|
|
|
3,359 |
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
30,715 |
|
|
|
32,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
15,632 |
|
|
$ |
11,372 |
|
|
$ |
(70,694 |
) |
|
$ |
(74,462 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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
$165,632,000, $149,846,000 and $134,519,000, respectively, for
the year ended December 31, 2004. The projected benefit
obligation and accumulated benefit obligation and fair value of
plan assets were $147,110,000, $115,769,000 and $110,672,000,
respectively, for the year ended December 31, 2003. The
accumulated benefit obligation was in excess of plan assets in
all of our plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits Year Ended | |
|
Other Benefits Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Components of net periodic benefit cost (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
4,298 |
|
|
$ |
3,984 |
|
|
$ |
3,212 |
|
|
$ |
76 |
|
|
$ |
75 |
|
|
$ |
40 |
|
|
Interest cost
|
|
|
8,908 |
|
|
|
8,736 |
|
|
|
7,310 |
|
|
|
4,599 |
|
|
|
5,012 |
|
|
|
5,604 |
|
|
Expected return on plan assets
|
|
|
(7,669 |
) |
|
|
(7,272 |
) |
|
|
(7,494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
306 |
|
|
|
411 |
|
|
|
442 |
|
|
|
31 |
|
|
|
32 |
|
|
|
|
|
|
Recognized net actuarial loss
|
|
|
2,610 |
|
|
|
2,440 |
|
|
|
535 |
|
|
|
617 |
|
|
|
158 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
8,453 |
|
|
$ |
8,299 |
|
|
$ |
4,005 |
|
|
$ |
5,323 |
|
|
$ |
5,277 |
|
|
$ |
5,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Increase in minimum liability included in other comprehensive
loss
|
|
$ |
2,172 |
|
|
$ |
69 |
|
|
|
N/A |
|
|
|
N/A |
|
F-33
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
Weighted average assumptions used to determine net periodic
benefit obligations at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.00% |
|
|
|
6.00% |
|
|
|
6.00 |
% |
|
|
6.00 |
% |
|
Rate of compensation increase
|
|
|
4.00% |
|
|
|
4.00% |
|
|
|
|
|
|
|
|
|
Weighted average assumptions used to determine net periodic
benefit cost for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.11% |
|
|
|
6.32% |
|
|
|
6.00 |
% |
|
|
6.50 |
% |
|
Expected return on plan assets
|
|
|
6.50% |
|
|
|
6.71% |
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
4.27% |
|
|
|
4.09% |
|
|
|
|
|
|
|
|
|
The expected rate of return on plan assets assumption is based
on the long-term expected returns for the investment mix of
assets currently in the portfolio. In setting this rate, we use
a building block approach. Historic real return trends for the
various asset classes in the plans portfolio are combined
with anticipated future market conditions to estimate the real
rate of return for each class. These rates are then adjusted for
anticipated future inflation to determine estimated nominal
rates of return for each class. The expected rate of return on
plan assets is determined to be the weighted average of the
nominal returns based on the weightings of the classes within
the total asset portfolio.
We have been using an expected return on plan assets assumption
of 8.5%, which is consistent with the long-term asset returns of
the portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Assumed health care cost trend rates at December 31:
|
|
|
|
|
|
|
|
|
|
Health care cost trend rate assumed for next year
|
|
|
10.00 |
% |
|
|
10.00 |
% |
|
Rates to which the cost trend rate is assumed to decline
(ultimate trend rate)
|
|
|
4.50 |
% |
|
|
5.00 |
% |
|
Year that the rate reaches ultimate trend rate
|
|
|
2011 |
|
|
|
2009 |
|
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
|
|
$ |
105 |
|
|
$ |
(102 |
) |
Effect on postretirement benefit obligation
|
|
$ |
1,629 |
|
|
$ |
(1,581 |
) |
We expect to contribute approximately $767,000 to our domestic
plans and $8,818,000 to our other postretirement benefit plans
in 2005.
F-34
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We expect the following benefit payments, which reflect expected
future service, as appropriate, to be made from our benefit
plans:
|
|
|
|
|
|
|
|
|
Year Ending December 31, |
|
Pension Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
(In thousands) | |
2005
|
|
$ |
57,865 |
|
|
$ |
9,124 |
|
2006
|
|
$ |
60,339 |
|
|
$ |
9,203 |
|
2007
|
|
$ |
63,078 |
|
|
$ |
9,129 |
|
2008
|
|
$ |
65,685 |
|
|
$ |
8,960 |
|
2009
|
|
$ |
68,229 |
|
|
$ |
8,709 |
|
2010-2014
|
|
$ |
380,172 |
|
|
$ |
36,995 |
|
One of B&Ws subsidiaries contributes to various
multiemployer plans. The plans generally provide defined
benefits to substantially all unionized workers in this
subsidiary. Amounts charged to pension cost and contributed to
the plans were $20,440,000, $22,625,000 and $30,891,000 in the
years ended December 31, 2004, 2003 and 2002, respectively.
NOTE 9 STOCK PLANS
Certain of our officers and employees participate in benefit
plans of McDermott which involve the issuance of McDermott
Common Stock.
Under McDermotts 1996 Officer Long-Term Incentive Plan
(and its predecessor plans), shares of McDermotts Common
Stock (including approved shares that were not awarded under
predecessor plans) are available for grants of nonqualified
stock options, incentive stock options and restricted stock to
officers and key employees. Options to purchase shares are
granted at not less than 100% of the fair market value on the
date of grant, become exercisable at such time or times as
determined when granted, and expire not more than ten years
after the date of the grant. Under this plan, performance-based
awards to purchase restricted shares of McDermott Common Stock
were granted 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 McDermott Common Stock over a specified
performance period.
Under McDermotts 1992 Senior Management Stock Option Plan,
options to purchase shares were granted at not less than 100% of
the fair market value on the date of grant, become exercisable
at such time or times as determined when granted, and expire not
more than ten years after the date of grant. McDermotts
authorization to grant additional awards under this plan expired
on May 5, 2004.
In the event of a change in control of McDermott, both programs
have provisions that may cause restrictions to lapse and
accelerate the exercisability of outstanding options.
F-35
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes our participation in
McDermotts stock option plans (share data in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
Options | |
|
Price | |
|
Options | |
|
Price | |
|
Options | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding, beginning of period
|
|
|
910 |
|
|
$ |
14.19 |
|
|
|
995 |
|
|
$ |
15.16 |
|
|
|
1,077 |
|
|
$ |
15.26 |
|
Exercised
|
|
|
(61 |
) |
|
|
9.41 |
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
9.41 |
|
Cancelled/forfeited
|
|
|
(47 |
) |
|
|
23.88 |
|
|
|
(85 |
) |
|
|
25.65 |
|
|
|
(78 |
) |
|
|
16.81 |
|
Outstanding, end of period
|
|
|
802 |
|
|
$ |
13.98 |
|
|
|
910 |
|
|
$ |
14.19 |
|
|
|
995 |
|
|
$ |
15.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
802 |
|
|
$ |
13.98 |
|
|
|
805 |
|
|
$ |
14.14 |
|
|
|
653 |
|
|
$ |
16.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no options granted to B&W employees during 2004
and 2003. Options granted to B&W employees during 2001
are accounted for using the fair value method of
SFAS No. 123, as B&W employees are not
considered employees of McDermott 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, 2004 (share data in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
|
|
|
| |
|
Options Exercisable | |
|
|
|
|
Weighted- | |
|
|
|
| |
|
|
|
|
Average | |
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
|
|
Number | |
|
Contractual | |
|
Exercise | |
|
Number | |
|
Exercise | |
Range of Exercise Prices |
|
Outstanding | |
|
Life in Years | |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$ 7.72 - 11.48
|
|
|
317 |
|
|
|
5.2 |
|
|
$ |
9.41 |
|
|
|
317 |
|
|
$ |
9.41 |
|
11.48 - 15.30
|
|
|
315 |
|
|
|
6.2 |
|
|
|
14.54 |
|
|
|
315 |
|
|
|
14.54 |
|
19.13 - 22.95
|
|
|
133 |
|
|
|
1.6 |
|
|
|
20.36 |
|
|
|
133 |
|
|
|
20.36 |
|
22.95 - 26.78
|
|
|
37 |
|
|
|
0.1 |
|
|
|
25.50 |
|
|
|
37 |
|
|
|
25.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 7.72 - 26.78
|
|
|
802 |
|
|
|
4.8 |
|
|
$ |
13.98 |
|
|
|
802 |
|
|
$ |
13.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10 COMMITMENTS AND CONTINGENCIES
|
|
|
Investigations and Litigation |
We, along with 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 us, along with ARCO, liable to eight
plaintiffs in the first cases brought to trial, awarding
$36,700,000 in compensatory damages. In June 1999, the district
court set aside the $36,700,000 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
F-36
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
courts rulings on certain evidentiary matters, which,
following the Chapter 11 filing, the Third Circuit Court of
Appeals declined to accept for review.
There is a controversy between us and our insurers as to the
amount of coverage available under the liability insurance
policies covering the facilities. We 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
our insurers; and (2) the scope of the insurers
defense obligations to us 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 us
under the policies at issue to $320,000,000. With respect to the
insurers duty to defend us, the Court held that we are
entitled to separate and independent counsel funded by the
insurers. On October 1, 2001, the Court denied the
insurers motion for reconsideration and entered an order
reaffirming its original substantive insurance coverage rulings
and further certified the order for immediate appeal by any
party. Our insurers filed an appeal and in November 2002, the
Pennsylvania Superior Court affirmed the rulings in our favor on
the trigger of coverage and duty to defend issues. The
Pennsylvania Supreme Court denied the insurers petition
for allowance of appeal by order dated December 2, 2003.
The plaintiffs remaining claims against us in the Hall
Litigation have been automatically stayed as a result of the
Chapter 11 filing. We 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 the Chapter 11 proceedings due to common insurance
coverage and the risk to us of issue or claim preclusion, which
stay the Bankruptcy Court denied in October 2000. We appealed
the Bankruptcy Courts Order and on May 18, 2001, the
U.S. District Court for the Eastern District of Louisiana,
which has jurisdiction over portions of the Chapter 11
proceeding, affirmed the Bankruptcy Courts Order. We
believe that all claims under the Hall Litigation will be
resolved within the limits of coverage of our insurance
policies. However, 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. We
transferred the two facilities subject to the Hall Litigation to
BWXT in June 1997 in connection with BWXTs formation and
an overall corporate restructuring. We are entitled to
reimbursement from BWXT under an indemnity agreement should we
be held liable for damages. See Note 15 for further
information.
In early April 2001, a group of insurers that includes certain
underwriters at Lloyds and Turegum Insurance Company (the
Plaintiff Insurers) who have previously provided
insurance to us under our excess liability policies filed
(1) a complaint for declaratory judgment and damages
against McDermott in the Chapter 11 proceedings in the
U.S. District Court for the Eastern District of Louisiana
and (2) a declaratory judgment complaint against us 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
Chapter 11 proceedings. The insurance policies at issue in
this litigation provide a significant portion of our excess
liability coverage available for the resolution of the
asbestos-related claims that are the subject of the
Chapter 11 proceedings. 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
Chapter 11 proceedings, we, along with McDermott, breached
the confidentiality provisions of an agreement we entered into
with these Plaintiff Insurers relating to insurance payments by
the Plaintiff Insurers as a result of asbestos claims. Our
agreement with the underwriters went into effect in April 1990
and has served as the allocation and payment mechanism to
resolve many of
F-37
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the asbestos claims against us. The Plaintiff Insurers also
allege that we, along with McDermott, 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 Chapter 11
proceedings 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 us. 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 us, as well as McDermott, under that
agreement. With respect to the insurance policies, if the
Plaintiff Insurers should succeed in vacating the settlement
agreement, they seek to litigate issues under the policies in
order to reduce their coverage obligations. The complaint
against McDermott also seeks a recovery of unspecified
compensatory damages. We 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. We seek a
declaratory judgment as to our 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, we, along
with McDermott, filed dispositive motions with the District
Court seeking dismissal of the Plaintiff Insurers claim
that we, along with McDermott, had materially breached the
settlement agreement at issue. In a ruling issued
January 4, 2002, the District Court granted
McDermotts and our 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. We believe this ruling
reflects the extent of the underwriters contractual
obligations and underscores that this coverage is available to
settle our asbestos claims. As a result of the January 4,
2002 ruling, the only claims that remained in the litigation
were our counterclaims against the Plaintiff Insurers and
against other insurers. The parties agreed to dismiss without
prejudice our counterclaims seeking a declaratory judgment
regarding the parties respective rights and obligations
under the settlement agreement. Our counterclaim seeking a money
judgment for approximately $6,500,000 due and owing by insurers
under the settlement agreement remains pending. The parties have
reached a preliminary agreement in principle to settle our
counterclaim for in excess of the claimed amounts, and
approximately $6,200,000 has been received to date from the
insurers, subject to reimbursement in the event a final
settlement agreement is not reached. A trial of this
counterclaim is presently scheduled to begin in March 2005.
Following the resolution of this remaining counterclaim, the
Plaintiff Insurers will have an opportunity to appeal the
January 4, 2002 ruling. As a result of a recent conditional
settlement reached with Equitas, those plaintiffs in this action
that are participating in the Equitas settlement (namely,
underwriters at Lloyds) have agreed to dismiss their
claims in this action, upon the effective date of the proposed
consensual plan of reorganization. However, there remain other
plaintiffs that are not participating in the Equitas settlement
(namely, certain London market companies), and those other
plaintiffs have not indicated whether they intend to pursue an
appeal. Settlement discussions are continuing with these
remaining plaintiffs. See Note 15 for further information.
On or about August 5, 2003, certain underwriters at
Lloyds, London and certain London Market companies (the
London Insurers) commenced a new adversary
proceeding against us in the Bankruptcy Court for the Eastern
District of Louisiana, which makes allegations similar to those
made in the prior adversary action. The complaint of the London
Insurers alleges that we anticipatorily repudiated the 1990
settlement agreement with the London Insurers. The alleged
anticipatory repudiation is based primarily on our submission of
the plan of reorganization to the Bankruptcy Court. The
complaint alleges that the London Insurers claims from the
first adversary action that were ruled to be premature are now
ripe for adjudication, given that we have reached agreement on a
consensual plan of reorganization with the representatives of
asbestos claimants. In addition to seeking unspecified damages
for this alleged
F-38
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
anticipatory repudiation, the complaint also seeks declaratory
relief as to the London Insurers obligations to indemnify
us for our asbestos-related claims and seeks to prevent the
assignment of rights to asbestos bodily injury coverage to the
Asbestos PI Trust. On or about August 6, 2003, a similar
lawsuit was filed in the District Court by the London Insurers
against McDermott. The London Insurers also filed a motion to
withdraw the reference with respect to the action pending in the
Bankruptcy Court, seeking to transfer it from the Bankruptcy
Court to the District Court. We, as well as McDermott, have each
filed motions to dismiss or, in the alternative, to stay the
actions filed against each of them by the London Insurers. The
Court has not ruled on the London Insurers motion to
withdraw the reference or on our or McDermotts motion to
dismiss or stay. A hearing on our motion to dismiss or stay is
scheduled to take place in the Bankruptcy Court on
April 27, 2005. No discovery has been taken in either case.
As a result of the recent conditional settlement reached with
Equitas, those plaintiffs in this action that are participating
in the Equitas settlement (namely, underwriters at Lloyds)
have agreed to dismiss their claims in this action upon the
effective date of the proposed consensual plan of
reorganization. However, there remain other Plaintiffs that are
not participating in the Equitas settlement (namely, certain
London market companies), and those other plaintiffs have not
indicated whether they intend to continue this action.
Settlement discussions are continuing with these remaining
plaintiffs. We do not believe that a material loss with respect
to these matters is likely. See Note 15 for further
information.
On or about August 22, 2003, Continental Insurance Co.
(Continental) commenced an action in the Eastern
District of Louisiana against McDermott and MI and a similar
adversary action against us in the Bankruptcy Court. These
actions make allegations similar to those made in the prior
adversary actions of the London Market Insurers. The complaints
of Continental allege, among other things, that McDermott
anticipatorily repudiated the settlement agreement McDermott and
we had entered into in 2000 with Continental relating to
insurance payments by Continental as a result of
asbestos-related products liability claims. The parties reached
a settlement of these actions in September 2004, subsequently
approved by the Bankruptcy Court, which provides for the payment
of certain insurance proceeds to the asbestos personal injury
trust if and when the plan of reorganization becomes effective.
See Note 15 for further information.
On or about November 5, 2001, The Travelers Indemnity
Company and Travelers Casualty and Surety Company (collectively,
Travelers) filed an adversary proceeding against us
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 us 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 McDermott in the
U.S. District Court for the Eastern District of Louisiana.
The cases filed against MI and McDermott were consolidated
before the District Court and the ACC and the FCR in the
Chapter 11 proceedings intervened in the action. We, along
with McDermott, 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 our asbestos
liabilities. The Court bifurcated the case into two phases, with
Phase I addressing the issue of whether previous agreements
between the parties served to release Travelers from any
coverage responsibility for asbestos non-products
claims and Phase II addressing whether, in the absence of
such a release, Travelers would be obligated to cover any
additional asbestos-related bodily injury claims asserted
against us. After discovery was completed, the parties filed
cross-motions for summary judgment on Phase I issues. On
August 22, 2003, the Court granted summary judgment to us,
the ACC, the FCR, MI and McDermott, and against Travelers,
finding that the agreements did not release Travelers from all
asbestos liability and further finding that McDermott and MI
were not liable to
F-39
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
indemnify Travelers for asbestos-related non-products claims
under those agreements. One of our captive insurers reinsured
certain coverages provided by Travelers to us, and therefore,
our captive insurer may have certain exposures, subject to the
terms, conditions and limits of liability of the reinsurance
coverages, in the event Travelers is ultimately found liable for
any amounts to us, on account of asbestos-related non-products
personal injury claims. The issue of whether Travelers will have
any additional coverage liability to us will be considered in
Phase II of the litigation, which has not yet commenced. We
and the ACC and FCR have reached an agreement to settle claims
under certain Travelers insurance policies with respect to which
our rights are to be assigned to the asbestos personal injury
trust under the plan of reorganization. The settlement would
liquidate these rights into cash payments that would be paid to
or for the benefit of the trust if and when the plan of
reorganization becomes effective. The Bankruptcy Court approved
the settlement at a hearing held on October 20, 2004. As a
result of the settlement, the parties have agreed to stay the
litigation until such a time as it is determined whether the
plan of reorganization will become effective. See Note 15
for further information.
On April 30, 2001, we filed a declaratory judgment action
in our Chapter 11 proceedings in the U.S. Bankruptcy
Court for the Eastern District of Louisiana against MI, BWICO,
BWXT, Hudson Products Corporation (HPC) and
McDermott Technology, Inc. (MTI) seeking a judgment,
among other things, that (1) we were 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, our
cancellation of a $313,000,000 note receivable and our transfer
of all the capital stock of HPC, Babcock & Wilcox Tracy
Power, Inc., BWXT and MTI to BWICO, and (2) the transfers
were not voidable. As an alternative, and only in the event that
the Bankruptcy Court finds we were insolvent at a pertinent time
and the transactions are voidable under applicable law, the
action preserved our claims against the defendants. The
Bankruptcy Court permitted the ACC and the FCR in the
Chapter 11 proceedings to intervene and proceed as
plaintiff-intervenors and realigned us as a defendant in this
action. The ACC and the FCR are asserting in this action, among
other things, that we were 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 our 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 the ACC and FCR failed to sustain their burden of
proving us insolvent at the time of the corporate
reorganization. On February 19, 2002, the ACC and the FCR
filed a motion with the District Court seeking leave to appeal
the February 8, 2002 ruling. On February 20, 2002, MI,
BWICO, BWXT, HPC and MTI filed a motion for summary judgment
asking that judgment be entered on a variety of additional
pending counts presented by the ACC and the FCR that we believe
are resolved by the February 8, 2002 ruling. By Order and
Judgment dated April 17, 2002, the Bankruptcy Court granted
this motion and dismissed all claims asserted in complaints
filed by the ACC and the FCR regarding the 1998 transfer of
certain assets to our parent, BWICO, and dismissed the
proceeding with prejudice. On April 26, 2002, the ACC and
the 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, HPC and MTI filed
their brief in opposition. The ACC and the FCR have not yet
filed their reply brief pending discussions regarding settlement
and a consensual joint plan of reorganization. If a consensual
joint plan of reorganization is confirmed, the ACC and the FCR
have agreed to dismiss this appeal with prejudice. In addition,
an injunction preventing derivative asbestos suits and other
actions for which there is shared insurance from being brought
against our nonfiling affiliates, including MI, J. Ray and
McDermott, and B&W subsidiaries not involved in the
Chapter 11 proceedings, extends through April 11,
2005. We intend to seek extensions of the preliminary injunction
periodically through the pendency of the Chapter 11
proceedings and believe that extensions will continue to be
granted by the
F-40
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Bankruptcy Court while the confirmation and settlement process
continues, although modifications to the nature and scope of the
injunction may occur. See Note 15 for further information.
On August 13, 2003, a proceeding entitled Citgo
Petroleum Corporation and PDV Midwest Refinery L.L.C. v.
McDermott International, Inc., et al, was filed in
the Circuit Court of Cook County, Illinois, alleging claims
against us, McDermott, J. Ray and MI, for damages in connection
with the manufacture and sale by B&W of a pipe fitting that
allegedly caused an August 14, 2001 fire at a refinery in
the Chicago, Illinois area, which refinery is owned and operated
by the plaintiffs. Plaintiffs seek damages in excess of
$100,000,000, including claims for damage to property and
consequential damages. On October 22, 2004 the claims
against McDermott, J. Ray and MI were dismissed by the court
without prejudice to the ability of plaintiff to refile such
claims against those entities upon the showing of appropriate
evidence. On March 2, 2005, McDermott filed a third party
claim against the former owner of the refinery, Unocal
Corporation, seeking contribution and indemnity. Discovery is
ongoing, and no trial date has been set. We intend to vigorously
defend the claims against B&W and pursue the claims against
Unocal. Additionally, we believe that we have insurance coverage
for these claims. We do not believe that any material loss with
respect to these matters is likely. However, the ultimate
outcome of the proceedings is uncertain, and an adverse ruling,
should insurance not be available, or should any judgment exceed
the available coverage, could have a material adverse impact on
our consolidated financial position, results of operations and
cash flows. See Note 15 for further 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
managements opinion, none of this litigation or disputes
and claims will have a material adverse effect on our
consolidated financial position, results of operations and cash
flows.
See Note 15 for additional subsequent events related to
B&Ws commitments and contingencies.
See Note 2 to the consolidated financial statements
regarding our potential liability for non-employee asbestos
claims and the settlement negotiations and other activities
related to the Chapter 11 proceedings.
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.
F-41
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future minimum payments required under operating leases that
have initial or remaining noncancellable lease terms in excess
of one year at December 31, 2004 are as follows:
|
|
|
|
|
Year Ending December 31, |
|
Amount | |
|
|
| |
2005
|
|
$ |
1,080,000 |
|
2006
|
|
$ |
996,000 |
|
2007
|
|
$ |
627,000 |
|
2008
|
|
$ |
459,000 |
|
2009
|
|
$ |
459,000 |
|
Thereafter
|
|
$ |
85,000 |
|
Total rental expense for the years ended December 31, 2004
and 2003 was $4,065,000 and $3,516,000, respectively. These
expense amounts include contingent rentals and are net of
sublease income, neither of which is material.
Following is a reconciliation of the changes in our warranty
liability:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Balance at beginning of period
|
|
$ |
50,958 |
|
|
$ |
48,877 |
|
Accruals for warranties issued during the period
|
|
|
8,574 |
|
|
|
11,269 |
|
Accruals related to pre-existing warranties
|
|
|
1,379 |
|
|
|
4,407 |
|
Settlements made during the period
|
|
|
(13,001 |
) |
|
|
(13,595 |
) |
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
47,910 |
|
|
$ |
50,958 |
|
|
|
|
|
|
|
|
See Note 1 for a discussion of our accounting policy
related to our warranty liability.
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.
At December 31, 2004, we are contingently liable under
standby letters of credit totaling $196,544,000, all of which
were issued in the normal course of business. We have been
notified by our two surety companies that they are no longer
willing to issue bonds on our behalf. We obtain surety bonds in
the ordinary course of business to secure contract bids and to
meet the bonding requirements of various construction and other
contracts with customers. We expect to obtain the coverage we
require through other surety companies as well as use our
existing credit facility for contract-related performance
guarantees. See Note 7. In addition, under certain
consortium agreements we are jointly and severally liable with
other consortium members for completion and performance on
long-term construction projects.
F-42
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 11 FOREIGN OPERATIONS
Summarized financial information of foreign subsidiaries
(primarily Canadian operations) included in our consolidated
financial statements is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Assets
|
|
$ |
407,632 |
|
|
$ |
465,346 |
|
Liabilities
|
|
$ |
209,484 |
|
|
$ |
323,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net Income (Loss)
|
|
$ |
30,682 |
|
|
$ |
11,699 |
|
|
$ |
(5,503 |
) |
NOTE 12 FINANCIAL INSTRUMENTS WITH
CONCENTRATIONS OF CREDIT RISK
Our principal businesses are the construction and supply of
fossil-fuel and nuclear steam generating equipment to the
electric power generation industry. Our customers are
principally the electric power generation industry (including
government-owned utilities and independent power producers) and
the pulp and paper and other process industries. 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 38% of our trade receivables at
December 31, 2004 were due from foreign customers. 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, 2004 and 2003, the allowance
for possible losses deducted from accounts receivable-trade, net
on the accompanying balance sheet was $3,167,000 and $3,242,000,
respectively.
NOTE 13 DERIVATIVE FINANCIAL INSTRUMENTS
Our foreign 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 which 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 derivatives
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
F-43
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 statements of income
(loss).
At December 31, 2004 and 2003, we had forward contracts to
purchase $71,144,000 and $12,629,000, respectively, in foreign
currencies (primarily Canadian Dollars) and to sell $24,108,000
and $5,780,000, respectively, in foreign currencies (primarily
Swedish Krona and Euros) at varying maturities through November
2004. 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, 2004, we had deferred approximately $947,000
of net losses on these forward contracts, 59% of which we expect
to recognize in income over the next 12 months in
accordance with the percentage-of-completion method of
accounting. At December 31, 2003, we had deferred
approximately $49,000 of net gains on forward contracts. For the
years ended December 31, 2004 and 2003, we recognized net
gains (losses) on forward contracts of approximately ($797,000)
and $449,000, respectively. Substantially all of these net
losses 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.
NOTE 14 FAIR VALUES OF FINANCIAL
INSTRUMENTS
We use 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.
Notes receivable affiliates: It is not
practical for us to estimate the fair value of our non-current
notes receivable from affiliates because the timing of the
settlement of these notes has not been determined.
Long and short-term debt: We base the fair values of debt
instruments on estimated prices based on current yields for debt
issues of similar quality and terms. The carrying amounts
reported in the accompanying balance sheet approximate their
fair values.
Liabilities subject to compromise: It is not practical
for us to estimate the fair value of our liabilities subject to
compromise because the timing and ultimate outcome of the
Chapter 11 proceedings are uncertain.
Foreign currency forward contracts: We estimate the fair
values of foreign currency forward contracts by obtaining quoted
market rates. At December 31, 2004 and 2003, we had net
forward contracts outstanding to purchase foreign currencies
with notional values of $47,036,000 and $6,849,000 and fair
values of ($2,612,000) and $484,000, respectively.
F-44
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The estimated fair values of our financial instruments are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
December 31, 2003 | |
|
|
| |
|
| |
|
|
Carrying | |
|
|
|
Carrying | |
|
|
|
|
Amount | |
|
Fair Value | |
|
Amount | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance Sheet Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
351,541 |
|
|
$ |
351,541 |
|
|
$ |
370,657 |
|
|
$ |
370,657 |
|
Notes receivable affiliates
|
|
$ |
10,342 |
|
|
$ |
10,342 |
|
|
$ |
10,735 |
|
|
$ |
10,735 |
|
Debt excluding capital leases
|
|
$ |
13,614 |
|
|
$ |
13,231 |
|
|
$ |
9,914 |
|
|
$ |
9,243 |
|
|
|
NOTE 15 |
SUBSEQUENT EVENTS (UNAUDITED) |
On August 29, 2005 McDermott and certain of its
subsidiaries, together with the Asbestos Claimants
Committee (ACC) and the Legal Representative for
Future Asbestos-Related Claimants (FCR), announced
that the parties have agreed upon the terms of a revised
settlement agreement (the Proposed Settlement
Agreement) in the Chapter 11 bankruptcy proceedings
involving B&W. The Proposed Settlement Agreement will modify
the existing plan and proposed settlement agreement currently
before the District Court, and recorded in McDermotts
financial statements.
Under the terms of the Proposed Settlement Agreement and a
related plan of reorganization the Chapter 11 Debtors, the
ACC, the FCR and MI, as plan proponents, have jointly proposed
(the Proposed Joint Plan), the Asbestos PI Trust
would be funded by contributions of:
|
|
|
|
|
$350 million in cash, which would be paid by MI or one of
its subsidiaries on the effective date of the Proposed Joint
Plan; |
|
|
|
an additional contingent cash payment of $355 million,
which would be payable by MI or one of its subsidiaries within
180 days of November 30, 2006, but only if the
condition precedent described below is satisfied, which amount
would be payable with interest accruing on that amount at
7% per year from December 1, 2006 to the date of
payment; and |
|
|
|
a note issued by B&W in the aggregate principal amount of
$250 million (the B&W Note), bearing
interest at 7% annually on the outstanding principal balance
from and after December 1, 2006, with a five- year term and
annual principal payments of $50 million each, commencing
on December 1, 2007, provided that, if the condition
precedent described below is not satisfied, only
$25 million principal amount of the B&W Note would be
payable (with the entire $25 million amount due on
December 1, 2007). B&Ws payment obligations under
the B&W Note would be fully and unconditionally guaranteed
by Babcock & Wilcox Investment Company, a Delaware
corporation and a wholly owned subsidiary of MI
(BWICO), and McDermott. The guarantee obligations of
BWICO and McDermott would be secured by a pledge of all of
B&Ws capital stock outstanding as of the effective
date of the Proposed Joint Plan. |
McDermott and most of its subsidiaries would also contribute to
the Asbestos PI Trust substantially the same insurance rights as
were to be contributed to the Asbestos PI Trust under the
Previously Negotiated Settlement Agreement. See
Description of the Proposed Settlement
Agreement Creation of the Asbestos PI Trust and
Contribution of Assets.
The Proposed Settlement Agreement includes a mechanism that
would potentially limit the consideration to be contributed to
the Asbestos PI Trust if the FAIR Act or similar
U.S. federal legislation is enacted and becomes law.
Specifically, the Proposed Settlement Agreement provides that the
F-45
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
right to receive the $355 million contingent payment (the
Contingent Payment Right) would vest and amounts
under the B&W Note in excess of $25 million would be
payable only upon satisfaction of the condition precedent that
neither the FAIR Act nor any other U.S. federal legislation
designed to resolve asbestos-related personal injury claims
through the implementation of a national trust shall have been
enacted and become law on or before November 30, 2006 (the
Condition Precedent). The Proposed Settlement
Agreement further provides that:
|
|
|
|
|
if such legislation is enacted and becomes law on or before
November 30, 2006 and is not subject to a legal proceeding
as of January 31, 2007 which challenges the
constitutionality of such legislation (any such proceeding is
referred to as a Challenge Proceeding), the
Condition Precedent would be deemed not to have been satisfied,
and no amounts would be payable under the Contingent Payment
Right and no amounts in excess of $25 million would be
payable under the B&W Note; and |
|
|
|
if such legislation is enacted and becomes law on or before
November 30, 2006, but is subject to a Challenge Proceeding
as of January 31, 2007, the Condition Precedent would be
deemed not to have been satisfied and any rights with respect to
the Contingent Payment Right and payments under the B&W Note
in excess of $25 million would be suspended until either: |
|
|
|
(1) there has been a final, nonappealable judicial decision
with respect to the Challenge Proceeding to the effect that such
legislation is unconstitutional as generally applied to debtors
in Chapter 11 proceedings whose plans of reorganization
have not yet been confirmed and become substantially consummated
(i.e., debtors that are similarly situated to B&W as
of September 1, 2005), so that such debtors would not be
subject to such legislation, in which event the Condition
Precedent would be deemed to have been satisfied, and the
Contingent Payment Right would vest and the B&W Note would
become fully payable pursuant to its terms (in each case subject
to the protection against double payment provisions described
below); or |
|
|
(2) there has been a final nonappealable judicial decision
with respect to the Challenge Proceeding which resolves the
Challenge Proceeding in a manner other than as contemplated by
the immediately preceding clause, in which event the Condition
Precedent would be deemed not to have been satisfied and no
amounts would be payable under the Contingent Payment Right and
no amounts in excess of $25 million would be payable under
the B&W Note. |
The Proposed Settlement Agreement also includes provisions to
provide some protection against double payment so that, if the
FAIR Act or similar U.S. federal legislation is enacted and
becomes law after November 30, 2006, or the Condition
Precedent is otherwise satisfied (in accordance with the
provisions described in clause (1) above), any payment
McDermott or any of its subsidiaries may be required to make
pursuant to the legislation on account of asbestos-related
personal injury claims against any of the B&W Entities would
reduce, by a like amount:
|
|
|
|
|
first, the amount, if any, then remaining payable pursuant to
the Contingent Payment right; and |
|
|
|
next, any then remaining amounts payable pursuant to the B&W
Note. |
Under the terms of the Proposed Settlement, the Apollo/ Parks
Township Claims will not be channeled to a trust, as
contemplated by the Previously Negotiated Settlement, and will
not be impaired under the terms of the Proposed Joint Plan in
its current form.
While the Proposed Settlement has been structured in a manner to
permit all disputes relating to the Apollo/ Parks Township
Claims and the associated insurance coverage to be resolved
after the proposed joint plan has been confirmed and becomes
effective, B&W, representatives of the claimants in the Hall
F-46
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Litigation and ARCO have negotiated an agreement in principle
that reflects a proposed settlement of present Apollo/ Parks
Township Claims, including those that are the subject of the
Hall Litigation. The agreement in principle, which has been
memorialized in a term sheet, contemplates, among other things,
that: (1) B&W and ARCO will be provided full and
complete releases from each of the Apollo/ Parks Township
Releasors (as that term is to be defined in a definitive
settlement agreement generally to mean the existing claimants in
the Hall Litigation and related pending litigation);
(2) ARCO will make a $27.5 million cash payment to the
Apollo/ Parks Township Releasors upon the effective date of the
Proposed Joint Plan; (3) B&W will make a
$47.5 million cash payment to the Apollo/ Parks Township
Releasors upon the effective date of the Proposed Joint Plan;
(4) B&W will make a $12.5 million payment to the
Apollo/ Parks Township Releasors upon the third anniversary of
the effective date of the Proposed Joint Plan; and
(5) B&W and ARCO will retain all insurance rights,
including without limitation with respect to the claims of the
Apollo/ Parks Township present claimants who are not Apollo/
Parks Township Releasors (the Unliquidated Apollo/ Parks
Township Present Claims) and with respect to any future
Apollo/ Parks Township Claims (the Apollo/ Parks Township
Future Demands). We intend to seek reimbursement from our
nuclear insurers for all amounts that would be paid by us under
the proposed settlement. Our nuclear insurers have refused to
fund the proposed settlement of the Hall Litigation and have
indicated that, while they do not anticipate objecting to the
terms of the Proposed Joint Plan, they will object to the
proposed settlement of the Hall Litigation unless the settlement
does not prejudice our nuclear insurers in any subsequent
litigation brought by us seeking reimbursement from them.
Under the Proposed Joint Plan and the proposed settlement of the
Hall Litigation, the Unliquidated Apollo/ Parks Township Present
Claims and Apollo/ Parks Township Future Demands will pass
through the bankruptcy case unimpaired. We believe that these
claims will be resolved within the limits of coverage of our
insurance policies. However, should the B&W Chapter 11
settlement fail, or should the proposed settlement of the Hall
Litigation 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.
Included in B&Ws operating loss for the nine months
ended September 30, 2005 is a net expense of B&Ws
asbestos liability and other liability claims totaling
approximately $477.4 million.
The Proposed Settlement Agreement contemplates that the Proposed
Joint Plan must become effective, on a final, nonappealable
basis, no later than February 22, 2006, or such later date
as McDermott, the ACC and the FCR may agree to. The Proposed
Settlement Agreement further contemplates that, if the effective
date of the Proposed Joint Plan has not occurred by that date,
and is not extended by the ACC, the FCR and McDermott, acting
together, then the settlement contemplated by the Proposed
Settlement Agreement will be abandoned and the parties will
resume their efforts to effect the settlement contemplated by
the Previously Negotiated Settlement Agreement and the
Previously Negotiated Joint Plan.
Effective January 31, 2005, MI spun off the assets and
liabilities associated with our portion of the MI Plan to the
Retirement Plan for Employees of The Babcock and Wilcox
Company and Participating Subsidiary and Affiliated
Companies (the New Plan) sponsored by us.
Beginning January 31, 2005, our financial statements
included pension assets, liabilities and pension costs
associated with the New Plan. Approximately 46% of the employees
in the MI Plan at January 31, 2005 transferred to the New
Plan.
Regarding the Citgo Petroleum Corporation proceedings discussed
in Note 10, the plaintiffs now seek damages of
approximately $600 million, including claims for damage to
property and consequential damages. Citgos insurers,
including certain underwriters at Lloyds, London
(Lloyds), have pursued
F-47
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
this action for recovery of amounts paid to Citgo under business
interruption and property damage policies. On March 10,
2005, B&W filed a motion with the Bankruptcy Court to stay
the Citgo litigation until the completion of the B&W
Chapter 11 proceedings, which motion was opposed by Citgo
and Lloyds. The Bankruptcy Court hearing on the motion to
stay the case has been deferred by agreement of the parties, and
discovery is proceeding. Unocal moved to be dismissed from the
case, which motion was granted by the court on or about
November 9, 2005. No trial date has been set at this time.
We intend to vigorously defend the claims against B&W and
appeal the dismissal of our claims against Unocal Corporation.
Additionally, although we have insurance which provides coverage
for claims of the nature asserted in this matter up to limits of
liability of $375 million, subject to certain terms and
conditions, our insurer that provides $125 million in
coverage for liability in excess of $200 million has denied
coverage for the alleged failure to give timely notice of the
claim under the policy and our insurer that provides
$50 million in coverage for liability in excess of
$325 million has reserved its rights to deny coverage.
Additionally, the insurers providing the first $200 million
in coverage have also recently reserved their rights to deny
coverage. We have filed suit against our broker for loss of the
$175 million in insurance coverage in excess of
$200 million in the event that one or more of the insurers
providing this coverage is successful in the denial of coverage.
We do not believe that any material loss with respect to these
matters is likely. However, the ultimate outcome of the
proceedings is uncertain, and an adverse ruling, should
insurance not be available, or should any judgment exceed the
available coverage, could have a material adverse impact on our
consolidated financial position, results of operations and cash
flows.
Regarding the proceedings brought by a group of insurers that
include certain underwriters at Lloyds London and Turegum
Insurance described in Note 10, as a result of the recent
conditional settlement reached with the London Market insurance
companies, the remaining plaintiffs in this action have agreed
to dismiss their claims without prejudice until such time as the
Proposed Joint Plan becomes effective, and to dismiss those
claims with prejudice after the Proposed Joint Plan becomes
effective. With these dismissals, and the dismissals provided by
underwriters at Lloyds by virtue of the settlement with
underwriters at Lloyds/ Equitas, we expect this litigation
will be terminated fully and finally upon the effective date of
the Proposed Joint Plan.
Regarding the proceeding against B&W and McDermott commenced
by certain underwriters at Lloyds London and certain
London Market companies, as described in Note 10, as a
result of the recent conditional settlement reached with the
London Market insurance companies, the remaining plaintiffs in
this action have agreed to dismiss their claims without
prejudice until such time as the Proposed Joint Plan becomes
effective, and to dismiss those claims with prejudice after the
Proposed Joint Plan becomes effective. With these dismissals,
and the dismissals provided by underwriters at Lloyds by
virtue of the settlement with underwriters at Lloyds/
Equitas, we expect this litigation will be terminated fully and
finally upon the effective date of the Proposed Joint Plan.
The preliminary injunction preventing asbestos-related liability
lawsuits and other actions for which there is shared insurance
from being brought against our nonfiling affiliates has been
extended to January 9, 2006.
On June 1, 2005, a proceeding entitled Iroquois Falls
Power Corp v. Jacobs Canada Inc., et al., was
filed in the Superior Court of Justice, in Ontario, Canada,
alleging damages of approximately C$16 million (Canadian)
for remedial work, loss of profits and related
engineering/redesign costs due to the alleged breach by Jacobs
Canada Inc. (formerly Delta Hudson Engineering Limited
(Delta)), of its engineering design obligations
relating to the supply and installation of heat recovery steam
generators (HRSGs). In addition to Jacobs, the
proceeding names as defendants MI, which provided a guarantee to
certain obligations of its then affiliate, Delta, and two
bonding companies with whom McDermott entered into an
F-48
THE BABCOCK & WILCOX COMPANY
(a wholly owned subsidiary of Babcock & Wilcox
Investment Company)
Debtor-in-Possession
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
indemnity arrangement. Pursuant to a subcontract with Delta,
B&W supplied and installed the HRSGs at issue. The matter is
in the initial stages and no trial date has been set. We plan to
vigorously defend the matter. However, the ultimate outcome of
these proceedings is uncertain, and an adverse ruling could have
a material adverse impact on our consolidated financial
position, results of operations and cash flows.
One of B&Ws Canadian subsidiaries has received notice
of a possible warranty claim on one of its projects. This
project included a limited term performance bond totaling
approximately $140 million for which McDermott entered into
an indemnity arrangement with the surety underwriters. At this
time, B&Ws subsidiary is analyzing the facts and
circumstances surrounding this issue. It is possible that
B&Ws subsidiary may incur warranty costs in excess of
amounts provided for as of September 30, 2005. It is also
possible that a claim could be initiated by the B&W
subsidiarys customer against the surety underwriter should
certain events occur. If such a claim were successful, the
surety could seek recoveries from B&Ws subsidiary for
costs incurred in satisfying the customer claim. If the surety
should seek recovery from B&Ws subsidiary in this
instance, we believe that B&Ws subsidiary has adequate
liquidity to satisfy its obligations.
F-49
Appendix A
NON-DEBTOR AFFILIATE SETTLEMENT AGREEMENT
THIS NON-DEBTOR AFFILIATE SETTLEMENT AGREEMENT (this
Agreement) is made as
of ,
2006 by and among McDermott International, Inc., a Panamanian
corporation (MII), McDermott Incorporated, a
Delaware corporation and a direct, wholly owned subsidiary of
MII (MI), Babcock & Wilcox Investment
Company, a Delaware corporation and a direct, wholly owned
subsidiary of MI (BWICO), The Babcock &
Wilcox Company, a Delaware corporation and a direct, wholly
owned subsidiary of BWICO (B&W), Diamond Power
International, Inc., a Delaware corporation and a direct, wholly
owned subsidiary of B&W (DPII), Americon, Inc.,
a Delaware corporation and a direct, wholly owned subsidiary of
B&W (Americon), Babcock & Wilcox
Construction Co., Inc., a Delaware corporation and a direct,
wholly owned subsidiary of Americon (BWCCI and,
collectively with B&W, DPII and Americon, the
Chapter 11 Debtors), the Asbestos Claimants
Committee in the Chapter 11 Proceedings defined below (the
ACC), the Legal Representative for Future
Asbestos-Related Claimants in the Chapter 11 Proceedings
(the FCR), and the Asbestos PI Trust (as defined in
the Plan of Reorganization referred to herein).
PRELIMINARY STATEMENT
On February 22, 2000, the Chapter 11 Debtors commenced
jointly administered reorganization cases under Chapter 11
of the U.S. Bankruptcy Code (collectively, the
Chapter 11 Proceedings) in the United States
Bankruptcy Court for the Eastern District of Louisiana (the
Bankruptcy Court).
In an adversary proceeding commenced on April 30, 2001 in
connection with the Chapter 11 Proceedings (Adversary
Proceeding Number 01-1155), the ACC and the FCR challenged the
1998 transfers by B&W to BWICO of, among other things, the
capital stock of Hudson Products Corporation, Babcock &
Wilcox Tracy Power, Inc., BWX Technologies, Inc. and McDermott
Technology, Inc. (MTI) and the concurrent
cancellation by B&W of a $313 million intercompany note
receivable (collectively, the 1998 Transfers) and
have appealed the decision of the Bankruptcy Court in that
adversary proceeding pursuant to an appeal filed with the United
States District Court for the Eastern District of Louisiana (the
District Court).
B&W, on the one hand, and the ACC and the FCR, on the other
hand, have heretofore filed competing plans of reorganization in
the Chapter 11 Proceedings.
MII, MI, BWICO, the Chapter 11 Debtors, the ACC and the FCR
have agreed to a settlement of (1) the outstanding disputes
among them concerning the contents of the plan of reorganization
to be consummated in connection with the Chapter 11
Proceedings, as reflected in a plan of reorganization the
parties have negotiated and submitted to the Bankruptcy Court,
and (2) various other issues, as reflected in the Plan of
Reorganization (as hereinafter defined) and this Agreement.
As part of the settlement, MII, MI, BWICO and the
Chapter 11 Debtors have agreed to, among other things,
cause a trust to be established for the benefit of asbestos
personal injury claimants, and the ACC and the FCR have agreed
to, among other things, file a motion with the District Court to
dismiss, with prejudice, their appeal of the Bankruptcy
Courts decision with respect to the 1998 Transfers,
effective as of the Effective Date (as hereinafter defined).
The respective Boards of Directors of MII, MI, BWICO and the
Chapter 11 Debtors have concluded it is in the best
interest of their respective corporations, and the ACC and the
FCR have concluded it is in the best interest of their
respective constituencies, to enter into this Agreement and to
effect the settlement reflected in the Plan of Reorganization
and this Agreement.
A-1
ARTICLE I
DEFINITIONS AND DEFINITIONAL PROVISIONS
Section 1.1 Defined
Terms. The following terms this Agreement uses have the
meanings this Section 1.1 assigns to them.
ACC has the meaning the Preliminary Statement
specifies.
Affiliate means, as to any specified Entity,
(i) any other Entity that, directly or indirectly through
one or more intermediaries or otherwise, controls, is controlled
by or is under common control with the specified Entity and
(ii) any Entity that is an affiliate (within
the meaning of Section 101(2) of the U.S. Bankruptcy
Code) of the specified Entity. As used in this definition,
control means the possession, directly or
indirectly, of the power to direct or cause the direction of the
management or policies of an Entity (whether through ownership
of Capital Stock of that Entity, by contract or otherwise).
Agreement has the meaning the Preamble
specifies.
Amended and Restated Indemnification and Reimbursement
Agreements means, collectively, (i) the Amended
and Restated Indemnification and Reimbursement Agreements, each
dated as of February 21, 2000, between each of MII, MI and
BWICO, on the one hand, and the Chapter 11 Debtors, on the
other hand, and (ii) the related Amended and Restated
Guaranty Agreements, each dated as of February 21, 2000,
between each of MII, MI and BWICO, on the one hand, and
Babcock & Wilcox Canada Ltd., a Canadian corporation
and a direct, wholly owned subsidiary of B&W, on the other
hand.
Americon has the meaning the Preamble
specifies.
Asbestos Insurance Rights Assignment
Agreement has the meaning the Plan of Reorganization
specifies.
Asbestos PD Insurance Rights has the meaning
the Plan of Reorganization specifies.
Asbestos PI Channeling Injunction has the
meaning the Plan of Reorganization specifies.
Asbestos PI Trust has the meaning the Plan of
Reorganization specifies.
Asbestos Protected Parties has the meaning
the Plan of Reorganization specifies.
Asbestos Resolution Legislation means the
U.S. federal legislation currently designated as Senate
Bill 852 (also referred to as the Fairness in Asbestos
Injury Resolution Act or the FAIR Act) or any
other U.S. federal legislation designed, in whole or in
part, to resolve asbestos-related personal injury claims through
the implementation of a national trust.
B&W has the meaning the Preamble
specifies.
B&W Common Stock means the common stock,
par value $10.00 per share, of B&W.
B&W Entities means B&W and its
Subsidiaries.
B&W Note shall mean a five-year
promissory note issued and payable by B&W in the original
principal amount of $250 million, payable (subject to the
satisfaction of the Payment Obligations Condition Precedent,
which shall be applicable to all payments other than the payment
of $25 million of the principal amount thereof, as more
specifically provided in Section 2.1(b) and in the form of
the B&W Note attached as Exhibit A hereto) to the
Asbestos PI Trust and guaranteed by MII and BWICO, with the
guarantee obligations secured by a security interest in all of
the issued and outstanding shares of Capital Stock of B&W
held by BWICO as of the Effective Date, in substantially the
form of Exhibit A hereto.
Bankruptcy Code means Title 11 of the
United States Code, as applicable to the Chapter 11
proceedings.
Business Day has the meaning the Plan of
Reorganization specifies.
A-2
Bankruptcy Court has the meaning the
Preliminary Statement specifies.
BWCCI has the meaning the Preamble specifies.
BWICO has the meaning the Preamble specifies.
Capital Stock means, with respect to:
(i) any corporation, any share, or any depositary receipt
or other certificate representing any share, of an equity
ownership interest in that corporation; and (ii) any other
Entity, any share, membership or other percentage interest, unit
of participation or other equivalent (however designated) of an
equity interest in that Entity.
Cash means cash and cash equivalents.
Chapter 11 Debtors has the meaning the
Preamble specifies.
Claims means any past, present or future
liability, obligation, claim, demand or cause of action
whatsoever, whether such liability, obligation, claim, demand or
cause of action is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured or unsecured, whether or
not the facts of or legal bases therefor are known or unknown,
and whether in the nature of or sounding in tort, or under
contract, warranty or any other theory of law, equity or
admiralty.
Contingent Payment Right has the meaning
Section 2.1(a) specifies.
Creole 1979 Year Policy means the
insurance policy issued by Creole Insurance Company, Ltd., a
Subsidiary of MII, for the policy coverage period from
April 1, 1979 to April 1, 1980 (policy no. 22,007).
Damage to any specified person or other
Entity means any cost, damage (including any consequential,
exemplary, punitive or treble damage) or expense (including
reasonable fees and actual disbursements by attorneys,
consultants, experts or other Representatives and costs of
litigation) to, any fine of or penalty on or any liability
(including loss of earnings or profits) of any other nature of
that person or other Entity.
D&O Insurers means the respective past,
present and future insurers that issued directors and officers
liability policies to any of the MII Indemnified Parties, but,
in the case of each such insurer, only in its capacity as an
issuer of any such directors and officers liability policies.
Debtor-Related Contingent Liability
Arrangements means (a) the letters of credit,
surety bonds and performance, payment, advance payment or
retention bonds described on Schedule 1.1(a) and
(b) all of the guaranty arrangements with respect to
obligations of any of the B&W Entities and as to which any
of the MII Entities has any direct or contingent obligation as
of the Effective Date, including those letters of credit, surety
bonds, performance bonds, payment bonds, nonpayment bonds,
retention bonds and guaranty arrangements described on
Schedule 1.1(a).
District Court has the meaning the
Preliminary Statement specifies.
DPII has the meaning the Preamble specifies.
Effective Date has the meaning the Plan of
Reorganization specifies.
Entity means any individual, corporation,
limited liability company, partnership, association, joint stock
company, joint venture, trust, unincorporated organization,
Governmental Authority or other entity.
Excluded Former Subsidiaries means Hudson
Products Corporation, a Texas corporation,
BWX Technologies, Inc., a Delaware corporation, and
McDermott Technology, Inc., a Delaware corporation, but excludes
any predecessor business operations of any of those corporations.
FCR has the meaning the Preliminary Statement
specifies.
Final Order means an order as to which the
time to appeal, petition for certiorari or move for reargument
or rehearing has expired and as to which no appeal, petition for
certiorari or other proceedings for reargument or rehearing
shall then be pending or as to which any right to appeal,
petition for certiorari,
A-3
reargue or rehear shall have been waived in writing by the
Entity possessing such right, or, in the event that an appeal,
writ of certiorari or reargument or rehearing thereof has been
sought, such order shall have been affirmed by the highest court
to which such order was appealed, or certiorari has been denied
or from which reargument or rehearing was sought, and the time
to take any further appeal, petition for certiorari or move for
reargument or rehearing shall have expired.
Governmental Authority means any federal,
state, county, municipal or other government, domestic or
foreign, or any agency, board, bureau, commission, court,
department or other instrumentality of any such government.
JRMHI means J. Ray McDermott Holdings, Inc.,
a Delaware corporation and an indirect, wholly owned subsidiary
of MII.
McDermott Cash means an amount of Cash equal
to $350 million, to be delivered to the Asbestos PI Trust
on the Effective Date as part of the McDermott Consideration
under the Plan.
MI has the meaning the Preamble specifies.
MII has the meaning the Preamble specifies.
MII Board means the board of directors of MII.
MII Common Stock means the common stock, par
value $1.00 per share, of MII.
MII Entities means MII, MI and BWICO.
MII Indemnified Parties means: (i) MII;
(ii) all Entities that Schedule 1.1(b) identifies as
Affiliates of MII; (iii) all natural persons who are past
or present Affiliates of MII or any of its Subsidiaries;
(iv) all future Affiliates of MII or any of its
Subsidiaries; (v) Hudson Products Corporation, a Delaware
corporation, and all of its present Subsidiaries; (vi) all
the respective Representatives of the persons or other Entities
described in clauses (i) through (v) of this
definition; (vii) all the respective past, present and
future Representatives of the B&W Entities; and
(viii) all the respective successors (by operation of law
or otherwise) of the Entities described in clauses (i)
through (vii) of this definition.
MII Special Meeting of Stockholders means a
meeting of the holders of the outstanding MII Common Stock duly
called and convened, pursuant to resolutions of the Board of
Directors of MII, for the purpose of voting on the approval of
this Agreement and the settlement contemplated by this Agreement.
MTI means McDermott Technology, Inc., a
Delaware corporation and a direct, wholly owned subsidiary of
BWICO.
1998 Transfers has the meaning the
Preliminary Statement specifies.
Payment Obligations Condition Precedent has
the meaning Section 2.1(b) specifies.
Plan of Reorganization means the Joint Plan
of Reorganization as of September 28, 2005, with such
amendments, supplements or other modifications thereto as shall
hereafter be approved by the parties hereto through the date on
which a confirmation order of the District Court with respect to
such plan of reorganization (as so amended, supplemented or
modified) becomes a Final Order.
Pledge Agreement means a pledge and security
agreement to which BWICO and the Asbestos PI Trust are parties,
pursuant to which BWICO will pledge all of the issued and
outstanding capital stock of the reorganized B&W as of the
Effective Date to secure the guarantee obligations of BWICO and
MII relating to the B&W Note, in substantially the form of
Exhibit B hereto.
Released Claims has the meaning
Section 3.1 specifies.
Representatives means, with respect to any
Entity, the directors, officers, employees, accountants
(including independent certified public accountants), advisors,
attorneys, consultants or other agents of that Entity, or any
other representatives of that Entity or of any of those
directors, officers, employees,
A-4
accountants (including independent certified public
accountants), advisors, attorneys, consultants or other agents.
Subject Asbestos Insurance Policies has the
meaning the Plan of Reorganization specifies.
Subsidiary of any specified Entity at any
time means any Entity a majority of the Capital Stock of which
the specified Entity owns or controls at that time, directly or
indirectly through another Subsidiary of the specified Entity.
Support Services Agreement means the existing
Support Services Agreement dated as of January 1, 2000, the
parties to which include the Chapter 11 Debtors and MI.
Tax Allocation Agreement means the existing
Tax Allocation Agreement dated as of January 1, 2000, the
parties to which include B&W and MI.
U.S. means the United States of America.
Section 1.2 Other
Defined Terms. Words and terms this Agreement uses which
other Sections of this Agreement define (whether specifically or
by reference to the Plan of Reorganization or any law or
regulation) are used in this Agreement as those other Sections
define them.
Section 1.3 Other
Definitional Provisions.
(a) This Agreement uses the words herein,
hereof and hereunder and words of
similar import to refer to this Agreement as a whole and not to
any provision of this Agreement, and the words
Article, Section, Preamble,
Preliminary Statement, Schedule and
Exhibit refer to Articles and Sections of, the
preamble and Preliminary Statement in, and Schedules and
Exhibits to, this Agreement unless otherwise specified.
(b) In this Agreement, whenever the context so requires,
the singular number includes the plural and vice versa, and a
reference to one gender includes the other gender and the neuter.
(c) As used herein, the word including (and,
with correlative meaning, the word include) means
including, without limiting the generality of any description
preceding that word, and the words shall and
will are used interchangeably and have the same
meaning.
(d) As used herein, the term business day means
any day other than a Saturday, Sunday or U.S. federal
holiday.
(e) Unless the context otherwise requires, any reference in
this Agreement to B&W or the Chapter 11 Debtors shall
also mean reorganized B&W or the reorganized Chapter 11
Debtors (in each case after giving effect to the consummation of
the Plan of Reorganization), respectively.
(f) All references herein to $ or
dollars are to U.S. dollars.
(g) The language this Agreement uses will be deemed to be
the language the parties hereto have chosen to express their
mutual intent, and no rule of strict construction will be
applied against any party hereto.
Section 1.4 Captions.
This Agreement includes captions to Articles, Sections and
subsections of, and Schedules and Exhibits to, this Agreement
for convenience of reference only, and these captions do not
constitute a part of this Agreement for any other purpose or in
any way affect the meaning or construction of any provision of
this Agreement.
A-5
ARTICLE II
CONTRIBUTIONS TO THE ASBESTOS PI TRUST AND RELATED MATTERS
Section 2.1 Contribution
of McDermott Consideration.
(a) In consideration of the provision of the Asbestos PI
Channeling Injunction and the releases and indemnification
protection to be provided pursuant to the Plan of Reorganization
and this Agreement, the applicable MII Indemnified Party or
B&W Entity will, subject to the satisfaction (or waiver by
the appropriate party or parties) of the conditions set forth in
Article VI, take the following actions:
|
|
|
(i) on the Effective Date, MII will cause one or more of
its Subsidiaries to transfer the McDermott Cash to the Asbestos
PI Trust; |
|
|
(ii) effective as of the Effective Date, B&W will issue
and deliver the B&W Note to the Asbestos PI Trust; |
|
|
(iii) effective as of the Effective Date, MII and BWICO
will provide guaranties with respect to the B&W Note (in
each case in substantially the form set forth in the form of
B&W Note attached as Exhibit A hereto); |
|
|
(iv) effective as of the Effective Date, BWICO will execute
and deliver appropriate documentation in favor of the Asbestos
PI Trust reasonably necessary to grant to the Asbestos PI Trust
a security interest under Article 9 of the Uniform
Commercial Code covering all of the outstanding and issued
shares of Capital Stock of B&W outstanding as of the
Effective Date to secure the guaranty obligations under the
B&W Note; |
|
|
(v) effective as of the Effective Date, MII will, and will
cause all of its Subsidiaries that are listed in the Asbestos
Insurance Rights Assignment Agreement as parties thereto, to
execute and deliver to the Asbestos PI Trust the Asbestos
Insurance Rights Assignment Agreement; and |
|
|
(vi) subject to the satisfaction of the Payment Obligations
Condition Precedent (as provided in Section 2.1(b)) and the
other provisions set forth in Section 2.1(b), on or before
May 29, 2007, MI will, or will cause one or more of its
Subsidiaries to, pay the Asbestos PI Trust an amount equal to
$355 million plus interest thereon at the rate of
7% per annum from (and including) December 1, 2006 to
(but excluding) the date of payment (the Asbestos PI
Trusts contingent right to receive such payment is
referred to herein as the Contingent Payment Right). |
(b) The Contingent Payment Right will vest and amounts
under the B&W Note in excess of $25 million will be
payable only upon satisfaction of the condition precedent that
Asbestos Resolution Legislation shall not have been enacted and
become law on or before November 30, 2006 (the
Payment Obligations Condition Precedent); provided,
however, that
|
|
|
(i) if Asbestos Resolution Legislation is enacted and
becomes law on or before November 30, 2006 and is not
subject to a legal proceeding as of January 31, 2007 which
challenges the constitutionality of such Asbestos Resolution
Legislation (any such proceeding being a Challenge
Proceeding), the Payment Obligations Condition Precedent
shall be deemed not to have been satisfied (and no amounts shall
be payable with respect to the Contingent Payment Right (which
shall be deemed to be extinguished in its entirety) and no
amounts in excess of $25 million shall be payable under the
B&W Note); and |
|
|
(ii) if Asbestos Resolution Legislation is enacted and
becomes law on or before November 30, 2006, but is subject
to a Challenge Proceeding as of January 31, 2007, the
Payment Obligations Condition Precedent shall be deemed not to
have been satisfied and any rights with respect to the
Contingent Payment Right and payments under the B&W Note
(other than a payment of principal in the amount of $25,000,000
to be made on December 1, 2007) shall be suspended until
either: |
|
|
|
(A) there has been a final, non-appealable judicial
decision with respect to such Challenge Proceeding to the effect
that the Asbestos Resolution Legislation is unconstitutional as
generally |
A-6
|
|
|
applied to debtors in Chapter 11 proceedings whose plans of
reorganization have not yet been confirmed and become
substantially consummated (i.e., debtors that are then
similarly situated to B&W as of September 1, 2005 (in a
Chapter 11 proceeding with a plan of reorganization that
has not yet been confirmed)), so that such debtors will not be
subject to the Asbestos Resolution Legislation, in which event
the Payment Obligations Condition Precedent shall be deemed to
have been satisfied on the first day following the later of
(1) the date of such judicial decision and (2) the
expiration of the last of any applicable periods of appeal from
such judicial decision (and the Contingent Payment Right will
then vest (and the payment with respect thereto will thereafter
become payable in full on the later of (x) the date which
is 30 days after the date of such vesting and
(y) May 31, 2007) and the B&W Note will then
become fully payable pursuant to its terms (as more fully
provided in the form of B&W Note attached hereto as
Exhibit A), in each case subject to the provisions of
Section 7.2); or |
|
|
(B) there has been a final nonappealable judicial decision
with respect to such Challenge Proceeding which resolves the
Challenge Proceeding in a manner other than as contemplated by
the immediately preceding clause (A), in which event, the
Payment Obligations Condition Precedent shall be irrevocably
deemed not to have been satisfied (and no amounts shall be
payable with respect to the Contingent Payment Right (which
shall be deemed to be extinguished in its entirety), no amounts
in excess of $25 million shall be payable under the B&W
Note, the guaranties provided in the B&W Note shall
terminate, the Pledge Agreement shall terminate and the
collateral provided pursuant to the Pledge Agreement shall be
released and returned to BWICO free and clear of any security
interest as promptly as practicable). |
Section 2.2 Cooperation
With Respect to Insurance Litigation and Settlement
Activity. To the extent permitted by applicable law and not
inconsistent with the provisions of the Plan of Reorganization,
MII will, after the Effective Date, provide the Asbestos PI
Trust with such reasonable cooperation as the Asbestos PI Trust
may reasonably request in connection with the ongoing insurance
litigation and/or settlement activity with respect to the
Subject Asbestos Insurance Policies; provided, however, that the
Asbestos PI Trust shall reimburse MII for its reasonable
out-of-pocket costs and expenses (including reasonable
attorneys and consultants fees) incurred in
connection with providing such cooperation, promptly (and, in
any event, within 20 days) following MIIs request for
reimbursement therefor.
ARTICLE III
GENERAL RELEASE AND INDEMNIFICATION
Section 3.1 General
Release. Effective as of the Effective Date, each of the
Reorganized Debtors (as that term is defined in the Plan of
Reorganization) and the respective estates of the
Chapter 11 Debtors hereby release, to the fullest extent
permitted by applicable law, each of the MII Indemnified Parties
from any and all Claims and/or Damages arising out of, resulting
from or attributable to, directly or indirectly, (a) the
business or operations of any of the Chapter 11 Debtors or
any of their respective past or present Subsidiaries (other than
the Excluded Former Subsidiaries, in each case, from and after
the date it was incorporated, as reflected in
Schedule 3.1(a)), (b) the ownership of any of the
Chapter 11 Debtors or any of their respective past or
present Subsidiaries (other than the Excluded Former
Subsidiaries, in each case, from and after the date it was
incorporated), (c) any contract, agreement, arrangement or
understanding between one or more of the MII Indemnified
Parties, on the one hand, and any one or more of the
Chapter 11 Debtors or any of their respective past or
present Subsidiaries (other than the Excluded Former
Subsidiaries, in each case, from and after the date it was
incorporated), on the other hand, in effect prior to the
Effective Date (other than this Agreement, the Tax Allocation
Agreement and the Support Services Agreement), (d) any
affiliation or relationship with any of the Chapter 11
Debtors or any of their respective past or present Subsidiaries
(other than the Excluded Former Subsidiaries, in each case, from
and after the date it was incorporated) prior to the Effective
Date (other than as parties to this Agreement, the Tax
Allocation Agreement and the Support Services Agreement) and/or
(e) any legal or equitable claims or causes of action of
any kind by any of the B&W
A-7
Entities relating to any period prior to the Effective Date,
including, in the case of each of clauses (a) through
(e), any Claims based on conduct that constituted or may have
constituted ordinary or gross negligence or reckless, willful or
wanton misconduct of any of the Asbestos Protected Parties or
any conduct for which any of the Asbestos Protected Parties may
be deemed to have strict liability under any applicable law
(collectively, the Released Claims), including:
|
|
|
(i) any and all Claims arising out of, resulting from or
attributable to, directly or indirectly, exposure to products,
equipment or materials completed, products, equipment or
materials in the process of construction, or products, equipment
or materials engineered, designed, marketed, manufactured,
fabricated, constructed, sold, supplied, produced, installed,
maintained, serviced, specified, selected, repaired, removed,
replaced, released, distributed or used at any time by
(A) any of the Chapter 11 Debtors or any of their
respective past or present Subsidiaries (other than the Excluded
Former Subsidiaries, in each case, from and after the date it
was incorporated), (B) any predecessor of any of the
Chapter 11 Debtors or any of their respective past or
present Subsidiaries, or (C) any other Entity for whose
products or operations any of the Entities referred to in the
immediately preceding clauses (A) and
(B) allegedly has liability or is otherwise liable,
including any and all Claims that may also constitute Asbestos
PI Trust Claims, Asbestos PD Claims and Workers
Compensation Claims (as those terms are defined in the Plan of
Reorganization), and including any such Claim (1) for
compensatory damages (such as loss of consortium, wrongful
death, survivorship, proximate, consequential, general and
special damages) and punitive damages, (2) for
reimbursement, indemnification, subrogation and contribution or
(3) under any settlement entered into by or on behalf of
any of the Entities referred to in the immediately preceding
clauses (A), (B) and (C) prior to the
commencement of the Chapter 11 Proceedings; provided,
however, that the Released Claims exclude Claims of the kind
described above in this clause (i) against any of the MII
Indemnified Parties in respect of any premises liability of any
of the MII Indemnified Parties that is not derived in any way
from or based upon or resulting from any affiliation with any of
the Chapter 11 Debtors or any of their respective past or
present Subsidiaries (other than the Excluded Former
Subsidiaries, in each case, from and after the date it was
incorporated); |
|
|
(ii) any and all Claims arising out of, resulting from or
attributable to, directly or indirectly, the 1998 Transfers,
including any and all Claims which were or could have been
asserted against any of the MII Indemnified Parties in the
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 Bankruptcy Court; |
|
|
(iii) any and all Claims (A) that (1) may be
asserted by or through any of the Chapter 11 Debtors or any
of their respective past or present Subsidiaries or (2) may
arise out of or result from, or may be attributable to, any act
or omission on the part of any of the Chapter 11 Debtors or
any of their respective past or present Subsidiaries and (B)
that may arise out of or result from, or may be attributable to,
insurance or the placement of insurance coverage under which any
of the Chapter 11 Debtors or any of their respective past
or present Subsidiaries is or was insured, including all Claims
for contribution, indemnity, retrospective premiums, insurance
coverages owed and reinsurance coverages owed, and all other
Claims arising from or relating to such insurance coverages,
whether based on statute, regulation or common law, and whether
sounding in contract or tort, including any extra-contractual
claims relating to the handling, adjustment or resolution of any
coverage claims and including any and all Claims (including for
contribution or indemnity) brought by any Entity in, pursuant to
or in connection with any Insurer Misconduct Action (as defined
in the Plan of Reorganization); |
|
|
(iv) any and all Claims (in addition to those described in
Sections 3.1(i) through (iv)) that may be asserted by or through
any of the Chapter 11 Debtors or any of their respective
past or present Subsidiaries against any of the MII Indemnified
Parties (including Claims arising under Section 544, 545,
547, 548, 549, 550, 551 or 553 of the Bankruptcy Code or similar
Claims arising under state or any other law) which are in the
nature of fraudulent transfer, successor liability, veil |
A-8
|
|
|
piercing or alter ego-type claims, as a consequence of
transactions, events or circumstances involving or affecting any
of the B&W Entities (or any of their respective
predecessors) or any of their respective businesses or
operations that occurred or existed prior to the Effective
Date; and |
|
|
(v) any and all Claims (in addition to those described in
Sections 3.1(i) through (v)) arising out of, resulting from or
attributable to, directly or indirectly, any and all other
intercompany dealings between MII and/or its past and present
Affiliates (other than the B&W Entities), on the one hand,
and any of the Chapter 11 Debtors and/or any of their
respective past or present Subsidiaries, on the other hand,
prior to the Effective Date; |
provided, however, that the Released Claims shall
not include: (A) any Claim referred to in clause (ii)
of the first sentence of Section 5.1 and (B) any Claim
referred to in clause (ii) of the second sentence of
Section 5.2. The releases provided pursuant to this
Section 3.1 shall also extend to each of the
D&O Insurers, in each case to the extent, and only to
the extent, that such insurer may have liability in respect of a
Released Claim that is derivative of any liability of any of the
MII Indemnified Parties with respect to such Released Claim
(before giving effect to the release to be provided pursuant to
this Section 3.1), and only with respect to such
insurers obligations under directors and officers
liability policies. The Plan of Reorganization shall provide
that the releases provided for in this Section 3.1 and the
indemnification provisions set forth in Section 3.2 shall
be binding on the Reorganized Debtors and the Asbestos PI Trust
with the same force and effect as if the Reorganized Debtors and
the Asbestos PI Trust were included in the list of parties
granting the releases in this Section 3.1. Nothing in this
Section 3.1 shall be deemed to limit or modify the releases
provided or to be provided pursuant to Sections 5.1 and 5.2.
Section 3.2 Indemnification.
(a) From and after the Effective Date, the Asbestos PI
Trust shall protect, defend, indemnify and hold harmless, to the
fullest extent permitted by applicable law, each of the MII
Indemnified Parties and the B&W Entities from and against:
(A) any and all Released Claims (whether or not brought by
or through any of the Chapter 11 Debtors or any of their
respective estates), to the extent they are channeled (or
purported to be channeled) to the Asbestos PI Trust as
contemplated by the Plan of Reorganization and the Asbestos PI
Channeling Injunction, together with any and all related
Damages; (B) any and all Damages relating to Claims
purported to be covered by the Asbestos PI Channeling
Injunction, to the extent such Claims are brought in
jurisdictions outside the United States of America or are not
otherwise, for any reason, subject to the Asbestos PI Channeling
Injunction; (C) any and all Claims or Damages arising out
of, resulting from or attributable to, directly or indirectly,
(i) the assignment, transfer or other provision to the
Asbestos PI Trust of the rights to the coverages under the
Subject Asbestos Insurance Policies and under the settlement and
coverage-in-place agreements relating to the Subject Asbestos
Insurance Policies as contemplated by Section 2.1(a)(v)
and/or (ii) any Asbestos PI Insurance Settlement Agreement;
(D) any and all Claims that have been or hereafter may be
made by any claimant, insurer or other Entity under or in
connection with (1) the Subject Asbestos Insurance Policies
and/or (2) any settlement, coverage-in-place, insurance,
reinsurance or other agreement relating to any of the Subject
Asbestos Insurance Policies, together with any and all related
Damages, including any and all Claims (including for
contribution or indemnity) brought by any Entity in, pursuant to
or in connection with any Insurer Misconduct Action (as defined
in the Plan of Reorganization); and (E) any and all Claims
that have been or hereafter may be made by any claimant, insurer
or other Entity under or in connection with any insurance policy
issued by any captive insurance Subsidiary of MII, including the
Creole 1979 Year Policy, to the extent such Claims arise
out of, result from or are attributable to, directly or
indirectly, Asbestos PI Trust Claims, together with any and
all related Damages. If there shall be pending any Claim against
the Asbestos PI Trust for indemnification under this
Section 3.2(a), the Asbestos PI Trust shall maintain
sufficient assets (as determined in good faith by the trustees
of the Asbestos PI Trust) to fund any payments in respect of
that Claim for indemnification.
(b) From and after the Effective Date, the B&W Entities
shall, jointly and severally, protect, indemnify and hold
harmless, to the fullest extent permitted by applicable law,
each of the MII
A-9
Indemnified Parties from and against: (i) any and all of
the Released Claims (whether or not brought by or through any of
the Chapter 11 Debtors or any of their respective estates),
together with any and all related Damages; (ii) any and all
Claims that may arise out of or result from, or may be
attributable to, the ownership or operation of B&Ws
foundry facility in Barberton, Ohio; (iii) any and all
Asbestos PD Claims; and (iv) any and all other Claims
that have been or hereafter may be made by any claimant, insurer
or other Entity under or in connection with any insurance policy
issued by any captive insurance Subsidiary of MII, including the
Creole 1979 Year Policy, to the extent such Claims arise
out of, result from or are attributable to, directly or
indirectly, the business or operations of any of the
Chapter 11 Debtors or any of their respective past or
present Subsidiaries (other than the Excluded Former
Subsidiaries, in each case, from and after the date it was
incorporated), together with any and all related Damages. To the
extent any provision of any existing agreement between or among
any of the B&W Entities, on the one hand, and any of the MII
Indemnified Parties, on the other hand, is inconsistent with any
of the release or indemnification provisions of this Agreement,
such provision of such other agreement is hereby superseded.
ARTICLE IV
RELEASE AND INDEMNIFICATION FROM DEBTOR-RELATED
CONTINGENT LIABILITIES
Section 4.1 Termination
or Replacement of Debtor-Related Contingent Liability
Arrangements. Subject to the satisfaction (or waiver by the
appropriate party or parties) of the conditions set forth in
Article VI, the Chapter 11 Debtors shall, and shall
cause the other B&W Entities to, use their best efforts to
terminate or replace, as of the Effective Date or as promptly as
practicable thereafter, each of the Debtor-Related Contingent
Liability Arrangements.
Section 4.2 Indemnification
with Respect to Debtor-Related Contingent Liability
Arrangements. The B&W Entities will, jointly and
severally, indemnify and hold harmless MII and each of the other
MII Indemnified Parties from and against any and all Claims and
any and all losses, costs, Damages or expenses whatsoever
(including reasonable attorneys fees) that any of them may
sustain, suffer or incur after the Effective Date and that
result from, arise out of or relate to any of the Debtor-Related
Contingent Liability Arrangements.
ARTICLE V
MUTUAL RELEASE OF INTERCOMPANY ACCOUNTS
AND OTHER CLAIMS
Section 5.1 Mutual
Release of Pre-Petition Intercompany Accounts and Claims.
Subject to the satisfaction (or waiver by the appropriate party
or parties) of the conditions set forth in Article VI,
effective as of the Effective Date, and except as may otherwise
be agreed to by the MII Entities and the B&W Entities:
(a) the MII Entities hereby release the Chapter 11
Debtors and the other B&W Entities from any and all
pre-petition accounts receivable, notes receivable, debts,
liabilities, Damages and obligations owed by any of the
Chapter 11 Debtors or any of the other B&W Entities to
MII or any of its Subsidiaries (other than the B&W Entities)
and any and all Claims, demands, actions or causes of action,
suits, judgments and controversies of any kind whatsoever of MII
or any of its Subsidiaries (other than the B&W Entities)
against any of the Chapter 11 Debtors or any of the other
B&W Entities, in each case whether at law or in equity,
known or unknown; and (b) in addition to the releases
effected pursuant to Section 3.1, the Chapter 11
Debtors (for themselves and the other B&W Entities) hereby
release the MII Indemnified Parties from any and all
pre-petition accounts receivable, notes receivable, debts,
liabilities, Damages and obligations owed by any of the MII
Indemnified Parties to any of the Chapter 11 Debtors or any
of the other B&W Entities and any and all Claims, demands,
actions or causes of action, suits, judgments and controversies
of any kind whatsoever of any of the Chapter 11 Debtors or
any of the other B&W Entities against any of the MII
Indemnified Parties, in each case whether at law or in equity,
A-10
known or unknown, including, in the case of each of
clause (a) and clause (b) of this sentence, any
liabilities, obligations, Claims, demands, actions or causes of
action, suits, judgments or controversies based on conduct that
constituted or may have constituted ordinary or gross negligence
or reckless, willful or wanton misconduct of any of the Entities
being released hereby or any conduct for which any of the
Entities being released hereby may be deemed to have strict
liability under any applicable law; provided, however, that
the releases set forth in this Section 5.1 shall not have
any effect on:
|
|
|
(i) any amounts owed to MI under the Support Services
Agreement; |
|
|
(ii) any amounts owed under the Tax Allocation Agreement by
any party to that agreement to any other party to that agreement; |
|
|
(iii) any amounts owed by any of the Chapter 11
Debtors to any of MII, MI or BWICO under any of the Amended and
Restated Indemnification and Reimbursement Agreements; |
|
|
(iv) any Claims (whether for indemnification, contribution
or otherwise) by any of the MII Indemnified Parties against any
of the B&W Entities in respect of warranty claims, breach of
contract claims or similar claims, in any case, initiated by a
customer and arising out of, resulting from or attributable to
actions by or omissions of any of the Chapter 11 Debtors or
any of their respective past or present Subsidiaries prior to
the Effective Date (including any warranty or indemnification
Claim relating to work performed for Northland Power Iroquois
Falls Partnership in connection with the design and construction
of a cogeneration plant in Iroquois Falls, Ontario, Canada); |
|
|
(v) any Claim (whether for contribution or otherwise) by
any of the MII Indemnified Parties against any of the B&W
Entities or the Asbestos PI Trust in respect of any premises
liability or other independent liability arising out of,
resulting from or attributable to, directly or indirectly,
exposure to products, equipment or materials completed,
products, equipment or materials in the process of construction
or products, equipment or materials engineered, designed,
marketed, manufactured, fabricated, constructed, sold, supplied,
produced, installed, maintained, serviced, specified, selected,
repaired, removed, replaced, released, distributed or used at
any time by B&W or any of its past or present Subsidiaries
(other than the Excluded Former Subsidiaries), any predecessor
of B&W or any of its past or present Subsidiaries, or any
other Entity for whose products or operations any of the B&W
Entities allegedly has liability or is otherwise liable,
including any such Claim (A) for compensatory damages (such
as loss of consortium, wrongful death, survivorship, proximate,
consequential, general and special damages) and punitive damages
or (B) for reimbursement, indemnification, subrogation and
contribution at any time, which Claims shall be fully preserved
and remain viable after the Effective Date; or |
|
|
(vi) any accounts receivable, notes receivable, debts,
liabilities, obligations, claims, demands, actions, causes of
action, suits, judgments or controversies that are specifically
established or preserved by, specifically disposed of by or
otherwise the specific subject of any other provision of this
Agreement or any provision of the Plan of Reorganization. |
Section 5.2 Cash
Settlement of Post-Petition Intercompany Accounts. Promptly
after the Effective Date, and except as otherwise may be agreed
to by the MII Entities and the B&W Entities, the MII
Entities, on the one hand, and the B&W Entities, on the
other hand, shall: (i) complete a cash settlement of the
post-petition intercompany accounts and notes between them (in
each case, the cash settlement will be an amount in cash equal
to the amount of the intercompany account, as reflected on the
respective books and records of the MII Entities and the B&W
Entities), other than (A) any amounts owed by any of the
B&W Entities to MI under the Support Services Agreement, and
(B) any amounts owed by any of the MII Entities to any of
the B&W Entities or owed by any of the B&W Entities to
any of the MII Entities under the Tax Allocation Agreement; and
(ii) enter into a mutual release that will evidence the
release of any other debts, liabilities, Damages, obligations,
Claims, demands, actions or causes of action arising during the
period from February 22, 2000 through the Effective Date,
including any based on conduct that constituted or may have
constituted ordinary or gross negligence or reckless, willful or
wanton misconduct of any of the Entities being so released or
any conduct for which any of the Entities being so released may
be deemed to have strict liability under any applicable law.
Notwithstanding the
A-11
provisions of clause (ii) of the immediately preceding
sentence, the mutual release to be entered into pursuant to this
Section 5.2 shall not have any effect on:
|
|
|
(i) any amounts owed to MI under the Support Services
Agreement; |
|
|
(ii) any amounts owed under the Tax Allocation Agreement by
any party to that agreement to any other party to that agreement; |
|
|
(iii) any amounts owed by any of the Chapter 11
Debtors to any of MII, MI or BWICO under any of the Amended and
Restated Indemnification and Reimbursement Agreements; |
|
|
(iv) any Claims (whether for indemnification, contribution
or otherwise) by any of the MII Indemnified Parties against
any of the B&W Entities in respect of warranty claims,
breach of contract claims or similar claims, in any case,
initiated by a customer and arising out of, resulting from or
attributable to actions by or omissions of any of the
Chapter 11 Debtors or any of their respective past or
present Subsidiaries prior to the Effective Date (including any
warranty or indemnification Claim relating to work performed for
Northland Power Iroquois Falls Partnership in connection with
the design and construction of a cogeneration plant in Iroquois
Falls, Ontario, Canada); |
|
|
(v) any Claim (whether for contribution or otherwise) by
any of the MII Indemnified Parties against any of the B&W
Entities or the Asbestos PI Trust in respect of any premises
liability or other independent liability arising out of,
resulting from or attributable to, directly or indirectly,
exposure to products, equipment or materials completed,
products, equipment or materials in the process of construction
or products, equipment or materials engineered, designed,
marketed, manufactured, fabricated, constructed, sold, supplied,
produced, installed, maintained, serviced, specified, selected,
repaired, removed, replaced, released, distributed or used at
any time by B&W or any of its past or present Subsidiaries
(other than the Excluded Former Subsidiaries), any predecessor
of B&W or any of its past or present Subsidiaries, or any
other Entity for whose products or operations any of the B&W
Entities allegedly has liability or is otherwise liable,
including any such Claim (A) for compensatory damages (such
as loss of consortium, wrongful death, survivorship, proximate,
consequential, general and special damages) and punitive damages
or (B) for reimbursement, indemnification, subrogation and
contribution at any time, which Claims shall be fully preserved
and remain viable after the Effective Date; or |
|
|
(vi) any accounts receivable, notes receivable, debts,
liabilities, obligations, claims, demands, actions, causes of
action, suits, judgments or controversies that are specifically
established or preserved by, specifically disposed of by or
otherwise the specific subject of any other provision of this
Agreement (including the indemnification provisions of
Sections 3.2 and 4.2) or any provision of the Plan of
Reorganization. |
ARTICLE VI
CONDITIONS TO CONSUMMATION OF THE SETTLEMENT
Section 6.1 Conditions
to the Obligations of Each Party. The obligation of each
party hereto to take the actions contemplated to be taken by
that party under this Agreement is subject to the satisfaction
on or before the Effective Date, or the written waiver by that
party under Section 8.2, of each of the following
conditions:
|
|
|
(i) No Injunctions or Restraints. No temporary
restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other
legal restraint or prohibition preventing or otherwise
interfering with the consummation of the settlement contemplated
by this Agreement shall be in effect (provided, however, that
this condition shall not be applicable with respect to the
provisions set forth in Section 3.1, Section 3.2(b),
Article IV and Article V); |
|
|
(ii) Effectiveness of Asbestos PI Channeling
Injunction. The Plan of Reorganization shall contain all
provisions necessary under Section 524(g) of the Bankruptcy
Code to implement the Asbestos PI Channeling Injunction to the
fullest extent possible under Section 524(g) of the
Bankruptcy Code; and the Asbestos PI Channeling Injunction shall
be in full force and effect; and |
A-12
|
|
|
(iii) No Legal Prohibitions. No Governmental
Authority shall have enacted, promulgated, issued, adopted,
decreed or otherwise implemented any law, statute, order, rule,
regulation, judgment, decree, award or other governmental
requirement that prohibits or restricts in any material respect
the consummation of the settlement contemplated by this
Agreement (provided, however, that this condition shall not be
applicable with respect to the provisions set forth in
Section 3.1, Section 3.2(b), Article IV and
Article V). |
Section 6.2 Conditions
to the Obligations of the MII Indemnified Parties. The
obligations of the MII Indemnified Parties with respect to the
actions contemplated to be taken by them under this Agreement
are subject to the satisfaction on or before the Effective Date,
or the written waiver by the MII Entities under
Section 8.2, of all the conditions set forth in
Section 6.1 and the conditions that (i) this Agreement
shall have been duly approved by the Board of Directors of each
of B&W, BWICO and MII, and (ii) this Agreement shall
have been duly and unconditionally approved by a majority of the
voting power of the outstanding shares of MII Common Stock
present in person or represented by proxy at the MII Special
Meeting of Stockholders (and the total number of shares for
which votes shall have been cast at the MII Special Meeting of
Stockholders on the proposal to so approve this Agreement and
the settlement contemplated by this Agreement shall have
represented at least 50% of the voting power of all the
outstanding shares of MII Common Stock entitled to vote on such
proposal), provided that this stockholder approval condition may
be satisfied through the approval (in the manner contemplated by
the foregoing provisions) of a draft of this Agreement, coupled
with an acknowledgment that the Board of Directors of MII shall
have the authority to approve any modifications to such draft as
may be mutually agreed among the parties hereto.
ARTICLE VII
SET-OFF PROVISIONS
Section 7.1 General.
If and to the extent the Asbestos PI Trust becomes obligated to
make any reimbursement or other payment to MII or any other MII
Indemnified Party under this Agreement (including pursuant to
Section 4.2), subject to the provisions of Section 4.2
(if applicable), MII may, at any time and from time to time,
elect, in lieu of MII or such other MII Indemnified Party
receiving cash for all or any part of that indemnification
obligation, to set-off any or all of such amount by reducing
(i) the amount, if any, payable pursuant to the Contingent
Payment Right, (ii) the principal amount of the B&W
Note then outstanding or (iii) both. In connection with any
such set-off effected by reducing the principal amount at the
B&W Note, the amount of such set-off shall be deemed a
prepayment in accordance with the terms of the B&W Note. Any
set-off election made by MII or any other MII Indemnified
Party under this Section 7.1 shall be effected by written
notice provided to the Asbestos PI Trust in accordance with
Section 8.5, which notice shall specify the obligations to
be set-off.
Section 7.2 Asbestos
Resolution Legislation Set-off. If Asbestos Resolution
Legislation is enacted and becomes law but the Payment
Obligations Condition Precedent nevertheless has been satisfied
in accordance with the provisions of Section 2.1(b), and
any of the MII Indemnified Parties or the B&W Entities
becomes obligated to make any payment or contribution with
respect to any claims that would constitute Asbestos PI
Trust Claims (as defined in the Plan) thereunder (any such
obligation being a Legislative Payment Obligation):
(i) any remaining payment obligation pursuant to the
Contingent Payment Right shall be reduced (but not below zero)
by the amount of such Legislative Payment Obligation; and
(ii) to the extent of any excess of such Legislative
Payment Obligation over the remaining payment obligations
pursuant to the Contingent Payment Right, the principal amount
of the B&W Note (together with the accrued and unpaid
interest on the principal amount being reduced pursuant to this
clause (ii)) shall be reduced (but not below zero) by the
amount of such excess. The provisions of this Section 7.2
shall be reflected in any documentation evidencing the
Contingent Payment Right and the B&W Note and related
guaranties and security documentation. In the event of any
conflict between the application of the provisions of
Section 7.1 and the foregoing provisions of this
Section 7.2, the foregoing provisions of this
Section 7.2 shall control.
A-13
Section 7.3 Legends.
The certificate representing the B&W Note will bear legends
and other provisions indicating that the amounts owing under the
B&W Note are subject to set-off as provided in
Section 7.1 and that the B&W Note is subject to
restrictions on transfer as provided therein.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Binding
Effect; Assignment; Third-Party Beneficiaries. This
Agreement shall be binding on each of the parties hereto and
their respective successors and assigns. In addition, the Plan
of Reorganization shall provide that this Agreement is binding
on the Reorganized Debtors. This Agreement and the rights of the
parties hereunder may not be assigned (except by operation of
law) and will be binding on and inure to the benefit of the
parties hereto and their respective successors and permitted
assigns. This Agreement is not intended, and shall not be
construed, deemed or interpreted, to confer on any person or
other Entity not a party hereto any rights or remedies
hereunder, except as otherwise provided expressly herein.
Section 8.2 Entire
Agreement; Amendment; Waivers. This Agreement, the Plan of
Reorganization and the documents to be delivered under this
Agreement or the Plan of Reorganization shall constitute the
entire agreement and understanding among the parties to this
Agreement with respect to the subject matter hereof and
supersede all prior agreements and understandings, oral or
written, among the parties hereto relating to the subject matter
of this Agreement. Except as Section 8.9 contemplates, this
Agreement may not be amended or modified, and no provision
hereof may be waived, except by an agreement in writing signed
by the party against whom enforcement of any such amendment,
modification or waiver is sought. The waiver of any of the terms
and conditions hereof shall not be construed or interpreted as,
or deemed to be, a waiver of any other term or condition hereof.
Section 8.3 Termination
of This Agreement.
(a) This Agreement may be terminated at any time prior to
the Effective Date solely:
|
|
|
(i) by the mutual written consent of the parties hereto; |
|
|
(ii) by MII, the ACC or the FCR if the board and
stockholder approvals contemplated by Section 6.2 shall not
have been obtained on or before January 31, 2006; |
|
|
(iii) by MII if, after the MII Special Meeting of
Stockholders, a majority of the members of the McDermott Board
concludes, in good faith, after consultation with inside and
outside counsel and as reflected in a written resolution duly
adopted by the MII Board, that there has been a material adverse
change (or a combination of more than one of such changes) in
(A) the financial condition, assets or operations of the
B&W Entities, taken as a whole, or (B) national or
international general business or economic conditions, which (in
any case) obligates the MII Board to cause this Agreement to be
terminated to avoid a breach of the fiduciary duties of the MII
Board under applicable law; or |
|
|
(iv) by any party hereto if the Effective Date shall not
have occurred on or
before ,
2006, or such other date as may be agreed to by the Plan
Proponents . |
(b) If this Agreement is terminated under
Section 8.3(a), there shall be no liability or obligation
under this Agreement on the part of any party hereto.
Section 8.4 No
Admissions. This Agreement does not constitute, and shall
not be construed, interpreted or otherwise read to constitute
any admission by any of the Chapter 11 Debtors or the MII
Entities with respect to any alleged asbestos-related
liabilities arising out of, resulting from or attributable to
the business or operations of the B&W Entities or their
respective predecessors.
Section 8.5 Notices.
All notices required or permitted under this Agreement must be
in writing and will be deemed to be delivered and received
(i) if personally delivered or if delivered by facsimile or
A-14
courier service, when actually received by the party to whom
notice is sent or (ii) if deposited with the United States
Postal Service (whether actually received or not), at the close
of business on the third business day next following the day
when placed in the mail, postage prepaid, certified or
registered with return receipt requested, addressed to the
appropriate party or parties, at the address of such party or
parties set forth below (or at such other address as such party
may designate by written notice to all other parties in
accordance with this Section 8.5):
|
|
|
(A) if to any of the Chapter 11 Debtors, addressed to
it at: |
|
|
|
20 S. Van Buren Avenue |
|
Barberton, Ohio 44203 |
|
Attention: David L. Keller |
|
Facsimile: (330) 860-1057 |
|
|
with copies (which will not constitute notice for purposes of
this Agreement) to: |
|
|
Kirkland & Ellis LLP |
|
Citicorp Center |
|
153 E. 53rd Street |
|
New York, New York 10022-4675 |
|
Attention: Theodore L. Freedman, Esq. |
|
Facsimile: (212) 446-4900 |
|
|
|
(B) If to MI, MII or BWICO: |
|
|
|
1450 Poydras Street |
|
New Orleans, Louisiana 70112-6050 |
|
Attention: John T. Nesser, Esq. |
|
Facsimile: (504) 587-5657 |
|
|
with a copy (which shall not constitute notice for purposes of
this Agreement) to: |
|
|
Baker Botts L.L.P. |
|
One Shell Plaza |
|
910 Louisiana |
|
Houston, Texas 77002-4995 |
|
Attention: Ted W. Paris, Esq. |
|
Facsimile: (713) 229-7738 |
|
|
|
(C) if to the ACC, addressed to it at: |
|
|
|
c/o Caplin & Drysdale, Chartered |
|
399 Park Avenue, 27th Floor |
|
New York, New York 10022 |
|
Attention: Elihu Inselbuch, Esq. |
|
Facsimile: (212) 644-6755 |
|
|
with copies (which will not constitute notice for purposes of
this Agreement) to: |
|
|
Caplin & Drysdale, Chartered |
|
One Thomas Circle, N.W., Suite 1100 |
|
Washington, D.C. 20005 |
|
Attention: Peter Van N. Lockwood, Esq. |
|
Facsimile: (202) 429-3329 |
|
|
|
(D) if to the FCR, addressed to him at: |
|
|
|
Eric D. Green, Esq. |
|
155 Federal Street |
|
Boston, Massachusetts 02110 |
|
Facsimile: (617) 556-9900 |
A-15
|
|
|
with copies (which will not constitute notice for purposes of
this Agreement) to: |
|
|
Young Conaway Stargatt & Taylor, LLP |
|
The Brandywine Building |
|
1000 West Street, 17th Floor |
|
P.O. Box 391 |
|
Wilmington, Delaware 19899 |
|
Attention: James L. Patton, Jr., Esq. |
|
Facsimile: (302) 571-1253 |
|
|
|
(E) if to the Asbestos PI Trust, to the trustees of such
trust at the address for such trustees as shall be specified in
the Asbestos PI Trust Agreement (as defined in the Plan of
Reorganization). |
Section 8.6 Governing
Law. This Agreement and the rights and obligations of the
parties hereto shall be governed by and construed and enforced
in accordance with the substantive laws of the State of
Louisiana without regard to any conflicts of law provisions
thereof that would result in the application of the laws of any
other jurisdiction.
Section 8.7 Exercise
of Rights and Remedies. Except as this Agreement otherwise
provides, no delay or omission in the exercise of any right,
power or remedy accruing to any party hereto as a result of any
breach or default hereunder by any other party hereto will
impair any such right, power or remedy, nor will it be
construed, deemed or interpreted as a waiver of or acquiescence
in any such breach or default, or of any similar breach or
default occurring later; nor will any waiver of any single
breach or default be construed, deemed or interpreted as a
waiver of any other breach or default hereunder occurring before
or after that waiver. No right, remedy or election any term of
this Agreement gives will be deemed exclusive, but each will be
cumulative with all other rights, remedies and elections
available at law or in equity. Anything in this agreement to the
contrary notwithstanding, the parties hereto acknowledge that in
no event shall any breach by any of the B&W Entities party
hereto of any of their covenants, agreements or other
obligations hereunder to any of the MII Indemnified Parties, or
any breach by any of the MII Indemnified Parties party hereto of
any of their covenants, agreements or other obligations
hereunder to any of the B&W Entities, have any impact on the
rights, remedies or obligations of the Asbestos PI Trust under
this Agreement.
Section 8.8 Further
Assurances. From and after the Effective Date, each party
hereto shall use all reasonable efforts to take, or cause to be
taken, all appropriate action, do or cause to be done all things
necessary under applicable laws and execute and deliver such
documents and other papers as may be required to carry out the
provisions of this Agreement and to consummate, perform and make
effective the settlement contemplated hereby. Without limiting
the generality of the foregoing, on or after the Effective Date,
(i) MII, MI and BWICO will, and will cause the other MII
Entities to, execute and deliver such release documents as any
of the Chapter 11 Debtors may reasonably request, and
(ii) the Chapter 11 Debtors will, and will cause the
other B&W Entities to, execute and deliver such release
documents as any of the MII Entities may reasonably request, in
each case in order to fully implement and effectuate the
releases set forth in or contemplated by the provisions of
Article V.
Section 8.9 Reformation
and Severability. If any provision of this Agreement is
invalid, illegal or unenforceable, that provision will, to the
extent possible, be modified in such manner as to be valid,
legal and enforceable but so as to most nearly retain the intent
of the parties hereto as expressed herein, and if such a
modification is not possible, that provision will be severed
from this Agreement, and in either case the validity, legality
and enforceability of the remaining provisions of this Agreement
will not in any way be affected or impaired thereby, it being
intended by each party hereto that all the rights and privileges
of all parties hereto will be enforceable to the fullest extent
permitted by applicable law.
Section 8.10 Counterparts.
This Agreement may be executed in multiple counterparts, each of
which will be an original, but all of which together will
constitute one and the same agreement.
A-16
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written:
|
|
|
MCDERMOTT INTERNATIONAL, INC. |
|
|
|
|
|
Name: |
|
Title: |
|
|
MCDERMOTT INCORPORATED |
|
|
|
|
|
Name: |
|
Title: |
|
|
BABCOCK & WILCOX INVESTMENT COMPANY |
|
|
|
|
|
Name: |
|
Title: |
|
|
THE BABCOCK & WILCOX COMPANY |
|
|
|
|
|
Name: |
|
Title: |
|
|
DIAMOND POWER INTERNATIONAL, INC. |
A-17
|
|
|
|
|
Name: |
|
Title: |
|
|
BABCOCK & WILCOX CONSTRUCTION |
|
CO., INC. |
|
|
|
|
|
Name: |
|
Title: |
|
|
THE ASBESTOS CLAIMANTS COMMITTEE |
|
|
|
|
|
Name: |
|
Title: |
|
|
THE LEGAL REPRESENTATIVE FOR FUTURE |
|
ASBESTOS-RELATED CLAIMANTS |
|
|
|
|
|
Name: |
|
Title: |
|
|
THE ASBESTOS PI TRUST |
A-18
SCHEDULE 1.1(a)
[to come]
A-19
SCHEDULE 1.1(b)
MII Indemnified Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
Jurisdiction of |
Name |
|
% Owned |
|
Organization |
|
|
|
|
|
B&W de Panama, Inc.
|
|
|
100 |
|
|
|
Panama |
|
B&W SOFC G.P., Inc.
|
|
|
100 |
|
|
|
Delaware |
|
B&W SOFC L.P., Inc.
|
|
|
100 |
|
|
|
Delaware |
|
Babcock & Wilcox Asia Limited
|
|
|
100 |
|
|
|
Hong Kong |
|
Babcock & Wilcox Beijing Company, Ltd.
|
|
|
50 |
|
|
|
China |
|
Babcock & Wilcox China Investment Co., Inc.
|
|
|
100 |
|
|
|
Panama |
|
Babcock & Wilcox HRSG Company
|
|
|
100 |
|
|
|
Delaware |
|
Babcock & Wilcox International Investments Co.,
Inc.
|
|
|
100 |
|
|
|
Panama |
|
Babcock & Wilcox Investment Company
|
|
|
100 |
|
|
|
Delaware |
|
Barmada McDermott (L) Limited
|
|
|
30 |
|
|
|
Malaysia |
|
Barmada McDermott Sdn. Bhd.
|
|
|
30 |
|
|
|
Malaysia |
|
Bechtel B&W Idaho, LLC
|
|
|
33 |
|
|
|
Delaware |
|
Brick Insurance Company, Ltd.
|
|
|
100 |
|
|
|
Bermuda |
|
BWX Technologies, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
BWXT Federal Services, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
BWXT Hanford Company
|
|
|
100 |
|
|
|
Delaware |
|
BWXT of Idaho, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
BWXT of Ohio, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
BWXT Pantex, L.L.C.
|
|
|
59 |
|
|
|
Delaware |
|
BWXT Protec, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
BWXT Savannah River Company
|
|
|
100 |
|
|
|
Delaware |
|
BWXT Services, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
BWXT Y-12, L.L.C.
|
|
|
51 |
|
|
|
Delaware |
|
Chartering Company (Singapore) Pte. Ltd.
|
|
|
100 |
|
|
|
Singapore |
|
Columbia Basin Ventures, LLC
|
|
|
18 |
|
|
|
Delaware |
|
Construcciones Maritimas Mexicanas, S.A. de C.V.
|
|
|
49 |
|
|
|
Mexico |
|
Creole Insurance Company, Ltd.
|
|
|
100 |
|
|
|
Bermuda |
|
Deep Oil Technology, Inc.
|
|
|
50 |
|
|
|
California |
|
Delta Catalytic (Holland) B.V.
|
|
|
100 |
|
|
|
Netherlands |
|
Delta Hudson International, Inc.
|
|
|
100 |
|
|
|
Panama |
|
DHEC Corporation
|
|
|
100 |
|
|
|
Texas |
|
Diamond Power (Australia) Pty. Limited
|
|
|
50 |
|
|
|
Australia |
|
Diamond Power Hubei Machine Company, Ltd.
|
|
|
50 |
|
|
|
China |
|
DynMcDermott Petroleum Operations Company
|
|
|
30 |
|
|
|
Louisiana |
|
Eastern Marine Services, Inc.
|
|
|
100 |
|
|
|
Panama |
|
First Emirates Trading Corporation
|
|
|
|
|
|
|
|
|
Global Energy-McDermott Limited
|
|
|
100 |
|
|
|
British Virgin Islands |
|
Greenbank Terotech Pty. Limited
|
|
|
50 |
|
|
|
Australia |
|
Halley & Mellowes Pty. Ltd.
|
|
|
50 |
|
|
|
Australia |
|
Honore Insurance Company, Ltd.
|
|
|
100 |
|
|
|
Bermuda |
|
Hudson Engineering (Canada), Ltd.
|
|
|
100 |
|
|
|
Canada |
|
Hudson Engineering International, Inc.
|
|
|
100 |
|
|
|
Panama |
|
Hydro Marine Services, Inc.
|
|
|
100 |
|
|
|
Panama |
|
Initec, Astanoy McDermott International Inc., S.A.
|
|
|
50 |
|
|
|
Spain |
|
J. Ray McDermott (Aust.) Holding Pty. Limited
|
|
|
100 |
|
|
|
Australia |
|
A-20
|
|
|
|
|
|
|
|
|
|
|
|
|
Jurisdiction of |
Name |
|
% Owned |
|
Organization |
|
|
|
|
|
J. Ray McDermott (Nigeria) Ltd.
|
|
|
100 |
|
|
|
Nigeria |
|
J. Ray McDermott Contractors, Inc.
|
|
|
100 |
|
|
|
Panama |
|
J. Ray McDermott de Mexico, S.A. de C. V.
|
|
|
100 |
|
|
|
Mexico |
|
J. Ray McDermott Diving International, Inc.
|
|
|
100 |
|
|
|
Panama |
|
J. Ray McDermott Eastern Hemisphere Limited
|
|
|
100 |
|
|
|
Mauritius |
|
J. Ray McDermott Engineering Holdings, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
J. Ray McDermott Engineering, LLC
|
|
|
100 |
|
|
|
Texas |
|
J. Ray McDermott Far East, Inc.
|
|
|
100 |
|
|
|
Panama |
|
J. Ray McDermott Holdings, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
J. Ray McDermott International Services Limited
|
|
|
100 |
|
|
|
United Kingdom |
|
J. Ray McDermott International Vessels, Ltd.
|
|
|
100 |
|
|
|
Cayman Islands |
|
J. Ray McDermott International, Inc.
|
|
|
100 |
|
|
|
Panama |
|
J. Ray McDermott Investments B.V.
|
|
|
100 |
|
|
|
Netherlands |
|
J. Ray McDermott Middle East, Inc.
|
|
|
100 |
|
|
|
Panama |
|
J. Ray McDermott Technology, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
J. Ray McDermott Underwater Services, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
J. Ray McDermott Underwater Services, Inc.
|
|
|
100 |
|
|
|
Panama |
|
J. Ray McDermott West Africa Holdings, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
J. Ray McDermott West Africa, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
J. Ray McDermott, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
J. Ray McDermott, S.A.
|
|
|
100 |
|
|
|
Panama |
|
Lagniappe Insurance Company, Ltd.
|
|
|
100 |
|
|
|
Bermuda |
|
Macshelf Ltd
|
|
|
50 |
|
|
|
United Kingdom |
|
Malmac Sdn. Bhd.
|
|
|
55 |
|
|
|
Malaysia |
|
McDermott (Malaysia) Sendirian Berhad
|
|
|
100 |
|
|
|
Malaysia |
|
McDermott Abu Dhabi Offshore Construction Company
|
|
|
49 |
|
|
|
United Arab Emirates |
|
McDermott Arabia Company Limited
|
|
|
49 |
|
|
|
Saudi Arabia |
|
McDermott Azerbaijan Marine Construction, Inc.
|
|
|
80 |
|
|
|
Panama |
|
McDermott Caspian Contractors, Inc.
|
|
|
100 |
|
|
|
Panama |
|
McDermott Far East, Inc.
|
|
|
100 |
|
|
|
Panama |
|
McDermott Gulf Operating Company, Inc.
|
|
|
100 |
|
|
|
Panama |
|
McDermott Holdings (U.K.) Limited
|
|
|
100 |
|
|
|
United Kingdom |
|
McDermott Incorporated
|
|
|
100 |
|
|
|
Delaware |
|
McDermott Industries (Aust.) Pty. Limited
|
|
|
100 |
|
|
|
Australia |
|
McDermott International B.V.
|
|
|
100 |
|
|
|
Netherlands |
|
McDermott International Beijing, Inc.
|
|
|
100 |
|
|
|
Panama |
|
McDermott International Investments Co., Inc.
|
|
|
100 |
|
|
|
Panama |
|
McDermott International Marine Investments N.V.
|
|
|
100 |
|
|
|
Netherlands Antilles |
|
McDermott International Trading Co., Inc.
|
|
|
100 |
|
|
|
Panama |
|
McDermott Marine Construction Limited
|
|
|
100 |
|
|
|
United Kingdom |
|
McDermott Marine UK Limited
|
|
|
100 |
|
|
|
United Kingdom |
|
McDermott Offshore Services Company, Inc.
|
|
|
100 |
|
|
|
Panama |
|
McDermott Old JV Office, Inc.
|
|
|
100 |
|
|
|
Panama |
|
McDermott Overseas Investment Co. N.V.
|
|
|
100 |
|
|
|
Antilles |
|
McDermott Overseas, Inc.
|
|
|
100 |
|
|
|
Panama |
|
McDermott Servicos de Construcao, Ltda.
|
|
|
100 |
|
|
|
Brazil |
|
McDermott Shipbuilding, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
McDermott South East Asia Pte. Ltd.
|
|
|
100 |
|
|
|
Singapore |
|
A-21
|
|
|
|
|
|
|
|
|
|
|
|
|
Jurisdiction of |
Name |
|
% Owned |
|
Organization |
|
|
|
|
|
McDermott Technology, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
McDermott Trade Corporation
|
|
|
100 |
|
|
|
Delaware |
|
McDermott West Indies Company
|
|
|
|
|
|
|
|
|
Menck GmbH
|
|
|
100 |
|
|
|
Germany |
|
Mentor Engineering Consultants Limited
|
|
|
100 |
|
|
|
United Kingdom |
|
Mentor Subsea Technology Services, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
Nooter/ Eriksen -Babcock & Wilcox, L.L.C.
|
|
|
50 |
|
|
|
Missouri |
|
North Atlantic Vessel, Inc.
|
|
|
100 |
|
|
|
Panama |
|
Oak Ridge Security Associates, L.L.C.
|
|
|
49 |
|
|
|
Delaware |
|
Oceanic Red Sea Company
|
|
|
|
|
|
|
|
|
Offshore Hyundai International Limited
|
|
|
50 |
|
|
|
Vanuatu |
|
Offshore Hyundai International, Ltd.
|
|
|
50 |
|
|
|
Cayman Islands |
|
Offshore Pipelines International Gulf E.C.
|
|
|
100 |
|
|
|
Bahrain |
|
Offshore Pipelines International, Ltd.
|
|
|
100 |
|
|
|
Cayman Islands |
|
Offshore Pipelines Nigeria Limited
|
|
|
60 |
|
|
|
Nigeria |
|
Offshore Pipelines Sdn. Bhd.
|
|
|
100 |
|
|
|
Malaysia |
|
OPI Vessels, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
OPMI, E.C.
|
|
|
100 |
|
|
|
Bahrain |
|
OPMI, Ltd.
|
|
|
100 |
|
|
|
Cayman Islands |
|
P. T. Armandi Pranaupaya
|
|
|
100 |
|
|
|
Indonesia |
|
P. T. Babcock & Wilcox Indonesia
|
|
|
49 |
|
|
|
Indonesia |
|
P. T. Bataves Fabricators
|
|
|
80 |
|
|
|
Indonesia |
|
P. T. McDermott Indonesia
|
|
|
49 |
|
|
|
Indonesia |
|
Pirogue Insurance Company, Ltd.
|
|
|
100 |
|
|
|
Bermuda |
|
POGC Sensor Technology Pty. Limited
|
|
|
50 |
|
|
|
Australia |
|
PT. J. Ray McDermott Indonesia
|
|
|
100 |
|
|
|
Indonesia |
|
Rocky Flats Technical Associates, Inc.
|
|
|
33 |
|
|
|
Colorado |
|
Sabine River Realty, Inc.
|
|
|
100 |
|
|
|
Louisiana |
|
Safe Sites of Colorado, L.L.C.
|
|
|
35 |
|
|
|
Delaware |
|
Saudi OPMI Company Limited
|
|
|
40 |
|
|
|
Saudi Arabia |
|
SOFCo-EFS Holdings LLC (formerly SOFCO Holdings LLC)
|
|
|
100 |
|
|
|
Delaware |
|
SOFCo L. P
|
|
|
100 |
|
|
|
Delaware |
|
SparTEC, Inc.
|
|
|
100 |
|
|
|
Delaware |
|
Spars International Inc.
|
|
|
50 |
|
|
|
Texas |
|
Tallares Navales del Golfo, S.A. de C.V.
|
|
|
95 |
|
|
|
Mexico |
|
Thermax Babcock & Wilcox Limited
|
|
|
40 |
|
|
|
India |
|
TL Marine Sdn. Bhd
|
|
|
49 |
|
|
|
Malaysia |
|
Trispec Technical Services Ltd.
|
|
|
50 |
|
|
|
Canada |
|
Valveco Industries Pty. Ltd.
|
|
|
50 |
|
|
|
Australia |
|
Varsy International N.V.
|
|
|
100 |
|
|
|
Netherlands Antilles |
|
Washington Group BWXT Operating Services, LLC
|
|
|
50 |
|
|
|
Delaware |
|
WD 140 Platform LLC
|
|
|
45 |
|
|
|
Louisiana |
|
A-22
EXHIBIT A
As provided in Section 6 of this Promissory Note (this
Note), this Note and the indebtedness evidenced
hereby are subject to the setoff and payment obligation
reduction provisions set forth in Sections 7.1 and 7.2 of
the within-referenced Settlement Agreement. The holder of this
Note, by its acceptance hereof, agrees to be bound by the
provisions of Sections 7.1 and 7.2 of such Settlement
Agreement.
Except as provided in Section 9 of this Note, neither
this Note nor any interest herein may be assigned without the
prior written consent of the maker hereof, which consent may be
withheld in the sole discretion of the maker hereof.
This Note has not been registered under the Securities Act of
1933 and may be sold or otherwise transferred only if the holder
hereof complies with that law and other applicable securities
laws.
PROMISSORY NOTE
|
|
|
|
|
$250,000,000.00
|
|
|
,2006 |
|
|
|
|
New Orleans, Louisiana |
|
FOR VALUE RECEIVED, The Babcock & Wilcox Company, a
Delaware corporation (herein referred to as the
Maker), hereby promises and agrees to pay to the
order of The Babcock & Wilcox Company, Diamond Power
International, Inc., Babcock & Wilcox Construction Co.,
Inc., and Americon, Inc. Asbestos PI Trust (the
Holder) the principal amount of TWO HUNDRED FIFTY
MILLION DOLLARS ($250,000,000), together with interest on the
unpaid principal sum from (and including) December 1, 2006
until (but excluding) the Maturity Date (as hereinafter
defined), at the rate of seven percent (7.0%) per annum as
hereinafter provided, in each case subject to the terms and
conditions hereof, including the provisions of
Section 1(b). Interest hereunder shall be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
References in this Promissory Note (this Note) to
the Settlement Agreement mean that certain
Settlement Agreement made as of
February , 2006 by and among
the Maker, the Holder, McDermott International, Inc., a
Panamanian corporation of which the Maker is an indirect, wholly
owned subsidiary (MII), McDermott Incorporated, a
Delaware corporation and a direct, wholly owned subsidiary of
MII (MI), Babcock & Wilcox Investment
Company, a Delaware corporation and a direct, wholly owned
subsidiary of MI (BWICO), Diamond Power
International, Inc., a Delaware corporation and a direct, wholly
owned subsidiary of the Maker, Americon, Inc., a Delaware
corporation and a direct, wholly owned subsidiary of the Maker
(Americon), Babcock & Wilcox Construction
Co., Inc., a Delaware corporation and a direct, wholly owned
subsidiary of Americon, the Asbestos Claimants Committee
referred to therein, the Legal Representative for Future
Asbestos-Related Claimants referred to therein, and the Apollo/
Parks Township Trust referred to therein.
ARTICLE IX
Payment Obligations.
Section 9.1 Principal
and Interest. Subject to Section 1(b), the principal
amount of this Note shall be payable in five equal annual
installments of $50,000,000 each, commencing on December 1,
2007 and continuing on each anniversary thereof through and
including December 1, 2011 (the Maturity Date),
at which time the remaining unpaid principal amount of this Note
shall be paid in full. Each such payment date, including the
Maturity Date, is referred to herein as a Scheduled
Principal Payment Date. Subject to Section 1(b),
interest on the unpaid principal amount of this Note shall begin
to accrue on December 1, 2006 and shall be payable on each
June 1 and December 1 thereafter through the Maturity
Date (each, an Interest Payment Date), in each case
to the extent interest has accrued from (and including) the date
of the then most recent prior payment of interest to (but
excluding) such Interest Payment Date. Payments of principal and
interest shall be made in lawful money of the United
A-23
States of America, by (i) check or (ii) wire transfer
of immediately available funds to such bank account of the
Holder as the Holder may designate from time to time by at least
thirty (30) days prior written notice to the Maker.
Any payment (excluding any prepayment) on or in respect of this
Note shall be applied first to accrued but unpaid interest and
then to the principal balance hereof. The unpaid principal may,
at the option of the Maker, be prepaid, in whole or in part, at
any time without premium or penalty, through the payment of an
amount equal to 100% of the principal amount being prepaid,
together with all accrued and unpaid interest on this Note to
(but excluding) the date of the prepayment. At such time as this
Note is paid or prepaid in full, it shall be surrendered to the
Maker and cancelled and shall not be reissued. Anything in this
Note to the contrary notwithstanding, any payment that is due on
a date other than a Business Day (as hereinafter defined) shall
be made on the next succeeding Business Day (and such extension
of time shall not be included in the computation of interest).
As used in this Note, the term Business Day means
any day other than a Saturday, a Sunday, or a day on which
commercial banks in New York City are required or authorized by
law to be closed.
Section 9.2 Payment
Obligations Condition Precedent. Except for the $25,000,000
payment described in this Section 1(b), payment obligations
under this Note shall only arise if the U.S. federal
legislation designated (as of the date of this Note) as Senate
Bill 852 (also referred to as the Fairness in Asbestos
Injury Resolution Act or the FAIR Act), or any
other U.S. federal legislation designed, in whole or in
part, to resolve asbestos-related personal injury claims through
the implementation of a national trust (any such legislation,
including the FAIR Act, being referred to herein as
Asbestos Resolution Legislation), has not been
enacted and become law on or before November 30, 2006 (the
Payment Obligations Condition Precedent); provided,
however, that:
|
|
|
(a) if Asbestos Resolution Legislation is enacted and
becomes law on or before November 30, 2006 and is not
subject to a legal proceeding as of January 31, 2007 which
challenges the constitutionality of such Asbestos Resolution
Legislation (any such proceeding being a Challenge
Proceeding), the Payment Obligations Condition Precedent
shall be deemed not to have been satisfied, the only payment to
be made under this Note shall be $25,000,000 (which payment
shall be made by the Maker on the first Scheduled Principal
Payment Date), the covenants set forth in Section 2 shall
terminate, the Guaranties (as hereinafter defined) shall
terminate, and this Note shall be deemed paid in full and
cancelled automatically pursuant to its terms, no interest shall
be deemed to have accrued hereunder, the Pledge Agreement shall
terminate, and the Collateral (as defined in Section 1(c))
shall be released and returned to BWICO free and clear of any
security interest (at no cost or expense to the Maker or either
Guarantor (as hereinafter defined)) as promptly as
practicable; and |
|
|
(b) if Asbestos Resolution Legislation is enacted and
becomes law on or before November 30, 2006, but is subject
to a Challenge Proceeding as of January 31, 2007, the
Payment Obligations Condition Precedent shall be deemed not to
have been satisfied and any payments under this Note (other than
a payment of principal in the amount of $25,000,000 to be made
on December 1, 2007) shall be suspended (any period of
suspension as provided in this Section 1(b)(ii) being a
Suspension Period) until either: |
|
|
|
(i) there has been a final, non-appealable judicial
decision with respect to such Challenge Proceeding to the effect
that the Asbestos Resolution Legislation is unconstitutional as
generally applied to debtors in Chapter 11 proceedings
whose plans of reorganization have not yet been confirmed and
become substantially consummated (i.e., debtors that are
then similarly situated to the Maker as of September 1,
2005 (in a Chapter 11 proceeding with a plan of
reorganization that has not yet been confirmed)), so that such
debtors will not be subject to the Asbestos Resolution
Legislation, in which event: (1) the Payment Obligations
Condition Precedent shall be deemed to have been satisfied on
the first day following the later of (a) the date of such
judicial decision and (b) the expiration of the last of any
applicable periods of appeal from such judicial decision;
(2) within thirty (30) days of the receipt of written
notice delivered by the Holder to the Maker and the United
States Bankruptcy Court for the Eastern District of Louisiana
(the Bankruptcy Court) of such judicial decision or
such expiration of the applicable |
A-24
|
|
|
periods of appeal (as applicable), interest on this Note held in
the escrow account referred to below shall be paid to the
Holder; and (3) principal payments and interest shall be
payable on this Note as described in Section 1(a) (with a
one-time payment of any such principal payments that would have
become due during the Suspension Period but for the application
of the foregoing provisions (after deducting the payment, if
previously made, of the $25,000,000 amount referred to above),
which payment shall be made within thirty (30) days of
receipt of the written notice by the Maker and the Bankruptcy
Court referred to in the immediately preceding
clause (2)); or |
|
|
(ii) there has been a final nonappealable judicial decision
with respect to such Challenge Proceeding which resolves the
Challenge Proceeding in a manner other than as contemplated by
the immediately preceding clause (A), in which event:
(1) the Payment Obligations Condition Precedent shall be
irrevocably deemed not to have been satisfied; and (2) as
of the later of the date that decision becomes final and
nonappealable or the date the $25,000,000 amount referred to
above in this Section 1(b)(ii) has been paid by the Maker,
(a) this Note shall be deemed to have been paid in full and
shall be cancelled; (b) the funds in the escrow account
referred to below shall be turned over to the Maker;
(c) the covenants set forth in Section 2 shall
terminate; (d) the Guaranties shall terminate; (e) the
Pledge Agreement shall terminate; and (f) the Collateral
shall be released and returned to BWICO free and clear of any
security interest (at no cost or expense to the Maker or either
Guarantor) as promptly as practicable. |
|
|
|
During any Suspension Period, interest shall be paid on this
Note as required by Section 1(a) into an escrow account
established by the Maker for such purpose with a national bank
or trust company which regularly acts as an escrow agent in
commercial transactions, which escrow account shall remain until
such time as there has been a final, non-appealable judicial
decision (to either effect contemplated by this
Section 1(b)) with respect to the Challenge Proceeding that
gave rise to the Suspension Period, as evidenced by a written
notice with respect thereto delivered by either (i) the
Holder to the Maker and the Bankruptcy Court or (ii) the
Maker to the Holder and the Bankruptcy Court. |
Section 9.3 As
further provided in Section 5, MII and BWICO (each a
Guarantor) are guaranteeing the payment obligations
of the Maker under this Note. Pursuant to the provisions of the
Pledge and Security Agreement dated as of the date of this Note
to which BWICO and the Holder are parties (the Pledge
Agreement), the guarantee obligations of the Guarantors
are being secured by a security interest in all of the capital
stock of the Maker outstanding as of the date of this Note (the
Collateral). Each of the Maker and the Guarantors
sometimes is referred to herein as an Obligor.
ARTICLE X
Certain Covenants.
The Obligors hereby covenant and agree as follows, after the
date of the Note and until such time as this Note has been paid
in full or deemed to have been paid in full pursuant to the
provisions of Section 1(b):
Section 10.1 Maintenance
of existence. Except as permitted by Section 2(h), each
Obligor shall maintain its corporate existence and remain in
good standing in its jurisdiction of incorporation.
Section 10.2 Continuation
of business. Each Obligor shall continue its principal lines
of business carried on as of the date of this Note, except where
the board of directors of such Obligor determines in good faith
that the discontinuation of a line of business would not
reasonably be expected to have a material adverse effect on the
business, financial condition, or results of operations of such
Obligor and its subsidiaries, taken as a whole.
Section 10.3 Maintenance
of insurance. Each Obligor shall maintain or cause to be
maintained insurance with respect to its property and business
against such liabilities and risks, in such types and
A-25
amounts and with such deductibles or self-insurance risk
retentions, in each case as the board of directors of such
Obligor determines in good faith to be customary in its
respective industries.
Section 10.4 Maintenance
of books and records. Each Obligor shall maintain its
accounting books and records in accordance with accounting
principles generally accepted in the United States
(GAAP) in all material respects, to the extent
applicable.
Section 10.5 Compliance
with laws. Each Obligor shall comply with all laws and
governmental regulations applicable to it, except to the extent
that the failure to so comply would not have a material adverse
effect on the business, financial condition, or results of
operations of such Obligor and its subsidiaries, taken as a
whole.
Section 10.6 Delivery
of financial statements. MII shall deliver to the Holder
(i) annual audited consolidated financial statements of MII
and its consolidated subsidiaries, (ii) if otherwise
available, annual audited financial statements of the Maker and
BWICO (provided that this clause will not require preparation of
such audited financial statements if they are not otherwise
available) and (iii) unaudited consolidating financial
statements of BWICO and MII, in each case no later than ninety
(90) days after the end of each such Obligors fiscal
year-end or as soon as otherwise available.
Section 10.7 Notification
of default. Each Obligor shall notify the Holder, within ten
(10) Business Days after receipt by such Obligor, of any
notice of default received by it under any agreement or
instrument governing or creating any material Indebtedness (as
hereinafter defined) of such Obligor or any of its consolidated
subsidiaries. As used in this Note, Indebtedness
means, with respect to any Obligor, without duplication:
|
|
|
(a) indebtedness of such Obligor for borrowed money; |
|
|
(b) obligations of such Obligor evidenced by debentures,
promissory notes, or other similar instruments; |
|
|
(c) obligations of such Obligor in respect of letters of
credit, bankers acceptances, or other similar instruments,
excluding obligations in respect of trade letters of credit,
bankers acceptances, or other similar instruments issued
in respect of trade payables or similar obligations to the
extent not drawn upon or presented, or, if drawn upon or
presented, the resulting obligation of such Obligor is paid with
30 Business Days; |
|
|
(d) obligations of such Obligor to pay the deferred and
unpaid purchase price of property or services which are recorded
as liabilities in accordance with GAAP, excluding trade
payables, advances on contracts, deferred compensation and
similar liabilities arising in the ordinary course of business
of such Obligor (obligations of the kind referred to in this
clause (iv) are hereinafter referred to as Purchase
Money Indebtedness); and |
|
|
(e) rent obligations of such Obligor as lessee under any
lease arrangement classified as a capital lease on the balance
sheet of such Obligor in accordance with GAAP. |
Section 10.8 Restrictions
on divestitures, mergers and consolidations. BWICO shall not
sell the outstanding common stock of the Maker to any entity
that is not an Obligor or a consolidated subsidiary of an
Obligor (excluding J. Ray McDermott, S.A. or any of its
subsidiaries). None of the Obligors shall enter into any merger
or consolidation transaction pursuant to which any of them is
acquired by an entity that is not an Obligor without the prior
written consent of the Holder, which consent shall not be
unreasonably withheld or delayed. Neither the Maker nor MII
shall sell all of its assets or its assets substantially as an
entirety (whether in a single transaction or a series of related
transactions), without the prior written consent of the Holder
(which consent shall not be unreasonably withheld or delayed).
Notwithstanding the foregoing, this covenant shall not restrict
any transaction pursuant to which the remaining principal
balance of this Note (and all accrued and unpaid interest on
this Note) is paid in full concurrently with the closing of such
transaction.
A-26
Section 10.9 Subordination
of additional Indebtedness. Any Indebtedness incurred by the
Maker after the date of this Note will be expressly subordinated
(pursuant to customary subordination provisions as determined by
the Maker in good faith upon advice from a nationally recognized
investment banking firm) to the indebtedness under this Note,
except for any such incurrence by the Maker under or in
connection with any (i) facilities for working capital,
letters of credit (including facilities relating to Indebtedness
incurred to provide collateral for letters of credit and similar
instruments, or so-called synthetic letter of credit
facilities) or bonding requirements entered into, issued,
or obtained in the ordinary course of business or as part of the
Exit Financing (as defined in the Plan of Reorganization
referred to in the Settlement Agreement), and any replacements,
refinancings, renewals, or extensions of any of the foregoing,
(ii) letters of credit, bankers acceptances, bonds,
capital leases, or similar instruments entered into, issued, or
obtained in the ordinary course of business, (iii) Purchase
Money Indebtedness arrangements entered into in the ordinary
course of business, (iv) replacements, refinancings,
renewals, or extensions of any Indebtedness outstanding as of
the date of this Note (provided that, in the case of any
Indebtedness incurred in accordance with this clause (iv),
the principal amount of the Indebtedness incurred does not
materially exceed the principal amount of the Indebtedness being
replaced, refinanced, renewed, or extended, plus any associated
premiums, fees and expenses), or (v) guaranties, surety
arrangements, interest rate protection arrangements and similar
arrangements of or with respect to any Indebtedness described in
any of the immediately preceding clauses (i) through
(iii) (the debt arrangements referred to in the immediately
preceding clauses (i) through (v) are collectively
referred to herein as the Specified Debt
Arrangements).
Section 10.10 Prohibitions
on incurrence of new liens. The Maker shall not grant any
liens on its assets to secure any Indebtedness, other than
Indebtedness pursuant to any of the Specified Debt Arrangements.
Section 10.11 Restrictions
on certain guaranties. The Maker shall not provide a
guaranty of the obligations of any entity that is not a
consolidated subsidiary of the Maker or a joint venture or other
similar business arrangement formed or invested in by the Maker
or any of its subsidiaries without the prior written consent of
the Holder (which consent will not be unreasonably withheld or
delayed).
Section 10.12 Restrictions
on transactions with affiliates. The Maker shall not engage
in any transactions with affiliated entities (other than its
consolidated subsidiaries) other than on an arms-length
basis in the ordinary course of business, except as permitted by
Section 2(m) or pursuant to existing agreements, including
the Support Services Agreement dated as of January 1, 2000
to which the Maker is a party, any amendments thereto that do
not materially change the rights or obligations of the parties
thereto in any manner that would be adverse to the Holder in any
material respect, the Tax Allocation Agreement dated as of
January 1, 2000 to which the Maker is a party, any
amendments thereto that do not materially change the rights or
obligations of the parties thereto in any manner that would be
adverse to the Holder in any material respect, the Amended and
Restated Indemnification Agreements dated as of
February 21, 2000 to which the Maker is a party, any
amendments thereto that do not materially change the rights or
obligations of the parties thereto in any manner that would be
adverse to the Holder in any material respect, and any
replacement or similar inter-company agreements approved by the
board of directors of the Maker in good faith, and except for
the spin-off of the Makers pension arrangements in a
manner consistent with MIIs prior public disclosure
thereof (as reflected in MIIs reports filed with the
Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended, prior to the date of this Note).
Section 10.13 Restricted
payments. The Maker shall not pay any dividends or make any
similar distributions to BWICO; provided, however, that this
covenant shall not restrict the Maker from making any dividends,
similar distributions, or payments in order to fund the
$350,000,000 cash payment being made concurrently with the
issuance of this Note (as contemplated by the Settlement
Agreement), any dividends, similar distributions, or payments in
order to fund the amount that may become payable pursuant to the
Contingent Payment Right (as defined in the Settlement
Agreement), any payments under this Note, or any payments to
reimburse the Guarantors for any amounts paid by either of them
pursuant to the Guaranties; provided, further, that:
(i) after any payment due and owing in respect of the
A-27
Contingent Payment Right has been paid in full, in the event the
Maker accumulates cash in excess of $75,000,000 (other than
pursuant to borrowings under any of the Specified Debt
Arrangements), this covenant shall not restrict the Maker from
paying dividends from time to time to the extent of such excess,
so long as the Maker is not in default under this Note at the
time any such dividend is declared or paid; and (ii) in the
event of any Suspension Period as contemplated by
Section 1(b)(ii), the Maker may from time to time pay
dividends or make similar distributions to BWICO so long as an
amount equal to any such dividend is placed in the escrow
account contemplated by Section 1(b)(ii) to satisfy any
contingent payments with respect to the Contingent Payment Right
or payment obligations under this Note, until such time as such
Suspension Period ends.
Section 10.14 Prohibition
on certain loans. The Maker shall not make loans to any
entity that is not a consolidated subsidiary of the Maker or a
joint venture or other similar business arrangement formed or
invested in by the Maker or any of its consolidated subsidiaries
without the prior written consent of the Holder (which consent
shall not be unreasonably withheld or delayed), other than loans
to customers, vendors, and subcontractors in the ordinary course
of business.
Section 10.15 Covenant
in event of foreclosure of security interest. In the event
the Holder forecloses on its security interest in the Collateral
pursuant to the provisions of the Pledge Agreement, the Obligors
will cooperate in the transition of the Maker to a stand-alone
operating entity.
ARTICLE XI
Events of Default and Remedies.
Section 11.1 Events
of Default. So long as this Note has not been paid in full,
each of the following events will constitute an Event of
Default:
|
|
|
(a) any default in the payment of the principal or accrued
interest payable under this Note, as and when the same shall
become due and payable, and continuance of such default for a
period of ten (10) days after the Makers receipt
of a Default Notice (as hereinafter defined) from the Holder
with respect to such default; |
|
|
(b) any breach of any of the covenants contained in
Section 2, and continuance of such breach for a period of
thirty (30) days after the Makers receipt of a
Default Notice from the Holder with respect to such breach; |
|
|
(c) commencement of an involuntary case or other proceeding
against any Obligor seeking (A) liquidation,
reorganization, or other relief with respect to it or its debts
under any applicable bankruptcy, insolvency, or other similar
law now or hereafter in effect, (B) the appointment of a
receiver, liquidator, custodian, or trustee of any Obligor or
for all or substantially all the property and other assets of
any Obligor, or (C) the winding up or liquidation of the
affairs of any Obligor, if, in the case of any of (A), (B), or
(C) above, such case or proceeding shall remain unstayed
and undismissed for a period of sixty (60) days; |
|
|
(d) (A) commencement of a voluntary case by any
Obligor under any applicable bankruptcy, insolvency, or other
similar law now or hereafter in effect, (B) consent by any
Obligor to the entry of an order for relief in an involuntary
case against such Obligor under any such law, (C) consent
by any Obligor to the appointment or taking possession by a
receiver, liquidator, custodian, or trustee of such Obligor or
for all or substantially all its assets, or (D) a general
assignment by any Obligor for the benefit of its
creditors; or |
|
|
(e) the failure by MI to make, or to cause one or more of
its subsidiaries to make, the required payment with respect to
the Contingent Payment Right, on a timely basis in accordance
with the provisions of the Settlement Agreement following the
satisfaction of the Payment Obligations Condition Precedent and
the vesting of the Contingent Payment Right pursuant to the
terms of the Settlement Agreement. |
A-28
Section 11.2 Remedies.
If an Event of Default specified in Section 3(a)(i), (ii),
or (v) shall occur, then the Holder may, by written notice
to the Maker (a Default Notice), so long as the
Event of Default is continuing, declare all unpaid principal and
accrued interest under this Note immediately due and payable
without further presentment, demand, protest, or further notice,
all of which are hereby expressly waived by the Maker. If any
Event of Default specified in Section 3(a)(iii) or
(iv) shall occur, then, without any notice to the Maker or
any other act by the Holder, the entire principal amount of this
Note (together with all accrued interest thereon) shall become
immediately due and payable without presentment, demand,
protest, or other notice of any kind, all of which are hereby
expressly waived by the Maker.
Section 11.3 Expenses.
If an Event of Default shall occur, the Maker shall pay, and
save the Holder harmless against liability for the payment of,
all reasonable expenses, including reasonable attorneys
fees, incurred by the Holder in enforcing its rights hereunder.
ARTICLE XII
Waivers; Amendments.
Except as set forth in Sections 3(a)(i), 3(a)(ii), and
3(b), to the extent permitted by applicable law, each Obligor
hereby expressly waives demand for payment, presentment, notice
of dishonor, notice of intent to demand, notice of acceleration,
notice of intent to accelerate, protest, notice of protest and
diligence in collecting and the bringing of suit against the
Maker with respect to this Note. The Obligors agree that the
Holder may extend the time for repayment or accept partial
payment an unlimited number of times without discharging or
releasing any of the Obligors from their respective obligations
under this Note (including the Guaranties). No delay or omission
on the part of the Holder in exercising any power or right in
connection herewith shall operate as a waiver of such right or
any other right under this Note (including the Guaranties), nor
shall any single or partial exercise of any such right or power,
or any abandonment or discontinuance of steps to enforce such a
right or power, preclude any other or further exercise thereof
or the exercise of any other right or power. No amendment,
modification, or waiver of any provision of this Note (including
the Guaranties), nor any consent to any departure therefrom,
shall in any event be effective unless the same shall be in
writing and signed by the person against whom enforcement
thereof is to be sought, and then such waiver or consent shall
be effective only in the specific instance and for the specific
purpose for which given.
ARTICLE XIII
Guaranties.
Section 13.1 Subject
to the terms and conditions of this Note, the Guarantors hereby,
jointly and severally, unconditionally guarantee to the Holder
the prompt and complete payment in cash when due, subject to any
applicable grace periods and notice requirements set forth in
this Note, of all the Makers payment obligations to the
Holder under this Note (the Obligations). An Event
of Default under this Note shall constitute an event of default
under the guaranties of the Guarantors provided in this
Section 5 (the Guaranties), and shall entitle
the Holder to accelerate the obligations of the Guarantors
hereunder in the same manner and to the same extent as the
Obligations. The Guaranties constitute guarantees of payment
when due and not of collection.
Section 13.2 Anything
herein to the contrary notwithstanding, the maximum liability of
each Guarantor hereunder shall in no event exceed the amount
which can be guaranteed by such Guarantor under applicable
federal and state laws relating to fraudulent transfers or
conveyances or to the insolvency of debtors (after giving effect
to any right of contribution from the other Guarantor).
Section 13.3 The
Guarantors shall not exercise any rights which they may acquire
by way of subrogation to the rights of the Holder hereunder
until all the Obligations shall have been paid in full. Subject
to the foregoing, upon payment of all the Obligations, the
Guarantors shall be subrogated to the
A-29
rights of the Holder against the Maker, and the Holder agrees to
take such steps as the Guarantors may reasonably request to
implement such subrogation.
Section 13.4 To
the maximum extent permitted by applicable law, the Guarantors
understand and agree that the Guaranties shall be construed as
continuing, complete, absolute, and unconditional guarantees of
payment without regard to, and each Guarantor hereby waives any
defense of a surety or guarantor or any other obligor on any
obligations arising in connection with or in respect of, and
hereby agrees that its obligations hereunder shall not be
discharged or otherwise affected as a result of, any of the
following: (i) any defense, setoff, or counterclaim (other
than the defense of payment or performance and the setoff rights
referred to in Section 6) which may at any time be
available to or be asserted by the Maker against the Holder;
(ii) the insolvency, bankruptcy arrangement,
reorganization, adjustment, composition, liquidation,
disability, dissolution, or lack of power of the Maker or the
other Guarantor, or any sale, lease, or transfer of any or all
of the assets of the Maker or the other Guarantor, or any change
in the shareholders of the Maker or the other Guarantor;
(iii) any change in the corporate existence, structure, or
ownership of any other Obligor; (iv) the absence of any
attempt to collect the Obligations or any part of them from any
other Obligor; or (v) any other circumstance or act which
constitutes, or might be construed to constitute, an equitable
or legal discharge of the Maker for the Obligations, or of such
Guarantor under its Guaranty, in bankruptcy or in any other
instance (other than the defense of payment or performance or
any such discharge that may arise out of or be based on Asbestos
Resolution Legislation, as provided in Sections 7.1 and 7.2
of the Settlement Agreement). When making any demand hereunder
or otherwise pursuing its rights and remedies hereunder against
either Guarantor, the Holder may, but shall be under no
obligation to, join or make a similar demand on or otherwise
pursue or exhaust such rights and remedies as it may have
against the Maker or the other Guarantor, and any failure by the
Holder to make any such demand, to pursue such other rights or
remedies, or to collect any payments from the Maker or the other
Guarantor, or any release of the Maker or the other Guarantor,
shall not relieve such Guarantor of any obligation or liability
hereunder, and shall not impair or affect the rights and
remedies, whether express, implied, or available as a matter of
law, of the Maker against such Guarantor.
Section 13.5 The
Guaranties shall terminate upon the payment in full of the
Obligations (as the same may be limited pursuant to the
provisions of Section 1(b)) or at such later time as may be
applicable pursuant to the provisions of
Section 1(b)(ii)(B)(2)(c).
ARTICLE XIV
Right of Setoff.
The Obligations shall be subject to the setoff and reduction in
payment obligations provisions set forth in Sections 7.1
and 7.2 of the Settlement Agreement. By its acceptance of this
Note, the Holder agrees to be bound by the provisions of
Section 7.1 and 7.2 of the Settlement Agreement.
ARTICLE XV
No Recourse Against Individuals.
No director, officer, employee, or representative of any of the
Obligors (in each case, in such persons capacity as such),
and no stockholder of MII (in its capacity as such), shall have
any personal liability in respect of any obligations of the
Obligors under this Note or the Guaranties, or for any claim
based on, with respect to, or by reason of such obligations or
their creation, by reason of his/her or its status as such. By
accepting this Note, the Holder hereby waives and releases all
such liability. Such waiver and release is part of the
consideration for the issue of the Note and the Guaranties by
the Obligors.
A-30
ARTICLE XVI
Certain Representations.
The Maker hereby represents that: (a) it is duly
incorporated, validly existing, and in good standing under the
laws of the State of Delaware and has full corporate power and
authority to execute and deliver this Note; (b) its
execution and delivery of this Note has been duly authorized by
all necessary corporate action on its part; and (c) this
Note constitutes a legal, valid, and binding obligation of the
Maker, enforceable against the Maker in accordance with the
terms hereof, except as such enforceability may be limited by:
(i) bankruptcy, insolvency, reorganization, fraudulent
transfer or conveyance, and other laws of general applicability
relating to or affecting creditors rights; and
(ii) general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or
at law).
ARTICLE XVII
Assignment.
Prior to satisfaction of the Payment Obligations Condition
Precedent, the Holder may not transfer or assign this Note, its
rights to payment hereunder, or any other rights hereunder
without the prior written consent of the Maker, which consent
the Maker may withhold in its sole discretion; provided,
however, that the Makers consent shall not be required in
connection with any such transfer or assignment to a national
trust established pursuant to any Asbestos Resolution
Legislation, provided such transfer or assignment is made in
accordance with the requirements of such legislation and in
accordance with the last sentence of this Section 9. If the
Payment Obligations Condition Precedent is satisfied, at any
time after the satisfaction thereof the Holder may transfer or
assign this Note and its rights hereunder (subject to the
provisions of Section 6), provided that such transfer is
effected in a transaction that is exempt from registration under
the Securities Act of 1933, as amended (the Securities
Act), and (ii) such transfer may only be in whole,
and not in part. In no event shall the Maker or the Guarantors
be required to register this Note, the related Guaranties, or
the Collateral under the Securities Act. The Holder, by its
acceptance of this Note, hereby represents, and it is
specifically understood and agreed, that the Holder is not
acquiring this Note or the related Guaranties with a view to any
sale or distribution thereof within the meaning of the
Securities Act. The Holder understands that this Note and the
related Guaranties have not been registered under the Securities
Act and may be transferred only in compliance with the
provisions of the Securities Act. In connection with any
transfer or assignment of this Note in accordance with the
foregoing provisions after the satisfaction of the Payment
Obligations Condition Precedent, the Maker shall issue to the
Holder a replacement note (which shall provide replacement
guaranties of the Guarantors) upon the written request of the
Holder, accompanied by this Note together with appropriate
instruments of transfer, which replacement note shall reflect
such modifications as shall be necessary or appropriate to
reflect that the Payment Obligations Condition Precedent has
been met and that successor holders are thereafter permitted,
and, upon the issuance of such replacement note, this Note shall
be cancelled. Any transfer or assignment of this Note must be
effected pursuant to written documentation pursuant to which the
transferee or assignee agrees to be bound by all the provisions
of this Note and the Pledge Agreement.
ARTICLE XVIII
Entire Agreement.
This Note, the Settlement Agreement and the Pledge Agreement
constitute the entire agreement and understanding among the
Holder and the Obligors with respect to the subject matter of
this Note and supersede all prior agreements and understandings,
oral or written, among such parties with respect to the subject
matter of this Note.
A-31
ARTICLE XIX
Notices.
All notices and communications provided for hereunder shall be
in writing and sent (a) by facsimile if the sender on the
same day sends a confirming copy of such notice by a recognized
overnight-delivery service (charges prepaid), or (b) by
registered or certified mail with return receipt requested
(postage prepaid), or (c) by a recognized
overnight-delivery service (with charges prepaid). Any such
notice shall be sent:
|
|
|
(a) if to the Holder, at such address as the Holder shall
have specified to the Maker in writing; or |
|
|
(b) if to any Obligor, addressed to it at 1450 Poydras, New
Orleans, Louisiana 70112-6050, to the attention of
Ms. Liane K. Hinrichs, or at such other address as any of
the Obligors may hereafter specify to the Holder in writing;
with a copy to McDermott International, Inc., 757 North Eldridge
Parkway, Houston, Texas 77079, to the attention of Mr. John
T. Nesser, III, or such other address as MII shall have
specified to the Holder in writing. |
ARTICLE XX
Captions; Interpretation.
The captions and section headings appearing herein are included
solely for convenience of reference and are not intended to
affect the interpretation of any provision of this Note. Except
where the context otherwise requires, the defined terms used in
this Note shall apply equally to the singular and plural forms
of the terms defined. Whenever the context may require, any
pronoun shall include the corresponding masculine, feminine, and
neuter forms. The words include,
includes and including shall be deemed
to be followed by the phrase without limitation. The
word will shall be construed to have the same
meaning and effect as the word shall and both
will and shall are used in the mandatory
and imperative sense. The word may means is
authorized or permitted to, while may not means is
not authorized or permitted to. Unless the context otherwise
requires: (i) any definition of or reference to any
agreement or other document herein shall be construed as
referring to such agreement or other document as from time to
time amended, restated, supplemented, or otherwise modified
(subject to any restrictions on such amendments, restatements,
supplements, or modifications set forth herein or therein);
(ii) any reference herein to the subsidiaries of any entity
shall be construed to include such entitys direct and
indirect subsidiaries; (iii) the words herein,
hereof, and hereunder, and words of
similar import, shall be construed to refer to this Agreement in
its entirety and not to any particular provision hereof; and
(iv) all references herein to sections shall be construed
to refer to sections of this Note.
ARTICLE XXI
Severability.
If any provision contained in this Note shall for any reason be
held to be invalid, illegal, or unenforceable in any respect,
that provision will, to the extent possible, be modified in such
manner as to be valid, legal, and enforceable but so as to most
nearly retain the intent of the parties hereto as expressed
herein, and if such a modification is not possible, that
provision will be severed from this Note, and in either case the
validity, legality, and enforceability of the remaining
provisions of this Note will not in any way be affected or
impaired thereby.
ARTICLE XXII
Governing Law.
The construction, validity, and enforceability of this Note
shall be governed by the substantive laws of the State of
Louisiana, without giving effect to any principles of conflicts
of laws thereof that would result in the application of the laws
of any other jurisdiction.
* * *
A-32
|
|
|
MAKER: |
|
|
THE BABCOCK & WILCOX COMPANY |
|
|
|
|
|
Name: |
|
Title: |
|
|
GUARANTORS: |
|
|
BABCOCK & WILCOX INVESTMENT COMPANY |
|
|
|
|
|
Name: |
|
Title: |
|
|
MCDERMOTT INTERNATIONAL,INC. |
A-33
A-34
EXHIBIT B
PLEDGE AND SECURITY AGREEMENT
dated as of
,
2006
by and among
BABCOCK & WILCOX INVESTMENT COMPANY
and
THE BABCOCK & WILCOX COMPANY,
DIAMOND POWER INTERNATIONAL, INC.,
BABCOCK & WILCOX CONSTRUCTION CO., INC.
AND AMERICON, INC. ASBESTOS PI TRUST
and
,
as Collateral Agent
A-35
This PLEDGE AND SECURITY AGREEMENT dated as
of ,
2006 (this Agreement) is by and between
(a) Babcock & Wilcox Investment Company, a
Delaware corporation (the Company), (b) The
Babcock & Wilcox Company, Diamond Power International,
Inc., Babcock & Wilcox Construction Co., Inc. and
Americon, Inc. Asbestos PI Trust (together with the permitted
successors and assigns thereof, the Secured Party),
and
(c) ([Bank
name]).
For good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company has agreed to
pledge and grant a security interest in the Collateral (as
defined below) as security for the Guarantee Obligations (as
defined below).
Accordingly, the parties hereto agree as follows:
ARTICLE XXIII
Definitions.
(a) As used in this Agreement, the terms defined in the
preamble hereto shall have the meanings ascribed therein and the
following terms have the meanings ascribed below:
|
|
|
Acceleration Event exists if all or any
portion of the Guarantee Obligations have been accelerated
pursuant to Section 5(a) of the Note and such acceleration
shall not have been rescinded. |
|
|
B&W means The Babcock & Wilcox
Company, a Delaware corporation and a direct, wholly owned
subsidiary of the Company. |
|
|
Collateral has the meaning assigned to such
term in Section 3. |
|
|
Collateral Agent means the collateral agent
appointed pursuant to this Agreement, which shall initially be
[Bank name]. |
|
|
Guarantee Obligations means the guarantee
obligations of the Guarantors set forth in Section 5 of the
Note. |
|
|
Guarantors means the Company and McDermott
International, Inc., a Panamanian corporation of which the
Company is an indirect, wholly owned subsidiary. |
|
|
Note means that certain Promissory Note
executed and delivered by B&W, dated as
of ,
2006, in the original principal amount of $250,000,000, as
amended or modified from time to time, together with any note
executed and delivered in exchange or substitution therefor or
transfer thereof. |
|
|
Pledged Stock means the capital stock of
B&W described on Annex 2, together with all
certificates evidencing the same. |
|
|
Proceeds has the meaning assigned to such
term in the UCC. |
|
|
UCC means the Uniform Commercial Code as in
effect from time to time in the State of Louisiana. |
(b) In addition, for all purposes hereof, capitalized terms
used but not otherwise defined herein shall have the respective
meanings ascribed to such terms in the Note and, if not defined
in the Note, in the UCC.
(c) Except where the context otherwise requires, the
foregoing definitions shall apply equally to the singular and
plural forms of the terms defined. Whenever the context may
require, any pronoun shall include the corresponding masculine,
feminine, and neuter forms. The words include,
includes, and including shall be deemed
to be followed by the phrase without limitation. The
word will shall be construed to have the same
meaning and effect as the word shall, and both
will and shall are used in the mandatory
and imperative sense. The word may means is
authorized or permitted to, while may not means is
not authorized or permitted to. Unless the context otherwise
requires: (i) any definition of
A-36
or reference to any agreement, instrument, or other document
herein shall be construed as referring to such agreement,
instrument, or other document as from time to time amended,
restated, supplemented, or otherwise modified (subject to any
restrictions on such amendments, restatements, supplements, or
modifications set forth herein or therein); (ii) any
reference herein to any person shall be construed to include
such persons permitted successors and assigns;
(iii) the words herein, hereof, and
hereunder, and words of similar import, shall be
construed to refer to this Agreement in its entirety and not to
any particular provision hereof; and (iv) all references
herein to sections and annexes shall be construed to refer to
sections of, and annexes to, this Agreement.
ARTICLE XXIV
Appointment of Collateral Agent.
Section 24.1 Appointment.
The Secured Party hereby
appoints as
the Collateral Agent under this Agreement, to take such actions
to be taken by the Collateral Agent under this Agreement and to
exercise such powers of the Collateral Agent contemplated by
this Agreement, in each case subject to the terms and conditions
hereof. The Company hereby consents to the appointment made
pursuant to the foregoing provisions of this Section 2.01.
Section 24.2 Fees
and Expenses of Collateral Agent. The Company agrees to pay
the Collateral Agent upon demand the amount of the Collateral
Agents annual fee (as set forth in a separate letter
agreement between the Company and the Collateral Agent) and any
and all reasonable out-of-pocket expenses, including the
reasonable fees and expenses of its counsel and agents, which
the Collateral Agent may invoice to the Company in connection
with (a) the custody or preservation of, or the sale of,
collection from or other realization upon, the Collateral,
(b) the exercise or enforcement (whether through
negotiations, legal proceedings, or otherwise) of any of the
rights of the Collateral Agent or the Secured Party hereunder,
or (c) the failure by the Company to perform or observe any
of the provisions hereof. The agreements in this
Section 2.02 shall survive the termination of this
Agreement. No provision of this Agreement shall require the
Collateral Agent to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its
duties hereunder, or in the exercise of any of its rights or
powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured to it.
ARTICLE XXV
Grant of Security Interest in the Collateral.
As collateral security for the prompt payment of the Guarantee
Obligations when due in accordance with their terms, the Company
hereby grants to the Collateral Agent, for the benefit of the
Secured Party, a security interest in all of the Companys
right, title, and interest in and to the Pledged Stock, whether
now existing or hereafter coming into existence (such property
described in this Section 3 being collectively referred to
herein as the Collateral). In connection with the
grant of such security interest, the Company agrees to take such
action as the Collateral Agent may reasonably request in order
to permit the Collateral Agent to establish and maintain such
security interest as a perfected, first priority security
interest until such time as this Agreement terminates pursuant
to the provisions of Section 7.10.
ARTICLE XXVI
Representations and Warranties.
Section 26.1 Representations
and Warranties of the Company. The Company represents and
warrants to the Secured Party as follows:
|
|
|
(a) Collateral. The Company is the sole beneficial
owner of the Collateral, and no lien exists upon the Collateral
other than the liens created hereby. |
A-37
|
|
|
(b) Creation, Perfection, and Priority. The security
interest created hereby constitutes a valid and perfected
security interest in the Collateral. |
|
|
(c) Company Information; Locations.
Annex 1 sets forth, as of date hereof, the exact
name, the location, including county or parish, of the chief
executive office, the jurisdiction of organization, and the
federal income tax identification number of the Company. |
|
|
(d) Changes in Circumstances. The Company has not,
within the period of 180 days prior to the date hereof,
changed its name or the jurisdiction or form of its organization. |
|
|
(e) Pledged Stock. The Pledged Stock identified in
Annex 2 has been duly authorized and validly issued
and is fully paid and nonassessable. The Pledged Stock
identified on Annex 2 constitutes all of the issued
and outstanding equity interests in B&W as of the date
hereof, and Annex 2 correctly identifies, as at the
date hereof, whether the Pledged Stock is certificated or
uncertificated, and the class of the shares constituting the
Pledged Stock. |
|
|
(f) Organization. The Company is duly incorporated,
validly existing, and in good standing under the laws of the
State of Delaware and has full corporate power and authority to
execute and deliver this Agreement. |
|
|
(g) Approvals; Noncontravention. The execution and
delivery of this Agreement by the Company have been duly
authorized by all necessary corporate action on the part of the
Company and will not result in a contravention by the Company of
any provision of applicable law or of the Companys
organizational documents or any material contractual restriction
binding on the Company or its assets. |
|
|
(h) Execution and Delivery; Enforceability. This
Agreement has been duly executed and delivered by the Company,
and this Agreement constitutes a legal, valid, and binding
agreement of the Company, enforceable against the Company in
accordance with its terms, except as such enforceability may be
limited by: (i) bankruptcy, insolvency, reorganization,
fraudulent transfer or conveyance, and other laws of general
applicability relating to or affecting creditors rights;
and (ii) general principles of equity (regardless of
whether such enforceability is considered in a proceeding in
equity or at law). |
Section 26.2 Representations
and Warranties of the Secured Party. The Secured Party
represents and warrants to the Company and the Collateral Agent
as follows:
|
|
|
(a) Organization. The Secured Party is a trust duly
organized, validly existing, and in good standing under the laws
of and
has all requisite power and authority to execute and deliver
this Agreement. |
|
|
(b) Approvals; Noncontravention. The execution and
delivery of this Agreement by the Secured Party have been duly
authorized by all necessary action on the part of the Secured
Party and will not result in a contravention by the Secured
Party of any provision of applicable law or of the Secured
Partys organizational documents or any material
contractual restriction binding on the Secured Party or its
assets. |
|
|
(c) Execution and Delivery; Enforceability. This
Agreement has been duly executed and delivered by authorized
officers or agents of the Secured Party and is a legal, valid,
and binding agreement of the Secured Party, enforceable against
the Secured Party in accordance with its terms, except as such
enforceability may be limited by: (i) bankruptcy,
insolvency, reorganization, fraudulent transfer or conveyance,
and other laws of general applicability relating to or affecting
the creditors rights generally; and (ii) general
principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law). |
A-38
Section 26.3 Representations
and Warranties of the Collateral Agent. The Collateral Agent
represents and warrants to the Company and the Secured Party as
follows:
|
|
|
(a) Organization. The Collateral Agent is a national
banking association duly organized, validly existing, and in
good standing under the laws of the United States of America and
has all requisite power and authority to execute and deliver
this Agreement. |
|
|
(b) Approvals; Noncontravention. The execution and
delivery of this Agreement by the Collateral Agent have been
duly authorized by all necessary action on the part of the
Collateral Agent and will not result in a contravention by the
Collateral Agent of any provision of applicable law or of the
Collateral Agents organizational documents or any material
contractual restriction binding on the Collateral Agent or its
assets. |
|
|
(c) Execution and Delivery; Enforceability. This
Agreement has been duly executed and delivered by authorized
officers or agents of the Collateral Agent and is a legal,
valid, and binding agreement of the Collateral Agent,
enforceable against the Collateral Agent in accordance with its
terms, except as such enforceability may be limited by:
(i) bankruptcy, insolvency, reorganization, fraudulent
transfer or conveyance, and other laws of general applicability
relating to or affecting the creditors rights generally;
and (ii) general principles of equity (regardless of
whether such enforceability is considered in a proceeding in
equity or at law). |
ARTICLE XXVII
Further Assurances; Remedies.
In furtherance of the pledge and grant of security interest
pursuant to Section 3 and for so long as the Guarantee
Obligations continue to exist and remain unsatisfied and this
Agreement remains in effect, the Company agrees with the
Collateral Agent and the Secured Party as follows:
Section 27.1 Delivery
and Perfection. The Company shall:
|
|
|
(a) deliver to the Collateral Agent all certificated
Pledged Stock, accompanied by properly executed stock powers in
blank; and |
|
|
(b) after the occurrence and during the continuance of an
Acceleration Event and at the reasonable request of the
Collateral Agent (in accordance with the provisions of
Section 5.06), execute and deliver all such documents as
may be necessary to cause any or all of the Pledged Stock to be
transferred of record into the name of the Collateral Agent or
to enable the Collateral Agent to exercise and enforce its
rights hereunder in accordance with the UCC (or any successor
statute) (and the Collateral Agent agrees that, if any Pledged
Stock is transferred into its name, the Collateral Agent will
thereafter promptly give to the Company copies of any notices
and communications received by the Collateral Agent with respect
to the Pledged Stock); provided, however, that no subsequent
transfer of the Pledged Stock may be made by the Collateral
Agent unless and until it has foreclosed on the Collateral in
accordance with the provisions of Section 5.06; provided,
further, that nothing in this Agreement shall require the
Company to take any action (or to assist any other person or
entity to take any action) to register with any governmental
authority any public offering of the Pledged Stock or any
interest therein. |
Section 27.2 Financing
Statements. The Company hereby authorizes the Collateral
Agent to file one or more financing statements in respect of the
Company as debtor in such filing offices in such jurisdictions
with which such a filing is (a) required to perfect the
security interest granted hereunder by the Company or
(b) desirable (in the reasonable judgment of the Collateral
Agent) to give notice of the security interest granted hereunder
by the Company.
Section 27.3 Other
Financing Statements and Control. Without the prior written
consent of the Collateral Agent, the Company shall not
(a) authorize the filing in any jurisdiction of any
financing statement or like instrument with respect to the
Collateral in which the Collateral Agent is not named as
A-39
the sole secured party or (b) cause or authorize any person
other than the Company or the Collateral Agent to acquire
control (as defined in Section 8-106 of the UCC
or as otherwise construed for purposes of Article 8 or 9 of
the UCC) over any Collateral that is Investment Property.
Section 27.4 Locations;
Names. Without at least 30 days prior notice to
the Collateral Agent, the Company shall not change its name or
the jurisdiction or form of its organization from the same shown
on Annex 1.
Section 27.5 Special
Provisions Relating to Pledged Stock.
(a) So long as no Acceleration Event shall have occurred
and be continuing, the Company shall have the right to exercise
all voting, consensual, and other powers of ownership pertaining
to the Pledged Stock, and the Collateral Agent shall execute and
deliver to the Company, or cause to be executed and delivered to
the Company, all such proxies, powers of attorney, dividend, and
other orders, and all such instruments, without recourse, as the
Company may reasonably request for the purpose of enabling the
Company to exercise the rights and powers that it is entitled to
exercise pursuant to this Section 5.05(a).
(b) Unless and until an Acceleration Event has occurred and
is continuing, the Company shall be entitled to receive and
retain any and all dividends and distributions paid on the
Pledged Stock (provided that such dividends and distributions
have not been paid in violation of the provisions of
Section 2(m) of the Note).
(c) If any Acceleration Event shall have occurred, then so
long as such Acceleration Event shall continue, all dividends
and other distributions on the Pledged Stock shall be paid or
distributed directly to the Collateral Agent, and, if the
Collateral Agent shall so request in writing, the Company agrees
to execute and deliver to the Collateral Agent appropriate
additional dividend, distribution, and other orders and
documents to that end.
Section 27.6 Acceleration
Event, Etc. Notwithstanding any other provision contained in
this Agreement or the Note, if an Acceleration Event shall have
occurred and be continuing as a result of an Event of Default
described in Section 3(a)(ii) of the Note, the Collateral
Agent may exercise its rights hereunder arising as a result of
such Acceleration Event only following a final judgment
determining that such an Event of Default has occurred and is
continuing. Subject to the provisions of the immediately
preceding sentence, in the period during which an Acceleration
Event shall have occurred and be continuing:
|
|
|
(a) the Collateral Agent shall have all of the rights and
remedies with respect to the Collateral of a secured party under
the UCC (subject to the provisions of clause (b) of this
Section 5.06), including the right, to the fullest extent
permitted by applicable law, to exercise all voting, consensual,
and other powers of ownership pertaining to the Collateral as if
the Collateral Agent were the sole and absolute owner thereof
(and the Company agrees to take all such action as the
Collateral Agent may reasonably request to give effect to such
right); and |
|
|
(b) the Collateral Agent may, upon 30 days prior
written notice to the Company of the time and place, with
respect to the Collateral or any part thereof that shall then be
or shall thereafter come into the possession, custody, or
control of the Collateral Agent, sell, assign, or otherwise
dispose of all or any part of the Collateral at such place or
places as the Collateral Agent deems best and for cash or for
credit or for future delivery (without thereby assuming any
credit risk), at public sale, without demand of performance or
notice of intention to effect any such disposition or of the
time or place thereof (except such notice as is required above
or by applicable statute and cannot be waived), and the
Collateral Agent or anyone else may be the purchaser, assignee,
or recipient of any or all of the Collateral so disposed of at
any such public sale and thereafter hold the same absolutely,
free from any claim or right of whatsoever kind, including any
right or equity of redemption (statutory or otherwise) of the
Company, any such demand, notice, and right or equity being
hereby expressly waived and released; the Collateral Agent may,
without notice, or publication, adjourn any public sale or cause
the same to be adjourned from time to time by announcement at
the time and place fixed for the sale, and such sale may be made
at any time or place to which the sale may be so adjourned. |
A-40
The Company recognizes that, by reason of certain prohibitions
contained in the Securities Act of 1933, as amended, and
applicable state securities laws, the Collateral Agent may be
compelled, with respect to any sale of all or any part of the
Collateral, to limit purchasers to those who will agree to
acquire the Collateral for their own account, for investment,
and not with a view to the distribution or resale thereof. The
Company (i) acknowledges that any such private sales may be
at prices and on terms less favorable to the Collateral Agent
than those obtainable through a public sale without such
restrictions and (ii) agrees that such circumstances shall
not, without taking into account the other circumstances of such
private sale, prevent such private sale from being deemed to
have been made in a commercially reasonable manner, and that the
Collateral Agent shall have no obligation to engage in public
sales and no obligation to delay the sale of any of the
Collateral for the period of time necessary to permit the issuer
thereof to register it for public sale.
Section 27.7 Application
of Proceeds. Upon the occurrence and during the continuance
of an Acceleration Event, the proceeds of any sale of, or other
realization upon, all or any part of the Collateral and any cash
held shall be applied by the Collateral Agent in the following
order of priorities:
|
|
|
(a) to payment of the expenses of such sale or other
realization, including any taxes arising from such sale or other
realization, and all expenses, liabilities, and advances
incurred or made by the Collateral Agent in connection therewith; |
|
|
(b) to the payment of unpaid Guarantee Obligations, until
all Guarantee Obligations shall have been fully satisfied or
terminated pursuant to the terms of the Note; and |
|
|
(c) to payment to the Company or its successors or assigns,
or as a court of competent jurisdiction may direct, of any
surplus then remaining from such proceeds. |
Section 27.8 Deficiency.
The Company shall remain liable for any deficiency if the
proceeds of any sale or other disposition of the Collateral are
insufficient to pay the Guarantee Obligations and the fees and
disbursements of any attorneys employed by the Collateral Agent
to collect such deficiency.
Section 27.9 Attorney-in-Fact.
Without limiting any rights or powers granted by this Agreement
to the Collateral Agent while no Acceleration Event has occurred
and is continuing, upon the occurrence and during the
continuance of any Acceleration Event, the Collateral Agent is
hereby appointed the attorney-in-fact of the Company for the
purpose of carrying out the provisions of this Section 5
and taking any action and executing any instruments that the
Collateral Agent may reasonably deem necessary or advisable to
accomplish the purposes hereof, which appointment as
attorney-in-fact is irrevocable (subject to the termination
provision set forth) and coupled with an interest. Without
limiting the generality of the foregoing, so long as the
Collateral Agent shall be entitled under this Section 5 to
make collections in respect of the Collateral, the Collateral
Agent shall have the right and power to receive, endorse, and
collect all checks made payable to the order of the Company
representing any dividend, payment, or other distribution in
respect of the Collateral or any part thereof and to give full
discharge for the same. The appointment (and all the associated
rights) provided by this Section 5.09 shall terminate
immediately upon the satisfaction or termination of the
Guaranteed Obligations.
Section 27.10 No
Marshalling. Upon the occurrence and continuance of an
Acceleration Event, the Collateral Agent shall not be required
to marshal the order of its enforcement of its security interest
in any part of the Collateral for the benefit of any person.
ARTICLE XXVIII
General Provisions Concerning the Collateral Agent.
Section 28.1 No
Implied Duties or Responsibilities. In connection with its
appointment and acting hereunder, the Collateral Agent shall not
be subject to any fiduciary or other implied duties or
responsibilities, regardless of whether an Acceleration Event
has occurred and is continuing, and none of the Collateral
Agent, its agents, or any of their respective affiliates will be
liable for any action taken or omitted to be taken by any of
them under or in connection with this Agreement, except that the
foregoing
A-41
provisions of this sentence will not excuse any such person from
liability arising out of or resulting from its own gross
negligence or willful misconduct or a material breach of this
Agreement. Without limiting the generality of the foregoing, the
Collateral Agent: (a) may treat the payee of the Note as
the holder thereof until the Collateral Agent receives written
notice of the assignment or transfer thereof signed by such
payee and B&W and in form satisfactory to the Collateral
Agent; (b) may consult with legal counsel of its selection,
independent public accountants, and other experts selected by it
and will 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
representation or warranty to the Secured Party of the Company
(other than as set forth in Section 4.03); (d) will
not have any duty to ascertain or to inquire as to the
performance or observance of any of the terms, covenants, or
conditions of the Note or this Agreement or to inspect the books
and records or any other property of B&W or the Company; and
(e) will not be responsible to the Secured Party for the
existence, genuineness, or value of the Collateral or for the
validity, perfection, priority, or enforceability of any
security interest in the Collateral. The Collateral Agent will
not be deemed to have knowledge or notice of any Acceleration
Event unless and until it has received written notice from the
Secured Party referring to this Agreement, describing the
Acceleration Event and stating that such notice is a
notice of acceleration event.
Section 28.2 Refusal
to Act. The Collateral Agent may refuse to act on any
notice, consent, direction, or instruction from the Secured
Party that, in the Collateral Agents opinion, (a) is
contrary to law or the provisions of the Note or this Agreement
or (b) may expose the Collateral Agent to liability (unless
the Collateral Agent shall have been indemnified, to its
satisfaction, for such liability by the Secured Party).
Section 28.3 Indemnification.
The Company hereby agrees to indemnify the Collateral Agent and,
in their respective capacities as such, its officers, directors,
controlling persons, employees, agents and representatives (each
an Indemnified Party) from and against any and all
claims, damages, losses, liabilities, obligations, penalties,
actions, causes of action, judgments, suits, costs, expenses, or
disbursements (including, without limitation, reasonable
attorneys and consultants fees and expenses) of any
kind or nature whatsoever which may at any time be imposed on,
incurred by or asserted against any Indemnified Party (or which
may be claimed against any Indemnified Party by any person) by
reason of, in connection with or in any way relating to or
arising out of, any action taken or omitted by the Collateral
Agent in compliance with the provisions of this Agreement;
provided, however, that the Company shall not be liable to any
Indemnified Party for any portion of such claims, liabilities,
obligations, losses, damages, penalties, judgments, costs,
expenses, or disbursements resulting from Indemnified
Partys gross negligence or willful misconduct as finally
determined by a court of competent jurisdiction. The Company
further shall, upon demand by any Indemnified Party, pay to such
Indemnified Party all documented costs and expenses incurred by
such Indemnified Party in enforcing any rights under this
Agreement, including reasonable fees and expenses of counsel. If
the Company shall fail to make any payment or reimbursement to
any Indemnified Party for any amount as to which the Company is
obligated to indemnify such Indemnified Party under this
Section 6.03, following exhaustion of all remedies against
the Company and promptly after demand therefor, the Secured
Party agrees to pay to such Indemnified Party the amount that
has not been paid by the Company. The agreements in this
Section 6.03 shall survive the termination of this
Agreement.
Section 28.4 Resignation
or Removal of the Collateral Agent. The Collateral Agent may
resign at any time by giving at least 60 days prior
written notice thereof to the Secured Party and the Company and
may be removed at any time by the Secured Party and the Company
acting together, with any such resignation or removal to become
effective only upon the appointment of a successor Collateral
Agent under this Section 6.04. Upon any such resignation or
removal, (a) the Secured Party will have the right to
appoint a successor Collateral Agent, and (b) unless an
Acceleration Event shall have occurred and be continuing, the
Company shall have the right to approve such appointed successor
Collateral Agent, such approval not to be unreasonably withheld
or delayed. If no successor Collateral Agent will have been so
appointed by the Secured Party and will have accepted its
appointment within 45 days after the resignation or removal
of the retiring Collateral Agent, the retiring Collateral Agent
or the Secured Party may, at the
A-42
expense of the Company, petition a court of competent
jurisdiction for the appointment of a successor Collateral
Agent. Upon the acceptance of its appointment as Collateral
Agent, the successor Collateral Agent will thereupon succeed to
and be vested with all the rights, powers, privileges and duties
of the retiring Collateral Agent, and the retiring Collateral
Agent will be discharged from its duties and obligations under
this Agreement. After any retiring Collateral Agents
resignation or removal, the provisions of this Agreement will
inure to its benefit as to any actions taken or omitted to be
taken by it while it was Collateral Agent.
ARTICLE XXIX
Miscellaneous.
Section 29.1 Entire
Agreement. This Agreement, the Note, and the Settlement
Agreement constitute the entire agreement and understanding
among the Company, the Secured Party, and the Collateral Agent
with respect to the subject matter hereof and supersede all
prior agreements and understandings, oral or written, among such
parties with respect to the subject matter hereof.
Section 29.2 Notices.
All notices, responses, consents, waivers, requests, statements,
and other communications provided for herein shall be in writing
and sent (a) by facsimile if the sender on the same day
sends a confirming copy of such notice by a recognized
overnight-delivery service (charges prepaid), or (b) by
registered or certified mail with return receipt requested
(postage prepaid), or (c) by a recognized
overnight-delivery service (with charges prepaid). Any such
notice shall be sent:
|
|
|
(a) if to the Secured Party, at such address as the Secured
Party shall have specified to the Company in writing; |
|
|
(b) if to the Company: |
|
|
Babcock & Wilcox Investment Company |
|
1450 Poydras |
|
New Orleans, Louisiana 70112 |
|
Attention: Liane K. Hinrichs |
|
Facsimile: (504) 587-5237 |
|
|
with a copy to: |
|
|
McDermott International, Inc. |
|
757 North Eldridge Parkway |
|
Houston, Texas 77079 |
|
Attention: John T. Nesser, III |
|
Facsimile: (281) 870-5015 |
|
|
; or |
|
|
|
|
(c) |
if to the Collateral Agent: |
|
|
|
|
|
|
|
|
________________________________________________________________________________. |
Section 29.3 No
Waiver. No failure on the part of any party hereto to
exercise, and no course of dealing with respect to, and no delay
in exercising, any right, power, or remedy of such party
hereunder shall operate as a waiver thereof; nor shall any
single or partial exercise by any party hereto of any right,
power, or remedy of such party hereunder preclude any other or
further exercise thereof or the exercise of any other right,
power, or remedy.
Section 29.4 Amendments,
Etc. Neither this Agreement nor any provision hereof may be
changed, waived, discharged, or (except as provided in
Section 7.10) terminated except in writing signed by the
Company, the Secured Party, and the Collateral Agent. The
Collateral Agent shall be provided
A-43
executed or true and correct copies of each amendment, notice,
waiver, consent, or certificate made or delivered with respect
to this Agreement sufficiently far in advance of the Collateral
Agent being required to take action under this Agreement or in
respect of any such notice, waiver, consent, or other
certificate delivered in connection therewith so as to allow the
Collateral Agent sufficient time to take any such action.
Section 29.5 Successors
and Assigns; No Third-Party Beneficiaries. This Agreement is
for the benefit of the parties hereto and their successors and
permitted assigns pursuant to the applicable provisions of the
Note and this Agreement. In the event of an assignment of the
Note by the Secured Party, the Secured Partys rights and
obligations hereunder shall be transferred with the Note.
Subject to the foregoing provisions of this Section 7.05,
this Agreement shall be binding on each of the parties hereto
and their respective successors and assigns. Except as provided
in Section 6.03, nothing in this Agreement, express or
implied, is intended or shall be construed to confer upon, or to
give to, any person other than the parties hereto and their
respective permitted successors and assigns any right, remedy,
or claim under or by reason of this Agreement or any provision
hereof, and the provision contained in this Agreement are and
shall be for the sole and exclusive benefit of the parties
hereto and their respective permitted successors and assigns.
Section 29.6 Counterparts.
This Agreement may be executed in any number of counterparts,
all of which taken together shall constitute one and the same
agreement, and any of the parties hereto may execute this
Agreement by signing any such counterpart.
Section 29.7 Governing
Law. The construction, validity, and enforceability of
this Agreement shall be governed by the substantive laws of the
State of Louisiana, without giving effect to any principles of
conflicts of laws thereof that would result in the application
of the laws of any other jurisdiction.
Section 29.8 Captions.
The captions and Section headings appearing herein are included
solely for convenience of reference and are not intended to
affect the interpretation of any provision of this Agreement.
Section 29.9 Severability.
If any provision contained in this Agreement shall for any
reason be held to be invalid, illegal, or unenforceable in any
respect, that provision will, to the extent possible, be
modified in such manner as to be valid, legal, and enforceable
but so as to most nearly retain the intent of the parties hereto
as expressed herein, and if such a modification is not possible,
that provision will be severed from this Agreement, and in
either case the validity, legality, and enforceability of the
remaining provisions of this Agreement will not in any way be
affected or impaired thereby.
Section 29.10 Termination.
This Agreement shall terminate concurrently with the termination
of the Guarantee Obligations pursuant to Section 5(e) of
the Note. Upon such termination: (a) the Collateral Agent
shall promptly return to the Company all the certificated
Pledged Stock and the stock powers previously delivered to the
Secured Party pursuant to Section 5.01(a); and (b) the
Secured Party and the Collateral Agent shall execute and deliver
to the Company such other documentation as the Company may
reasonably request to evidence the termination of this
Agreement. The provisions of Section 7.01 through
Section 7.09 and this Section 7.10 shall survive any
termination of this Agreement.
[signature pages follow]
A-44
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered as of the day and
year first above written.
|
|
|
BABCOCK & WILCOX INVESTMENT COMPANY |
|
|
|
|
|
Name: |
|
Title: |
|
|
THE BABCOCK & WILCOX COMPANY, |
|
DIAMOND POWER INTERNATIONAL, INC., |
|
BABCOCK & WILCOX CONSTRUCTION |
|
CO., INC. AND AMERICON, INC. ASBESTOS PI TRUST |
|
|
|
|
|
Name: |
|
Managing Trustee |
|
|
[BANK NAME], as Collateral Agent |
A-45
Annex 1
Company Information; Locations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of | |
|
Jurisdiction of | |
|
Organizational | |
|
IRS Taxpayer | |
Name |
|
Chief Executive Office | |
|
Organization | |
|
Number | |
|
I.D. No. | |
|
|
| |
|
| |
|
| |
|
| |
Babcock & Wilcox Investment Company
|
|
|
|
|
|
|
Delaware |
|
|
|
|
|
|
|
|
|
Annex 2
Description of Pledged Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No. of | |
|
Certificate | |
|
Percent | |
|
Percent | |
Owner |
|
Issuer | |
|
Class of Stock | |
|
Shares | |
|
No. | |
|
Owned | |
|
Pledged | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Babcock & Wilcox Investment Company
|
|
The Babcock & Wilcox Company |
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
McDERMOTT INTERNATIONAL, INC.
SPECIAL MEETING OF STOCKHOLDERS
Wednesday, January 18, 2006
10:00 a.m.
McDermott International, Inc.
14thFloor
757 N. Eldridge Parkway
Houston, Texas 77079
Dear Stockholder:
McDermott International, Inc. encourages you to vote your shares electronically through the
Internet or the telephone 24 hours a day, 7 days a week. This eliminates the need to return the
proxy card.
1. |
|
To vote over the Internet: |
|
|
|
Log on the Internet and go to the web site http://www.eproxyvote.com/mdr |
2. |
|
To vote over the telephone: |
|
|
|
On a touch-tone telephone call 1-877-PRX-VOTE (1-877-779-8683) |
|
|
|
|
Outside of the U.S. and Canada call 201-536-8073. |
Your electronic vote authorizes the named proxies in the same manner as if you marked, signed,
dated and returned your proxy card.
If you choose to vote your shares electronically, there is no need for you to mail back your proxy
card.
Your vote is important. Thank you for voting.
PLEASE FOLD AND DETACH HERE IF YOU ARE NOT VOTING BY INTERNET OR TELEPHONE
McDERMOTT INTERNATIONAL, INC.
This Proxy Is Solicited on Behalf of the Board of Directors
The
undersigned hereby appoints John T. Nesser, III and Liane K. Hinrichs, and each of them
individually, as attorneys, agents and proxies of the undersigned, with full power of substitution
and resubstitution, to vote all the shares of common stock of McDermott International, Inc.
(McDermott) that the undersigned may be entitled to vote at McDermotts Special Meeting of
Stockholders to be held on January 18, 2006, and at any adjournment or postponement of such
meeting, as indicated on the reverse side hereof, with all powers which the undersigned would
possess if personally present.
The undersigned acknowledges receipt of McDermotts Notice of Special Meeting of Stockholders and
related Proxy Statement.
PLEASE MARK, SIGN AND DATE THE REVERSE SIDE OF THIS PROXY CARD AND PROMPTLY RETURN IT IN THE
ENCLOSED ENVELOPE.
SEE REVERSE SIDE
McDermott International, Inc.
C/O
COMPUTERSHARE
P.O. BOX 8694
EDISON, NJ 08818-8694
The
Computershare Vote by Telephone and Vote by Internet systems can be accessed
24-hours a day, seven days a week until 11:59 PM on January 17, 2006.
Your vote is important. Please vote immediately.
|
|
|
|
|
Vote-by-Internet |
|
|
|
|
1.
|
|
Log on to the Internet and go to
http://www.eproxyvote.com/mdr |
|
|
|
2.
|
|
Follow the easy steps outlined on
the secured website. |
|
|
|
|
|
Vote-by-Telephone |
|
|
|
|
1.
|
|
Call toll-free
1-877-PRX-VOTE (1-877-779-8683) |
|
|
|
2.
|
|
Follow the easy recorded
instructions.
|
If you vote over the Internet or by telephone, please do not mail your card.
DETACH HERE IF YOU ARE RETURNING YOUR PROXY CARD BY MAIL
|
|
|
þ
|
|
Please mark |
|
|
votes as in |
|
|
this example |
IMPORTANT-PLEASE MARK APPROPRIATE BOXES ONLY IN BLUE OR BLACK INK AS SHOWN ABOVE.
|
McDERMOTT INTERNATIONAL, INC. |
1. Resolution authorizing and approving the settlement contemplated by the Proposed Settlement
Agreement in substantially the form attached as Appendix A to the accompanying Proxy Statement and
approving the form, terms and provisions of, and authorizing McDermotts execution and delivery of,
and, subject to the ability of the Board of Directors to cause McDermott to terminate the Proposed
Settlement Agreement in certain limited circumstances pursuant to the provisions of Section 8.3 of the Proposed Settlement
Agreement, performance under, the Proposed Settlement Agreement; in each case with such
modifications or changes as the Board of Directors of McDermott may subsequently approve (the
Directors recommend a vote FOR).
|
|
|
|
|
FOR
|
|
AGAINST
|
|
ABSTAIN |
o
|
|
o
|
|
o |
|
Every properly signed Proxy will
be voted in accordance with the
specifications made thereon. If not
otherwise specified, this Proxy will
be voted FOR the resolution. The
proxy holders named on the reverse
side also will vote in their
discretion on any other matter that
may properly come before the meeting. |
Signature Date: Signature Date:
|
|
|
NOTE: |
|
Signature(s) should agree with name(s) on stock certificates as specified hereon.
Executors, administrators, trustees, etc., should indicate when signing. All proxies
heretofore given by the signatory to vote at such meeting or any adjournment or postponement
thereof with respect to the shares covered by this proxy are hereby revoked. |
NOTICE TO PARTICIPANTS OF
THE THRIFT PLAN FOR EMPLOYEES OF McDERMOTT INCORPORATED
AND PARTICIPATING SUBSIDIARY AND AFFILIATED COMPANIES
December 13, 2005
Dear Thrift Plan Participant:
As you may know, a Special Meeting of Stockholders of McDermott International, Inc.
(McDermott) will be held on Wednesday, January 18, 2006. Enclosed for your careful review
are the Notice of McDermotts Special Meeting of Stockholders and the related Proxy Statement.
YOUR VOTE IS IMPORTANT!
As a participant in The Thrift Plan for Employees of McDermott Incorporated and Participating
Subsidiary and Affiliated Companies (the Thrift Plan), you are strongly encouraged to direct
Vanguard Fiduciary Trust Company (Vanguard), the trustee of your Thrift Plan, to vote your shares
of McDermott common stock held in your separate Thrift Plan account.
PROVIDING YOUR INSTRUCTIONS TO VANGUARD
To instruct Vanguard how to vote the shares of McDermott common stock in your Thrift Plan
account, you may vote by mail, telephone or the Internet. To vote by mail, complete, sign and date
the enclosed instruction form and mail it to Vanguard in the enclosed postage-paid reply envelope.
If you wish to vote via telephone, please call 1-888-221-0697 and follow the appropriate prompts.
If you wish to vote via the Internet, log on to www.401kproxy.com and follow the instructions
provided. Regardless of the method you choose, your instructions must be received at Vanguard
by the Thrift Plan Deadline, which is 4:00 p.m. Eastern time on
Friday, January 13, 2006.
Please note, should you elect to vote via telephone or the Internet, there is no need to mail in
your proxy card. Your telephone or Internet vote serves as an electronic ballot and provides
instruction to vote your shares in the same manner as if you signed and returned your proxy card.
Your proxy voting
direction will apply to shares held in your Thrift Plan account at the close
of the New York Stock Exchange on the record date, December 9, 2005.
THE TERMS OF YOUR THRIFT PLAN
Please note the terms of your Thrift Plan provide that Vanguard will vote the shares of
McDermott common stock held in your Thrift Plan account as directed. Additionally, any shares of
McDermott common stock held in the Thrift Plan for which Vanguard does not receive timely
participant directions generally will be voted by Vanguard in the same proportion as the shares for
which Vanguard receives timely voting instructions from participants within the Thrift Plan.
The
enclosed information relates only to shares of McDermott common stock held in
your Thrift Plan account. If you own other shares outside of the Thrift Plan, you should receive
separate mailings relating to those shares.
YOUR DECISION IS CONFIDENTIAL
All instructions received by Vanguard from individual participants will be held in confidence
and will not be divulged to any person, including McDermott, or any of its directors,
officers, employees or affiliates.
FOR ADDITIONAL QUESTIONS
If you have any questions about the proxy solicitation by McDermott, please
direct all inquiries to:
McDermott International, Inc.
757 N. Eldridge Parkway
Houston, Texas 77079
Attention: Corporate Secretary
Or call (281) 870-5011
Additionally, all proxy-solicitation materials are available online at www.sec.gov. If you have
questions on how to provide voting instructions to Vanguard, please contact Vanguard Participant
Services weekdays during normal business hours at 1-800-523-1188.
Sincerely,
Vanguard Fiduciary Trust Company
3 Easy Ways to Vote Your Voting Instruction Form
24 Hours a Day
VOTE ON THE INTERNET
|
|
Read the Proxy Statement and have this card at hand |
|
|
|
Log on to www.401kproxy.com |
|
|
|
Follow the on-screen instructions |
|
|
|
Do not return this paper ballot |
VOTE BY PHONE
|
|
Read the Proxy Statement and have this card at hand |
|
|
|
Call toll-free 1-888-221-0697 |
|
|
|
Follow the recorded instructions |
|
|
|
Do not return this paper ballot |
VOTE BY MAIL
|
|
Read the Proxy Statement and have this card at hand |
|
|
|
Check the appropriate boxes on reverse |
|
|
|
Sign and date proxy card |
|
|
|
Return promptly in the enclosed envelope |
Please fold and detach card at perforation before mailing
CONFIDENTIAL VOTING INSTRUCTION FORM
TO: VANGUARD FIDUCIARY TRUST COMPANY, TRUSTEE
UNDER THE THRIFT PLAN FOR EMPLOYEES OF McDERMOTT INCORPORATED
AND PARTICIPATING SUBSIDIARY AND AFFILIATED COMPANIES
The undersigned participant in The Thrift Plan for Employees of McDermott Incorporated and
Participating Subsidiary and Affiliated Companies (the Thrift Plan) hereby directs Vanguard
Fiduciary Trust Company (Vanguard), the trustee for the Thrift Plan, to vote all the shares of
common stock (common stock) of McDermott International, Inc. (McDermott) held in the
undersigneds Thrift Plan account at McDermotts Special Meeting of Stockholders to be held on the
14th Floor of 757 N. Eldridge Parkway, Houston, Texas 77079 on Wednesday, January 18,
2006, at 10:00 a.m. local time, and at any adjournment or postponement of such meeting, as
indicated on the reverse side of this voting instruction form.
Every properly signed voting instruction form will be voted in accordance with the specifications
made thereon. If your voting instruction form is not properly signed or dated or if no direction
is provided, your shares generally will be voted in the same proportion as the shares for which
Vanguard receives timely voting instructions from participants in the Thrift Plan.
THIS
INSTRUCTION FORM MUST BE RECEIVED AT VANGUARD BY 4:00 p.m. Eastern
time, Friday, January 13, 2006.
The undersigned acknowledges receipt of McDermotts Notice of Special Meeting of Stockholders
and related Proxy Statement.
Dated
SIGNATURE
|
(Please sign in Box) |
|
|
|
|
|
|
NOTE: Signature should be the same as
the name on your Thrift Plan account. When
signing as attorney, executor,
administrator, trustee, guardian or other
similar capacity, please give full title as
such. The person signing above hereby
revokes all instructions heretofore given by
such person to vote the shares of McDermott
common stock held in such persons Thrift
Plan account at such meeting or any
adjournment or postponement thereof. |
Please
fill in box(es) as shown using black or blue
ink. n
PLEASE DO NOT USE FINE POINT PENS.
1. |
|
Resolution authorizing and approving the settlement contemplated by the Proposed Settlement
Agreement in substantially the form attached as Appendix A to the accompanying Proxy Statement
and approving the form, terms and provisions of, and authorizing McDermotts execution and
delivery of, and, subject to the ability of the Board of Directors to cause McDermott to
terminate the Proposed Settlement Agreement in certain limited
circumstances pursuant to the provisions of Section 8.3 of the
Proposed Settlement Agreement, performance under, the Proposed Settlement Agreement; in each
case with such modifications or changes as the Board of Directors of McDermott may
subsequently approve (the Directors recommend a vote FOR). |
|
|
|
|
|
|
|
|
|
|
FOR
|
|
AGAINST
|
|
ABSTAIN |
o
|
|
o
|
|
o |
|
|
|
|
|
The terms of your Thrift Plan provide that Vanguard will vote the shares of McDermott common stock
held in your Thrift Plan account as directed. Additionally, McDermott common stock held in the
Thrift Plan for which Vanguard does not receive direction before 4:00
p.m. Eastern time, on Friday,
January 13, 2006, generally will be voted by Vanguard in the same proportion as the shares for
which Vanguard receives timely voting instructions from participants in the Thrift Plan.
PLEASE SIGN AND DATE THE FRONT SIDE OF THIS VOTING INSTRUCTION FORM AND PROMPTLY RETURN IT IN
THE ENCLOSED ENVELOPE.